HUBBELL INC - Quarter Report: 2022 June (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-2958
HUBBELL INCORPORATED
(Exact name of registrant as specified in its charter)
| Connecticut | 06-0397030 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 40 Waterview Drive | ||||||||
| Shelton, | CT | 06484 | ||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
| (475) | 882-4000 | |||||||
| (Registrant’s telephone number, including area code) | ||||||||
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report.) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock - par value $0.01 per share | HUBB | New York Stock Exchange | ||||||
| Indicate by check mark | |||||||||||||||||||||||||||||
•whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | ☐ | |||||||||||||||||||||||||
•whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | ☑ | No | ☐ | |||||||||||||||||||||||||
•whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): | |||||||||||||||||||||||||||||
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||||||||
| Emerging growth company | ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐ | |||||||||||||||||||||||||||
•whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ | |||||||||||||||||||||||||
The number of shares outstanding of Hubbell common stock as of July 22, 2022 was 53,677,757.
HUBBELL INCORPORATED-Form 10-Q 1
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Index
| Table of Contents | ||||||||
HUBBELL INCORPORATED-Form 10-Q 2
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| PART I | FINANCIAL INFORMATION | ||||
| ITEM 1 | Financial Statements | ||||
Condensed Consolidated Statements of Income (unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| (in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | $ | 1,256.0 | $ | 1,054.3 | $ | 2,412.1 | $ | 2,010.6 | ||||||
| Cost of goods sold | 872.8 | 756.0 | 1,705.8 | 1,450.1 | ||||||||||
| Gross profit | 383.2 | 298.3 | 706.3 | 560.5 | ||||||||||
| Selling & administrative expenses | 192.6 | 156.1 | 372.8 | 308.4 | ||||||||||
| Operating income | 190.6 | 142.2 | 333.5 | 252.1 | ||||||||||
| Interest expense, net | (12.7) | (12.6) | (25.8) | (27.8) | ||||||||||
| Loss on disposition of business | — | (6.8) | — | (6.8) | ||||||||||
| Loss on extinguishment of debt | — | (16.8) | — | (16.8) | ||||||||||
| Pension charge (Note 12) | (4.4) | — | (4.4) | — | ||||||||||
| Other income, net | 2.5 | 0.5 | 6.1 | 1.7 | ||||||||||
| Total other expense | (14.6) | (35.7) | (24.1) | (49.7) | ||||||||||
| Income from continuing operations before income taxes | 176.0 | 106.5 | 309.4 | 202.4 | ||||||||||
| Provision for income taxes | 38.9 | 16.9 | 68.5 | 38.1 | ||||||||||
| Net income from continuing operations | 137.1 | 89.6 | 240.9 | 164.3 | ||||||||||
| Less: Net income from continuing operations attributable to noncontrolling interest | (1.5) | (0.8) | (2.8) | (2.2) | ||||||||||
| Net income from continuing operations attributable to Hubbell Incorporated | 135.6 | 88.8 | 238.1 | 162.1 | ||||||||||
| (Loss) income from discontinued operations, net of tax (Note 2) | (13.6) | 7.0 | 64.1 | 11.4 | ||||||||||
| Net Income attributable to Hubbell Incorporated | $ | 122.0 | $ | 95.8 | $ | 302.2 | $ | 173.5 | ||||||
| Earnings per share: | ||||||||||||||
| Basic earnings per share from continuing operations | $ | 2.52 | $ | 1.63 | $ | 4.41 | $ | 2.97 | ||||||
| Basic earnings per share from discontinued operations | (0.25) | 0.13 | 1.19 | 0.22 | ||||||||||
| Basic earnings per share | $ | 2.27 | $ | 1.76 | $ | 5.60 | $ | 3.19 | ||||||
| Diluted earnings per share from continuing operations | $ | 2.51 | $ | 1.62 | $ | 4.39 | $ | 2.95 | ||||||
| Diluted earnings per share from discontinued operations | (0.25) | 0.12 | 1.18 | 0.21 | ||||||||||
| Diluted earnings per share | $ | 2.26 | $ | 1.74 | $ | 5.57 | $ | 3.16 | ||||||
| Cash dividends per common share | $ | 1.05 | $ | 0.98 | $ | 2.10 | $ | 1.96 | ||||||
See notes to unaudited Condensed Consolidated Financial Statements.
HUBBELL INCORPORATED-Form 10-Q 3
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Condensed Consolidated Statements of Comprehensive Income (unaudited)
| Three Months Ended June 30, | ||||||||
| (in millions) | 2022 | 2021 | ||||||
| Net income | $ | 123.5 | $ | 96.6 | ||||
| Other comprehensive (loss) income: | ||||||||
| Currency translation adjustments: | ||||||||
| Foreign currency translation adjustments | (29.7) | 9.3 | ||||||
| Reclassification of currency translation losses included in net income | — | — | ||||||
Defined benefit pension and post-retirement plans, net of taxes of $(1.3) and $(0.7) | 3.4 | 2.1 | ||||||
Unrealized losses on investments, net of taxes of $0.0 and $0.0 | — | — | ||||||
Unrealized (losses) gains on cash flow hedges, net of taxes of $(0.2) and $(0.1) | 0.5 | 0.2 | ||||||
| Other comprehensive (loss) income | (25.8) | 11.6 | ||||||
| Comprehensive income | 97.7 | 108.2 | ||||||
| Less: Comprehensive income attributable to noncontrolling interest | 1.5 | 0.8 | ||||||
| Comprehensive income attributable to Hubbell Incorporated | $ | 96.2 | $ | 107.4 | ||||
See notes to unaudited Condensed Consolidated Financial Statements.
| Six Months Ended June 30, | ||||||||
| (in millions) | 2022 | 2021 | ||||||
| Net income | $ | 305.0 | $ | 175.7 | ||||
| Other comprehensive (loss) income: | ||||||||
| Currency translation adjustment: | ||||||||
| Foreign currency translation adjustments | (25.1) | 2.7 | ||||||
| Reclassification of currency translation losses included in net income | 0.5 | — | ||||||
Defined benefit pension and post-retirement plans, net of taxes of $(1.8) and $(1.4) | 5.5 | 4.1 | ||||||
Unrealized losses on investments, net of taxes of $0.4 and $0.0 | (1.2) | (0.1) | ||||||
Unrealized (losses) gains on cash flow hedges, net of taxes of $0.0 and $(0.1) | (0.1) | 0.3 | ||||||
| Other comprehensive (loss) income | (20.4) | 7.0 | ||||||
| Comprehensive income | 284.6 | 182.7 | ||||||
| Less: Comprehensive income attributable to noncontrolling interest | 2.8 | 2.2 | ||||||
| Comprehensive income attributable to Hubbell Incorporated | $ | 281.8 | $ | 180.5 | ||||
See notes to unaudited Condensed Consolidated Financial Statements.
HUBBELL INCORPORATED-Form 10-Q 4
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Condensed Consolidated Balance Sheets (unaudited)
(in millions) | June 30, 2022 | December 31, 2021 | ||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
Cash and cash equivalents | $ | 424.2 | $ | 286.2 | ||||
Short-term investments | 13.9 | 9.4 | ||||||
Accounts receivable (net of allowances of $13.9 and $10.6) | 780.5 | 675.3 | ||||||
Inventories, net | 719.5 | 662.1 | ||||||
| Other current assets | 96.1 | 66.8 | ||||||
| Assets held for sale - current | — | 179.5 | ||||||
| Total Current Assets | 2,034.2 | 1,879.3 | ||||||
| Property, Plant, and Equipment, net | 464.8 | 459.5 | ||||||
| Other Assets | ||||||||
| Investments | 71.9 | 69.1 | ||||||
| Goodwill | 1,859.4 | 1,871.3 | ||||||
| Other intangible assets, net | 644.1 | 681.5 | ||||||
| Other long-term assets | 163.8 | 143.7 | ||||||
| Assets held for sale - non-current | — | 177.1 | ||||||
| TOTAL ASSETS | $ | 5,238.2 | $ | 5,281.5 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities | ||||||||
| Short-term debt | $ | 5.8 | $ | 9.7 | ||||
Accounts payable | 550.7 | 532.8 | ||||||
Accrued salaries, wages and employee benefits | 91.7 | 94.7 | ||||||
Accrued insurance | 73.0 | 73.3 | ||||||
Other accrued liabilities | 281.7 | 263.4 | ||||||
| Liabilities held for sale - current | — | 91.3 | ||||||
| Total Current Liabilities | 1,002.9 | 1,065.2 | ||||||
| Long-Term Debt | 1,436.7 | 1,435.5 | ||||||
| Other Non-Current Liabilities | 530.7 | 521.3 | ||||||
| Liabilities held for sale - non-current | — | 18.8 | ||||||
| TOTAL LIABILITIES | 2,970.3 | 3,040.8 | ||||||
| Hubbell Incorporated Shareholders’ Equity | 2,256.9 | 2,229.8 | ||||||
| Noncontrolling interest | 11.0 | 10.9 | ||||||
| TOTAL EQUITY | 2,267.9 | 2,240.7 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 5,238.2 | $ | 5,281.5 | ||||
See notes to unaudited Condensed Consolidated Financial Statements.
HUBBELL INCORPORATED-Form 10-Q 5
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Condensed Consolidated Statements of Cash Flows (unaudited)
| Six Months Ended June 30, | ||||||||
| (in millions) | 2022 | 2021 | ||||||
| Cash Flows from Operating Activities of Continuing Operations | ||||||||
| Net income from continuing operations | $ | 240.9 | $ | 164.3 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 69.4 | 76.9 | ||||||
| Deferred income taxes | (38.4) | 6.0 | ||||||
| Stock-based compensation | 16.7 | 12.8 | ||||||
| Provision for bad debt expense | 4.4 | (0.3) | ||||||
| Loss on disposition of business | — | 6.8 | ||||||
| Loss on extinguishment of debt | — | 16.8 | ||||||
| Pension charge | 4.4 | — | ||||||
| Loss (gain) on sale of assets | 1.2 | (4.0) | ||||||
| Changes in assets and liabilities, excluding effects of acquisitions: | ||||||||
| Increase in accounts receivable, net | (107.4) | (110.9) | ||||||
| Increase in inventories, net | (61.0) | (32.6) | ||||||
| Increase in accounts payable | 22.0 | 78.5 | ||||||
| Increase (decrease) in current liabilities | 25.3 | (18.3) | ||||||
| Changes in other assets and liabilities, net | (1.9) | (4.9) | ||||||
| Contribution to qualified defined benefit pension plans | (2.5) | (0.1) | ||||||
| Other, net | 1.1 | (1.2) | ||||||
| Net cash provided by operating activities from Continuing Operations | 174.2 | 189.8 | ||||||
| Cash Flows from Investing Activities of Continuing Operations | ||||||||
| Capital expenditures | (41.9) | (36.9) | ||||||
| Acquisitions, net of cash acquired | — | 0.1 | ||||||
| Proceeds from disposal of business, net of cash | 348.6 | 8.5 | ||||||
| Purchases of available-for-sale investments | (23.8) | (6.2) | ||||||
| Proceeds from available-for-sale investments | 9.8 | 3.3 | ||||||
| Other, net | 1.1 | 6.6 | ||||||
| Net cash provided (used in) investing activities from Continuing Operations | 293.8 | (24.6) | ||||||
| Cash Flows from Financing Activities of Continuing Operations | ||||||||
| Issuance of long-term debt | — | 298.7 | ||||||
| Payment of long-term debt | — | (300.0) | ||||||
| Payment of short-term debt, net | (3.8) | (15.6) | ||||||
| Payment of dividends | (113.3) | (106.5) | ||||||
| Debt issuance costs | — | (4.5) | ||||||
| Acquisition of common shares | (150.0) | (11.2) | ||||||
| Other, net | (11.1) | (39.2) | ||||||
| Net cash used in financing activities from Continuing Operations | (278.2) | (178.3) | ||||||
| Discontinued Operations: | ||||||||
| Cash (used in) provided by operating activities | (44.7) | 19.5 | ||||||
| Cash used in investing activities | (1.7) | (2.2) | ||||||
| Cash (used in) provided by discontinued operations | (46.4) | 17.3 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (6.0) | 1.7 | ||||||
| Increase in cash and cash equivalents | 137.4 | 5.9 | ||||||
| Cash and cash equivalents, beginning of year | 286.2 | 259.6 | ||||||
| Cash and cash equivalents within assets held for sale, beginning of year | 0.7 | 1.0 | ||||||
| Restricted cash, included in other assets, beginning of year | 2.7 | — | ||||||
| Less: Restricted cash, included in Other Assets | 2.8 | — | ||||||
| Less: Cash and cash equivalents within assets held for sale, end of period | — | 1.1 | ||||||
| Cash and cash equivalents, end of period | $ | 424.2 | $ | 265.4 | ||||
See notes to unaudited Condensed Consolidated Financial Statements.
HUBBELL INCORPORATED-Form 10-Q 6
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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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022.
The balance sheet at December 31, 2021 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, 2021.
Discontinued Operations
On February 1, 2022, the Company completed the sale of the Commercial and Industrial Lighting business (the "C&I Lighting business") to GE Current, a Daintree Company, for total cash consideration of $350 million, subject to customary adjustments with respect to working capital. The disposal of the Commercial and Industrial Lighting business met the criteria set forth in ASC 205-20 to be presented as a discontinued operation. The Commercial and Industrial Lighting businesses' results of operations and the related cash flows have been reclassified to income from discontinued operations in the Condensed Consolidated Statements of Income and cash flows from discontinued operations in the Condensed Consolidated Statement of Cash Flows, respectively, for all periods presented. For additional information regarding this transaction and its effect on our financial reporting, see Note 2 – Discontinued Operations, in the accompanying Condensed Consolidated Financial Statements, which note is incorporated herein by reference.
Impact of the COVID-19 Pandemic
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has had, and may continue to have, a significant effect on global economic conditions. U.S. Federal, state, local, and foreign governments have reacted 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, supply chains, and our 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 Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional expedients and 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 June 30, 2022. The Company is currently assessing the impact of adopting this standard on its financial statements and the timing of adoption.
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities, including deferred revenue, acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) as if the acquirer had originated the contracts at the date of the business combination. The provisions of ASU 2021-08 are effective for interim periods and fiscal years beginning after December 15, 2022, with early adoption permitted. If early adopted, the provisions of ASU 2021-08 apply retrospectively to all business combinations that occurred on or after the first day of the fiscal year in which the standard is adopted. 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
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In November 2021, the FASB issued ASU No. 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance." This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This standard is effective for financial statements issued for annual periods beginning after December 15, 2021 and should be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently assessing the impact of adopting this standard on its financial statements and the timing of adoption.
NOTE 2 Discontinued Operations
On February 1, 2022, the Company completed the sale of the Commercial and Industrial Lighting business to GE Current, a Daintree Company, for total cash consideration of $350 million, subject to customary adjustments with respect to working capital. The sale of this business represents a strategic shift that will have a major effect on our operations and financial results, and as a result, is reported as a discontinued operation in our Condensed Consolidated Financial Statements for all periods presented. The assets and liabilities of this business are also presented as held for sale in the Condensed Consolidated Balance Sheets, in the periods prior to the sale. The Commercial and Industrial Lighting business was previously included in the Electrical Solutions segment.
Under the terms of the transaction, Hubbell and the buyer entered into a transition services agreement ("TSA"), pursuant to which the Company agreed to provide certain administrative and operational services for a period of 12 months or less. Furthermore, we entered into a short-term supply agreement whereby the Company will act as a supplier of finished goods and component parts to the Commercial and Industrial Lighting business after the completion of the sale. Income from the TSA and supply agreement was $4.8 million and $7.6 million, respectively, for the three and six months ended June 30, 2022 and was recorded in Other Income in the Condensed Consolidated Financial Statements.
The following table presents the summarized components of income from discontinued operations, net of income taxes, for the Commercial and Industrial Lighting business:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | $ | — | $ | 137.5 | $ | 29.1 | $ | 259.6 | ||||||
| Cost of goods sold | — | 105.9 | 27.7 | 201.9 | ||||||||||
| Gross profit | — | 31.6 | 1.4 | 57.7 | ||||||||||
| Selling & administrative expenses | 4.5 | 21.9 | 15.2 | 41.7 | ||||||||||
| Operating (loss) income | (4.5) | 9.7 | (13.8) | 16.0 | ||||||||||
| (Loss) Gain on disposal of business | (7.7) | — | 80.7 | — | ||||||||||
| Other expense | (1.4) | (0.8) | (1.1) | (1.4) | ||||||||||
| (Loss) income from discontinued operations before income taxes | (13.6) | 8.9 | 65.8 | 14.6 | ||||||||||
| Provision for income taxes | — | 1.9 | 1.7 | 3.2 | ||||||||||
| (Loss) income from discontinued operations, net of taxes | $ | (13.6) | $ | 7.0 | $ | 64.1 | $ | 11.4 | ||||||
(Loss) income from discontinued operations, net of taxes for the three and six months ended June 30, 2022 includes transaction and separation costs of $4.5 million and $6.7 million, respectively, and the six months ended June 30, 2022 includes a pre-tax gain on the disposal of $80.7 million.
HUBBELL INCORPORATED-Form 10-Q 8
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The following table presents the major classes of assets and liabilities classified as held for sale in the Condensed Consolidated Balance Sheet for the year ended December 31, 2021:
| (in millions) | December 31, 2021 | ||||
| Cash and cash equivalents | $ | 0.7 | |||
| Accounts receivable | 83.1 | ||||
| Inventories, net | 89.8 | ||||
| Other current assets | 5.9 | ||||
| Assets held for sale - current | $ | 179.5 | |||
| Property, Plant, and Equipment, net | 77.7 | ||||
| Goodwill | 50.2 | ||||
| Other intangible assets, net | 37.3 | ||||
| Other long-term assets | 11.9 | ||||
| Assets held for sale - non-current | $ | 177.1 | |||
| Accounts payable | 50.2 | ||||
| Accrued salaries, wages and employee benefits | 8.5 | ||||
| Accrued insurance | 3.9 | ||||
| Other accrued liabilities | 28.7 | ||||
| Liabilities held for sale - current | $ | 91.3 | |||
| Other Non-Current Liabilities | 18.8 | ||||
| Liabilities held for sale - non-current | $ | 18.8 | |||
NOTE 3 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 two 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 Solutions segment, certain businesses require a portion of the transaction price to be paid in advance of transfer of control. Advance payments are not considered a significant financing component as they are received less than one year before the related performance obligations are satisfied. In addition, in the 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.
HUBBELL INCORPORATED-Form 10-Q 9
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The following table presents disaggregated revenue by business group. On January 1, 2022, we internally reorganized certain businesses within our Electrical Solutions segment to simplify the organization structure and align the organization to better serve our customers. This change had no impact to our reportable segments. In conjunction with this change, prior period amounts have been reclassified to conform to the organizational changes within the Electrical Solutions segment.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| in millions | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | ||||||||||||||
| Electrical Products | $ | 234.8 | $ | 196.6 | $ | 462.5 | $ | 378.2 | ||||||
| Connection and Bonding | 156.4 | 135.4 | 300.3 | 251.5 | ||||||||||
| Industrial Controls | 76.7 | 64.7 | 149.7 | 123.2 | ||||||||||
| Retail and Builder | 59.6 | 68.8 | 119.3 | 136.7 | ||||||||||
| Total Electrical Solutions | $ | 527.5 | $ | 465.5 | $ | 1,031.8 | $ | 889.6 | ||||||
| Utility T&D Components | 556.5 | 421.2 | 1,048.0 | 796.1 | ||||||||||
| Utility Communications and Controls | 172.0 | 167.6 | 332.3 | 324.9 | ||||||||||
| Total Utility Solutions | $ | 728.5 | $ | 588.8 | $ | 1,380.3 | $ | 1,121.0 | ||||||
| TOTAL | $ | 1,256.0 | $ | 1,054.3 | $ | 2,412.1 | $ | 2,010.6 | ||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||
| in millions | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | ||||||||||||||
| United States | $ | 461.4 | $ | 396.5 | $ | 901.8 | $ | 763.3 | ||||||
| International | 66.1 | 69.0 | 130.0 | 126.3 | ||||||||||
| Total Electrical Solutions | $ | 527.5 | $ | 465.5 | $ | 1,031.8 | $ | 889.6 | ||||||
| United States | 689.9 | 560.3 | 1,308.4 | 1,061.7 | ||||||||||
| International | 38.6 | 28.5 | 71.9 | 59.3 | ||||||||||
| Total Utility Solutions | $ | 728.5 | $ | 588.8 | $ | 1,380.3 | $ | 1,121.0 | ||||||
| TOTAL | $ | 1,256.0 | $ | 1,054.3 | $ | 2,412.1 | $ | 2,010.6 | ||||||
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 $21.9 million as of June 30, 2022 compared to $16.7 million as of December 31, 2021. The $5.2 million increase in our contract liabilities balance was primarily due to a $15.0 million net increase in current year deferrals primarily due to timing of advance payments on certain orders partially offset by the recognition of $9.8 million in revenue related to amounts that were recorded in contract liabilities at January 1, 2022. 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 six months ended June 30, 2022.
Unsatisfied Performance Obligations
As of June 30, 2022, the Company had approximately $390 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 two years.
HUBBELL INCORPORATED-Form 10-Q 10
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NOTE 4 Segment Information
The Company's reporting segments consist of the Electrical Solutions segment and the Utility Solutions segment. The Electrical Solutions 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, components 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 wiring devices, lighting fixtures 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 Utility Solutions segment consists of businesses that design, manufacture, and sell a wide variety of electrical distribution, transmission, substation, and telecommunications products. This includes utility transmission & distribution (T&D) components such as arresters, insulators, connectors, anchors, bushings, and enclosures. The Utility Solutions segment also offers solutions that serve the utility infrastructure, including smart meters, communications systems, and protection and control devices. Hubbell Utility Solutions supports the electrical distribution, electrical transmission, water, gas distribution, telecommunications, and solar and wind markets. 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 | ||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Three Months Ended June 30, | ||||||||||||||||||||
| Electrical Solutions | $ | 527.5 | $ | 465.5 | $ | 79.2 | $ | 69.3 | 15.0 | % | 14.9 | % | ||||||||
| Utility Solutions | 728.5 | 588.8 | 111.4 | 72.9 | 15.3 | % | 12.4 | % | ||||||||||||
| TOTAL | $ | 1,256.0 | $ | 1,054.3 | $ | 190.6 | $ | 142.2 | 15.2 | % | 13.5 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Electrical Solutions | $ | 1,031.8 | $ | 889.6 | $ | 134.0 | $ | 118.5 | 13.0 | % | 13.3 | % | ||||||||
| Utility Solutions | 1,380.3 | 1,121.0 | 199.5 | 133.6 | 14.5 | % | 11.9 | % | ||||||||||||
| TOTAL | $ | 2,412.1 | $ | 2,010.6 | $ | 333.5 | $ | 252.1 | 13.8 | % | 12.5 | % | ||||||||
HUBBELL INCORPORATED-Form 10-Q 11
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NOTE 5 Inventories, net
Inventories, net consists of the following (in millions):
| June 30, 2022 | December 31, 2021 | |||||||
| Raw material | $ | 277.0 | $ | 241.0 | ||||
| Work-in-process | 149.3 | 129.4 | ||||||
| Finished goods | 429.6 | 428.6 | ||||||
| Subtotal | 855.9 | 799.0 | ||||||
| Excess of FIFO over LIFO cost basis | (136.4) | (136.9) | ||||||
| TOTAL | $ | 719.5 | $ | 662.1 | ||||
HUBBELL INCORPORATED-Form 10-Q 12
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NOTE 6 Goodwill and Other Intangible Assets, net
Changes in the carrying values of goodwill for the six months ended June 30, 2022, by segment, were as follows (in millions):
| Segment | |||||||||||
| Electrical Solutions | Utility Solutions | Total | |||||||||
| BALANCE DECEMBER 31, 2021 | $ | 612.5 | $ | 1,258.8 | $ | 1,871.3 | |||||
| Foreign currency translation | (4.8) | (7.1) | (11.9) | ||||||||
| BALANCE JUNE 30, 2022 | $ | 607.7 | $ | 1,251.7 | $ | 1,859.4 | |||||
The carrying value of other intangible assets included in Other intangible assets, net in the Condensed Consolidated Balance Sheets is as follows (in millions):
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||||||||
| Definite-lived: | ||||||||||||||
| Patents, tradenames and trademarks | $ | 180.0 | $ | (71.4) | $ | 181.3 | $ | (67.6) | ||||||
| Customer relationships, developed technology and other | 897.4 | (402.4) | 901.2 | (374.0) | ||||||||||
| TOTAL DEFINITE-LIVED INTANGIBLES | $ | 1,077.4 | $ | (473.8) | $ | 1,082.5 | $ | (441.6) | ||||||
| Indefinite-lived: | ||||||||||||||
| Tradenames and other | 40.5 | — | 40.6 | — | ||||||||||
| TOTAL OTHER INTANGIBLE ASSETS | $ | 1,117.9 | $ | (473.8) | $ | 1,123.1 | $ | (441.6) | ||||||
Amortization expense associated with definite-lived intangible assets was $17.4 million and $19.1 million during the three months ended June 30, 2022 and 2021, respectively, and $34.9 million and $39.0 million during the six months ended June 30, 2022 and 2021, respectively. Future amortization expense associated with these intangible assets is estimated to be $34.8 million for the remainder of 2022, $65.3 million in 2023, $61.3 million in 2024, $57.2 million in 2025, $53.7 million in 2026, and $48.6 million in 2027. 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 asset's useful life, or using a straight line method. Approximately 80% of the gross value of definite-lived intangible assets follow an accelerated amortization method.
The Company completed its annual goodwill impairment test as of April 1, 2022. The Company applied the "Step-zero" test to one of its four reporting units, which allows the Company to first assess qualitative factors to determine whether it is more likely than not that a reporting unit's fair value is greater than its carrying amount. Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of this reporting unit substantially exceeded its carrying value and, therefore, further quantitative analysis was not required. For the other three reporting units, the Company elected to utilize the quantitative goodwill impairment testing process, as permitted in the accounting guidance, by comparing the estimated fair value of the reporting units to their carrying values. If the estimated fair value exceeds its carrying value, no impairment exists.
Goodwill impairment testing requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units and determining the fair value of each reporting unit. Significant judgment is required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates and other assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic, impacts to the supply chain and higher inflation. The Company uses internal discounted cash flow models to estimate fair value. These cash flow estimates are derived from historical experience, third party end market data, and future long-term business plans and include assumptions of future sales growth, gross margin, operating margin, terminal growth rate, and the application of an appropriate discount rate. Significant changes in these estimates and assumptions could affect the determination of fair value and/or goodwill impairment for each reporting unit. The Company believes that its estimated aggregate fair value of its reporting units is reasonable when compared to the Company's market capitalization on the valuation date.
As of April 1, 2022, the impairment testing resulted in implied fair values for each reporting unit that significantly exceeded such reporting unit's carrying value, including goodwill. The Company did not have any reporting units at risk of failing the quantitative impairment test as the excess of the implied fair value significantly exceeded the carrying value of each of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts.
HUBBELL INCORPORATED-Form 10-Q 13
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The Company performs its impairment assessment of indefinite-lived intangible assets as of April 1st of each year, unless circumstances dictate the need for more frequent assessments. For the 2022 test, the Company elected to utilize the quantitative impairment testing process as permitted in the accounting guidance, by comparing the estimated fair value of the indefinite-lived intangible assets to their carrying values. If the estimated fair value of the indefinite-lived intangible assets exceeds their carrying value, no impairment exists. The estimated fair value was determined utilizing an income approach (relief from royalty method). Significant judgment is required to estimate the fair value of the indefinite-lived intangible assets including assumptions for future revenues, discount rates, royalty rates, and other assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. Significant changes in these estimates and assumptions could affect the determination of fair value and/or impairment for each indefinite-lived intangible asset. As of April 1, 2022, the impairment testing resulted in estimated fair values for each indefinite-lived intangible asset that significantly exceeded the carrying values and there were no indefinite-lived intangible assets at risk of failing the quantitative impairment test.
HUBBELL INCORPORATED-Form 10-Q 14
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NOTE 7 Other Accrued Liabilities
Other accrued liabilities consists of the following (in millions):
| June 30, 2022 | December 31, 2021 | |||||||
| Customer program incentives | $ | 53.6 | $ | 67.3 | ||||
| Accrued income taxes | 11.0 | 4.8 | ||||||
| Contract liabilities - deferred revenue | 21.9 | 16.7 | ||||||
| Customer refund liability | 15.3 | 16.7 | ||||||
Accrued warranties(1) | 36.0 | 36.7 | ||||||
| Current operating lease liabilities | 29.4 | 27.1 | ||||||
| Other | 114.5 | 94.1 | ||||||
| TOTAL | $ | 281.7 | $ | 263.4 | ||||
(1) Refer to Note 22 - Guarantees, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding warranties.
NOTE 8 Other Non-Current Liabilities
Other non-current liabilities consists of the following (in millions):
| June 30, 2022 | December 31, 2021 | |||||||
| Pensions | $ | 187.5 | $ | 189.8 | ||||
| Other post-retirement benefits | 17.0 | 17.0 | ||||||
| Deferred tax liabilities | 102.2 | 114.7 | ||||||
Accrued warranties long-term(1) | 30.1 | 29.4 | ||||||
| Non-current operating lease liabilities | 82.6 | 58.3 | ||||||
| Other | 111.3 | 112.1 | ||||||
| TOTAL | $ | 530.7 | $ | 521.3 | ||||
(1) Refer to Note 22 - Guarantees, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding warranties.
HUBBELL INCORPORATED-Form 10-Q 15
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NOTE 9 Total Equity
A summary of changes in total equity for the three and six months ended June 30, 2022 and the three and six months ended June 30, 2021 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, 2021 | $ | 0.6 | $ | — | $ | 2,560.0 | $ | (330.8) | $ | 2,229.8 | $ | 10.9 | ||||||||
| Net income | — | — | 180.2 | — | 180.2 | 1.3 | ||||||||||||||
| Other comprehensive (loss) income | — | — | — | 5.4 | 5.4 | — | ||||||||||||||
| Stock-based compensation | — | 11.1 | — | — | 11.1 | — | ||||||||||||||
Acquisition/surrender of common shares(1) | — | (11.2) | (145.2) | — | (156.4) | — | ||||||||||||||
Cash dividends declared ($1.05 per share) | — | — | (56.9) | — | (56.9) | — | ||||||||||||||
| Dividends to noncontrolling interest | — | — | — | — | — | (1.1) | ||||||||||||||
| Directors deferred compensation | — | 0.1 | — | — | 0.1 | — | ||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | 0.6 | $ | — | $ | 2,538.1 | $ | (325.4) | $ | 2,213.3 | $ | 11.1 | ||||||||
| Net income | — | — | 122.0 | — | 122.0 | 1.5 | ||||||||||||||
| Other comprehensive (loss) income | — | — | — | (25.8) | (25.8) | — | ||||||||||||||
| Stock-based compensation | — | 5.6 | — | — | 5.6 | — | ||||||||||||||
Acquisition/surrender of common shares(1) | — | (1.9) | — | — | (1.9) | — | ||||||||||||||
Cash dividends declared ($1.05 per share) | — | — | (56.5) | — | (56.5) | — | ||||||||||||||
| Dividends to noncontrolling interest | — | — | — | — | — | (1.6) | ||||||||||||||
| Directors deferred compensation | — | 0.2 | — | — | 0.2 | — | ||||||||||||||
| BALANCE AT JUNE 30, 2022 | $ | 0.6 | $ | 3.9 | $ | 2,603.6 | $ | (351.2) | $ | 2,256.9 | $ | 11.0 | ||||||||
HUBBELL INCORPORATED-Form 10-Q 16
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| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Hubbell Shareholders' Equity | Non- controlling interest | |||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | 0.6 | $ | 4.9 | $ | 2,393.7 | $ | (329.2) | $ | 2,070.0 | $ | 15.4 | ||||||||
| Net income | — | — | 77.7 | — | 77.7 | 1.4 | ||||||||||||||
| Other comprehensive (loss) income | — | — | — | (4.6) | (4.6) | — | ||||||||||||||
| Stock-based compensation | — | 9.5 | — | — | 9.5 | — | ||||||||||||||
Acquisition/surrender of common shares(1) | — | (14.0) | (2.7) | — | (16.7) | — | ||||||||||||||
Cash dividends declared ($0.98 per share) | — | — | (53.3) | — | (53.3) | — | ||||||||||||||
| Dividends to noncontrolling interest | — | — | — | — | — | (1.5) | ||||||||||||||
| Directors deferred compensation | — | 0.1 | — | — | 0.1 | — | ||||||||||||||
| BALANCE AT MARCH 31, 2021 | $ | 0.6 | $ | 0.5 | $ | 2,415.4 | $ | (333.8) | $ | 2,082.7 | $ | 15.3 | ||||||||
| Net income | — | — | 95.8 | — | 95.8 | 0.8 | ||||||||||||||
| Other comprehensive (loss) income | — | — | — | 11.6 | 11.6 | — | ||||||||||||||
| Stock-based compensation | — | 3.9 | — | — | 3.9 | — | ||||||||||||||
Acquisition/surrender of common shares(1) | — | (4.5) | (10.5) | — | (15.0) | — | ||||||||||||||
Cash dividends declared ($0.98 per share) | — | — | (53.4) | — | (53.4) | — | ||||||||||||||
| Dividends to noncontrolling interest | — | — | — | — | — | (0.9) | ||||||||||||||
| Directors deferred compensation | — | 0.1 | — | — | 0.1 | — | ||||||||||||||
| BALANCE AT JUNE 30, 2021 | $ | 0.6 | $ | — | $ | 2,447.3 | $ | (322.2) | $ | 2,125.7 | $ | 15.2 | ||||||||
(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 $145.2 million and $13.2 million in the first six months of 2022 and 2021, 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 17
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NOTE 10 Accumulated Other Comprehensive Loss
A summary of the changes in Accumulated other comprehensive loss (net of tax) for the six months ended June 30, 2022 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, 2021 | $ | 0.4 | $ | 0.6 | $ | (202.8) | $ | (129.0) | $ | (330.8) | |||||||
| Other comprehensive income (loss) before reclassifications | 0.1 | (1.2) | (2.9) | (25.1) | (29.1) | ||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.2) | — | 8.4 | 0.5 | 8.7 | ||||||||||||
| Current period other comprehensive income (loss) | (0.1) | (1.2) | 5.5 | (24.6) | (20.4) | ||||||||||||
| BALANCE AT JUNE 30, 2022 | $ | 0.3 | $ | (0.6) | $ | (197.3) | $ | (153.6) | $ | (351.2) | |||||||
A summary of the gain (loss) reclassifications out of Accumulated other comprehensive loss for the three and six months ended June 30, 2022 and 2021 is provided below (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| Details about Accumulated Other Comprehensive Loss Components | 2022 | 2021 | 2022 | 2021 | Location of Gain (Loss) Reclassified into Income | |||||||||||||||
| Cash flow hedges gain (loss): | ||||||||||||||||||||
| Forward exchange contracts | $ | — | $ | — | $ | — | $ | (0.1) | Net sales | |||||||||||
| 0.2 | (0.5) | 0.2 | (0.8) | Cost of goods sold | ||||||||||||||||
| — | (0.2) | — | (0.2) | Other expense, net | ||||||||||||||||
| 0.2 | (0.7) | 0.2 | (1.1) | Total before tax | ||||||||||||||||
| — | 0.2 | — | 0.3 | Tax benefit (expense) | ||||||||||||||||
| $ | 0.2 | $ | (0.5) | $ | 0.2 | $ | (0.8) | Gain (loss) net of tax | ||||||||||||
| Amortization of defined benefit pension and post retirement benefit items: | ||||||||||||||||||||
| Prior-service costs (a) | $ | (0.1) | $ | (0.1) | $ | (0.2) | $ | (0.1) | ||||||||||||
| Actuarial gains/(losses) (a) | (2.5) | (2.7) | (5.0) | (5.4) | ||||||||||||||||
| Settlement losses (a) | (5.8) | — | (5.8) | — | ||||||||||||||||
| (8.4) | (2.8) | (11.0) | (5.5) | Total before tax | ||||||||||||||||
| 2.1 | 0.7 | 2.6 | 1.4 | Tax benefit (expense) | ||||||||||||||||
| $ | (6.3) | $ | (2.1) | $ | (8.4) | $ | (4.1) | Gain (loss) net of tax | ||||||||||||
| Reclassification of currency translation gain (loss): | ||||||||||||||||||||
| $ | — | $ | — | $ | (0.5) | $ | — | Gain (loss) on disposition of business (Note 2) | ||||||||||||
| — | — | — | — | Tax benefit (expense) | ||||||||||||||||
| $ | — | $ | — | $ | (0.5) | $ | — | Gain (loss) net of tax | ||||||||||||
| Gains (losses) reclassified into earnings | $ | (6.1) | $ | (2.6) | $ | (8.7) | $ | (4.9) | Gain (loss) net of tax | |||||||||||
(a) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 12 - Pension and Other Benefits in the Notes to Condensed Consolidated Financial Statements for additional details).
HUBBELL INCORPORATED-Form 10-Q 18
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NOTE 11 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 six months ended June 30, 2022 and 2021 (in millions, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| Numerator: | ||||||||||||||
| Net income from continuing operations attributable to Hubbell Incorporated | $ | 135.6 | $ | 88.8 | $ | 238.1 | $ | 162.1 | ||||||
| Less: Earnings allocated to participating securities | (0.4) | (0.3) | (0.6) | (0.5) | ||||||||||
| Net income from continuing operations available to common shareholders | $ | 135.2 | $ | 88.5 | $ | 237.5 | $ | 161.6 | ||||||
| Net (loss) income from discontinued operations attributable to Hubbell Incorporated | $ | (13.6) | $ | 7.0 | $ | 64.1 | $ | 11.4 | ||||||
| Less: Earnings allocated to participating securities | — | — | (0.2) | — | ||||||||||
| Net (loss) income from discontinued operations available to common shareholders | $ | (13.6) | $ | 7.0 | $ | 63.9 | $ | 11.4 | ||||||
| Net income attributable to Hubbell Incorporated | $ | 122.0 | $ | 95.8 | $ | 302.2 | $ | 173.5 | ||||||
| Less: Earnings allocated to participating securities | (0.4) | (0.3) | (0.8) | (0.6) | ||||||||||
| Net income available to common shareholders | $ | 121.6 | $ | 95.5 | $ | 301.4 | $ | 172.9 | ||||||
| Denominator: | ||||||||||||||
| Average number of common shares outstanding | 53.6 | 54.3 | 53.8 | 54.3 | ||||||||||
| Potential dilutive common shares | 0.3 | 0.4 | 0.3 | 0.4 | ||||||||||
| Average number of diluted shares outstanding | 53.9 | 54.7 | 54.1 | 54.7 | ||||||||||
| Basic earnings per share: | ||||||||||||||
| Basic earnings per share from continuing operations | $ | 2.52 | $ | 1.63 | $ | 4.41 | $ | 2.97 | ||||||
| Basic earnings per share from discontinued operations | $ | (0.25) | $ | 0.13 | $ | 1.19 | $ | 0.22 | ||||||
| Basic earnings per share | $ | 2.27 | $ | 1.76 | $ | 5.60 | $ | 3.19 | ||||||
| Diluted earnings per share: | ||||||||||||||
| Diluted earnings per share from continuing operations | $ | 2.51 | $ | 1.62 | $ | 4.39 | $ | 2.95 | ||||||
| Diluted earnings per share from discontinued operations | $ | (0.25) | $ | 0.12 | $ | 1.18 | $ | 0.21 | ||||||
| Diluted earnings per share | $ | 2.26 | $ | 1.74 | $ | 5.57 | $ | 3.16 | ||||||
The Company did not have any significant anti-dilutive securities outstanding during the three and six months ended June 30, 2022 and 2021.
HUBBELL INCORPORATED-Form 10-Q 19
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NOTE 12 Pension and Other Benefits
The following table sets forth the components of net pension and other benefit costs for the three and six months ended June 30, 2022 and 2021 (in millions):
| Pension Benefits | Other Benefits | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| Three Months Ended June 30, | ||||||||||||||
| Service cost | $ | 0.2 | $ | 0.3 | $ | — | $ | — | ||||||
| Interest cost | 6.3 | 6.0 | 0.1 | 0.2 | ||||||||||
| Expected return on plan assets | (8.2) | (9.2) | — | — | ||||||||||
| Amortization of prior service cost | 0.1 | 0.1 | — | — | ||||||||||
| Amortization of actuarial losses (gains) | 2.6 | 2.7 | (0.1) | — | ||||||||||
| Settlement losses | 5.8 | — | — | — | ||||||||||
| NET PERIODIC BENEFIT COST | $ | 6.8 | $ | (0.1) | $ | — | $ | 0.2 | ||||||
| Six Months Ended June 30, | ||||||||||||||
| Service cost | $ | 0.4 | $ | 0.5 | $ | — | $ | — | ||||||
| Interest cost | 12.6 | 12.0 | 0.2 | 0.3 | ||||||||||
| Expected return on plan assets | (16.4) | (18.3) | — | — | ||||||||||
| Amortization of prior service cost | 0.2 | 0.1 | — | — | ||||||||||
| Amortization of actuarial losses (gains) | 5.2 | 5.4 | (0.2) | — | ||||||||||
| Settlement losses | 5.8 | — | — | — | ||||||||||
| NET PERIODIC BENEFIT COST | $ | 7.8 | $ | (0.3) | $ | — | $ | 0.3 | ||||||
In the second quarter of 2022, the Company recorded $4.4 million of settlement losses in continuing operations and $1.4 million of settlement losses in discontinued operations 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 made $2.5 million in contributions to its foreign pension plans during the six months ended June 30, 2022. 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 2022.
HUBBELL INCORPORATED-Form 10-Q 20
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NOTE 13 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 June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and 2021 are set forth below (in millions):
| 2022 | 2021 | |||||||
BALANCE AT JANUARY 1, (a) | $ | 66.1 | $ | 72.7 | ||||
| Provision | 7.3 | 4.4 | ||||||
| Expenditures/payments/other | (7.3) | (9.4) | ||||||
BALANCE AT June 30, (a) | $ | 66.1 | $ | 67.7 | ||||
(a) Refer to Note 7 – Other Accrued Liabilities and Note 8 – Other Non-Current Liabilities for a breakout of short-term and long-term warranties.
HUBBELL INCORPORATED-Form 10-Q 21
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NOTE 14 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 June 30, 2022 our accounts receivable balance was $780.5 million, net of allowances of $13.9 million. During the six months ended June 30, 2022 our allowances increased approximately $3.3 million.
Investments
At June 30, 2022 and December 31, 2021, the Company had $65.6 million and $54.0 million, respectively, of available-for-sale municipal debt securities. These investments had an amortized cost of $66.6 million and $53.3 million, respectively. No allowance for credit losses related to our available-for-sale debt securities was recorded for the six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021 the unrealized losses attributable to our available-for-sale debt securities was $1.2 million and $0.1 million, respectively. The fair value of available-for-sale debt securities with unrealized losses was $49.6 million at June 30, 2022 and $12.2 million at December 31, 2021.
The Company also had trading securities of $20.2 million at June 30, 2022 and $24.5 million at December 31, 2021 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.
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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 June 30, 2022 and December 31, 2021 (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 | ||||||||||
| June 30, 2022 | ||||||||||||||
Money market funds(a) | $ | 232.3 | $ | — | $ | — | $ | 232.3 | ||||||
Time Deposits(a) | — | 4.8 | — | 4.8 | ||||||||||
| Available for sale investments | — | 65.6 | — | 65.6 | ||||||||||
| Trading securities | 20.2 | — | — | 20.2 | ||||||||||
| Deferred compensation plan liabilities | (20.2) | — | — | (20.2) | ||||||||||
| Derivatives: | ||||||||||||||
Forward exchange contracts-Assets(b) | — | 0.3 | — | 0.3 | ||||||||||
Forward exchange contracts-(Liabilities)(c) | — | (0.1) | — | (0.1) | ||||||||||
| TOTAL | $ | 232.3 | $ | 70.6 | $ | — | $ | 302.9 | ||||||
| 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, 2021 | ||||||||||||||
Money market funds(a) | $ | 58.5 | $ | — | $ | — | $ | 58.5 | ||||||
| Available for sale investments | — | 54.0 | — | 54.0 | ||||||||||
| Trading securities | 24.5 | — | — | 24.5 | ||||||||||
| Deferred compensation plan liabilities | (24.5) | — | — | (24.5) | ||||||||||
| Derivatives: | ||||||||||||||
Forward exchange contracts-Assets(b) | — | 0.5 | — | 0.5 | ||||||||||
| TOTAL | $ | 58.5 | $ | 54.5 | $ | — | $ | 113.0 | ||||||
(a) Money market funds and time deposits 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 $1.9 million and $2.3 million of trading securities related to these deferred compensation plans during the six months ended June 30, 2022 and 2021, respectively. As a result of participant distributions, the Company sold $2.4 million of these trading securities during the six months ended June 30, 2022 and $3.0 million during the six months ended June 30, 2021. 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.
Long Term Debt
As of June 30, 2022 and December 31, 2021, the carrying value of long-term debt, net of unamortized discount and debt issuance costs, was $1,436.7 million and $1,435.5 million, respectively. The estimated fair value of the long-term debt as of June 30, 2022 and December 31, 2021 was $1,355.6 million and $1,524.5 million, respectively, using quoted market prices in active markets for similar liabilities (Level 2).
HUBBELL INCORPORATED-Form 10-Q 23
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NOTE 15 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.
HUBBELL INCORPORATED-Form 10-Q 24
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NOTE 16 Restructuring Costs and Other
In the three and six months ended June 30, 2022, we incurred costs for restructuring actions initiated in 2022 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. 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 six months ended June 30, 2022 and 2021 is as follows (in millions):
| Three Months Ended June 30, | ||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Cost of goods sold | Selling & administrative expense | Total | ||||||||||||||||||
| Electrical Solutions | $ | 0.5 | $ | 0.5 | $ | 0.6 | $ | 0.3 | $ | 1.1 | $ | 0.8 | ||||||||
| Utility Solutions | 0.7 | 0.3 | (0.2) | 0.1 | 0.5 | 0.4 | ||||||||||||||
| Total Pre-Tax Restructuring Costs | $ | 1.2 | $ | 0.8 | $ | 0.4 | $ | 0.4 | $ | 1.6 | $ | 1.2 | ||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Cost of goods sold | Selling & administrative expense | Total | ||||||||||||||||||
| Electrical Solutions | $ | 0.6 | $ | 0.7 | $ | 0.7 | $ | 0.1 | $ | 1.3 | $ | 0.8 | ||||||||
| Utility Solutions | 1.7 | 0.6 | 0.2 | 0.1 | 1.9 | 0.7 | ||||||||||||||
| Total Pre-Tax Restructuring Costs | $ | 2.3 | $ | 1.3 | $ | 0.9 | $ | 0.2 | $ | 3.2 | $ | 1.5 | ||||||||
The following table summarizes the accrued liabilities for our restructuring actions (in millions):
| Beginning Accrued Restructuring Balance 1/1/22 | Pre-tax Restructuring Costs | Utilization and Foreign Exchange | Ending Accrued Restructuring Balance 6/30/2022 | |||||||||||
| 2022 Restructuring Actions | ||||||||||||||
| Severance | $ | — | $ | 2.0 | $ | (0.2) | $ | 1.8 | ||||||
| Asset write-downs | — | — | — | — | ||||||||||
| Facility closure and other costs | — | 0.8 | (0.7) | 0.1 | ||||||||||
| Total 2022 Restructuring Actions | $ | — | $ | 2.8 | $ | (0.9) | $ | 1.9 | ||||||
| 2021 and Prior Restructuring Actions | ||||||||||||||
| Severance | $ | 4.1 | $ | 0.3 | $ | (0.6) | $ | 3.8 | ||||||
| Asset write-downs | — | — | — | — | ||||||||||
| Facility closure and other costs | 0.1 | 0.1 | (0.2) | — | ||||||||||
| Total 2021 and Prior Restructuring Actions | $ | 4.2 | $ | 0.4 | $ | (0.8) | $ | 3.8 | ||||||
| Total Restructuring Actions | $ | 4.2 | $ | 3.2 | $ | (1.7) | $ | 5.7 | ||||||
HUBBELL INCORPORATED-Form 10-Q 25
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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 2021 | Costs incurred in the first six months of 2022 | Remaining costs at 6/30/2022 | |||||||||||
| 2022 Restructuring Actions | ||||||||||||||
| Electrical Solutions | $ | 1.1 | $ | — | $ | 0.8 | $ | 0.3 | ||||||
| Utility Solutions | 3.1 | — | 2.0 | 1.1 | ||||||||||
| Total 2022 Restructuring Actions | $ | 4.2 | $ | — | $ | 2.8 | $ | 1.4 | ||||||
| 2021 and Prior Restructuring Actions | ||||||||||||||
| Electrical Solutions | $ | 2.2 | $ | 1.5 | $ | 0.5 | $ | 0.2 | ||||||
| Utility Solutions | 7.3 | 2.4 | (0.1) | 5.0 | ||||||||||
| Total 2021 and Prior Restructuring Actions | $ | 9.5 | $ | 3.9 | $ | 0.4 | $ | 5.2 | ||||||
| Total Restructuring Actions | $ | 13.7 | $ | 3.9 | $ | 3.2 | $ | 6.6 | ||||||
NOTE 17 Debt and Financing Arrangements
Long-term debt consists of the following (in millions):
| Maturity | June 30, 2022 | December 31, 2021 | |||||||||
Senior notes at 3.35% | 2026 | $ | 397.5 | $ | 397.2 | ||||||
Senior notes at 3.15% | 2027 | 297.2 | 297.0 | ||||||||
Senior notes at 3.50% | 2028 | 445.9 | 445.5 | ||||||||
Senior notes at 2.300% | 2031 | 296.1 | 295.8 | ||||||||
TOTAL LONG-TERM DEBT(a) | $ | 1,436.7 | $ | 1,435.5 | |||||||
(a)Long-term debt is presented net of debt issuance costs and unamortized discounts.
2021 Credit Facility
The Company has a five-year credit agreement with a syndicate of lenders and JPMorgan Chase, N.A., as administrative agent, that provides a $750 million committed revolving credit facility (the “2021 Credit Facility"). Commitments under the 2021 Credit Facility may be increased to an aggregate amount not to exceed $1.25 billion.
The 2021 Credit Facility contains a financial covenant requiring that, as of the last day of each fiscal quarter, the ratio of total indebtedness to total capitalization shall not be greater than 65%. The Company was in compliance with this covenant as of June 30, 2022. As of June 30, 2022, the 2021 Credit Facility was undrawn.
Short-Term Debt
The Company had $5.8 million and $9.7 million of short-term debt outstanding at June 30, 2022 and December 31, 2021, respectively, which consisted primarily of borrowings to support our international operations in China and other short term debt to support operations.
HUBBELL INCORPORATED-Form 10-Q 26
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NOTE 18 Stock-Based Compensation
As of June 30, 2022, 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, 2022, 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, 2022.
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 either in three equal installments on each of the first three anniversaries of the grant date or 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 2022, the Company granted 55,457 restricted stock awards with a fair value per share of $185.87.
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 2022, the Company granted 137,099 SAR awards. The fair value of each SAR award was measured using the Black-Scholes option pricing model.
The following table summarizes the weighted-average assumptions used in estimating the fair value of the SARs granted during the first three months of 2022:
| Grant Date | Expected Dividend Yield | Expected Volatility | Risk Free Interest Rate | Expected Term | Weighted Avg. Grant Date Fair Value of 1 SAR | ||||||||||||
| February 2022 | 2.1% | 27.4% | 1.8% | 4.9 years | $39.25 | ||||||||||||
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 SARs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the award.
HUBBELL INCORPORATED-Form 10-Q 27
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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 - Market Condition
In February 2022, the Company granted 14,076 performance shares that will vest subject to a market condition and service condition through the performance period. The market condition associated with the awards is the Company's total shareholder return ("TSR") compared to the TSR generated by the companies that comprise the S&P Capital Goods 900 index over a three year performance period. Performance at target will result in vesting and issuance of the number of performance shares granted, equal to 100% payout. Performance below or above target can result in issuance in the range of 0%-200% of the number of shares granted. Expense is recognized irrespective of the market condition being achieved.
The fair value of the performance share awards with a market condition for the 2022 grant was determined based upon a lattice model.
The following table summarizes the related assumptions used to determine the fair values of the performance share awards with a market condition granted during February 2022:
| Grant Date | Stock Price on Measurement Date | Dividend Yield | Expected Volatility | Risk Free Interest Rate | Expected Term | Weighted Avg. Grant Date Fair Value | ||||||||||||||
| February 2022 | $185.87 | 2.3% | 39.7% | 1.6% | 2.9 years | $221.94 | ||||||||||||||
Expected volatilities are based on historical volatilities of the Company’s and members of the peer group's stock over the expected term of the award. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term of the award.
Performance Shares - Performance Condition
In February 2022, the Company granted 28,628 performance shares that will vest subject to an internal Company-based performance condition and service requirement.
Fifty percent of these performance 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. Fifty percent of these performance shares granted will vest based on achieved operating profit margin performance 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.
The fair value of the award is measured based upon the average of the high and low trading prices of the Company's common stock on the measurement date reduced by the present value of dividends expected to be paid during the requisite service period. The Company expenses these awards on a straight-line basis over the requisite service period and including an assessment of the performance achieved to date. The weighted average fair value per share was $174.48 for the awards granted in the first quarter of 2022.
| Grant Date | Fair Value | Performance Period | Payout Range | ||||||||||||||
| February 2022 | $174.48 | Jan 2022 - Dec 2024 | 0-200% | ||||||||||||||
HUBBELL INCORPORATED-Form 10-Q 28
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NOTE 19 Subsequent Events
On July 8, 2022, the Company acquired all of the issued and outstanding membership interests of PCX Holdings LLC ("PCX") for a cash purchase price of approximately $128 million. PCX is a leading designer and manufacturer of factory built modular power solutions for applications in the data center market. This business will be reported in the Electrical Solutions segment
On July 11, 2022, the Company acquired all of the issued and outstanding membership interests of Ripley Tools, LLC and Nooks Hill Road, LLC, collectively referred to as Ripley Tools, for a cash purchase price of approximately $50 million. Ripley Tools is a leading manufacturer of cable and fiber prep tools and test equipment that serves both the Electric and Utility and Communications market. This business will be reported in the Utility Solutions segment.
These acquisitions will be accounted for as business combinations whereby purchase accounting requires the assets acquired and liabilities assumed to be recognized at their fair value as of the acquisition date and goodwill and other intangible assets associated with tradenames and customer lists, among others, to be recognized. The preliminary purchase accounting for these acquisitions has not yet been completed.
HUBBELL INCORPORATED-Form 10-Q 29
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| ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Executive Overview of the Business
Hubbell is a global manufacturer of quality electrical products and utility solutions for a broad range of customer and end market applications. We provide utility and electrical solutions that enable our customers to operate critical infrastructure reliably and efficiently, and we empower and energize communities through innovation solutions supporting energy infrastructure In Front of the Meter, on The Edge, and Behind the Meter. In Front of the Meter is where utilities transmit and distribute energy to their customers. The Edge connects utilities with owner/operators and allows energy and data to be distributed back and forth. Behind the Meter is where owners and operators of building and other critical infrastructure consume energy. Products are either sourced complete, manufactured or assembled by subsidiaries in the United States, Canada, Puerto Rico, Mexico, China, the UK, Brazil, Australia, Spain and Ireland. The Company also participates in joint ventures in Hong Kong and the Philippines, and maintains offices in Singapore, Italy, China, India, Mexico, South Korea, Chile, and countries in the Middle East. The Company employed approximately 15,900 individuals worldwide as of June 30, 2022.
The Company’s reporting segments consist of the Electrical Solutions segment and the Utility Solutions segment.
Results for the three and six months ended June 30, 2022 by segment are included under “Segment Results” within this Management’s Discussion and Analysis.
The Company's long-term strategy is to serve its customers with reliable and innovative electrical and related infrastructure solutions with desired brands and high-quality service, delivered through a competitive cost structure; to complement organic revenue growth with acquisitions that enhance its product offerings; and to allocate capital effectively to create shareholder value.
Our strategy to complement organic revenue growth with acquisitions is focused on acquiring assets that extend our capabilities, expand our product offerings, and present opportunities to compete in core, adjacent or complementary markets. Our acquisition strategy also provides the opportunity to advance our revenue growth objectives during periods of weakness or inconsistency in our end-markets.
Our strategy to deliver products through a competitive cost structure has resulted in past and ongoing restructuring and related activities. Our restructuring and related efforts include the consolidation of manufacturing and distribution facilities, and workforce actions, as well as streamlining and consolidating our back-office functions. The primary objectives of our restructuring and related activities are to optimize our manufacturing footprint, cost structure, and effectiveness and efficiency of our workforce.
Productivity improvement also continues to be a key area of focus for the Company and efforts to drive productivity complement our restructuring and related activities to minimize the impact of rising material costs and other administrative cost inflation. Because material costs are approximately two thirds of our cost of goods sold, volatility in this area can significantly impact profitability. Our goal is to have pricing and productivity programs that offset material and other inflationary cost increases as well as pay for investments in key growth areas.
Productivity programs affect virtually all functional areas within the Company by reducing or eliminating waste and improving processes. We continue to expand our efforts related to global product and component sourcing and supplier cost reduction programs. Value engineering efforts, product transfers and the use of lean process improvement techniques are expected to continue to increase manufacturing efficiency. In addition, we continue to build upon the benefits of our enterprise resource planning system across all functions.
Our sales are also subject to market conditions that may cause customer demand for our products to be volatile and unpredictable, particularly in our Electrical Solutions segment. Product demand can be affected by fluctuations in domestic and international economic conditions, as well as currency fluctuations, commodity costs, and a variety of other factors. We have recently experienced significant inflationary pressure across much of our business and have initiated pricing actions to cover the higher costs and protect our margin profile. Because we expect inflation to remain a factor for the foreseeable future, we expect to continue these pricing actions subject, however, to demand and market conditions. Accordingly, there can be no assurance that we will be able to maintain our margins if inflation persists or accelerates. In addition, macroeconomic effects such as increases in interest rates and other measures taken by central banks and other policy makers could have a negative effect on overall economic activity that could reduce our customers’ demand for our products.
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Impact of the COVID-19 Pandemic
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). U.S. federal, state, local, and foreign governments reacted to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economies, including the shutdown of large portions of, or imposition of restrictions on, the U.S. and global economies. Notwithstanding a general improvement in conditions and reduction of adverse effects from the pandemic, as of June 30, 2022 there continues to be significant uncertainty around the scope, severity, and duration of the pandemic, as well as the breadth and duration of business disruptions related to it and the overall impact on the U.S., global economies, and our operating results in future periods.
Additionally, as economies have re-opened, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions have, in certain cases, affected our ability to ship finished products in a timely manner. These supply chain disruptions and the increase in demand have also led to increased freight, labor and commodity cost that may persist through 2022.
Discontinued Operations
On February 1, 2022, the Company completed the sale of the Commercial and Industrial Lighting business (the "C&I Lighting business") to GE Current, a Daintree Company, for total cash consideration of $350 million, subject to customary adjustments with respect to working capital. The sale of this business is reported as a discontinued operation in our Condensed Consolidated Financial Statements. For additional information regarding this transaction and its effect on our financial reporting, see Note 2 – Discontinued Operations, in the accompanying Condensed Consolidated Financial Statements, which note is incorporated herein by reference.
The following is a discussion and analysis of our business, financial condition and results of operations as of and for the three and six month periods ended June 30, 2022 and 2021. This discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto in Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Results of Operations – Second Quarter of 2022 compared to the Second Quarter of 2021
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
| Three Months Ended June 30, | ||||||||||||||
| 2022 | % of Net sales | 2021 | % of Net sales | |||||||||||
| Net sales | $ | 1,256.0 | $ | 1,054.3 | ||||||||||
| Cost of goods sold | 872.8 | 69.5 | % | 756.0 | 71.7 | % | ||||||||
| Gross profit | 383.2 | 30.5 | % | 298.3 | 28.3 | % | ||||||||
| Selling & administrative ("S&A") expense | 192.6 | 15.3 | % | 156.1 | 14.8 | % | ||||||||
| Operating income | 190.6 | 15.2 | % | 142.2 | 13.5 | % | ||||||||
| Net income from continuing operations | 137.1 | 10.9 | % | 89.6 | 8.5 | % | ||||||||
| Less: Net income from continuing operations attributable to non-controlling interest | (1.5) | (0.1) | % | (0.8) | (0.1) | % | ||||||||
| Net income from continuing operations attributable to Hubbell Incorporated | 135.6 | 10.8 | % | 88.8 | 8.4 | % | ||||||||
| (Loss) income from discontinued operations, net of tax | (13.6) | 7.0 | ||||||||||||
| Net income attributable to Hubbell incorporated | 122.0 | 95.8 | ||||||||||||
| Less: Earnings allocated to participating securities | (0.4) | (0.3) | ||||||||||||
| Net income available to common shareholders | $ | 121.6 | $ | 95.5 | ||||||||||
| Average number of diluted shares outstanding | 53.9 | 54.7 | ||||||||||||
| DILUTED EARNINGS PER SHARE - CONTINUING OPERATIONS | $ | 2.51 | $ | 1.62 | ||||||||||
| DILUTED EARNINGS PER SHARE - DISCONTINUED OPERATIONS | $ | (0.25) | $ | 0.12 | ||||||||||
In the following discussion of results of operations, we refer to "adjusted" operating measures. We believe those adjusted measures, which exclude the impact of certain costs, gains and losses, may provide investors with useful information regarding our underlying performance from period to period and allow investors to understand our results of operations without regard to items we do not consider a component of our core operating performance.
HUBBELL INCORPORATED-Form 10-Q 31
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Adjusted operating measures exclude amortization of all intangible assets associated with our business acquisitions, including inventory step-up amortization associated with those acquisitions. The intangible assets associated with our business acquisitions arise from the allocation of the purchase price using the acquisition method of accounting in accordance with Accounting Standards Codification 805, “Business Combinations.” These assets consist primarily of customer relationships, developed technology, trademarks and tradenames, and patents, as reported in Note 7 – Goodwill and Other Intangible Assets, under the heading “Total Definite-Lived Intangibles,” within the Company’s audited consolidated financial statements set forth in its Annual Report on Form 10-K for fiscal year ended December 31, 2021.
The Company believes that the exclusion of these non-cash expenses (i) enhances management’s and investors’ ability to analyze underlying business performance, (ii) facilitates comparisons of our financial results over multiple periods, and (iii) provides more relevant comparisons of our results with the results of other companies as the amortization expense associated with these assets may fluctuate significantly from period to period based on the timing, size, nature, and number of acquisitions. Although we exclude amortization of these acquired intangible assets and inventory step-up from our non-GAAP results, we believe that it is important for investors to understand that revenue generated, in part, from such intangibles is included within revenue in determining adjusted net income attributable to Hubbell Incorporated.
Adjusted operating measurers also exclude the following:
• 2022 - A pension settlement charge of $4.4 million.
• 2021 - A $16.8 million pre-tax loss on the early extinguishment of long-term debt from the redemption of all of the Company's outstanding 3.625% Senior Notes due 2022 in the aggregate principal amount of $300 million and a $6.8 million loss on the disposal of a business.
These items are reported in Total other expense (below Operating income) in the Condensed Consolidated Statements of Income. The Company excludes these non-core items because we believe it enhances management's and investors' ability to analyze underlying business performance and facilitates comparisons of our financial results over multiple periods. Refer to the reconciliation of non-GAAP measures presented below, Note 12 – Pension and Other Benefits and Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources – Debt to Capital - Unsecured Senior Notes, for additional information.
Organic net sales (or organic net sales growth), a non-GAAP measure, represents Net sales according to U.S. GAAP, less Net sales from acquisitions and divestitures during the first twelve months of ownership or divestiture, respectively, less the effect of fluctuations in Net sales from foreign currency exchange. The period-over-period effect of fluctuations in Net sales from foreign currency exchange is calculated as the difference between local currency Net sales of the prior period translated at the current period exchange rate as compared to the same local currency Net sales translated at the prior period exchange rate. We believe this measure provides management and investors with a more complete understanding of the underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency as these activities can obscure underlying trends. When comparing Net sales growth between periods, excluding the effects of acquisitions, business dispositions and currency exchange rates, those effects are different when comparing results for different periods. For example, because Net sales from acquisitions are considered inorganic from the date we complete an acquisition through the end of the first year following the acquisition, Net sales from such acquisition are reflected as organic net sales thereafter.
There are limitations to the use of non-GAAP measures. Non-GAAP measures do not present complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. These financial measures should not be considered in isolation from, as substitutes for, or alternative measures of, reported GAAP financial results, and should be viewed in conjunction with the most comparable GAAP financial measures and the provided reconciliations thereto. We believe, however, that these non-GAAP financial measures, when viewed together with our GAAP results and related reconciliations, provide a more complete understanding of our business. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not rely on any single financial measure.
HUBBELL INCORPORATED-Form 10-Q 32
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The following table reconciles each of our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
| Three Months Ended June 30, | ||||||||||||||
| 2022 | % of Net sales | 2021 | % of Net sales | |||||||||||
| Gross profit (GAAP measure) | $ | 383.2 | 30.5 | % | $ | 298.3 | 28.3 | % | ||||||
| Amortization of acquisition-related intangible assets | 5.6 | 0.5 | % | 6.9 | 0.6 | % | ||||||||
| Adjusted gross profit | $ | 388.8 | 31.0 | % | $ | 305.2 | 28.9 | % | ||||||
| S&A expenses (GAAP measure) | $ | 192.6 | 15.3 | % | $ | 156.1 | 14.8 | % | ||||||
| Amortization of acquisition-related intangible assets | 11.8 | 0.9 | % | 12.7 | 1.2 | % | ||||||||
| Adjusted S&A expenses | $ | 180.8 | 14.4 | % | $ | 143.4 | 13.6 | % | ||||||
| Operating income (GAAP measure) | $ | 190.6 | 15.2 | % | $ | 142.2 | 13.5 | % | ||||||
| Amortization of acquisition-related intangible assets | 17.4 | 1.4 | % | 19.6 | 1.8 | % | ||||||||
| Adjusted operating income | $ | 208.0 | 16.6 | % | $ | 161.8 | 15.3 | % | ||||||
| Net income from continuing operations attributable to Hubbell Incorporated (GAAP measure) | $ | 135.6 | $ | 88.8 | ||||||||||
| Amortization of acquisition-related intangible assets | 17.4 | 19.6 | ||||||||||||
| Loss on disposition of business | — | 6.8 | ||||||||||||
| Loss on extinguishment of debt | — | 16.8 | ||||||||||||
| Pension charge | 4.4 | — | ||||||||||||
| Subtotal | $ | 21.8 | $ | 43.2 | ||||||||||
Income tax effects(1) | 5.4 | 10.3 | ||||||||||||
| Adjusted net income from continuing operations attributable to Hubbell Incorporated | $ | 152.0 | $ | 121.7 | ||||||||||
| Less: Earnings allocated to participating securities | (0.4) | (0.4) | ||||||||||||
| Adjusted net income from continuing operations available to common shareholders | $ | 151.6 | $ | 121.3 | ||||||||||
| Average number of diluted shares outstanding | 53.9 | 54.7 | ||||||||||||
| ADJUSTED EARNINGS PER SHARE – DILUTED FROM CONTINUING OPERATIONS | $ | 2.81 | $ | 2.22 | ||||||||||
(1) The income tax effects are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction, unless otherwise noted.
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Three Months Ended June 30, | ||||||||||||||
| 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | |||||||||||
| Net sales growth (GAAP measure) | $ | 201.7 | 19.1 | $ | 216.8 | 25.9 | ||||||||
| Impact of acquisitions | — | — | 35.8 | 4.3 | ||||||||||
| Impact of divestitures | (1.3) | (0.1) | (0.6) | (0.1) | ||||||||||
| Foreign currency exchange | (3.2) | (0.4) | 8.1 | 1.0 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 206.2 | 19.6 | $ | 173.5 | 20.7 | ||||||||
Net Sales
Net sales of $1,256.0 million in the second quarter of 2022 increased by $201.7 million compared to the second quarter of 2021. Organic net sales increased by 19.6% primarily due to favorable price realization, and higher unit volume, which was partially offset by 0.4% due to foreign exchange and 0.1% due to the impact of divestitures.
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Cost of Goods Sold
As a percentage of Net sales, cost of goods sold decreased by 220 basis points to 69.5% in the second quarter of 2022, as compared to 71.7% in the second quarter of 2021. The decrease was primarily driven by favorable price realization that was in excess of material cost inflation, and higher unit volume, partially offset by higher freight, logistics and manufacturing costs, and cost increases in excess of productivity.
Gross Profit
The gross profit margin in the second quarter of 2022 increased by 220 basis points to 30.5% as compared to 28.3% in the second quarter of 2021. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 31.0% in the second quarter of 2022 as compared to 28.9% in the same period of the prior year. The increase in the adjusted gross profit margin primarily reflects favorable price realization that was in excess of material cost inflation, and higher unit volume, partially offset by higher freight, logistics and manufacturing costs, and cost increases in excess of productivity.
Selling & Administrative Expenses
S&A expense in the second quarter of 2022 was $192.6 million and increased by $36.5 million compared to the prior year period. S&A expense as a percentage of Net sales increased by 50 basis points to 15.3% in the second quarter of 2022. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales was 14.4% in the second quarter of 2022 which increased by 80 basis points compared to the same period of the prior year, primarily as a result of the impact of higher T&E cost and other cost inflation, partially offset by a benefit from an increase in Net sales volume.
Total Other Expense
Total other expense decreased by $21.1 million in the second quarter of 2022 to $14.6 million, primarily due to a $16.8 million loss on extinguishment of debt and $6.8 million loss on the disposition of a business recorded during the second quarter of 2021, partially offset by a pension settlement charge of $4.4 million recorded during the second quarter of 2022.
Income Taxes
The effective tax rate in the second quarter of 2022 increased to 22.1% as compared to 15.9% in the second quarter of 2021, primarily due to more favorable tax effects in the second quarter of 2021 from stock based compensation and statute of limitation expirations on certain tax reserves. On July 21, 2022 the Company closed an IRS examination of the 2017 period and as a result will recognize a related benefit in income tax expense in the third quarter of 2022.
Net Income From Continuing Operations Attributable to Hubbell Incorporated and Earnings Per Diluted Share From Continuing Operations
Net income from continuing operations attributable to Hubbell Incorporated was $135.6 million in the second quarter of 2022 and increased 52.7% as compared to the same period of the prior year. As a result, earnings per diluted share from continuing operations in the second quarter of 2022 increased 54.9% as compared to the second quarter of 2021. Adjusted net income from continuing operations attributable to Hubbell Incorporated, which excludes amortization of acquisition-related intangibles from both periods, a pension settlement charge in 2022 and a loss on the extinguishment of debt and loss on the disposition of business in 2021, was $152.0 million in the second quarter of 2022 and increased by 24.9% as compared to the second quarter of 2021. Adjusted earnings per diluted share from continuing operations in the second quarter of 2022 increased by 26.6% as compared to the second quarter of 2021.
(Loss) Income From Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was $13.6 million in the second quarter of 2022 as compared to income of $7.0 million in the same prior year period. The results in the second quarter of 2022 included $4.5 million of pre-tax transaction and separation costs.
HUBBELL INCORPORATED-Form 10-Q 34
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Segment Results
ELECTRICAL SOLUTIONS
| Three Months Ended June 30, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Net sales | $ | 527.5 | $ | 465.5 | ||||
| Operating income (GAAP measure) | 79.2 | 69.3 | ||||||
| Amortization of acquisition-related intangible assets | 3.5 | 3.3 | ||||||
| Adjusted operating income | $ | 82.7 | $ | 72.6 | ||||
| Operating margin (GAAP measure) | 15.0 | % | 14.9 | % | ||||
| Adjusted operating margin | 15.7 | % | 15.6 | % | ||||
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Three Months Ended June 30, | ||||||||||||||
| Electrical Solutions | 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | ||||||||||
| Net sales growth (GAAP measure) | $ | 62.0 | 13.3 | $ | 107.8 | 30.1 | ||||||||
| Impact of acquisitions | — | — | 5.5 | 1.5 | ||||||||||
| Impact of divestitures | — | — | — | — | ||||||||||
| Foreign currency exchange | (3.7) | (0.8) | 6.4 | 1.8 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 65.7 | 14.1 | $ | 95.9 | 26.8 | ||||||||
Net sales in the Electrical Solutions segment in the second quarter of 2022 were $527.5 million and increased by $62.0 million, or 13.3%, as compared to the second quarter of 2021. The increase resulted from a 14.1% increase in organic net sales in the second quarter of 2022 as compared to the same prior year period, primarily due to favorable price realization and higher unit volume, partially offset by a 0.8% decrease from foreign exchange.
Operating income in the Electrical Solutions segment for the second quarter of 2022 was $79.2 million and increased approximately 14.3% compared to the second quarter of 2021, while operating margin in the second quarter of 2022 increased by 10 basis points to 15.0%. Excluding amortization of acquisition-related intangibles, adjusted operating margin increased by 10 basis points to 15.7%, as compared to the same prior year period. The increase in the adjusted operating margin in the second quarter of 2022 is primarily due to favorable price realization that was in excess of higher material costs, and higher unit volume, partially offset by higher freight, logistics and manufacturing costs and cost increases in excess of productivity.
HUBBELL INCORPORATED-Form 10-Q 35
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UTILITY SOLUTIONS
| Three Months Ended June 30, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Net sales | $ | 728.5 | $ | 588.8 | ||||
| Operating income (GAAP measure) | 111.4 | 72.9 | ||||||
| Amortization of acquisition-related intangible assets | 13.9 | 16.3 | ||||||
| Adjusted operating income | $ | 125.3 | $ | 89.2 | ||||
| Operating margin (GAAP measure) | 15.3 | % | 12.4 | % | ||||
| Adjusted operating margin | 17.2 | % | 15.1 | % | ||||
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Three Months Ended June 30, | ||||||||||||||
| Utility Solutions | 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | ||||||||||
| Net sales growth (GAAP measure) | $ | 139.7 | 23.7 | $ | 109.0 | 22.7 | ||||||||
| Impact of acquisitions | — | — | 30.3 | 6.3 | ||||||||||
| Impact of divestitures | (1.3) | (0.3) | (0.6) | (0.1) | ||||||||||
| Foreign currency exchange | 0.5 | 0.1 | 1.7 | 0.3 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 140.5 | 23.9 | $ | 77.6 | 16.2 | ||||||||
Net sales in the Utility Solutions segment in the second quarter of 2022 were $728.5 million, an increase of $139.7 million, or 23.7%, as compared to the second quarter of 2021. This increase was due to a 23.9% increase in organic net sales in the second quarter of 2022 as compared to the same prior year period, driven by favorable price realization, and higher unit volumes, partially offset by 0.3% due to the impact of divestitures.
Operating income in the Utility Solutions segment for the second quarter of 2022 was $111.4 million, increasing 52.8% compared to the second quarter of 2021. Operating margin increased to 15.3% as compared to 12.4% in the same period of 2021. Excluding amortization of acquisition-related intangibles, the adjusted operating margin increased to 17.2% in the second quarter of 2022 compared to 15.1% in the prior year period, primarily driven by price realization that exceeded material cost inflation, higher unit volume, partially offset by higher freight, logistics and manufacturing costs, costs increases in excess of productivity and higher investments.
HUBBELL INCORPORATED-Form 10-Q 36
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Results of Operations – Six months ended June 30, 2022 compared to the Six months ended June 30, 2021
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
| Six Months Ended June 30, | ||||||||||||||
| 2022 | % of Net sales | 2021 | % of Net sales | |||||||||||
| Net sales | $ | 2,412.1 | $ | 2,010.6 | ||||||||||
| Cost of goods sold | 1,705.8 | 70.7 | % | 1,450.1 | 72.1 | % | ||||||||
| Gross profit | 706.3 | 29.3 | % | 560.5 | 27.9 | % | ||||||||
| Selling & administrative ("S&A") expense | 372.8 | 15.5 | % | 308.4 | 15.4 | % | ||||||||
| Operating income | 333.5 | 13.8 | % | 252.1 | 12.5 | % | ||||||||
| Net income from continuing operations | 240.9 | 10.0 | % | 164.3 | 8.2 | % | ||||||||
| Less: Net income from continuing operations attributable to non-controlling interest | (2.8) | (0.1) | % | (2.2) | (0.1) | % | ||||||||
| Net income from continuing operations attributable to Hubbell Incorporated | 238.1 | 9.9 | % | 162.1 | 8.1 | % | ||||||||
| Income from discontinued operations, net of tax | 64.1 | 11.4 | ||||||||||||
| Net income attributable to Hubbell incorporated | 302.2 | 173.5 | ||||||||||||
| Less: Earnings allocated to participating securities | (0.8) | (0.6) | ||||||||||||
| Net income available to common shareholders | $ | 301.4 | $ | 172.9 | ||||||||||
| Average number of diluted shares outstanding | 54.1 | 54.7 | ||||||||||||
| DILUTED EARNINGS PER SHARE - CONTINUING OPERATIONS | $ | 4.39 | $ | 2.95 | ||||||||||
| DILUTED EARNINGS PER SHARE - DISCONTINUED OPERATIONS | $ | 1.18 | $ | 0.21 | ||||||||||
The following table reconciles each of our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
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| Six Months Ended June 30, | ||||||||||||||
| 2022 | % of Net sales | 2021 | % of Net sales | |||||||||||
| Gross profit (GAAP measure) | $ | 706.3 | 29.3 | % | $ | 560.5 | 27.9 | % | ||||||
| Amortization of acquisition-related intangible assets | 11.1 | 0.4 | % | 15.5 | 0.7 | % | ||||||||
| Adjusted gross profit | $ | 717.4 | 29.7 | % | $ | 576.0 | 28.6 | % | ||||||
| S&A expenses (GAAP measure) | $ | 372.8 | 15.5 | % | $ | 308.4 | 15.3 | % | ||||||
| Amortization of acquisition-related intangible assets | 23.8 | 1.0 | % | 25.5 | 1.2 | % | ||||||||
| Adjusted S&A expenses | $ | 349.0 | 14.5 | % | $ | 282.9 | 14.1 | % | ||||||
| Operating income (GAAP measure) | $ | 333.5 | 13.8 | % | $ | 252.1 | 12.5 | % | ||||||
| Amortization of acquisition-related intangible assets | 34.9 | 1.5 | % | 41.0 | 2.1 | % | ||||||||
| Adjusted operating income | $ | 368.4 | 15.3 | % | $ | 293.1 | 14.6 | % | ||||||
| Net income from continuing operations attributable to Hubbell Incorporated (GAAP measure) | $ | 238.1 | $ | 162.1 | ||||||||||
| Amortization of acquisition-related intangible assets | 34.9 | 41.0 | ||||||||||||
| Loss on disposition of business | — | 6.8 | ||||||||||||
| Loss on extinguishment of debt | — | 16.8 | ||||||||||||
| Pension charge | 4.4 | — | ||||||||||||
| Subtotal | $ | 39.3 | $ | 64.6 | ||||||||||
Income tax effects(1) | 9.8 | 15.6 | ||||||||||||
| Adjusted net income from continuing operations attributable to Hubbell Incorporated | $ | 267.6 | $ | 211.1 | ||||||||||
| Less: Earnings allocated to participating securities | (0.7) | (0.7) | ||||||||||||
| Adjusted net income from continuing operations available to common shareholders | $ | 266.9 | $ | 210.4 | ||||||||||
| Average number of diluted shares outstanding | 54.1 | 54.7 | ||||||||||||
| ADJUSTED EARNINGS PER SHARE – DILUTED FROM CONTINUING OPERATIONS | $ | 4.93 | $ | 3.85 | ||||||||||
(1) The income tax effects are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction, unless otherwise noted.
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Six Months Ended June 30, | ||||||||||||||
| 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | |||||||||||
| Net sales growth (GAAP measure) | $ | 401.5 | 20.0 | $ | 215.5 | 12.0 | ||||||||
| Impact of acquisitions | — | — | 68.7 | 3.8 | ||||||||||
| Impact of divestitures | (4.0) | (0.2) | (0.6) | (0.1) | ||||||||||
| Foreign currency exchange | (3.5) | (0.1) | 9.0 | 0.6 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 409.0 | 20.3 | $ | 138.4 | 7.7 | ||||||||
Net Sales
Net sales of $2,412.1 million in the first six months of 2022 increased by $401.5 million compared to the first six months of 2021. Organic net sales increased by 20.3% primarily due to favorable price realization, and higher unit volume, which was partially offset by 0.2% due to the impact of divestitures.
Cost of Goods Sold
As a percentage of Net sales, cost of goods sold decreased by 140 basis points to 70.7% in the first six months of 2022, as compared to 72.1% in the first six months of 2021. The decrease was primarily driven by favorable price realization that was in excess of material cost inflation, and higher unit volume, and lower intangible amortization, partially offset by higher freight, logistics and manufacturing costs and cost increases in excess of productivity.
HUBBELL INCORPORATED-Form 10-Q 38
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Gross Profit
The gross profit margin in the first six months of 2022 increased by 140 basis points to 29.3% as compared to 27.9% in the first six months of 2021. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 29.7% in the first six months of 2022 as compared to 28.6% in the same period of the prior year. The increase in the adjusted gross profit margin primarily reflects favorable price realization that was in excess of material cost inflation and higher unit volume, partially offset by higher freight, logistics and manufacturing costs and cost increases in excess of productivity.
Selling & Administrative Expenses
S&A expense in the first six months of 2022 was $372.8 million and increased by $64.4 million compared to the prior year period. S&A expense as a percentage of Net sales increased by 20 basis points to 15.5% in the first six months of 2022. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales was 14.5% in the first six months of 2022 which was increased by 40 basis points from 14.1% in the same period of the prior year, as the impact of higher T&E cost and other cost inflation was partially offset by a benefit from an increase in Net sales volume.
Total Other Expense
Total other expense decreased by $25.6 million in the first six months of 2022 to $24.1 million, primarily due to a $16.8 million loss on extinguishment of debt and $6.8 million loss on the disposition of a business recorded during the second quarter of 2021, and $7.9 million of income from transition services related to the C&I Lighting business disposition recorded in 2022, partially offset by a pension settlement charge of $4.4 million recorded in the second quarter of 2022.
Income Taxes
The effective tax rate in the first six months of 2022 increased to 22.1% as compared to 18.8% in the first six months of 2021, primarily due to favorable tax effects in 2021 from stock based compensation and statute of limitation expirations on certain tax reserves.
Net Income From Continuing Operations Attributable to Hubbell Incorporated and Earnings Per Diluted Share From Continuing Operations
Net income from continuing operations attributable to Hubbell Incorporated was $238.1 million in the first six months of 2022 and increased 46.9% as compared to the same period of the prior year. As a result, earnings per diluted share from continuing operations in the first six months of 2022 increased 48.8% as compared to the first six months of 2021. Adjusted net income from continuing operations attributable to Hubbell Incorporated, which excludes amortization of acquisition-related intangibles from both periods, a pension settlement charge in 2022, and the loss on extinguishment of debt and loss on the disposition of business in 2021, was $267.6 million in the first six months of 2022 and increased by 26.8% as compared to the same period of the prior year. Adjusted earnings per diluted share from continuing operations in the first six months of 2022 increased by 28.1% as compared to the first six months of 2021.
Income From Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax was $64.1 million in the first six months of 2022, as compared to income of $11.4 million in the same prior year period. The results in the first six months 2022 included a $80.7 million gain on disposal as a result of the disposition of the C&I Lighting business, partially offset by $6.6 million of transaction and separation costs.
HUBBELL INCORPORATED-Form 10-Q 39
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Segment Results
ELECTRICAL SOLUTIONS
| Six Months Ended June 30, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Net sales | $ | 1,031.8 | $ | 889.6 | ||||
| Operating income (GAAP measure) | 134.0 | 118.5 | ||||||
| Amortization of acquisition-related intangible assets | 7.0 | 6.7 | ||||||
| Adjusted operating income | $ | 141.0 | $ | 125.2 | ||||
| Operating margin (GAAP measure) | 13.0 | % | 13.3 | % | ||||
| Adjusted operating margin | 13.7 | % | 14.1 | % | ||||
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Six Months Ended June 30, | ||||||||||||||
| Electrical Solutions | 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | ||||||||||
| Net sales growth (GAAP measure) | $ | 142.2 | 16.0 | $ | 101.0 | 12.8 | ||||||||
| Impact of acquisitions | — | — | 11.2 | 1.4 | ||||||||||
| Impact of divestitures | — | — | — | — | ||||||||||
| Foreign currency exchange | (4.5) | (0.5) | 8.4 | 1.1 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 146.7 | 16.5 | $ | 81.4 | 10.3 | ||||||||
Net sales in the Electrical Solutions segment in the first six months of 2022 were $1,031.8 million and increased by $142.2 million, or 16.0%, as compared to the first six months of 2021. The increase resulted from a 16.5% increase in organic net sales in the first six months of 2022 as compared to the same prior year period, primarily due to favorable price realization and higher unit volume, partially offset by a 0.5% decrease from foreign exchange.
Operating income in the Electrical Solutions segment for the first six months of 2022 was $134.0 million and increased approximately 13.1% compared to the first six months of 2021, while operating margin in the first six months of 2022 decreased by 30 basis points to 13.0%. Excluding amortization of acquisition-related intangibles, adjusted operating margin decreased by 40 basis points to 13.7%, as compared to the same prior year period. The decrease in the adjusted operating margin in the first six months of 2022 is primarily due to higher freight, logistics and manufacturing costs, costs increases in excess of productivity, partially offset by price realization, that exceeded material cost inflation and higher Net sales volume.
HUBBELL INCORPORATED-Form 10-Q 40
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UTILITY SOLUTIONS
| Six Months Ended June 30, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Net sales | $ | 1,380.3 | $ | 1,121.0 | ||||
| Operating income (GAAP measure) | 199.5 | 133.6 | ||||||
| Amortization of acquisition-related intangible assets | 27.9 | 34.3 | ||||||
| Adjusted operating income | $ | 227.4 | $ | 167.9 | ||||
| Operating margin (GAAP measure) | 14.5 | % | 11.9 | % | ||||
| Adjusted operating margin | 16.5 | % | 15.0 | % | ||||
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| Six Months Ended June 30, | ||||||||||||||
| Utility Solutions | 2022 | Inc/(Dec) % | 2021 | Inc/(Dec) % | ||||||||||
| Net sales growth (GAAP measure) | $ | 259.3 | 23.1 | $ | 114.5 | 11.4 | ||||||||
| Impact of acquisitions | — | — | 57.5 | 5.7 | ||||||||||
| Impact of divestitures | (4.0) | (0.4) | (0.6) | (0.1) | ||||||||||
| Foreign currency exchange | 1.0 | 0.1 | 0.6 | 0.1 | ||||||||||
| Organic net sales growth (non-GAAP measure) | $ | 262.3 | 23.4 | $ | 57.0 | 5.7 | ||||||||
Net sales in the Utility Solutions segment in the first six months of 2022 were $1,380.3 million, an increase of $259.3 million, or 23.1%, as compared to the first six months of 2021. This increase was due to a 23.4% increase in organic net sales driven by favorable price realization and higher unit volumes, partially offset by 0.4% due to the impact of divestitures.
Operating income in the Utility Solutions segment for the first six months of 2022 was $199.5 million, increasing 49.3% compared to the first six months of 2021. Operating margin increased to 14.5% as compared to 11.9% in the same period of 2021. Excluding amortization of acquisition-related intangibles, the adjusted operating margin increased to 16.5% in the first six months of 2022 compared to 15.0% in the prior year period, primarily driven by price realization that exceeded material cost inflation, higher unit volume, partially offset by, higher freight, logistics and manufacturing costs, costs increase in excess of productivity and increased investment.
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Financial Condition, Liquidity and Capital Resources
Cash Flow
| Six months ended June 30, | ||||||||
| (In millions) | 2022 | 2021 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities from continuing operations | $ | 174.2 | $ | 189.8 | ||||
| Investing activities from continuing operations | 293.8 | (24.6) | ||||||
| Financing activities from continuing operations | (278.2) | (178.3) | ||||||
| Cash from discontinued operations | (46.4) | 17.3 | ||||||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (6.0) | 1.7 | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | $ | 137.4 | $ | 5.9 | ||||
Cash provided by operating activities from continuing operations for the six months ended June 30, 2022 was $174.2 million compared to cash provided by operating activities from continuing operations of $189.8 million for the same period in 2021. The decrease was primarily due to changes in the components of working capital, as we invested in working capital to serve customer demand and growth in our order backlog, partially offset by higher net income during the first six months of 2022 compared to the same period in the prior year.
Cash provided by investing activities from continuing operations was $293.8 million in the six months ended June 30, 2022 compared to cash used of $24.6 million during the comparable period in 2021 and this increase was driven by $348.6 million in net proceeds from the disposal of the C&I Lighting business, partially offset by higher net purchases of available for sale investments, as well as higher cash used for capital expenditures in the first six months of 2022 compared to the first six months of 2021.
Cash used in financing activities from continuing operations was $278.2 million in the six months ended June 30, 2022 as compared to cash used of $178.3 million in the comparable period of 2021. The change in cash flows from financing activities of continuing operations primarily reflects an increase of $138.8 million from the Company's share repurchases in the first six months of 2022 compared to the same prior year period, partially offset by change in net borrowings.
Cash from discontinued operations was a use of cash of $46.4 million in the six months ended June 30, 2022 as compared to cash provided by discontinued operations of $17.3 million in the comparable period of 2021.
The unfavorable impact of foreign currency exchange rates on cash was $6.0 million for the six months ended June 30, 2022 and is primarily related to weakening of the British Pound, Canadian dollar and Australian Dollar versus the U.S. Dollar.
Investments in the Business
Investments in our business include cash outlays for the acquisition of businesses as well as expenditures to maintain the operation of our equipment and facilities and invest in restructuring activities.
In July 2022, the Company acquired all of the issued and outstanding membership interests of PCX Holdings LLC ("PCX") for a cash purchase price of approximately $128 million. PCX is a leading designer and manufacturer of factory built modular power solutions for applications in the data center market. This business will be reported in the Electrical Solutions segment. In July 2022, the Company also acquired all of the issued and outstanding membership interests of Ripley Tools, LLC and Nooks Hill Road, LLC, collectively referred to as Ripley Tools, for a cash purchase price of approximately $50 million. Ripley Tools is a leading manufacturer of cable and fiber prep tools and test equipment that serves both the Electric and Utility and Communications market. This business will be reported in the Utility Solutions segment.
We continue to invest in restructuring and related programs to maintain a competitive cost structure, to drive operational efficiencies and to mitigate the impact of rising material costs and administrative cost inflation. We expect our investment in restructuring and related activities to continue in 2022 as we continue to invest in previously initiated actions and initiate further footprint consolidation and other cost reduction initiatives.
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In connection with our restructuring and related actions, we have incurred restructuring costs as defined by U.S. GAAP, which are primarily severance and employee benefits, asset impairments, accelerated depreciation, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. We also incurred restructuring-related costs, which are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining of our processes, and certain other costs and gains associated with restructuring actions. We refer to these costs on a combined basis as "restructuring and related costs", which is a non-GAAP measure. We believe this non-GAAP measure provides investors with useful information regarding our underlying performance from period to period. Restructuring costs are predominantly settled in cash from our operating activities and are generally settled within one year, with the exception of asset impairments, which are non-cash.
The table below presents the restructuring and related costs incurred in the first six months of 2022, additional expected costs, and the expected completion date of restructuring actions that have been initiated as of June 30, 2022 and in prior years (in millions):
| Costs incurred in the six months ended June 30, 2022 | Additional expected costs | Expected completion date | |||||||||
| 2022 Restructuring Actions | $ | 2.8 | $ | 1.4 | 2022 | ||||||
| 2021 and Prior Restructuring Actions | 0.4 | 5.2 | 2022 | ||||||||
| Total Restructuring cost (GAAP measure) | $ | 3.2 | $ | 6.6 | |||||||
| Restructuring-related costs | 4.1 | 0.3 | |||||||||
| Restructuring and related costs (Non-GAAP) | $ | 7.3 | $ | 6.9 | |||||||
During the first six months of 2022, we invested $41.9 million in capital expenditures, an increase of $5.0 million from the comparable period of 2021 as we continue to invest in automation and productivity initiatives.
Stock Repurchase Program
On October 23, 2020, the Board of Directors approved a stock repurchase program that authorized the repurchase of up to $300 million of common stock and expires in October 2023 (the "October 2020 program"). In the first six months of 2022, the Company repurchased $150.0 million of shares of common stock authorized under the October 2020 program. At June 30, 2022, our remaining share repurchase authorization under the October 2020 program is $138.8 million. Subject to numerous factors, including market conditions and alternative uses of cash, we may conduct discretionary repurchases through open market or privately negotiated transactions, which may include repurchases under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.
Debt to Capital
At June 30, 2022 and December 31, 2021, the Company had $1,436.7 million and $1,435.5 million, respectively, of long-term debt outstanding, net of the unamortized balance of capitalized debt issuance costs.
Revolving Credit Facility
On March 12, 2021, the Company, as borrower, and its subsidiaries Hubbell Power Holdings S.à r.l. and Harvey Hubbell Holdings S.à r.l., each as a subsidiary borrower (collectively, the “Subsidiary Borrowers”) entered into a new five-year credit agreement with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provides a $750 million committed revolving credit facility (the “2021 Credit Facility"). Commitments under the 2021 Credit Facility may be increased to an aggregate amount not to exceed $1.25 billion. The 2021 Credit Facility includes a $50 million sub-limit for the issuance of letters of credit. The sum of the dollar amount of loans and letters of credits to the Subsidiary Borrowers under the 2021 Credit Facility may not exceed $75 million. There were no borrowings outstanding under the 2021 Credit Facility at June 30, 2022.
The interest rate applicable to borrowings under the 2021 Credit Facility is (i) either the alternate base rate (as defined in the 2021 Credit Facility) or (ii) the adjusted LIBOR rate (as defined in the 2021 Credit Facility) plus an applicable margin based on the Company’s credit ratings. All revolving loans outstanding under the 2021 Credit Facility will be due and payable on March 12, 2026.
The 2021 Credit Facility contains a financial covenant requiring that, as of the last day of each fiscal quarter, the ratio of total indebtedness to total capitalization shall not be greater than 65%. The Company was in compliance with this covenant as of June 30, 2022. As of June 30, 2022, the 2021 Credit Facility was undrawn.
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Unsecured Senior Notes
On March 12, 2021, the Company completed a public offering of $300 million aggregate principal amount of its 2.300% Senior Notes due 2031 (the “2031 Notes” and collectively with those described below, the "Notes"). The net proceeds from the offering were approximately $295.5 million after deducting the underwriting discount and estimated offering expenses payable by the Company. The 2031 Notes bear interest at a rate of 2.300% per annum from March 12, 2021. Interest on the 2031 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The 2031 Notes will mature on March 15, 2031.
The Company used the net proceeds from the offering of the 2031 Notes, together with cash on hand, on April 2, 2021 to redeem in full all of the Company’s outstanding 3.625% Senior Notes due in 2022 for an aggregate principal amount of $300 million, which had a stated maturity date of November 15, 2022, and to pay the premium and accrued interest in respect thereof. The redemption of the 2022 Notes resulted in a $16.8 million loss on extinguishment that was recognized in the second quarter of 2021.
At June 30, 2022 and December 31, 2021, the Company had outstanding unsecured, senior notes in principal amounts of $400 million due in 2026, $300 million due in 2027, $450 million due in 2028 and $300 million due in 2031.
The carrying value of the Notes, net of unamortized discount and the unamortized balance of capitalized debt issuance costs, was $1,436.7 million and $1,435.5 million at June 30, 2022 and December 31, 2021, respectively.
The Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of default, or upon a change in control triggering event as defined in the indenture governing the Notes, as supplemented. The Company was in compliance with all covenants (none of which are financial) as of June 30, 2022.
Short-term Debt
At June 30, 2022 and December 31, 2021 the Company had $5.8 million and $9.7 million, respectively, of short-term debt outstanding, which consisted primarily of borrowings to support our international operations in China, as well as $2.6 million of other short term debt at June 30, 2022 to support operations.
Net debt, defined as total debt less cash and investments, is a non-GAAP measure that may not be comparable to definitions used by other companies. We consider net debt to be a useful measure of our financial leverage for evaluating the Company’s ability to meet its funding needs.
| (In millions) | June 30, 2022 | December 31, 2021 | ||||||
| Total Debt | $ | 1,442.5 | $ | 1,445.2 | ||||
| Hubbell Incorporated Shareholders’ Equity | 2,256.9 | 2,229.8 | ||||||
| TOTAL CAPITAL | $ | 3,699.4 | $ | 3,675.0 | ||||
| Total Debt to Total Capital | 39 | % | 39 | % | ||||
| Cash and Investments | 510.0 | 364.7 | ||||||
| Net Debt | $ | 932.5 | $ | 1,080.5 | ||||
| Net Debt to Total Capital | 25 | % | 29 | % | ||||
Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operational funding needs, to fund additional investments, including acquisitions, and to make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividend payments, stock repurchases, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms. In the first six months of 2022, we returned capital to our shareholders by paying $113.3 million of dividends on our common stock and using $150.0 million of cash for share repurchases.
We also require cash outlays to fund our operations, capital expenditures, and working capital requirements to accommodate anticipated levels of business activity, as well as our rate of cash dividends, and potential future acquisitions. We have contractual obligations for long-term debt, operating leases, purchase obligations, and certain other long-term liabilities that are summarized in the Financial Condition, Liquidity and Capital Resources section in our Annual Report on Form 10-K for the year ended December 31, 2021. As a result of the Tax Cuts and Jobs Acts of 2017 (the "TCJA"), we also have an obligation to fund, by annual installments through 2025, the Company's liability for the transition tax on the deemed repatriation of foreign earnings.
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Our sources of funds and available resources to meet these funding needs are as follows:
◦Cash flows from operating activities and existing cash resources: In addition to cash flows from operating activities, we also had $424.2 million of cash and cash equivalents at June 30, 2022, of which approximately 53% was held inside the United States and the remainder held internationally.
◦Our 2021 Credit Facility provides a $750.0 million committed revolving credit facility and commitments under the 2021 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.250 billion. Annual commitment fees to support availability under the 2021 Credit Facility are not material. Although not the principal source of liquidity, we believe our 2021 Credit Facility is capable of providing significant financing flexibility at reasonable rates of interest and is an attractive alternative source of funding in the event that commercial paper markets experience disruption. However, an increase in usage of the 2021 Credit Facility related to growth or a significant deterioration in the results of our operations or cash flows could cause our borrowing costs to increase and/or our ability to borrow could be restricted. We have not entered into any guarantees that could give rise to material unexpected cash requirements. The full $750.0 million of borrowing capacity under the 2021 Credit Facility was available to the Company at June 30, 2022.
◦In addition to our commercial paper program and existing revolving credit facility, we also have the ability to obtain additional financing through the issuance of long-term debt. Considering our current credit rating, historical earnings performance, and financial position, we believe that we would be able to obtain additional long-term debt financing on attractive terms.
Critical Accounting Estimates
A summary of our critical accounting estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021. We are required to make estimates and judgments in the preparation of our financial statements that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a material impact on our financial results. During the six months ended June 30, 2022, there were no material changes in our estimates and critical accounting policies.
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Forward-Looking Statements
Some of the information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-Q, contain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These include statements about our expectations regarding our financial results, condition and outlook, anticipated end markets, expected capital resources, liquidity, financial performance, pension funding, and results of operations and are based on our reasonable current expectations. In addition, all statements regarding the expected financial impact of the integration of acquisitions and completion of certain divestitures, the anticipated effects of the COVID-19 pandemic and the responses thereto, including the pandemic’s impact on general economic and market conditions, as well as on our business, customers, end markets, results of operations and financial condition and anticipated actions to be taken by management in response to the pandemic and related governmental and business actions, as well as other statements that are not strictly historic in nature are forward looking. In addition, all statements regarding anticipated growth, changes in operating results, market conditions and economic conditions, adoption of updated accounting standards and any expected effects of such adoption, restructuring plans and expected associated costs and benefits, intent to repurchase shares of common stock, and changes in operating results, anticipated market conditions and productivity initiatives, including those regarding the adverse impact of the COVID-19 pandemic on the Company's end markets, are forward looking. Forward-looking statements may be identified by the use of words, such as “believe”, “expect”, “anticipate”, “intend”, “depend”, “should”, “plan”, “estimated”, “predict”, “could”, “may”, “subject to”, “continues”, “growing”, “prospective”, “forecast”, “projected”, “purport”, “might”, “if”, “contemplate”, “potential”, “pending,” “target”, “goals”, “scheduled”, “will likely be”, and similar words and phrases. Discussions of strategies, plans or intentions often contain forward-looking statements. Important factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include, but are not limited to:
•Availability, costs and quantity of raw materials, purchased components, energy and freight, particularly as global economic activity recovers from the effects of the COVID-19 pandemic.
•The scope, duration, or resurgence of the COVID-19 pandemic and its impact on global economic systems, our employees, sites, operations, customers, and supply chain.
•Changes in demand for our products, market conditions, product quality, or product availability adversely affecting sales levels.
•Ability to effectively develop and introduce new products.
•Changes in markets or competition adversely affecting realization of price increases.
•Failure to achieve projected levels of efficiencies, cost savings and cost reduction measures, including those expected as a result of our lean initiatives and strategic sourcing plans.
•Impacts of trade tariffs, import quotas or other trade restrictions or measures taken by the U.S., U.K. and other countries, including the recent and potential changes in U.S. trade policies.
•Failure to comply with import and export laws.
•Changes relating to impairment of our goodwill and other intangible assets.
•Inability to access capital markets or failure to maintain our credit ratings.
•Changes in expected or future levels of operating cash flow, indebtedness and capital spending.
•General economic and business conditions in particular industries, markets or geographic regions, as well as inflationary trends.
•Regulatory issues, changes in tax laws, including revisions or clarifications of the TCJA, or changes in geographic profit mix affecting tax rates and availability of tax incentives.
•A major disruption in one or more of our manufacturing or distribution facilities or headquarters, including the impact of plant consolidations and relocations.
•Changes in our relationships with, or the financial condition or performance of, key distributors and other customers, agents or business partners which could adversely affect our results of operations.
•Impact of productivity improvements on lead times, quality and delivery of product.
•Anticipated future contributions and assumptions including changes in interest rates and plan assets with respect to pensions and other retirement benefits, as well as pension withdrawal liabilities.
•Adjustments to product warranty accruals in response to claims incurred, historical experiences and known costs.
•Unexpected costs or charges, certain of which might be outside of our control.
•Changes in strategy, economic conditions or other conditions outside of our control affecting anticipated future global product sourcing levels.
•Ability to carry out future acquisitions and strategic investments in our core businesses as well as the acquisition related costs.
•Ability to successfully manage and integrate key acquisitions, mergers, and other transactions, such as the recent acquisitions of PCX and Ripley Tools, as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition.
•The impact of certain divestitures, including the benefits and costs of the sale of the C&I Lighting business to GE Current, a Daintree Company.
•The ability to effectively implement Enterprise Resource Planning systems without disrupting operational and financial processes.
•The ability of government customers to meet their financial obligations.
•Political unrest in foreign countries.
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•The impact of world economic and political issues, including the long-term effects of Brexit.
•The impact of potential natural disasters or additional public health emergencies on our financial condition and results of operations.
•Failure of information technology systems, security breaches, cyber threats, malware, phishing attacks, break-ins and similar events resulting in unauthorized disclosure of confidential information or disruptions or damage to information technology systems that could cause interruptions to our operations or adversely affect our internal control over financial reporting.
•Incurring significant and/or unexpected costs to avoid, manage, defend and litigate intellectual property matters.
•Future repurchases of common stock under our common stock repurchase program.
•Changes in accounting principles, interpretations, or estimates.
•Failure to comply with any laws and regulations, including those related to data privacy and information security, environmental and conflict-free minerals.
•The outcome of environmental, legal and tax contingencies or costs compared to amounts provided for such contingencies, including contingencies or costs with respect to pension withdrawal liabilities.
•Improper conduct by any of our employees, agents or business partners that damages our reputation or subjects us to civil or criminal liability.
•Our ability to hire, retain and develop qualified personnel.
•Adverse changes in foreign currency exchange rates and the potential use of hedging instruments to hedge the exposure to fluctuating rates of foreign currency exchange on inventory purchases.
•Completion of the transition from LIBOR to a replacement alternative reference rate.
•Other factors described in our Securities and Exchange Commission filings, including the “Business”, “Risk Factors,” "Management's Discussion and Analysis of Financial Condition and Results of Operations," and “Quantitative and Qualitative Disclosures about Market Risk” sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and in the Company's Quarterly Reports on Form 10-Q.
Any such forward-looking statements are not guarantees of future performances and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. The Company disclaims any duty to update any forward-looking statement, all of which are expressly qualified by the foregoing, other than as required by law.
| ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk | ||||
In the operation of its business, the Company has exposures to fluctuating foreign currency exchange rates, availability of purchased finished goods and raw materials, changes in material prices, foreign sourcing issues, and changes in interest rates. There have been no significant changes in our exposure to these market risks during the six months ended June 30, 2022. For a complete discussion of the Company’s exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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| ITEM 4 | Controls and Procedures | ||||
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, each of the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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| PART II | OTHER INFORMATION | ||||
| ITEM 1A | Risk Factors | ||||
There have been no material changes in the Company’s risk factors from those disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
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| ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Issuer Purchases of Equity Securities
On October 23, 2020 the Board of Directors approved a stock repurchase program that authorized the repurchase of up to $300 million of common stock and expires in October 2023. Our remaining share repurchase authorization under the 2020 program is $138.8 million. Subject to numerous factors, including market conditions and alternative uses of cash, we may conduct discretionary repurchases through open market or privately negotiated transactions, which may include repurchases under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.
There were no share repurchases during the quarter ended June 30, 2022.
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| ITEM 6 | Exhibits | ||||
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/ Furnished Herewith | ||||||||||||||
| 31.1 | * | |||||||||||||||||||
| 31.2 | * | |||||||||||||||||||
| 32.1 | ** | |||||||||||||||||||
| 32.2 | ** | |||||||||||||||||||
| 101 | The following materials from Hubbell Incorporated's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements. | |||||||||||||||||||
| 104 | The cover page of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included within the Exhibit 101 attachments) | * | ||||||||||||||||||
| * | Filed herewith | ||||
| ** | Furnished herewith | ||||
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 27, 2022
| HUBBELL INCORPORATED | ||||||||||||||
| By | /s/ William R. Sperry | By | /s/ Jonathan M. Del Nero | |||||||||||
| William R. Sperry | Jonathan M. Del Nero | |||||||||||||
| Executive Vice President and Chief Financial Officer | Vice President, Controller (Principal Accounting Officer) | |||||||||||||
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