HUBBELL INCORPORATED 
Executive Overview of the Business
The Company is a global manufacturer of quality electrical products and utility solutions for a broad range of non-residential and residential construction, industrial and utility applications. Products are either sourced complete, manufactured or assembled by subsidiaries inthe United States ,Canada ,Puerto Rico ,China ,Mexico , theUnited Kingdom ,Brazil ,Australia ,Spain andIreland . The Company also participates in joint ventures inTaiwan ,Hong Kong andthe Philippines , and maintains offices inSingapore ,Italy ,China ,India ,Mexico ,South Korea ,Chile , and countries in theMiddle East . The Company employed approximately 18,400 individuals worldwide as ofJune 30, 2020 . The Company's reporting segments consist of the Electrical segment and the Utility Solutions segment (formerly named the Power Systems segment). In the first quarter of 2020 our former Power segment was re-named Utility Solutions to reflect the depth and breadth of our industry-leading offering for electric, water, gas and telecom utilities ranging from a wide variety of critical infrastructure components to full-scale smart grid solutions. Results for the three and six months endedJune 30, 2020 by segment are included under "Segment Results" within this Management's Discussion and Analysis. InAugust 2019 , the Company completed the sale ofHaefely Test, AG ("Haefely"), which was previously included within the Electrical segment. 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
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 surrounding global product and component sourcing and supplier cost
reduction programs. Value engineering efforts, product transfers and the use of
lean process improvement techniques are expected to continue to increase
manufacturing efficiency. In addition, we continue to build upon the benefits of
our enterprise resource planning system across all functions.
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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), which began to affect the Company's business and
operations late in the first quarter of 2020 and became more pronounced during
the second quarter of 2020 as foreign and U.S. federal, state and local
governments reacted to the public health crisis with mitigation measures,
including the shutdown of large portions of the U.S. and global economies. The
pandemic continues to significantly affect U.S. and global economic conditions
as governments, businesses and individuals react to the COVID-19 pandemic and
efforts to reopen their respective economies. While the severity of the pandemic
has lessened in certain areas of the U.S. and certain other countries and
portions of the global and national economy have begun to reopen, there is still
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. and global economies.
The extent to which the coronavirus pandemic affects our business, operations
and financial results will depend on numerous evolving factors that we may not
be able to accurately predict including new information that may emerge
concerning the severity of the COVID-19 pandemic, whether there are additional
outbreaks of COVID-19, and the actions taken to contain it or treat its effects.
Due to heightened uncertainty relating to the COVID-19 pandemic on our business
operations, including the duration and impact on overall customer demand, we
withdrew our 2020 guidance in April and reinstated revised guidance in July.
Most of our manufacturing operations are currently deemed essential and continue
to operate. Our top priority has been to take appropriate actions to protect the
health and safety of our employees. We have adjusted standard operating
procedures within our business operations to ensure continued employee,
non-employee workers, vendor and customer safety, and are continually monitoring
evolving health guidelines and responding to changes as appropriate. These
procedures include expanded and more frequent cleaning within facilities,
implementation of appropriate distancing programs, and requiring use of certain
personal protective equipment. In March 2020 , we implemented a mandatory
work-at-home program for all of our administrative offices and employees; in
June we began to re-open certain of those administrative offices, subject to
statutory guidelines, including protocols regarding social distancing, shared
spaces, and the use of personal protective equipment. Despite these efforts, the
COVID-19 pandemic continues to pose the risk that our employees, contractors,
suppliers, customers and other business partners may be prevented from
conducting business activities, partially or completely, for an indefinite
period of time, including due to shutdowns that may be requested or mandated by
governmental authorities or imposed by our management, or that the pandemic may
otherwise interrupt or impair business activities.
We have developed action plans for a wide range of scenarios, but given the
uncertainty regarding the magnitude and duration of the pandemic's effects, it
is impossible to predict with specificity or quantify the future impact on our
business, financial condition and results of operations. In the second quarter
of 2020 certain of our manufacturing operations and installation services were
temporarily disrupted by shutdowns mandated by government authorities and from
actual and potential exposure to COVID-19, negatively affecting sales volume and
contributing to operating inefficiencies, such as a decrease in manufacturing
cost absorption in the quarter. These temporary disruptions included work
stoppages in several of our manufacturing operations in the U.S. , Mexico , and
the United Kingdom . We also experienced a temporary stoppage of certain large
meter installation services within our Aclara business in the second quarter. We
expect these disruptions and inefficiencies may continue to adversely affect our
operating results in future periods and the ultimate extent and duration of
these disruptions could have a material adverse effect on our results of
operations and liquidity in 2020.
The disruption in economic activity as a result of the COVID-19 pandemic also
affected customer demand across our end markets during the first half of 2020
and we anticipate that continuing measures to combat the pandemic will continue
to adversely affect demand for an unknown period. In general terms, we continue
to expect our Electrical segment to experience significant volume declines in
2020. In our Utility Solutions segment, demand continued to be strong within our
Power Systems business group, which provides critical T&D components to electric
utilities. Despite higher demand, Net sales were lower in the second quarter due
to a temporary supply chain disruption involving mandated regulatory orders to
close two large manufacturing facilities in Mexico . Net sales of our Aclara
business group were also negatively affected in the second quarter of 2020 by
the temporary stoppage of certain large meter installations and other regulatory
restrictions on smart infrastructure projects and deployments.
We incurred higher costs in the first half of 2020 due to increases to our bad
debt reserves in light of expected credit losses resulting from the
deterioration of general economic conditions. During the second quarter, our
labor costs increased due to the appreciation pay increase provided to our U.S.
and Mexican hourly employees, as well as salaried employees who are involved in
the ongoing management of plant and warehouse operations. We have also
implemented an emergency paid leave program for our employees that provides
hourly employees with up to 80 hours of paid time off. The extent and duration
of additional cost increases of this nature in the future, or other future costs
increases due to the COVID-19 pandemic, remains uncertain.
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In addition, we have taken actions that we expect may mitigate a portion of the
impact of the anticipated decline in demand and cost increases. Cost containment
actions effective for the second quarter of 2020 include a 25% salary reduction
for senior executives, a 15% salary reduction for all other executives, a two
week mandatory furlough for other salaried employees during the second quarter,
and forgone quarterly retainer payments for the Board of Directors. Beginning in
the first quarter of 2020 we instituted a travel and entertainment expense
freeze and other discretionary expense reduction initiatives and began
re-aligning facilities and headcount in response to expected changes in demand.
Our results of operations in the second quarter of 2020 reflect the benefit of
these actions, as well as other costs reductions associated with lower net sales
volume and economic activity. We expect an increase in costs in the second half
of the year as temporary containment actions are lifted and other costs
associated with net sale volume and economic activity begin to return and may
take further steps to manage costs, as appropriate, depending on order volume
patterns. We also continue to expect savings from our restructuring and related
activities and to invest in restructuring and related actions as appropriate.
Our net cash flows provided by operating activities were strong in the first
half of 2020; however, as a precautionary measure, in order to preserve
financial flexibility and liquidity in light of disruption in the global markets
resulting from the COVID-19 pandemic, we borrowed $225.0 million from our
revolving credit facility in March and April of 2020, of which $100.0 million
was repaid during the second quarter, and the remaining $125.0 million of
outstanding borrowings was repaid in July 2020 using a combination of cash on
hand and proceeds from commercial paper. As another precautionary measure, we
also anticipate limiting our capital expenditures in 2020.
Further quantification and discussion of these pandemic related effects are included in the discussion of results of operations below.
Results of Operations - Second Quarter of 2020 compared to the Second Quarter of 2019
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Three Months Ended June 30,
2020 % of Net sales 2019 % of Net sales
Net sales $ 949.2 $ 1,196.4
Cost of goods sold 668.7 70.4 % 839.0 70.1 %
Gross profit 280.5 29.6 % 357.4 29.9 %
Selling & administrative ("S&A") expense 149.0 15.7 % 190.5 15.9 %
Operating income 131.5 13.9 % 166.9 14.0 %
Net income attributable to Hubbell Incorporated 88.2 9.3 % 96.0 8.0 %
EARNINGS PER SHARE - DILUTED $ 1.62 $ 1.75
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. Adjusted operating
measures for the periods presented herein exclude amortization of intangible
assets associated with all of our business acquisitions, including inventory
step-up amortization associated with those acquisitions. Management uses these
adjusted measures when assessing the performance of the business.
Adjusted operating measures in 2019 also exclude a net charge reported in Total
other expense (below Operating income) in the Consolidated Statements of Income
to recognize certain additional liabilities associated with the Company's
previously disclosed withdrawal from a multi-employer pension plan. Refer to
Note 14 - Commitments and Contingencies in the Notes to Condensed Consolidated
Financial Statements, for additional information.
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The following table reconciles our adjusted financial measures to the directly
comparable GAAP financial measure (in millions, except per share amounts):
Three Months Ended
2020 % of Net sales 2019 % of Net sales
Gross profit (GAAP measure) $ 280.5 29.6 % $ 357.4 29.9 %
Amortization of acquisition-related intangible assets 6.4 6.0
Adjusted gross profit $ 286.9 30.2 % $ 363.4 30.4 %
S&A expenses (GAAP measure) $ 149.0 15.7 % $ 190.5 15.9 %
Amortization of acquisition-related intangible assets 12.2 12.0
Adjusted S&A expenses $ 136.8 14.4 % $ 178.5 14.9 %
Operating income (GAAP measure) $ 131.5 13.9 % $ 166.9 14.0 %
Amortization of acquisition-related intangible assets 18.6 18.0
Adjusted operating income $ 150.1 15.8 % $ 184.9 15.5 %
Net income attributable to
$ 96.0
Amortization of acquisition-related intangible assets, net of tax
13.9 13.5
Multi-employer pension charge, net of tax - 17.1
Adjusted net income attributable to
$ 126.6 Less: Earnings allocated to participating securities (0.4) (0.5) Adjusted net income available to common shareholders$ 101.7 $ 126.1 Average number of diluted shares outstanding 54.3 54.6 ADJUSTED EARNINGS PER SHARE - DILUTED$ 1.87 $ 2.31 Net Sales Net sales of$949.2 million in the second quarter of 2020 decreased by$247.2 million compared to the second quarter of 2019. Organic net sales declined by 20.5% due primarily to lower unit volume driven by the unfavorable effects of the COVID-19 pandemic on demand, as well as from supply chain disruptions due to the temporary closure of manufacturing facilities and restrictions on project deployments and installations within ourAclara business associated with the COVID-19 pandemic. The impact of lower unit volume was partially offset by favorable price realization. Net sales in the second quarter of 2020 increased from the effect of acquisitions and dispositions by less than one percentage point compared to the second quarter of 2019 as the decline from the disposal of the Haefely business was less than Net sales added by our fourth quarter 2019 acquisitions. The magnitude of the pandemic's effects varied by segment; Net sales of our Electrical segment declined by 26.3% in the second quarter of 2020 as compared to the same prior year period, reflecting notably weaker end market conditions. Despite higher demand from more resilient end markets, Net sales of our Utility Solutions segment declined by 13.0%, in the second quarter of 2020 as compared to the same prior year period due to a temporary supply chain disruption involving mandated local regulatory closure of two large manufacturing facilities.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold increased by 30 basis points to 70.4% in the second quarter of 2020, as compared to 70.1% in the second quarter of 2019. The increase was primarily driven by the effects of lower sales volume and inefficiencies related to the COVID pandemic, partially offset by favorable price realization in excess of material costs, favorable Net sales mix within our Utility Solutions segment, as well as higher savings and lower costs from our restructuring and related actions and higher savings from productivity initiatives.
Gross Profit
The gross profit margin in the second quarter of 2020 decreased by 30 basis
points to 29.6% as compared to 29.9% in the second quarter of 2019. Excluding
amortization of acquisition-related intangible assets, the adjusted gross profit
margin was 30.2% in the second quarter of 2020 as compared to 30.4% in the same
period of the prior year. The decrease in the adjusted gross profit margin
primarily reflects the effects of lower sales volume and inefficiencies related
to the COVID pandemic, partially offset by favorable price realization in excess
of material costs, favorable Net sales mix within our Utility Solutions segment,
as well as higher savings and lower costs from our restructuring and related
actions and higher savings from productivity initiatives.
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Selling & Administrative Expenses
S&A expense in the second quarter of 2020 was $149.0 million and decreased by
$41.5 million compared to the prior year period. S&A expense as a percentage of
Net sales decreased by 20 basis points to 15.7% in the second quarter of 2020.
Excluding amortization of acquisition-related intangible assets, adjusted S&A
expense as a percentage of Net sales decreased by 50 basis points to 14.4% in
the second quarter of 2020. The decrease in adjusted S&A expense as a percentage
of net sales is primarily due to the impact of compensation actions and other
cost reductions, including lower T&E costs, partially offset by the deleveraging
effect of lower sale volume.
Total Other Expense
Total other expense decreased by$24.8 million in the second quarter of 2020 to$18.5 million primarily due to a$22.9 million charge in the second quarter of 2019 associated with the withdrawal from a multi-employer pension plan, lower interest expense associated with a reduction in principal amount of borrowings outstanding under our Term Loan Agreement (as defined below), as well as lower non-service pension costs as compared to the same period of 2019.
Income Taxes
The effective tax rate in the second quarter of 2020 increased to 21.2% as compared to 20.8% in the second quarter of 2019 primarily due to the absence of favorable income tax effects of share-based compensation awards relative to the same period of the prior year, partially offset by net favorable year over year benefit from the release of reserves related to statute of limitations expirations.
Net Income Attributable to
Net income attributable toHubbell Incorporated was$88.2 million in the second quarter of 2020 and decreased 8.1% as compared to the same period of the prior year. Excluding amortization of acquisition-related intangibles from both periods and the multi-employer pension charge from 2019, adjusted net income attributable toHubbell Incorporated was$102.1 million in the second quarter of 2020 and decreased by 19.4% as compared to the second quarter of 2019 as a result of lower operating income driven primarily by lower net sales volumes and other COVID-19 pandemic effects detailed above, partially offset by lower non-operating costs such as interest expense and non-service pension costs. As a result, earnings per diluted share in the second quarter of 2020 decreased 7.4% as compared to the second quarter of 2019. Adjusted earnings per diluted share in the second quarter of 2020 decreased by 19.0% as compared to the second quarter of 2019. Segment Results ELECTRICAL Three Months Ended June 30, (In millions) 2020 2019 Net sales$ 507.1 $ 688.2 Operating income (GAAP measure) 57.1 88.0 Amortization of acquisition-related intangible assets 5.8 5.6 Adjusted operating income$ 62.9 $ 93.6 Operating margin (GAAP measure) 11.3 % 12.8 % Adjusted operating margin 12.4 % 13.6 % Net sales in the Electrical segment in the second quarter of 2020 were$507.1 million and declined by$181.1 million , or 26.3%, as compared to the second quarter of 2019. Organic net sales in the second quarter of 2020 decreased by approximately 26 percentage points as compared to the same prior year period, due to lower unit volume primarily driven by the unfavorable impact of the COVID-19 pandemic on demand and from supply chain disruptions caused by the temporary closures of a limited number of manufacturing facilities, which disruptions were resolved within the quarter (although there can be no assurance that new closures may not be mandated depending on pandemic conditions). Net sales in the second quarter of 2020 also declined from the effect of acquisitions and dispositions, by less than one percentage point, compared to the same prior year period as the decline from the disposal of the Haefely business was slightly greater than Net sales added by our fourth quarter 2019 acquisition. HUBBELL INCORPORATED-Form 10-Q 34 -------------------------------------------------------------------------------- Back to Contents Within the segment, the aggregate net sales of our Commercial andIndustrial and Construction and Energy business groups decreased in the second quarter of 2020 by approximately 26 percentage points, as compared to the prior year period primarily due to lower volume driven by the unfavorable effects of the pandemic on demand. Net sales of our Lighting business group declined by approximately 27 percentage points in the second quarter of 2020 as compared to the same prior year period due to lower unit volumes driven by the unfavorable effects of the pandemic on demand as well as the impact of supply chain disruptions as noted above. Within the Lighting business group, Net sales of commercial and industrial lighting products decreased by approximately 36% in the second quarter of 2020 as compared to the same prior year period, driven by continued lower overall market demand as well as softness in the national accounts and the impact of supply chain disruptions associated with the pandemic. Net sales of residential lighting products decreased by 4% in the second quarter of 2020 as compared to the same prior year period as weakness in home builder markets were largely offset by strength in home center and e-commerce sales. Operating income in the Electrical segment for the second quarter of 2020 was$57.1 million and decreased approximately 35% compared to the second quarter of 2019, while operating margin in the second quarter of 2020 decreased by 150 basis points to 11.3%. Excluding amortization of acquisition-related intangibles, adjusted operating income decreased 33%, as compared to the same prior year period and the adjusted operating margin decreased by 120 basis points to 12.4% in the second quarter of 2020 as compared to the same prior year period. The decrease in operating income and margin in the second quarter of 2020 is primarily due to lower net sales volume and inefficiencies related to COVID, partially offset by the impact of compensation actions and other cost reductions, favorable price realization in excess of material costs, as well as higher savings and lower costs from our restructuring and related activities.
UTILITY SOLUTIONS
Three Months Ended June 30,
(In millions) 2020 2019
Net sales $ 442.1 $ 508.2
Operating income (GAAP measure) 74.4 78.9
Amortization of acquisition-related intangible assets 12.8 12.4
Adjusted operating income $ 87.2 $ 91.3
Operating margin (GAAP measure) 16.8 % 15.5 %
Adjusted operating margin 19.7 % 18.0 %
Net sales in the Utility Solutions segment in the second quarter of 2020 were
$442.1 million , down $66.1 million , or 13%, as compared to the second quarter of
2019 due to supply chain disruptions from the temporary closure of manufacturing
locations and restrictions associated with the pandemic on project deployments
and installations. This impact was partially offset by acquisitions, which
contributed approximately one percentage point to net sales growth, as well as
resilient end-market demand and favorable price realization. Foreign exchange
was slightly unfavorable.
Within the Utility Solutions segment, Net sales of our Power Systems business
group in the second quarter of 2020 decreased by approximately 6% as compared to
the prior year primarily driven by temporary supply chain disruptions, partially
offset by net sales growth from acquisitions. Demand for utility transmission
and distribution components remained resilient. Net sales of the Aclara business
group in the second quarter of 2020 decreased by approximately 26% as compared
to the prior year primarily as a result of restrictions associated with the
pandemic on project deployments and installations.
Operating income in the Utility Solutions segment for the second quarter of 2020
decreased 5.7% to $74.4 million as compared to the same period of 2019,
primarily due to the pandemic related effects discussed above. Operating margin
in the second quarter of 2020 increased to 16.8% as compared to 15.5% in the
same period of 2019. Excluding amortization of acquisition-related intangibles,
the adjusted operating margin increased by 170 basis points to 19.7%, primarily
driven by the impact of compensation actions and other cost reductions, savings
from our productivity initiatives, as well as favorable price realization in
excess of material costs and favorable Net sales mix, partially offset by the
impact of lower volume and pandemic related inefficiencies.
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Results of Operations - Six Months Ended
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Six Months Ended June 30,
2020 % of Net sales 2019 % of Net sales
Net sales $ 2,039.5 $ 2,283.7
Cost of goods sold 1,445.5 70.9 % 1,619.0 70.9 %
Gross profit 594.0 29.1 % 664.7 29.1 %
Selling & administrative ("S&A") expense 343.7 16.9 % 376.9 16.5 %
Operating income 250.3 12.3 % 287.8 12.6 %
Net income attributable to Hubbell Incorporated 163.2 8.0 % 168.3 7.4 %
EARNINGS PER SHARE - DILUTED $ 2.99 $ 3.07 The following table reconciles our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
Six Months Ended
2020 % of Net sales 2019 % of Net sales
Gross profit (GAAP measure) $ 594.0 29.1 % $ 664.7 29.1 %
Amortization of acquisition-related intangible assets 13.3 12.1
Adjusted gross profit $ 607.3 29.8 % $ 676.8 29.6 %
S&A expenses (GAAP measure) $ 343.7 16.9 % $ 376.9 16.5 %
Amortization of acquisition-related intangible assets 24.8 24.2
Adjusted S&A expenses $ 318.9 15.6 % $ 352.7 15.4 %
Operating income (GAAP measure) $ 250.3 12.3 % $ 287.8 12.6 %
Amortization of acquisition-related intangible assets 38.1 36.3
Adjusted operating income $ 288.4 14.1 % $ 324.1 14.2 %
Net income attributable to
$ 168.3
Amortization of acquisition-related intangible assets, net of tax
28.5 27.1
Multi-employer pension charge, net of tax - 17.1
Adjusted net income attributable to
$ 212.5 Less: Earnings allocated to participating securities (0.7) (0.8) Adjusted net income available to common shareholders$ 191.0 $ 211.7 Average number of diluted shares outstanding 54.4 54.6 ADJUSTED EARNINGS PER SHARE - DILUTED$ 3.51 $ 3.87 Net Sales Net sales of$2.04 billion in the first six months of 2020 decreased by$244.2 million compared to the first six months of 2019. Organic net sales declined by 10.6% due to lower unit volume primarily driven by the unfavorable effects of the COVID-19 pandemic on demand, as well as supply chain disruptions due to the temporary closure of manufacturing facilities and restrictions on project deployments and installations within ourAclara business associated with the COVID-19 pandemic. The impact of lower unit volume was partially offset by favorable price realization and Net sales increased by less than one percentage point from the effect of acquisitions and dispositions.
Cost of Goods Sold
As a percentage of Net sales, Cost of goods sold was 70.9% in the first six
months of 2020 and was flat as compared to the first six months of 2019. This
result reflects favorable price realization in excess of material costs, higher
savings from our restructuring and related actions, and favorable Net sales mix
within our Utility Solutions segment, offset by the impact of lower sales volume
and inefficiencies related to the COVID-19 pandemic, as well as higher
amortization of acquisition-related intangible assets.
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Gross Profit
The gross profit margin in the first six months of 2020 was 29.1% and was flat
as compared to the first six months of 2019. Excluding amortization of
acquisition-related intangible assets, the adjusted gross profit margin was
29.8% in the first six months of 2020 as compared to 29.6% in the same period of
the prior year. The increase in the adjusted gross profit margin primarily
reflects favorable price realization in excess of material costs, higher savings
from our restructuring and related actions, and favorable Net sales mix within
our Utility Solutions segment, partially offset by the impact of lower sales
volume and inefficiencies related to the COVID-19 pandemic.
Selling & Administrative Expenses
S&A expense in the first six months of 2020 was$343.7 million and decreased by$33.2 million compared to the prior year period. S&A expense as a percentage of Net sales increased by 40 basis points to 16.9% in the first six months of 2020. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales increased by 20 basis points to 15.6% in the first six months of 2020. The increase in S&A expense as a percentage of Net sales in the first six months of 2020 as compared to the same prior year period is primarily due to the deleveraging effect of lower sales volume, the timing of stock-based compensation expense associated with our annual grant, which shifted from the fourth quarter to the first quarter, as well as an increase in our reserves for bad debt expense that reflects our current estimate for higher future credit losses due to customer liquidity issues driven by the recent downturn in economic conditions associated with the COVID-19 pandemic as detailed above. These increases were partially offset by the impact of compensation actions taken in the second quarter of 2020 in response to lower Net sales volumes associated with the pandemic as well as other costs reductions, including lower T&E costs.
Total Other Expense
Total other expense decreased by$28.8 million in the first six months of 2020 to$37.4 million primarily due to a$22.9 million charge in the second quarter of 2019 associated with the withdrawal from a multi-employer pension plan, lower non-service pension costs as compared to the same period of 2019 and lower interest expense associated with a reduction in principal amount of borrowings outstanding under our Term Loan Agreement (as defined below).
Income Taxes
The effective tax rate in the first six months of 2020 increased to 22.6% from 22.5% in the first six months of 2019 primarily due to offsetting discrete adjustments and earnings mix.
Net Income Attributable to
Net income attributable toHubbell Incorporated was$163.2 million in the first six months of 2020 and decreased 3.0% as compared to the same period of the prior year. Excluding amortization of acquisition-related intangibles, adjusted net income attributable toHubbell Incorporated was$191.7 million in the first six months of 2020 and decreased by 9.8% as compared to the first six months of 2019 primarily as a result of lower operating income, driven by lower Net sales volumes and other COVID-19 pandemic effects as detailed above, partially offset by lower non-operating costs such as interest expense and non-service pension costs. As a result, earnings per diluted share in the first six months of 2020 decreased 2.6% percent as compared to the first six months of 2019 and adjusted earnings per diluted share in the first six months of 2020 decreased by 9.3% as compared to the first six months of 2019. HUBBELL INCORPORATED-Form 10-Q 37 --------------------------------------------------------------------------------
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Segment Results
ELECTRICAL
Six Months Ended June 30,
(In millions) 2020 2019
Net sales $ 1,113.2 $ 1,318.4
Operating income (GAAP measure) 115.1 156.6
Amortization of acquisition-related intangible assets 12.2
11.4
Adjusted operating income$ 127.3 $
168.0
Operating margin (GAAP measure) 10.3 % 11.9 % Adjusted operating margin 11.4 % 12.7 % Net sales in the Electrical segment in the first six months of 2020 were$1.11 billion , and declined by$205.2 million , or 15.6%, as compared to the first six months of 2019. Organic net sales in the first six months of 2020 declined by approximately 13 percentage points as compared to the same prior year period due to lower unit volume, primarily in the second quarter of 2020, driven by the unfavorable effects of the COVID-19 pandemic on demand and from supply chain disruptions due to the temporary closure of manufacturing facilities, which disruptions were resolved in the second quarter of 2020 (although there can be no assurance that new closures may not be mandated depending on pandemic conditions), partially offset by favorable price realization. Net sales in the first six months of 2020 also declined by approximately two percentage points from the effect of acquisitions and dispositions, as the decline from the disposal of the Haefely business was greater than Net sales added by our fourth quarter 2019 acquisition. Within the segment, the aggregate Net sales of our Commercial andIndustrial and Construction and Energy business groups decreased in the first six months of 2020 by approximately 14 percentage points as compared to the same prior year period, primarily due to lower volume driven by the unfavorable impact of the COVID-19 pandemic on demand and the effect of acquisitions and dispositions (as noted above), partially offset by favorable price realization. Net sales of our Lighting business group in the first six months of 2020 declined by approximately 18 percentage points as compared to the prior year period due to lower unit volumes driven by the unfavorable effects of COVID-19 on demand as well as the impact of supply chain disruptions as noted above, partially offset by favorable price realization. Within the Lighting business group, Net sales of commercial and industrial lighting products in the first six months of 2020 decreased by approximately 26% compared to the prior year period driven by lower overall market demand, as well as softness in the national accounts, and the impact of supply chain disruptions associated with the pandemic in the second quarter of 2020. Net sales of residential lighting products increased by approximately 3% in the first six months of 2020 as compared to the same prior year period due strength in home center and e-commerce sales, partially offset by weakness in home builder markets. Operating income in the Electrical segment for the first six months of 2020 was$115.1 million and decreased approximately 27% compared to the first six months of 2019, while operating margin in the first six months of 2020 decreased by 160 basis points to 10.3%. Excluding amortization of acquisition-related intangibles, adjusted operating income in the first six months of 2020 decreased 24% as compared to the same prior year period and the adjusted operating margin decreased by 130 basis points to 11.4% in the first six months of 2020 as compared to the first six months of 2019. The decrease in operating income and operating margin in the first six months of 2020 is primarily due to lower net sales volume and inefficiencies related to the pandemic, higher stock based compensation expense due to the change in timing of our annual grant, and an increase in our reserves for bad debt expense. These items were partially offset by favorable price realization in excess of material costs, higher savings from our restructuring and related activities, and the impact of compensation actions and other cost reductions. HUBBELL INCORPORATED-Form 10-Q 38 --------------------------------------------------------------------------------
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UTILITY SOLUTIONS
Six Months Ended June 30,
(In millions) 2020 2019
Net sales $ 926.3 $ 965.3
Operating income (GAAP measure) 135.2 131.2
Amortization of acquisition-related intangible assets 25.9 24.9
Adjusted operating income $ 161.1 $ 156.1
Operating margin (GAAP measure) 14.6 % 13.6 %
Adjusted operating margin 17.4 % 16.2 %
Net sales in the Utility Solutions segment in the first six months of 2020 were
$926.3 million , down approximately 4% as compared to the first six months of
2019 due to supply chain disruptions in the second quarter from the temporary
closure of manufacturing locations and restrictions associated with the pandemic
on project deployments and installations. This impact was partially offset by
acquisitions, which contributed approximately one and one-half percentage points
to Net sales growth, as well as higher end-market demand and favorable price
realization. Foreign exchange was slightly unfavorable.
Within the Utility Solutions segment, Net sales of our Power Systems business
group in the first six months of 2020 increased by approximately 2% as compared
to the same prior year period driven by net sales growth from acquisitions, as
well as domestic demand in the utility transmission and distribution markets.
Net sales growth was muted by the impact of temporary supply chain disruptions
in the second quarter of 2020 as a result of COVID-19. Net sales of the Aclara
business group in the first six months of 2020 decreased by approximately 15% as
compared to the prior year primarily driven by restrictions associated with the
pandemic on project deployments and installations, partially offset by growth of
Aclara's AMI business in gas and water markets.
Operating income in the Utility Solutions segment for the first six months of
2020 increased 3% to $135.2 million as compared to the same period of 2019.
Operating margin in the first six months of 2020 increased to 14.6% as compared
to 13.6% in the same period of 2019. Excluding amortization of
acquisition-related intangibles, the adjusted operating margin for the first six
months of 2020 increased by 120 basis points to 17.4% as compared to the same
prior year period, primarily driven by savings from our productivity
initiatives, favorable price realization in excess of material costs, favorable
Net sales mix, and the impact of compensation actions and other cost reductions.
Those favorable items were partially offset by the impact of lower volume and
COVID-19 related inefficiencies, higher stock based compensation expense due to
the change in timing of our annual grant, and an increase in our reserves for
bad debt expense.
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