HUBBELL INCORPORATED Executive Overview of the Business
Hubbell 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 inHong Kong andthe Philippines , and maintains offices inSingapore ,Italy ,China ,India ,Mexico ,South Korea ,Chile , and countries in theMiddle East . The Company employed approximately 18,500 individuals worldwide as ofSeptember 30, 2020 . The Company's reporting segments consist of the Electrical segment and the Utility Solutions segment (formerly named the Power 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 nine months endedSeptember 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 or resurgence of COVID-19, the availability of vaccines and effective
treatments and the actions taken to contain it or respond to its health and
economic 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. In
the third quarter of 2020, the effect of disruptions to our manufacturing
operations was not as significant and the effect on installation services
moderated, however, given the continued uncertainty around the scope, severity,
and duration of the pandemic, we expect these disruptions and inefficiencies in
our operations, or disruptions in the operations of our suppliers, may adversely
affect our operating results in future periods. The ultimate extent and duration
of these disruptions could have a material adverse effect on our results of
operations and liquidity.
The disruption in economic activity as a result of the COVID-19 pandemic also
affected customer demand across our end markets during the first nine months 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 and the
effect of these disruptions did not recur in the third quarter of 2020. 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 and Aclara revenues continued to be affected by regulatory
restrictions on certain project deployments and installations as a result of the
COVID-19 pandemic, although these headwinds moderated as the third quarter
progressed.
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 cost increases due to the COVID-19 pandemic, remains
uncertain. We also incurred higher costs in the first nine months of 2020 due to
increases to our bad debt reserves in light of expected credit losses resulting
from the deterioration of general economic conditions.
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We have taken actions that we expect may mitigate a portion of the impact of the
anticipated decline in demand and cost increases. 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. 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. While the
majority of these compensation actions were limited to the second quarter of
2020, we continue to take cost actions as necessary to mitigate the effect of
lower demand. We also continue to expect savings from our restructuring and
related activities and to invest in restructuring and related actions as
appropriate. Moreover, during the third quarter of 2020, our strong cash
position allowed us to pre-pay the remaining $90.6 million principal of the Term
Loan incurred to acquire Aclara approximately 2.5 years prior to its scheduled
maturity as further discussed below. Given continued economic uncertainty,
however, we continue to expect that we will remain selective with our capital
expenditures for the remainder of 2020.
Our net cash flows provided by operating activities were strong in the first
nine months 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.
Further quantification and discussion of these pandemic related effects are included in the discussion of results of operations below.
Results of Operations - Third Quarter of 2020 compared to the Third Quarter of 2019
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Three Months Ended
2020 % of Net sales 2019 % of Net sales Net sales
$ 1,108.6 $ 1,204.0 Cost of goods sold 779.0 70.3 % 842.0 69.9 % Gross profit 329.6 29.7 % 362.0 30.1 % Selling & administrative ("S&A") expense 166.7 15.0 % 189.1 15.7 % Operating income 162.9 14.7 % 172.9 14.4 % Net income attributable to Hubbell Incorporated 107.1 9.7 % 130.7 10.9 % EARNINGS PER SHARE - DILUTED $ 1.96$ 2.38 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 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 6 -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 EndedDecember 31, 2019 . 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 toHubbell Incorporated . HUBBELL INCORPORATED-Form 10-Q 31 -------------------------------------------------------------------------------- Back to Contents Adjusted operating measures in 2020 also exclude a pension settlement charge and adjusted operating measures in 2019 exclude the gain on the disposition of the Haefely business, an investment loss, as well as a charge to recognize certain additional liabilities associated with the Company's withdrawal from a multi-employer pension plan. The Company believes that the exclusion of these unusual items enhances management's and investors' ability to analyze underlying business performance and facilitates comparisons of our financial results over multiple periods. These items are reported in Total other expense (below Operating income) in the Condensed Consolidated Statements of Income. Refer to Note 11 - Pension and Other Benefits, Note 13 - Fair Value Measurement, and Note 14 - Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements, for additional information. Organic net sales, a non-GAAP measure, represent Net sales according toU.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 -------------------------------------------------------------------------------- Back to Contents 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)
$ 329.6 29.7 %$ 362.0 30.1 % Amortization of acquisition-related intangible assets 6.1 5.7 Adjusted gross profit$ 335.7 30.3 %$ 367.7 30.5 % S&A expenses (GAAP measure)$ 166.7 15.0 %$ 189.1 15.7 % Amortization of acquisition-related intangible assets 12.4 11.8 Adjusted S&A expenses$ 154.3 13.9 %$ 177.3 14.7 % Operating income (GAAP measure)$ 162.9 14.7 %$ 172.9 14.4 % Amortization of acquisition-related intangible assets 18.5 17.5 Adjusted operating income$ 181.4 16.4 %$ 190.4 15.8 %
Net income attributable to
$ 130.7 Amortization of acquisition-related intangible assets 18.5 17.5 Gain on disposition of business - (21.7) Pension charge 6.6 - Loss on investment - 5.0 Total pre-tax adjustments to net income $ 25.1$ 0.8 Income tax effects(1) 6.3 3.2
Adjusted net income attributable to
$ 128.3 Less: Earnings allocated to participating securities (0.5) (0.5) Adjusted net income available to common shareholders$ 125.4 $ 127.8 Average number of diluted shares outstanding 54.5 54.6 ADJUSTED EARNINGS PER SHARE - DILUTED $ 2.30$ 2.34 (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. For 2019, the gain on the disposition of business was not taxable in the jurisdiction of sale but resulted in additionalU.S. and Canadian tax and adjustments were made accordingly. Furthermore, no tax effects are reflected for the loss on investment because the Company recorded a full valuation allowance against the loss based on its evaluation that it is more likely than not that the benefit of the realized loss will not be recognized for tax purposes.
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the
Three Months Ended
2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ (95.4) (7.9) $ 24.3 2.1
Impact of acquisitions 11.3 0.9 - -
Impact of divestitures (4.5) (0.4) (5.6) (0.5)
Foreign currency exchange (3.4) (0.2) (3.3) (0.2)
Organic net sales growth (non-GAAP measure)
2.8
Net Sales
Net sales of $1.11 billion in the third quarter of 2020 decreased by
$95.4 million compared to the third quarter of 2019. Organic net sales declined
by 8.2% primarily due to lower unit volume driven by the unfavorable effects of
the COVID-19 pandemic on demand. Net sales in the third quarter of 2020
increased from the effect of acquisitions and dispositions by less than one
percentage point compared to the third 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 14.2% in the third
quarter of 2020 as compared to the same prior year period, reflecting notably
weaker end market conditions, while Net sales of our Utility Solutions segment
increased by 0.5%, in the third quarter of 2020 as compared to the same prior
year period due to more resilient utility transmission and distribution end
markets, higher storm-related shipments as compared to the prior year period,
and a reduction of backlog created by supply chain disruptions in the second
quarter of 2020.
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Cost of Goods Sold
As a percentage of Net sales, cost of goods sold increased by 40 basis points to 70.3% in the third quarter of 2020, as compared to 69.9% in the third quarter of 2019. The increase was primarily driven by the effect of lower sales volume, cost increases that exceeded savings from productivity initiatives, and higher amortization of acquisition-related intangibles, partially offset by favorable material costs and price realization, and higher savings and lower costs from our restructuring and related actions.
Gross Profit
The gross profit margin in the third quarter of 2020 decreased by 40 basis points to 29.7% as compared to 30.1% in the third quarter of 2019. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 30.3% in the third quarter of 2020 as compared to 30.5% in the same period of the prior year. The decrease in the adjusted gross profit margin primarily reflects the effect of lower sales volume and cost increases that exceeded savings from productivity initiatives, partially offset by favorable material costs and price realization, and higher savings and lower costs from our restructuring and related actions.
Selling & Administrative Expenses
S&A expense in the third quarter of 2020 was$166.7 million and decreased by$22.4 million compared to the prior year period. S&A expense as a percentage of Net sales decreased by 70 basis points to 15.0% in the third quarter of 2020. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales decreased by 80 basis points to 13.9% in the third quarter of 2020. The decrease in adjusted S&A expense as a percentage of Net sales is primarily due to the impact of cost reductions associated with lower volume and the COVID-19 pandemic, including lower travel and entertainment costs, partially offset by the deleveraging effect of lower sale volume.
Total Other Expense
Total other expense increased by$19.0 million in the third quarter of 2020 to$23.9 million primarily due to a$6.6 million charge associated with pension settlement losses recognized in the third quarter of 2020, and the absence of non-operating items that were incurred in the third quarter of 2019 including the$21.7 million gain recognized on the disposal of the Haefely business and a$5.0 million loss on an investment in an available-for-sale debt security. The impact of these items was partially offset by lower non-service pension costs, as well as lower interest expense as compared to the same period of 2019.
Income Taxes
The effective tax rate in the third quarter of 2020 increased to 21.9% as compared to 21.1% in the third quarter of 2019 primarily due to the absence of the favorable tax impact from the disposition of the Haefely business in the third quarter of 2019, a net year over year increase in reserves primarily related to the timing of statute of limitations expiration, partially offset by a favorable provision to return adjustment and favorability resulting from the finalization ofU.S. Treasury Regulations related to the Tax Cuts and Job Act of 2017 ("TCJA") in the quarter. We will continue to evaluate, review and incorporate as necessary the impact of changes resulting from these and futureU.S. Treasury Regulations related to provisions of the TCJA.
Net Income Attributable to
Net income attributable toHubbell Incorporated was$107.1 million in the third quarter of 2020 and decreased 18.1% as compared to the same period of the prior year. Adjusted net income attributable toHubbell Incorporated , which excludes amortization of acquisition-related intangibles, the impact of the 2020 pension charge, and other non-operating items from Total other expense (described above) was$125.9 million in the third quarter of 2020 and decreased by 1.9% as compared to the third quarter of 2019. The decrease is a result of lower operating income driven primarily by lower Net sales volumes as well as an increase in the effective tax rate, partially offset by lower non-service pension costs and interest expense. As a result, earnings per diluted share in the third quarter of 2020 decreased 17.6% as compared to the third quarter of 2019. Adjusted earnings per diluted share in the third quarter of 2020 decreased by 1.7% as compared to the third quarter of 2019. HUBBELL INCORPORATED-Form 10-Q 34 --------------------------------------------------------------------------------
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Segment Results
ELECTRICAL
Three Months Ended September 30,
(In millions) 2020 2019
Net sales $ 591.2 $ 689.3
Operating income (GAAP measure) 70.6 90.2
Amortization of acquisition-related intangible assets 5.8 5.6
Adjusted operating income $ 76.4 $ 95.8
Operating margin (GAAP measure) 11.9 % 13.1 %
Adjusted operating margin 12.9 % 13.9 %
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the Three Months Ended September 30,
Electrical Segment 2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ (98.1) (14.2) $ 1.9 0.3
Impact of acquisitions 4.4 0.6 - -
Impact of divestitures (4.5) (0.6) (5.6) (0.8)
Foreign currency exchange (0.8) (0.1) (1.7) (0.2)
Organic net sales growth (non-GAAP measure)
1.3
Net sales in the Electrical segment in the third quarter of 2020 were $591.2
million and declined by $98.1 million , or 14.2%, as compared to the third
quarter of 2019. Organic net sales in the third quarter of 2020 decreased by
14.1% percentage points as compared to the same prior year period, primarily due
to lower unit volume driven by the unfavorable impact of the COVID-19 pandemic.
Net sales from the effect of acquisitions and dispositions in the third quarter
of 2020 was flat compared to the same prior year period as the decline from the
disposal of the Haefely business was offset by Net sales added by our fourth
quarter 2019 acquisition.
Within the segment, the aggregate Net sales of our Commercial and Industrial and
Construction and Energy business groups decreased in the third quarter of 2020
by approximately 16 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 10
percentage points in the third quarter of 2020 as compared to the same prior
year period, also primarily due to lower unit volumes driven by the unfavorable
effects of the pandemic on demand. Within the Lighting business group, Net sales
of commercial and industrial lighting products decreased by approximately 19% in
the third quarter of 2020 as compared to the same prior year period, primarily
driven by continued lower overall market demand as well as softness in our
national accounts. Net sales of residential lighting products increased by
approximately 11% in the third quarter of 2020 as compared to the same prior
year period primarily due to strength in home center and e-commerce sales, as
well as modest improvement in home builder markets.
Operating income in the Electrical segment for the third quarter of 2020 was
$70.6 million and decreased approximately 22% compared to the third quarter of
2019, while operating margin in the third quarter of 2020 decreased by 120 basis
points to 11.9%. Excluding amortization of acquisition-related intangibles,
adjusted operating income decreased 20%, as compared to the same prior year
period and the adjusted operating margin decreased by 100 basis points to 12.9%
in the third quarter of 2020 as compared to the same prior year period. The
decrease in operating income and margin in the third quarter of 2020 is
primarily due to lower Net sales volume and unfavorable Net sales mix, partially
offset by higher savings and lower costs from our restructuring and related
activities, a favorable net impact from price and lower material costs, as well
as the impact of productivity savings and cost increases that were low partially
due to the pandemic.
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UTILITY SOLUTIONS
Three Months Ended September 30,
(In millions) 2020 2019
Net sales $ 517.4 $ 514.7
Operating income (GAAP measure) 92.3 82.7
Amortization of acquisition-related intangible assets 12.7 11.9
Adjusted operating income $ 105.0 $ 94.6
Operating margin (GAAP measure) 17.8 % 16.1 %
Adjusted operating margin 20.3 % 18.4 %
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the Three Months Ended September 30,
Utility Solutions 2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ 2.7 0.5 $ 22.4 4.6
Impact of acquisitions 6.9 1.3 - -
Impact of divestitures - - - -
Foreign currency exchange (2.6) (0.5) (1.6) (0.3)
Organic net sales growth (non-GAAP measure)
4.9
Net sales in the Utility Solutions segment in the third quarter of 2020 were
$517.4 million , up $2.7 million , or 0.5%, as compared to the third quarter of
2019 due to acquisitions, which contributed 1.3% to Net sales growth, partially
offset by a 0.5% decline in Net sales from foreign exchange and a 0.3% decline
in Organic net sales.
Within the Utility Solutions segment, Net sales of our Power Systems business
group in the third quarter of 2020 increased by approximately 9% as compared to
the prior year primarily driven by Net sales growth from acquisitions and
Organic net sales growth as demand for utility transmission and distribution
components remained resilient, higher storm-related shipments as compared to the
comparable prior year period and a reduction of backlog created by supply chain
disruptions in the second quarter of 2020. Net sales of the Aclara business
group in the third quarter of 2020 decreased by approximately 16% as compared to
the prior year primarily as a result of the continued effect of restrictions and
delays associated with the pandemic on project deployments and installations.
Operating income in the Utility Solutions segment for the third quarter of 2020
increased 11.6% to $92.3 million as compared to the same period of 2019.
Operating margin in the third quarter of 2020 increased to 17.8% as compared to
16.1% in the same period of 2019. Excluding amortization of acquisition-related
intangibles, the adjusted operating margin increased by 190 basis points to
20.3%, primarily driven by favorable price realization and material costs,
savings from our productivity initiatives and cost increases that were low
partially due to the pandemic, and favorable Net sales mix, partially offset by
the impact of lower organic volume. The adjusted operating margin also increased
by approximately 20 basis points due to acquisitions.
Results of Operations - Nine Months Ended
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Nine Months Ended
2020 % of Net sales 2019 % of Net sales
Net sales $ 3,148.1 $ 3,487.7
Cost of goods sold 2,224.5 70.7 % 2,461.0 70.6 %
Gross profit 923.6 29.3 % 1,026.7 29.4 %
Selling & administrative ("S&A") expense 510.4 16.2 % 566.0 16.2 %
Operating income 413.2 13.1 % 460.7 13.2 %
Net income attributable to Hubbell Incorporated 270.3 8.6 % 299.0 8.6 %
EARNINGS PER SHARE - DILUTED $ 4.95 $ 5.45
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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):
Nine Months Ended
2020 % of Net sales 2019 % of Net sales Gross profit (GAAP measure)
$ 923.6 29.3 %$ 1,026.7 29.4 % Amortization of acquisition-related intangible assets 19.4 17.8 Adjusted gross profit$ 943.0 30.0 %$ 1,044.5 29.9 % S&A expenses (GAAP measure)$ 510.4 16.2 %$ 566.0 16.2 % Amortization of acquisition-related intangible assets 37.2 36.0 Adjusted S&A expenses$ 473.2 15.0 %$ 530.0 15.2 % Operating income (GAAP measure)$ 413.2 13.1 %$ 460.7 13.2 % Amortization of acquisition-related intangible assets 56.6 53.8 Adjusted operating income$ 469.8 14.9 %$ 514.5 14.8 %
Net income attributable to
$ 299.0 Amortization of acquisition-related intangible assets 56.6 53.8 Gain on disposition of business - (21.7) Pension charge 6.6 22.9 Loss on investment - 5.0 Total pre-tax adjustments to net income$ 63.2 $ 60.0 Income tax effects (1) 15.9 18.2
Adjusted net income attributable to
$ 340.8 Less: Earnings allocated to participating securities (1.1) (1.3) Adjusted net income available to common shareholders$ 316.5 $ 339.5 Average number of diluted shares outstanding 54.4 54.7 ADJUSTED EARNINGS PER SHARE - DILUTED$ 5.81 $ 6.21 (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. For 2019, the gain on the disposition of business was not taxable in the jurisdiction of sale but resulted in additionalU.S. and Canadian tax and adjustments were made accordingly. Furthermore, no tax effects are reflected for the loss on investment because the Company recorded a full valuation allowance against the loss based on its evaluation that it is more likely than not that the benefit of the realized loss will not be recognized for tax purposes.
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the
Nine Months Ended
2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ (339.6) (9.7) $ 150.1 4.5
Impact of acquisitions 33.2 1.0 51.4 1.5
Impact of divestitures (20.3) (0.6) (5.6) (0.1)
Foreign currency exchange (11.3) (0.3) (15.5) (0.5)
Organic net sales growth (non-GAAP measure)
3.6
Net Sales
Net sales of $3.15 billion in the first nine months of 2020 decreased by $339.6
million compared to the first nine months of 2019. Organic net sales declined by
9.8% due to lower unit volume primarily driven by the unfavorable effects of the
COVID-19 pandemic on demand, as well as supply chain disruptions experienced
primarily in the second quarter of 2020 due to the temporary closure of
manufacturing facilities and restrictions on project deployments and
installations within our Aclara business associated with the COVID-19 pandemic.
The impact of lower unit volume was partially offset by favorable price
realization and an increase in Net sales of less than one percentage point from
the effect of acquisitions and dispositions.
HUBBELL INCORPORATED-Form 10-Q 37
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Cost of Goods Sold
As a percentage of Net sales, Cost of goods sold was 70.7% in the first nine
months of 2020 and was flat as compared to the first nine months of 2019. This
result reflects favorable price realization in excess of material costs, higher
savings from our restructuring and related actions, and a favorable impact from
acquisitions, offset by the impact of cost increases that exceeded savings from
productivity initiatives, inefficiencies related to the COVID-19 pandemic, lower
sales volume, and higher amortization of acquisition related intangibles.
Gross Profit
The gross profit margin in the first nine months of 2020 was 29.3% and was flat as compared to the first nine months of 2019. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 30.0% in the first nine months of 2020 as compared to 29.9% in the same period of the prior year. This result primarily reflects favorable price realization in excess of material costs, higher savings from our restructuring and related actions, and a favorable impact from acquisitions, partially offset by cost increases that exceeded savings from productivity initiatives, inefficiencies related to the COVID-19 pandemic and lower sales volume.
Selling & Administrative Expenses
S&A expense in the first nine months of 2020 was$510.4 million and decreased by$55.6 million compared to the prior year period. S&A expense as a percentage of Net sales was 16.2% in the first nine months of 2020 and was flat as compared to the same period of the prior year. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales decreased by 20 basis points to 15.0% in the first nine months of 2020. The decrease in S&A expense as a percentage of Net sales in the first nine months of 2020 as compared to the same prior year period is primarily due to 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 associated with lower volume and the COVID-19 pandemic, including lower travel and entertainment costs. These decreases were partially offset by 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 of 2019 to the first quarter of 2020, 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.
Total Other Expense
Total other expense decreased by$9.8 million in the first nine months of 2020 to$61.3 million primarily due to a$6.6 million charge associated with pension settlement losses recognized in the third quarter of 2020, and the absence of non-operating items that were incurred in the third quarter of 2019 including the$21.7 million gain recognized on the disposal of the Haefely business and a$5.0 million loss on an investment in an available-for-sale debt security. The impact of these items was partially offset by lower non-service pension costs, as well as lower interest expense as compared to the first nine months of 2019.
Income Taxes
The effective tax rate in the first nine months of 2020 increased to 22.3% from 21.9% in the first nine months of 2019 primarily due to absence of the favorable tax impact from the disposition of the Haefely business in the third quarter of 2019 and the timing of reserve releases related to statute of limitations expirations in 2019, partially offset by a favorable provision to return adjustment and favorability resulting from the finalization ofU.S. Treasury Regulations related to the TCJA in the quarter. We will continue to evaluate, review and incorporate as necessary the impact of changes resulting from these and futureU.S. Treasury Regulations related to provisions of the TCJA.
Net Income Attributable to
Net income attributable toHubbell Incorporated was$270.3 million in the first nine months of 2020 and decreased 9.6% as compared to the same period of the prior year. Adjusted net income attributable toHubbell Incorporated , which excludes amortization of acquisition-related intangibles, the impact of the 2020 pension charge, and other non-operating items from Total other expense (described above) was$317.6 million in the first nine months of 2020 and decreased by 6.8% as compared to the first nine 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) as well as an increase in the effective tax rate, partially offset by lower non-service pension costs and interest expense. As a result, earnings per diluted share in the first nine months of 2020 decreased 9.2% percent as compared to the first nine months of 2019 and adjusted earnings per diluted share in the first nine months of 2020 decreased by 6.4% as compared to the first nine months of 2019. HUBBELL INCORPORATED-Form 10-Q 38 --------------------------------------------------------------------------------
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Segment Results
ELECTRICAL
Nine Months Ended September 30,
(In millions) 2020 2019
Net sales $ 1,704.4 $ 2,007.7
Operating income (GAAP measure) 185.7 246.8
Amortization of acquisition-related intangible assets 18.0 17.0
Adjusted operating income $ 203.7 $ 263.8
Operating margin (GAAP measure) 10.9 % 12.3 %
Adjusted operating margin 12.0 % 13.1 %
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the Nine Months Ended September 30,
Electrical Segment 2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ (303.3) (15.1) $ 13.6 0.7
Impact of acquisitions 12.4 0.6 - -
Impact of divestitures (20.3) (1.0) (5.6) (0.2)
Foreign currency exchange (4.2) (0.2) (9.0) (0.5)
Organic net sales growth (non-GAAP measure)
1.4
Net sales in the Electrical segment in the first nine months of 2020 were
$1.70 billion , and declined by $303.3 million , or 15.1%, as compared to the
first nine months of 2019. Organic net sales in the first nine months of 2020
declined by 14.5% as compared to the same prior year period due to lower unit
volume, primarily driven by the unfavorable effects of the COVID-19 pandemic on
demand, partially offset by favorable price realization. Net sales in the first
nine months of 2020 also declined by less than one percentage point 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 and Industrial and
Construction and Energy business groups decreased in the first nine months of
2020 by approximately 15 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, partially offset by favorable price realization.
Net sales of our Lighting business group in the first nine months of 2020
declined by approximately 16 percentage points as compared to the prior year
period due to lower unit volumes also driven by the unfavorable effects of
COVID-19 on demand. Within the Lighting business group, Net sales of commercial
and industrial lighting products in the first nine months of 2020 decreased by
approximately 24% compared to the prior year period driven by lower overall
market demand, as well as softness in our national accounts. Net sales of
residential lighting products increased by approximately 6% in the first nine
months of 2020 as compared to the same prior year period due to strength in home
center and e-commerce sales, partially offset by weakness in home builder
markets in the nine months ended September 30, 2020 as compared to the same
period of the prior year.
Operating income in the Electrical segment for the first nine months of 2020 was
$185.7 million and decreased approximately 25% compared to the first nine months
of 2019, while operating margin in the first nine months of 2020 decreased by
140 basis points to 10.9%. Excluding amortization of acquisition-related
intangibles, adjusted operating income in the first nine months of 2020
decreased 23% as compared to the same prior year period and the adjusted
operating margin decreased by 110 basis points to 12.0% in the first nine months
of 2020 as compared to the first nine months of 2019. The decrease in operating
income and operating margin in the first nine 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 and material costs, higher savings from
our restructuring and related activities, savings from productivity initiatives,
and lower costs due in part to the impact of compensation actions and other cost
reductions associated with the COVID-19 pandemic.
HUBBELL INCORPORATED-Form 10-Q 39
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UTILITY SOLUTIONS
Nine Months Ended September 30,
(In millions) 2020 2019
Net sales $ 1,443.7 $ 1,480.0
Operating income (GAAP measure) 227.5 213.9
Amortization of acquisition-related intangible assets 38.6 36.8
Adjusted operating income $ 266.1 $ 250.7
Operating margin (GAAP measure) 15.8 % 14.5 %
Adjusted operating margin 18.4 % 16.9 %
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
For the Nine Months Ended September 30,
Utility Solutions 2020 Inc/(Dec) % 2019 Inc/(Dec) %
Net sales growth (GAAP measure) $ (36.3) (2.5) $ 136.5 10.2
Impact of acquisitions 20.8 1.4 51.4 3.8
Impact of divestitures - - - -
Foreign currency exchange (7.1) (0.5) (6.5) (0.4)
Organic net sales growth (non-GAAP measure)
6.8
Net sales in the Utility Solutions segment in the first nine months of 2020 were
$1.44 billion , down 2.5% as compared to the first nine months of 2019 due to a
3.4% decline in Organic net sales due to backlog created by supply chain
disruptions in the second quarter resulting from the temporary closure of
manufacturing locations and restrictions associated with the pandemic on project
deployments and installations, partially offset by higher end-market demand in
the electrical transmission and distribution markets, an increase in
storm-related sales in the third quarter of 2020, and favorable price
realization. Acquisitions contributed 1.4% to Net sales growth in the first nine
months of 2020 and foreign exchange was slightly unfavorable by 0.5%.
Within the Utility Solutions segment, Net sales of our Power Systems business
group in the first nine months of 2020 increased by approximately 5% 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 and
higher storm-related sales as compared to the prior year. Net sales growth was
affected by 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 nine
months of 2020 decreased by approximately 16% as compared to the prior year
primarily driven by restrictions associated with the pandemic on project
deployments and installations.
Operating income in the Utility Solutions segment for the first nine months of
2020 increased 6% to $227.5 million as compared to the same period of 2019.
Operating margin in the first nine months of 2020 increased to 15.8% as compared
to 14.5% in the same period of 2019. Excluding amortization of
acquisition-related intangibles, the adjusted operating margin for the first
nine months of 2020 increased by 150 basis points to 18.4% as compared to the
same prior year period, primarily driven by savings from our productivity
initiatives and lower cost inflation, due in part to the impact of compensation
actions and other cost reductions associated with the COVID-19 pandemic,
favorable price realization in excess of material costs, and favorable Net sales
mix. 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.
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