UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
¨ 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)
STATE OF 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.) |
Indicate by check mark | YES | NO | ||
• 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. | þ | ¨ | ||
• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). | þ | ¨ | ||
• 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 þ | Accelerated filer ¨ | Non-accelerated filer (Do not check if a smaller reporting company) ¨ | 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). | ¨ | þ | ||
The number of shares outstanding of Hubbell Common Stock as of July 21, 2017 was 54,702,464.
HUBBELL INCORPORATED-Form 10-Q 1
Index
HUBBELL INCORPORATED-Form 10-Q 2
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) | 2017 | 2016 | 2017 | 2016 | ||||||||
Net sales | $ | 948.3 | $ | 908.8 | $ | 1,800.6 | $ | 1,743.6 | ||||
Cost of goods sold | 653.6 | 615.3 | 1,244.1 | 1,190.2 | ||||||||
Gross profit | 294.7 | 293.5 | 556.5 | 553.4 | ||||||||
Selling & administrative expenses | 164.1 | 161.4 | 321.8 | 319.4 | ||||||||
Operating income | 130.6 | 132.1 | 234.7 | 234.0 | ||||||||
Interest expense, net | (11.6 | ) | (11.3 | ) | (22.7 | ) | (20.3 | ) | ||||
Other (expense) income, net | (2.3 | ) | (4.0 | ) | (4.4 | ) | (5.3 | ) | ||||
Total other expense | (13.9 | ) | (15.3 | ) | (27.1 | ) | (25.6 | ) | ||||
Income before income taxes | 116.7 | 116.8 | 207.6 | 208.4 | ||||||||
Provision for income taxes | 35.9 | 34.8 | 62.9 | 64.4 | ||||||||
Net income | 80.8 | 82.0 | 144.7 | 144.0 | ||||||||
Less: Net income attributable to noncontrolling interest | 1.7 | 1.0 | 2.8 | 2.1 | ||||||||
Net income attributable to Hubbell | $ | 79.1 | $ | 81.0 | $ | 141.9 | $ | 141.9 | ||||
Earnings per share | ||||||||||||
Basic | $ | 1.44 | $ | 1.46 | $ | 2.57 | $ | 2.54 | ||||
Diluted | $ | 1.43 | $ | 1.45 | $ | 2.56 | $ | 2.53 | ||||
Cash dividends per common share | $ | 0.70 | $ | 0.63 | $ | 1.40 | $ | 1.26 | ||||
See notes to unaudited condensed consolidated financial statements.
HUBBELL INCORPORATED-Form 10-Q 3
Condensed Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended June 30, | ||||||
(in millions) | 2017 | 2016 | ||||
Net income | $ | 80.8 | $ | 82.0 | ||
Other comprehensive income (loss): | ||||||
Foreign currency translation adjustments | 7.7 | (13.8 | ) | |||
Pension and post-retirement benefit plans’ prior service costs, net actuarial gains and other pension-related, net of taxes of ($1.0) and ($1.2) | 2.0 | 2.1 | ||||
Unrealized gain on investments, net of taxes of $0.0 and ($0.1) | 0.1 | 0.2 | ||||
Unrealized loss on cash flow hedges, net of taxes of $0.3 and $0.0 | (0.8 | ) | (0.2 | ) | ||
Other comprehensive income (loss) | 9.0 | (11.7 | ) | |||
Total comprehensive income | 89.8 | 70.3 | ||||
Less: Comprehensive income attributable to noncontrolling interest | 1.7 | 1.0 | ||||
Comprehensive income attributable to Hubbell | $ | 88.1 | $ | 69.3 | ||
See notes to unaudited condensed consolidated financial statements.
Six Months Ended June 30, | ||||||
(in millions) | 2017 | 2016 | ||||
Net income | $ | 144.7 | $ | 144.0 | ||
Other comprehensive income (loss): | ||||||
Foreign currency translation adjustments | 19.2 | (13.1 | ) | |||
Pension and post retirement benefit plans’ prior service costs, net actuarial gains and other pension-related, net of taxes of ($1.9) and ($2.5) | 3.7 | 4.1 | ||||
Unrealized gain on investments, net of taxes of ($0.4) and ($0.3) | 0.5 | 0.5 | ||||
Unrealized loss on cash flow hedges, net of taxes of $0.4 and $1.0 | (0.9 | ) | (2.5 | ) | ||
Other comprehensive income (loss) | 22.5 | (11.0 | ) | |||
Total comprehensive income | 167.2 | 133.0 | ||||
Less: Comprehensive income attributable to noncontrolling interest | 2.8 | 2.1 | ||||
Comprehensive income attributable to Hubbell | $ | 164.4 | $ | 130.9 | ||
See notes to unaudited condensed consolidated financial statements.
HUBBELL INCORPORATED-Form 10-Q 4
Condensed Consolidated Balance Sheets (unaudited)
(in millions) | June 30, 2017 | December 31, 2016 | ||||
ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 367.7 | $ | 437.6 | ||
Short-term investments | 13.8 | 11.2 | ||||
Accounts receivable, net | 600.8 | 530.0 | ||||
Inventories, net | 585.3 | 532.4 | ||||
Other current assets | 42.0 | 40.1 | ||||
Total Current Assets | 1,609.6 | 1,551.3 | ||||
Property, Plant, and Equipment, net | 441.6 | 439.8 | ||||
Other Assets | ||||||
Investments | 57.1 | 56.4 | ||||
Goodwill | 1,058.7 | 991.0 | ||||
Intangible assets, net | 446.8 | 431.5 | ||||
Other long-term assets | 52.9 | 55.0 | ||||
TOTAL ASSETS | $ | 3,666.7 | $ | 3,525.0 | ||
LIABILITIES AND EQUITY | ||||||
Current Liabilities | ||||||
Short-term and current portion of long-term debt | $ | 403.4 | $ | 3.2 | ||
Accounts payable | 353.0 | 291.6 | ||||
Accrued salaries, wages and employee benefits | 56.7 | 82.8 | ||||
Accrued insurance | 62.4 | 55.8 | ||||
Other accrued liabilities | 149.8 | 156.2 | ||||
Total Current Liabilities | 1,025.3 | 589.6 | ||||
Long-Term Debt | 691.8 | 990.5 | ||||
Other Non-Current Liabilities | 346.4 | 341.7 | ||||
TOTAL LIABILITIES | 2,063.5 | 1,921.8 | ||||
Total Hubbell Shareholders’ Equity | 1,592.3 | 1,592.8 | ||||
Noncontrolling interest | 10.9 | 10.4 | ||||
Total Equity | 1,603.2 | 1,603.2 | ||||
TOTAL LIABILITIES AND EQUITY | $ | 3,666.7 | $ | 3,525.0 | ||
See notes to unaudited condensed consolidated financial statements.
HUBBELL INCORPORATED-Form 10-Q 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, | ||||||
(in millions) | 2017 | 2016 | ||||
Cash Flows from Operating Activities | ||||||
Net income | $ | 144.7 | $ | 144.0 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 50.4 | 45.9 | ||||
Deferred income taxes | 3.0 | (0.8 | ) | |||
Stock-based compensation | 8.1 | 8.8 | ||||
Changes in assets and liabilities, excluding effects of acquisitions: | ||||||
Increase in accounts receivable, net | (61.7 | ) | (40.0 | ) | ||
(Increase) decrease in inventories, net | (42.8 | ) | 4.1 | |||
Increase (decrease) in current liabilities | 42.7 | (33.5 | ) | |||
Changes in other assets and liabilities, net | (10.4 | ) | (6.8 | ) | ||
Contribution to qualified defined benefit pension plans | (0.9 | ) | (0.9 | ) | ||
Other, net | (1.0 | ) | 5.8 | |||
Net cash provided by operating activities | 132.1 | 126.6 | ||||
Cash Flows from Investing Activities | ||||||
Capital expenditures | (33.0 | ) | (29.9 | ) | ||
Acquisition of businesses, net of cash acquired | (108.5 | ) | (171.6 | ) | ||
Purchases of available-for-sale investments | (8.6 | ) | (5.8 | ) | ||
Proceeds from available-for-sale investments | 8.4 | 5.8 | ||||
Other, net | 1.8 | 1.0 | ||||
Net cash used in investing activities | (139.9 | ) | (200.5 | ) | ||
Cash Flows from Financing Activities | ||||||
Long-term debt borrowings | — | 397.0 | ||||
Short-term debt borrowings, net | 100.8 | 10.1 | ||||
Payment of dividends | (77.2 | ) | (70.3 | ) | ||
Payment of dividends to noncontrolling interest | (2.3 | ) | (1.3 | ) | ||
Repurchase of common shares | (92.6 | ) | (246.8 | ) | ||
Debt issuance costs | — | (3.6 | ) | |||
Other, net | (3.4 | ) | (3.2 | ) | ||
Net cash (used) provided by financing activities | (74.7 | ) | 81.9 | |||
Effect of foreign currency exchange rate changes on cash and cash equivalents | 12.6 | (13.0 | ) | |||
Decrease in cash and cash equivalents | (69.9 | ) | (5.0 | ) | ||
Cash and cash equivalents | ||||||
Beginning of period | 437.6 | 343.5 | ||||
End of period | $ | 367.7 | $ | 338.5 | ||
See notes to unaudited condensed consolidated financial statements.
HUBBELL INCORPORATED-Form 10-Q 6
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Hubbell Incorporated (“Hubbell”, the “Company”, “registrant”, “we”, “our” or “us”, which references shall include its divisions and subsidiaries) have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. In the opinion of management, all adjustments consisting only of normal recurring adjustments considered necessary for a fair statement of the results of the periods presented have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Hubbell Incorporated Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (ASU 2017-07) on the presentation of net periodic pension cost and net periodic post-retirement benefit cost. The new guidance requires the service cost component of net periodic pension and post-retirement benefit costs to be reported in the same income statement line item as other employee compensation costs, and the other components to be reported outside of operating income. This new guidance is effective for fiscal years beginning after December 15, 2017 and must be applied on a retrospective basis. At this time, the Company does not expect the adoption of this guidance will have a material impact on its financial statements.
In August 2016, the FASB issued an Accounting Standards Update (ASU 2016-15) to provide additional guidance and reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
In March 2016, the FASB issued an Accounting Standards Update (ASU 2016-09) relating to the accounting for share-based payments. The new guidance requires all income tax effects of share-based awards to be recognized in the income statement when the awards vest or are settled, and allows companies an additional election in the method to estimate forfeitures of share-based payments. The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows and cash paid to a tax authority when shares are withheld to satisfy the employer's statutory income tax withholdings be classified as a financing activity. The Company adopted the standard on January 1, 2017. The Company elected to adopt all provisions impacting the Condensed Consolidated Statements of Cash Flows retrospectively: as such the comparable period within the Condensed Consolidated Statements of Cash Flows has been recast to reflect the adoption. The income statement provisions of the new guidance have been adopted prospectively. There is no change to the Company's accounting policy with respect to estimation of forfeitures. The adoption did not have a material impact on the Company's financial statements.
In February 2016, the FASB issued an Accounting Standards Update (ASU 2016-02) related to the accounting for leases. This guidance will require a lessee to recognize a right-to-use asset and a lease liability for both financing and operating leases, with a policy election permitting an exception to this guidance for leases whose term is twelve months or less. For financing leases, the lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases the lessee will recognize a straight-line lease expense. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard must be adopted using a modified retrospective transition at the beginning of the earliest comparative period presented. We are currently reviewing the new guidance and will provide updates on the expected impact to the Company in future filings, as appropriate.
HUBBELL INCORPORATED-Form 10-Q 7
In May 2014, the FASB issued an Accounting Standards Update (ASU 2014-09) related to new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Subsequently, the FASB has issued amendments to certain aspects of the guidance including the effective date. This guidance is required to be effective beginning in the first quarter of 2018 and can be adopted on either a retrospective or modified-retrospective approach.
The Company has a project team that is currently reviewing contract terms and assessing the impact of adopting the standard, including impacts to the Company's processes, controls and financial statement disclosures. The implementation team reports the progress and findings of its review to Management on a periodic basis. Based on the reviews and assessments performed to date, the Company expects the pattern of revenue recognition for the vast majority of its businesses to be unchanged, and that upon adoption revenue will generally continue to be recognized at a single point in time when control is transferred to the customer. In the second half of 2017 the Company expect to complete the assessment phase, evaluate and update controls and policies affected by the new standard, and identify and gather the data necessary for new disclosure requirements. We will provide additional updates in future filings, as appropriate.
NOTE 2 Business Acquisitions
In the first quarter of 2017, the Company completed two acquisitions for $9.5 million, net of cash received, resulting in the recognition of intangible assets of $3.4 million and goodwill of $4.7 million. The $3.4 million of intangible assets consists primarily of customer relationships and trade names that will be amortized over a weighted average period of approximately 13 years. These acquisitions have been added to the Power segment and $2.7 million of the goodwill related to one of the acquisitions is currently expected to be deductible for tax purposes.
In the second quarter of 2017, the Company acquired all of the issued and outstanding limited liability company interests in iDevices, LLC ("iDevices") for $59.2 million. iDevices is a developer with embedded firmware and application development expertise with custom-built Internet of Things ("IoT") Cloud infrastructure. The iDevices acquisition adds capabilities and expertise in IoT technology that is required to provide Tier 3 energy management solutions via connected hardware with a software front-end. iDevices has been allocated to the Electrical segment. We have recognized intangible assets of $9.6 million and goodwill of $45.4 million as a result of this acquisition. The $9.6 million of intangible assets consists primarily of developed technology, customer relationships and trade names and will be amortized over a weighted average period of approximately 12 years. All of the goodwill is expected to be deductible for tax purposes.
In the second quarter of 2017, the Company also acquired substantially all of the assets of Advance Engineering Corporation and related companies (collectively "AEC") for $31.5 million. AEC is a gas components manufacturer that complements the Company's existing business in the natural gas distribution vertical. AEC joins the Company's recent acquisitions of GasBreaker and Lyall to bolster its main-to-meter mechanical solutions in this area. AEC has been added to the Electrical segment. We have recognized intangible assets of $18.5 million and goodwill of $10.0 million as a result of this acquisition. The $18.5 million of intangible assets consists primarily of customer relationships and trade names and will be amortized over a weighted average period of approximately 22 years. All of the goodwill is expected to be deductible for tax purposes.
These business acquisitions have been accounted for as business combinations and have resulted in the recognition of goodwill. The goodwill relates to a number of factors built into the purchase price, including the future earnings and cash flow potential of the businesses as well as the complementary strategic fit and resulting synergies they bring to the Company’s existing operations.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the dates of acquisition related to these transactions (in millions):
Tangible assets acquired | $ | 21.4 | |
Intangible assets | 31.5 | ||
Goodwill | 60.1 | ||
Net deferred taxes | (0.4 | ) | |
Other liabilities assumed | (12.4 | ) | |
TOTAL CONSIDERATION, NET OF CASH RECEIVED | $ | 100.2 | |
The allocation of purchase price for these acquisitions is based on preliminary estimates and assumptions, and is subject to revision based on final information received and other analysis that support the underlying estimates. We expect to complete our purchase accounting within the measurement period for each acquisition.
HUBBELL INCORPORATED-Form 10-Q 8
The Condensed Consolidated Financial Statements include the results of operations of the entities acquired from the date of acquisition. Net sales and earnings related to these acquisitions for the six months ended June 30, 2017 were not significant to the consolidated results. Pro forma information related to these acquisitions has not been included because the impact to the Company’s consolidated results of operations was not material.
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the six months ended June 30, 2017, is $108.5 million and includes payments associated with a 2016 acquisition for which the purchase price is due to be settled in installments.
NOTE 3 Segment Information
The Company's reporting segments consist of the Electrical segment and the Power segment. The Electrical segment is comprised of businesses that sell stock and custom products including standard and special application wiring device products, rough-in electrical products, connector and grounding products, light fixtures and controls, components and assemblies for the natural gas distribution market as well as other electrical and communication equipment, some of which is designed such that it can also be used in harsh and hazardous locations primarily in the oil and gas (onshore and offshore) and mining industries. These products are primarily sold through electrical and industrial distributors, home centers, retail and hardware outlets, lighting showrooms and residential product-oriented internet sites. The Electrical segment is comprised of three business groups, which have been aggregated as they have similar long-term economic characteristics, customers and distribution channels, among other factors. The Power segment primarily serves the electric utility industry and is comprised of a wide variety of electrical distribution, transmission, and substation products with high voltage applications as well as telecommunication products. The following table sets forth financial information by business segment (in millions):
Net Sales | Operating Income | Operating Income as a % of Net Sales | ||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||
Three Months Ended June 30, | ||||||||||||||||
Electrical | $ | 656.4 | $ | 641.4 | $ | 71.0 | $ | 77.1 | 10.8 | % | 12.0 | % | ||||
Power | 291.9 | 267.4 | 59.6 | 55.0 | 20.4 | % | 20.6 | % | ||||||||
TOTAL | $ | 948.3 | $ | 908.8 | $ | 130.6 | $ | 132.1 | 13.8 | % | 14.5 | % | ||||
Six Months Ended June 30, | ||||||||||||||||
Electrical | $ | 1,243.9 | $ | 1,224.1 | $ | 121.0 | $ | 132.5 | 9.7 | % | 10.8 | % | ||||
Power | 556.7 | 519.5 | 113.7 | 101.5 | 20.4 | % | 19.5 | % | ||||||||
TOTAL | $ | 1,800.6 | $ | 1,743.6 | $ | 234.7 | $ | 234.0 | 13.0 | % | 13.4 | % | ||||
NOTE 4 Inventories, net
Inventories, net are comprised of the following (in millions):
June 30, 2017 | December 31, 2016 | |||||
Raw material | $ | 180.0 | $ | 162.7 | ||
Work-in-process | 115.5 | 102.8 | ||||
Finished goods | 350.7 | 327.9 | ||||
646.2 | 593.4 | |||||
Excess of FIFO over LIFO cost basis | (60.9 | ) | (61.0 | ) | ||
TOTAL | $ | 585.3 | $ | 532.4 | ||
HUBBELL INCORPORATED-Form 10-Q 9
NOTE 5 Goodwill and Intangible Assets, net
Changes in the carrying values of goodwill for the six months ended June 30, 2017, were as follows (in millions):
Segment | |||||||||
Electrical | Power | Total | |||||||
BALANCE DECEMBER 31, 2016 | $ | 652.0 | $ | 339.0 | $ | 991.0 | |||
Current year acquisitions (Note 2 – Business Acquisitions) | 55.4 | 4.7 | 60.1 | ||||||
Foreign currency translation and prior year acquisitions | 5.1 | 2.5 | 7.6 | ||||||
BALANCE JUNE 30, 2017 | $ | 712.5 | $ | 346.2 | $ | 1,058.7 | |||
In the first quarter of 2017 we completed two acquisitions that were added to the Power segment. In the second quarter of 2017, the Company completed the acquisitions of AEC and iDevices. The AEC and iDevices acquisitions were added to the Electrical segment. These acquisitions have been accounted for as business combinations and have resulted in the recognition of $60.1 million of goodwill. See Note 2 – Business Acquisitions for additional information.
The Company performs its goodwill impairment testing as of April 1st of each year, unless circumstances dictate the need for more frequent assessments. For the 2017 test, the Company applied the "Step-zero" test to two of its 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 these reporting units substantially exceeded their carrying values and therefore, further quantitative analysis was not required. For each of the Company's other reporting units, the Company has elected to utilize the two step goodwill impairment testing process as permitted in the accounting guidance. Step 1 compares the fair value of the Company's reporting units to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. If the carrying value of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount of impairment.
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. The Company uses internal discounted cash flow estimates to determine fair value. These cash flow estimates are derived from historical experience and future long-term business plans and the application of appropriate discount rates. The Company uses market-based multiples of select industrial competitors to validate the reasonableness of internal discounted cash flow estimates of fair value. Changes in these estimates and assumptions could affect the determination of fair value and/or goodwill impairment for each reporting unit. The Company's estimated aggregate fair value of its reporting units are reasonable when compared to the Company's market capitalization on the valuation date.
As of April 1, 2017, the impairment testing resulted in implied fair values for each reporting unit that exceeded the reporting unit's carrying value, including goodwill. The Company did not have any reporting units at risk of failing Step 1 of the impairment test as the excess of the implied fair value significantly exceeded the carrying value of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts.
The carrying value of other intangible assets included in Intangible assets, net in the Condensed Consolidated Balance Sheet is as follows (in millions):
June 30, 2017 | December 31, 2016 | |||||||||||
Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||||||
Definite-lived: | ||||||||||||
Patents, tradenames and trademarks | $ | 150.8 | $ | (47.3 | ) | $ | 143.7 | $ | (43.4 | ) | ||
Customer/agent relationships and other | 432.0 | (142.4 | ) | 405.9 | (128.0 | ) | ||||||
Total | $ | 582.8 | $ | (189.7 | ) | $ | 549.6 | $ | (171.4 | ) | ||
Indefinite-lived: | ||||||||||||
Tradenames and other | 53.7 | — | 53.3 | — | ||||||||
TOTAL | $ | 636.5 | $ | (189.7 | ) | $ | 602.9 | $ | (171.4 | ) | ||
HUBBELL INCORPORATED-Form 10-Q 10
Amortization expense associated with definite-lived intangible assets was $17.5 million and $16.5 million for the six months ended June 30, 2017 and 2016, respectively. Future amortization expense associated with these intangible assets is expected to be $17.0 million for the remainder of 2017, $32.7 million in 2018, $31.1 million in 2019, $31.2 million in 2020, $30.6 million in 2021, and $29.2 million in 2022.
NOTE 6 Other Accrued Liabilities
Other accrued liabilities are comprised of the following (in millions):
June 30, 2017 | December 31, 2016 | |||||
Customer program incentives | $ | 28.7 | $ | 41.2 | ||
Accrued income taxes | 9.0 | 8.4 | ||||
Deferred revenue | 12.1 | 11.8 | ||||
Other | 100.0 | 94.8 | ||||
TOTAL | $ | 149.8 | $ | 156.2 | ||
NOTE 7 Other Non-Current Liabilities
Other non-current liabilities are comprised of the following (in millions):
June 30, 2017 | December 31, 2016 | |||||
Pensions | $ | 209.8 | $ | 208.3 | ||
Other post-retirement benefits | 24.0 | 24.0 | ||||
Deferred tax liabilities | 44.6 | 41.2 | ||||
Other | 68.0 | 68.2 | ||||
TOTAL | $ | 346.4 | $ | 341.7 | ||
HUBBELL INCORPORATED-Form 10-Q 11
NOTE 8 Total Equity
Total equity is comprised of the following (in millions, except per share amounts):
June 30, 2017 | December 31, 2016 | |||||
Common stock, $.01 par value: | ||||||
Common Stock-- authorized 200.0 shares; issued and outstanding 54.7 and 55.5 shares | $ | 0.5 | $ | 0.6 | ||
Additional paid-in capital | — | 15.4 | ||||
Retained earnings | 1,871.8 | 1,879.3 | ||||
Accumulated other comprehensive loss: | ||||||
Pension and post retirement benefit plan adjustment, net of tax | (176.8 | ) | (180.5 | ) | ||
Cumulative translation adjustment | (101.6 | ) | (120.8 | ) | ||
Unrealized gain on investment, net of tax | (0.7 | ) | (1.2 | ) | ||
Cash flow hedge (loss) gain, net of tax | (0.9 | ) | — | |||
Total Accumulated other comprehensive loss | (280.0 | ) | (302.5 | ) | ||
Hubbell shareholders’ equity | 1,592.3 | 1,592.8 | ||||
Noncontrolling interest | 10.9 | 10.4 | ||||
TOTAL EQUITY | $ | 1,603.2 | $ | 1,603.2 | ||
For accounting purposes, the Company treats repurchased shares as constructively retired when acquired and accordingly charges the purchase price against Common Stock par value, Additional paid-in capital, to the extent available, and Retained earnings. As a result of this accounting treatment, during the first six months of 2017, $72.1 million of purchase price of repurchased shares was allocated to retained earnings.
A summary of the changes in equity for the six months ended June 30, 2017 and 2016 is provided below (in millions):
Six Months Ended June 30, | ||||||||||||||||||
2017 | 2016 | |||||||||||||||||
Hubbell Shareholders’ Equity | Noncontrolling interest | Total Equity | Hubbell Shareholders’ Equity | Noncontrolling interest | Total Equity | |||||||||||||
EQUITY, JANUARY 1 | $ | 1,592.8 | $ | 10.4 | $ | 1,603.2 | $ | 1,740.6 | $ | 8.4 | $ | 1,749.0 | ||||||
Total comprehensive income | 164.4 | 2.8 | 167.2 | 130.9 | 2.1 | 133.0 | ||||||||||||
Stock-based compensation | 8.1 | — | 8.1 | 8.8 | — | 8.8 | ||||||||||||
Income tax windfall from stock-based awards, net | — | — | — | 0.9 | — | 0.9 | ||||||||||||
Repurchase/surrender of shares of common stock | (96.0 | ) | — | (96.0 | ) | (240.8 | ) | — | (240.8 | ) | ||||||||
Issuance of shares related to directors’ deferred compensation, net | 0.3 | — | 0.3 | 0.3 | — | 0.3 | ||||||||||||
Dividends to noncontrolling interest | — | (2.3 | ) | (2.3 | ) | — | (1.3 | ) | (1.3 | ) | ||||||||
Cash dividends declared | (77.3 | ) | — | (77.3 | ) | (70.5 | ) | — | (70.5 | ) | ||||||||
EQUITY, JUNE 30 | $ | 1,592.3 | $ | 10.9 | $ | 1,603.2 | $ | 1,570.2 | $ | 9.2 | $ | 1,579.4 | ||||||
The detailed components of total comprehensive income are presented in the Condensed Consolidated Statement of Comprehensive Income.
HUBBELL INCORPORATED-Form 10-Q 12
NOTE 9 Accumulated Other Comprehensive Loss
A summary of the changes in Accumulated other comprehensive loss (net of tax) for the six months ended June 30, 2017 is provided below (in millions):
(debit) credit | Cash flow hedge loss | Unrealized gain (loss) on available-for- sale securities | Pension and post retirement benefit plan adjustment | Cumulative translation adjustment | Total | ||||||||||
BALANCE AT DECEMBER 31, 2016 | $ | — | $ | (1.2 | ) | $ | (180.5 | ) | $ | (120.8 | ) | $ | (302.5 | ) | |
Other comprehensive income (loss) before reclassifications | (0.9 | ) | 0.5 | — | 19.2 | 18.8 | |||||||||
Amounts reclassified from accumulated other comprehensive loss | — | — | 3.7 | — | 3.7 | ||||||||||
Current period other comprehensive income (loss) | (0.9 | ) | 0.5 | 3.7 | 19.2 | 22.5 | |||||||||
BALANCE AT JUNE 30, 2017 | $ | (0.9 | ) | $ | (0.7 | ) | $ | (176.8 | ) | $ | (101.6 | ) | $ | (280.0 | ) |
A summary of the gain (loss) reclassifications out of Accumulated other comprehensive loss for the three and six months ended June 30, 2017 and 2016 is provided below (in millions):
Details about Accumulated Other Comprehensive Loss Components | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Location of Gain (Loss) Reclassified into Income | |||||
Cash flow hedges gain (loss): | ||||||||
Forward exchange contracts | $ | — | $ | (0.3 | ) | Net sales | ||
0.1 | (0.3 | ) | Cost of goods sold | |||||
0.1 | (0.6 | ) | Total before tax | |||||
— | 0.2 | Tax (expense) benefit | ||||||
$ | 0.1 | $ | (0.4 | ) | Gain (loss) net of tax | |||
Defined benefit pension and post retirement benefit items: | ||||||||
Amortization of prior-service costs | $ | 0.2 | $ | 0.2 | (a) | |||
Amortization of actuarial gains/(losses) | (2.7 | ) | (3.5 | ) | (a) | |||
Settlement and curtailment losses | (0.5 | ) | — | (a) | ||||
(3.0 | ) | (3.3 | ) | Total before tax | ||||
1.0 | 1.2 | Tax benefit (expense) | ||||||
$ | (2.0 | ) | $ | (2.1 | ) | (Loss) gain net of tax | ||
Losses reclassified into earnings | $ | (1.9 | ) | $ | (2.5 | ) | (Loss) gain net of tax | |
(a) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 11 - Pension and Other Benefits for additional details). |
HUBBELL INCORPORATED-Form 10-Q 13
Details about Accumulated Other Comprehensive Loss Components | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | Location of Gain (Loss) Reclassified into Income | |||||
Cash flow hedges gain (loss): | ||||||||
Forward exchange contracts | $ | — | $ | (0.2 | ) | Net sales | ||
— | 0.7 | Cost of goods sold | ||||||
— | 0.5 | Total before tax | ||||||
— | (0.1 | ) | Tax (expense) benefit | |||||
$ | — | $ | 0.4 | Gain (loss) net of tax | ||||
Defined benefit pension and post retirement benefit items: | ||||||||
Amortization of prior-service costs | $ | 0.4 | $ | 0.4 | (a) | |||
Amortization of actuarial gains/(losses) | (5.5 | ) | (7.0 | ) | (a) | |||
Settlement and curtailment losses | (0.5 | ) | — | (a) | ||||
(5.6 | ) | (6.6 | ) | Total before tax | ||||
1.9 | 2.5 | Tax benefit (expense) | ||||||
$ | (3.7 | ) | $ | (4.1 | ) | (Loss) gain net of tax | ||
Losses reclassified into earnings | $ | (3.7 | ) | $ | (3.7 | ) | (Loss) gain net of tax | |
(a) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 11 - Pension and Other Benefits for additional details). |
NOTE 10 Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Service-based and performance-based restricted stock awards granted by the Company are considered participating securities as these awards contain a non-forfeitable right to dividends.
The following table sets forth the computation of earnings per share for the three and six months ended June 30, 2017 and 2016 (in millions, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Numerator: | ||||||||||||
Net income attributable to Hubbell | $ | 79.1 | $ | 81.0 | $ | 141.9 | $ | 141.9 | ||||
Less: Earnings allocated to participating securities | (0.3 | ) | (0.2 | ) | (0.5 | ) | (0.4 | ) | ||||
Net income available to common shareholders | $ | 78.8 | $ | 80.8 | $ | 141.4 | $ | 141.5 | ||||
Denominator: | ||||||||||||
Average number of common shares outstanding | 54.8 | 55.3 | 55.0 | 55.8 | ||||||||
Potential dilutive common shares | 0.3 | 0.3 | 0.3 | 0.2 | ||||||||
Average number of diluted shares outstanding | 55.1 | 55.6 | 55.3 | 56.0 | ||||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.44 | $ | 1.46 | $ | 2.57 | $ | 2.54 | ||||
Diluted | $ | 1.43 | $ | 1.45 | $ | 2.56 | $ | 2.53 | ||||
The Company did not have outstanding any significant anti-dilutive securities during the three and six months ended June 30, 2017 and 2016.
HUBBELL INCORPORATED-Form 10-Q 14
NOTE 11 Pension and Other Benefits
The following table sets forth the components of net pension and other benefit costs for the three and six months ended June 30, 2017 and 2016 (in millions):
Pension Benefits | Other Benefits | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Three Months Ended June 30, | ||||||||||||
Service cost | $ | 1.5 | $ | 3.5 | $ | — | $ | — | ||||
Interest cost | 9.3 | 10.5 | 0.3 | 0.3 | ||||||||
Expected return on plan assets | (8.5 | ) | (11.0 | ) | — | — | ||||||
Amortization of prior service cost | — | — | (0.2 | ) | (0.2 | ) | ||||||
Amortization of actuarial losses | 2.7 | 3.5 | — | — | ||||||||
Settlement and curtailment losses | 0.5 | — | — | — | ||||||||
NET PERIODIC BENEFIT COST | $ | 5.5 | $ | 6.5 | $ | 0.1 | $ | 0.1 | ||||
Six Months Ended June 30, | ||||||||||||
Service cost | $ | 3.0 | $ | 7.0 | $ | — | $ | — | ||||
Interest cost | 18.5 | 21.0 | 0.4 | 0.6 | ||||||||
Expected return on plan assets | (17.0 | ) | (22.0 | ) | — | — | ||||||
Amortization of prior service cost | — | — | (0.4 | ) | (0.4 | ) | ||||||
Amortization of actuarial losses/(gains) | 5.5 | 7.0 | — | — | ||||||||
Settlement and curtailment losses | 0.5 | — | — | — | ||||||||
NET PERIODIC BENEFIT COST | $ | 10.5 | $ | 13.0 | $ | — | $ | 0.2 | ||||
Employer Contributions
Although not required by ERISA and the Internal Revenue Code, the Company may elect to make a voluntary contribution to its qualified domestic defined benefit pension plan in 2017. The Company anticipates making required contributions of approximately $1.7 million to its foreign pension plans during 2017, of which $0.9 million has been contributed through June 30, 2017.
NOTE 12 Guarantees
The Company records a liability equal to the fair value of guarantees in accordance with the accounting guidance for guarantees. When it is probable that a liability has been incurred and the amount can be reasonably estimated, the Company accrues for costs associated with guarantees. The most likely costs to be incurred are accrued based on an evaluation of currently available facts and, where no amount within a range of estimates is more likely, the minimum is accrued.
As of June 30, 2017 and December 31, 2016, the fair value and maximum potential payment related to the Company’s guarantees were not material.
The Company offers product warranties that cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates.
Changes in the accrual for product warranties during the six months ended June 30, 2017 and 2016 are set forth below (in millions):
2017 | 2016 | |||||
BALANCE AT JANUARY 1, | $ | 13.2 | $ | 13.2 | ||
Provision | 6.6 | 5.0 | ||||
Expenditures/other | (3.8 | ) | (4.8 | ) | ||
BALANCE AT JUNE 30, | $ | 16.0 | $ | 13.4 | ||
HUBBELL INCORPORATED-Form 10-Q 15
NOTE 13 Fair Value Measurement
Investments
At June 30, 2017 and December 31, 2016, the Company had $58.2 million and $57.4 million, respectively, of available-for-sale securities, consisting of municipal bonds classified in Level 2 of the fair value hierarchy and an investment in the redeemable preferred stock of a privately-held electrical utility substation security provider classified in Level 3 of the fair value hierarchy. The Company also had $12.7 million of trading securities at June 30, 2017 and $10.2 million at December 31, 2016 that are carried on the balance sheet at fair value. Unrealized gains and losses associated with available-for-sale securities are reflected in Accumulated other comprehensive loss, net of tax, while unrealized gains and losses associated with trading securities are reflected in the results of operations.
Fair value measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three broad levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions.
HUBBELL INCORPORATED-Form 10-Q 16
The following table shows, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at June 30, 2017 and December 31, 2016 (in millions):
Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total | ||||||||
June 30, 2017 | ||||||||||||
Money market funds (a) | $ | 221.4 | $ | — | $ | — | $ | 221.4 | ||||
Available for sale investments | — | 54.2 | 4.0 | 58.2 | ||||||||
Trading securities | 12.7 | — | — | 12.7 | ||||||||
Deferred compensation plan liabilities | (12.7 | ) | — | — | (12.7 | ) | ||||||
Derivatives: | ||||||||||||
Forward exchange contracts-Assets (b) | — | — | — | — | ||||||||
Forward exchange contracts-(Liabilities) (c) | — | (0.7 | ) | — | (0.7 | ) | ||||||
TOTAL | $ | 221.4 | $ | 53.5 | $ | 4.0 | $ | 278.9 | ||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total | |||||||||
December 31, 2016 | ||||||||||||
Money market funds (a) | $ | 263.5 | $ | — | $ | — | $ | 263.5 | ||||
Available for sale investments | — | 53.6 | 3.8 | 57.4 | ||||||||
Trading securities | 10.2 | — | — | 10.2 | ||||||||
Deferred compensation plan liabilities | (10.2 | ) | — | — | (10.2 | ) | ||||||
Derivatives: | ||||||||||||
Forward exchange contracts-Assets (b) | — | 0.8 | — | 0.8 | ||||||||
Forward exchange contracts-(Liabilities) (c) | — | (0.1 | ) | — | (0.1 | ) | ||||||
TOTAL | $ | 263.5 | $ | 54.3 | $ | 3.8 | $ | 321.6 | ||||
(a) Money market funds are reflected in Cash and cash equivalents in the Condensed Consolidated Balance Sheet.
(b) Forward exchange contracts-Assets are reflected in Other current assets in the Condensed Consolidated Balance Sheet.
(c) Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Condensed Consolidated Balance Sheet.
The methods and assumptions used to estimate the Level 2 and Level 3 fair values were as follows:
Forward exchange contracts – The fair value of forward exchange contracts were based on quoted forward foreign exchange prices at the reporting date.
Available-for-sale municipal bonds classified in Level 2 – The fair value of available-for-sale investments in municipal bonds is based on observable market-based inputs, other than quoted prices in active markets for identical assets.
Available-for-sale redeemable preferred stock classified in Level 3 – The fair value of the available-for-sale investment in redeemable preferred stock is valued based on a discounted cash flow model, using significant unobservable inputs, including expected cash flows and the discount rate.
During the three and six months ended June 30, 2017 there were no transfers of financial assets or liabilities in or out of Level 1 or Level 2 of the fair value hierarchy. There were also no transfers in or out of Level 3 during that period.
Deferred compensation plans
The Company offers certain employees the opportunity to participate in non-qualified deferred compensation plans. A participant’s deferrals are invested in a variety of participant-directed debt and equity mutual funds that are classified as trading securities. During the six months ended June 30, 2017 and 2016, the Company purchased $1.9 million and $1.2 million, respectively, of trading securities related to these deferred compensation plans. As a result of participant distributions, the Company sold $0.3 million of these trading securities during the six months ended June 30, 2017 and $1.1 million during the six months ended June 30, 2016. The unrealized gains and losses associated with these trading securities are directly offset by the changes in the fair value of the underlying deferred compensation plan obligation.
HUBBELL INCORPORATED-Form 10-Q 17
Derivatives
In order to limit financial risk in the management of its assets, liabilities and debt, the Company may use derivative financial instruments such as foreign currency hedges, commodity hedges, interest rate hedges and interest rate swaps. All derivative financial instruments are matched with an existing Company asset, liability or forecasted transaction. Market value gains or losses on the derivative financial instrument are recognized in income when the effects of the related price changes of the underlying asset, liability or forecasted transaction are recognized in income. Derivative assets and derivative liabilities are not offset in the Condensed Consolidated Balance Sheet.
In 2017 and 2016, the Company entered into a series of forward exchange contracts to purchase U.S. dollars in order to hedge exposure to fluctuating rates of exchange for both anticipated inventory purchases and forecasted sales by its subsidiaries that transact business in Canada. As of June 30, 2017, the Company had 55 individual forward exchange contracts for an aggregate notional amount of $40.4 million, having various expiration dates through June 2018. These contracts have been designated as cash flow hedges in accordance with the accounting guidance for derivatives.
The following table summarizes the results of cash flow hedging relationships for the three months ended June 30, 2017 and 2016 (in millions):
Derivative Gain/(Loss) Recognized in Accumulated Other Comprehensive Income (net of tax) | Location of Gain/(Loss) Reclassified into Income | Gain/(Loss) Reclassified into Earnings Effective Portion (net of tax) | |||||||||||
Derivative Instrument | 2017 | 2016 | (Effective Portion) | 2017 | 2016 | ||||||||
Forward exchange contract | $ | (0.7 | ) | $ | (0.6 | ) | Net sales | $ | — | $ | (0.2 | ) | |
Cost of goods sold | $ | 0.1 | $ | (0.2 | ) | ||||||||
The following table summarizes the results of cash flow hedging relationships for the six months ended June 30, 2017 and 2016 (in millions):
Derivative Gain/(Loss) Recognized in Accumulated Other Comprehensive Loss (net of tax) | Location of Gain/(Loss) Reclassified into Income | Gain/(Loss) Reclassified into Earnings Effective Portion (net of tax) | |||||||||||
Derivative Instrument | 2017 | 2016 | (Effective Portion) | 2017 | 2016 | ||||||||
Forward exchange contract | $ | (0.9 | ) | $ | (2.1 | ) | Net sales | $ | — | $ | (0.1 | ) | |
Cost of goods sold | $ | — | $ | 0.5 | |||||||||
Hedge ineffectiveness was immaterial with respect to the forward exchange cash flow hedges during the three and six months ended June 30, 2017 and 2016.
Long Term Debt
As of June 30, 2017 and December 31, 2016, the estimated fair value of our long-term debt (inclusive of amounts classified on the Condensed Consolidated Balance Sheets as current and long-term) was $1,024.3 million and $1,017.8 million, respectively, using quoted market prices in active markets for similar liabilities (Level 2).
NOTE 14 Commitments and Contingencies
The Company is subject to various legal proceedings arising in the normal course of its business. These proceedings include claims for damages arising out of use of the Company’s products, intellectual property, workers’ compensation and environmental matters. The Company is self-insured up to specified limits for certain types of claims, including product liability and workers’ compensation, and is fully self-insured for certain other types of claims, including environmental and intellectual property matters. The Company recognizes a liability for any contingency that in management’s judgment is probable of occurrence and can be reasonably estimated. We continually reassess the likelihood of adverse judgments and outcomes in these matters, as well as estimated ranges of possible losses based upon an analysis of each matter which includes consideration of outside legal counsel and, if applicable, other experts.
HUBBELL INCORPORATED-Form 10-Q 18
NOTE 15 Restructuring Costs and Other
In the six months ended June 30, 2017, we incurred costs for restructuring actions initiated in 2017 as well as costs for restructuring actions initiated in the prior year. Our restructuring actions are associated with cost reduction efforts that include the consolidation of manufacturing and distribution facilities as well as workforce reductions and the sale or exit of business units we determine to be non-strategic. Restructuring costs include severance and employee benefits, asset impairments, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. These costs are predominantly settled in cash from our operating activities and are generally settled within one year, with the exception of asset impairments, which are non-cash, and a $12.5 million charge in the fourth quarter of 2016 to recognize the estimated liability associated with the withdrawal from a multi-employer pension plan, which may be settled either in periodic payments over approximately 19 years, or in a lump sum, subject to negotiations expected to occur in the second half of 2017.
Pre-tax restructuring costs incurred in each of our segments and the location of the costs in the Condensed Consolidated Statement of Income for the three and six months ended June 30, 2017 and 2016 is as follows (in millions):
Three Months Ended June 30, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Cost of goods sold | Selling & administrative expense | Total | ||||||||||||||||
Electrical Segment | $ | 2.5 | $ | 2.0 | $ | 1.4 | $ | 1.4 | $ | 3.9 | $ | 3.4 | ||||||
Power Segment | 0.7 | 0.2 | 0.2 | 0.1 | 0.9 | 0.3 | ||||||||||||
Total Pre-Tax Restructuring Costs | $ | 3.2 | $ | 2.2 | $ | 1.6 | $ | 1.5 | $ | 4.8 | $ | 3.7 | ||||||
Six Months Ended June 30, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Cost of goods sold | Selling & administrative expense | Total | ||||||||||||||||
Electrical Segment | $ | 6.3 | $ | 3.8 | $ | 2.3 | $ | 5.1 | $ | 8.6 | $ | 8.9 | ||||||
Power Segment | 1.1 | 0.2 | 0.5 | 0.4 | 1.6 | 0.6 | ||||||||||||
Total Pre-Tax Restructuring Costs | $ | 7.4 | $ | 4.0 | $ | 2.8 | $ | 5.5 | $ | 10.2 | $ | 9.5 | ||||||
The following table summarizes the accrued liabilities for our restructuring actions (in millions):
Beginning Accrued Restructuring Balance 1/1/17 | Pre-tax Restructuring Costs | Utilization and Foreign Exchange | Ending Accrued Restructuring Balance 6/30/2017 | |||||||||
2017 Restructuring Actions | ||||||||||||
Severance | $ | — | $ | 4.9 | $ | (1.4 | ) | $ | 3.5 | |||
Asset write-downs | — | — | — | — | ||||||||
Facility closure and other costs | — | 1.6 | (1.5 | ) | 0.1 | |||||||
Total 2017 Restructuring Actions | $ | — | $ | 6.5 | $ | (2.9 | ) | $ | 3.6 | |||
2016 and Prior Restructuring Actions | ||||||||||||
Severance | $ | 10.4 | $ | (0.4 | ) | $ | (3.6 | ) | $ | 6.4 | ||
Asset write-downs | — | — | — | — | ||||||||
Facility closure and other costs (a) | $ | 14.1 | $ | 4.1 | $ | (4.4 | ) | $ | 13.8 | |||
Total 2016 and Prior Restructuring Actions | $ | 24.5 | $ | 3.7 | $ | (8.0 | ) | $ | 20.2 | |||
Total Restructuring Actions | $ | 24.5 | $ | 10.2 | $ | (10.9 | ) | $ | 23.8 | |||
(a) Facility closure and other costs as of 1/1/17 includes a charge of approximately $12.5 million to accrue the estimated liability associated with the anticipated withdrawal from a multi-employer pension plan as a result of a restructuring action.
HUBBELL INCORPORATED-Form 10-Q 19
The actual costs incurred and total expected cost of our on-going restructuring actions are as follows (in millions):
Total expected costs | Costs incurred during 2016 | Costs incurred during first six months of 2017 | Remaining costs at 6/30/2017 | |||||||||
2017 Restructuring Actions | ||||||||||||
Electrical Segment | $ | 6.3 | $ | — | $ | 4.9 | $ | 1.4 | ||||
Power Segment | 3.6 | — | 1.6 | 2.0 | ||||||||
Total 2017 Restructuring Actions | $ | 9.9 | $ | — | $ | 6.5 | $ | 3.4 | ||||
2016 and Prior Restructuring Actions | ||||||||||||
Electrical Segment (a) | 41.7 | 33.9 | 3.7 | 4.1 | ||||||||
Power Segment | 1.7 | 1.1 | — | 0.6 | ||||||||
Total 2016 and Prior Restructuring Actions | $ | 43.4 | $ | 35.0 | $ | 3.7 | $ | 4.7 | ||||
Total Restructuring Actions | $ | 53.3 | $ | 35.0 | $ | 10.2 | $ | 8.1 | ||||
(a) Costs incurred in 2016 relating to 2016 Restructuring Actions in the Electrical segment include the $12.5 million previously mentioned charge representing the estimated withdrawal liability from a multi-employer pension plan. Any potential future liability in excess of the amount already recognized in 2016 is not included in the remaining costs at June 30, 2017. Additional information about the estimated withdrawal liability can be found in Note 10 - Retirement Benefits in the Notes to Consolidated Financial Statements in the Hubbell Incorporated Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview of the Business
The Company is primarily engaged in the design, manufacture and sale of quality electrical and electronic products for a broad range of non-residential and residential construction, industrial and utility applications. Products are either sourced complete, manufactured or assembled by subsidiaries in the United States, Canada, Switzerland, Puerto Rico, China, Mexico, Italy, the United Kingdom, Brazil, Australia and Ireland. The Company also participates in joint ventures in Taiwan and Hong Kong, and maintains offices in Singapore, China, India, Mexico, South Korea and countries in the Middle East. The Company employs approximately 18,000 individuals worldwide.
The Company’s reporting segments consist of the Electrical segment and the Power segment. Results for the three and six months ended June 30, 2017 are included under “Segment Results” within this Management Discussion and Analysis.
The Company's long-term strategy is to serve its customers with reliable and innovative solutions delivered through a competitive cost structure; to complement organic growth with acquisitions that enhance its product offerings; and to allocate capital effectively to create shareholder value. In executing this strategy the Company is focused on growing profits and delivering attractive returns to shareholders by executing a business plan focused on the following key initiatives: growing revenue, aligning the cost structure, improving productivity, and deploying capital effectively.
Our strategy to grow revenue is focused on complementing organic growth with acquisitions that expand our product offerings and present opportunities to compete in core, adjacent or complementary markets. Our organic growth initiatives remain focused on expanding market share through new product introductions and more effective utilization of sales and marketing efforts across the organization. Acquisitions are a key component of our revenue growth strategy, not only to expand our reach into new markets and further into existing markets with new products, but also to advance our revenue growth objectives during periods of weakness or inconsistency in our end-markets.
Aligning our cost structure with the needs of our business is a key initiative and has resulted in the restructuring and related activities we have initiated, beginning in 2014. Our restructuring and related efforts include the consolidation of manufacturing and distribution facilities, 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.
HUBBELL INCORPORATED-Form 10-Q 20
Productivity improvement also continues to be a key area of focus for the Company and efforts to drive productivity work with our restructuring and related activities to minimize the impact of rising material costs and administrative cost inflation. Material costs are approximately two-thirds of our cost of goods sold therefore 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 impact 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.
Results of Operations – Second Quarter of 2017 compared to the Second Quarter of 2016
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Three Months Ended June 30, | ||||||||||
2017 | % of Net sales | 2016 | % of Net sales | |||||||
Net sales | $ | 948.3 | $ | 908.8 | ||||||
Cost of goods sold | 653.6 | 68.9 | % | 615.3 | 67.7 | % | ||||
Gross profit | 294.7 | 31.1 | % | 293.5 | 32.3 | % | ||||
Selling & administrative ("S&A") expense | 164.1 | 17.3 | % | 161.4 | 17.8 | % | ||||
Operating income | 130.6 | 13.8 | % | 132.1 | 14.5 | % | ||||
Net income attributable to Hubbell | 79.1 | 8.3 | % | 81.0 | 8.9 | % | ||||
EARNINGS PER SHARE – DILUTED | $ | 1.43 | $ | 1.45 | ||||||
Our consolidated results of operations in the three and six months ending June 30, 2017 and 2016 include what we refer to as "Restructuring and Related Costs". Restructuring actions support our cost reduction efforts involving the consolidation of manufacturing and distribution facilities as well as workforce reductions and the sale or exit of business units we determine to be non-strategic. Restructuring costs include severance and employee benefits, asset impairments, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. Restructuring-related costs are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining our processes, and certain other costs and gains associated with restructuring actions.
We believe certain non-GAAP measures that exclude the impact of these Restructuring and Related Costs may provide investors with useful information regarding our underlying performance from period to period and allow investors to assess the impact of the Company's restructuring and related activities and business transformation initiatives on the results of operations. Adjusted gross profit, adjusted selling & administrative ("S&A") expense, adjusted operating income, adjusted net income attributable to Hubbell and adjusted earnings per diluted share each exclude Restructuring and Related Costs. Management uses these adjusted measures when assessing the performance of the business.
The following table reconciles our restructuring costs to our Restructuring and Related Costs for the three months ended June 30, 2017 and 2016 (in millions):
Three Months Ended June 30, | ||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
Cost of goods sold | S&A expense | Total | ||||||||||||||||||
Restructuring costs (See Note 15 - Restructuring Costs) | $ | 3.2 | $ | 2.2 | $ | 1.6 | $ | 1.5 | $ | 4.8 | $ | 3.7 | ||||||||
Restructuring related costs | 0.1 | 1.2 | 1.5 | 1.5 | 1.6 | 2.7 | ||||||||||||||
Restructuring and related costs (non-GAAP measure) | $ | 3.3 | $ | 3.4 | $ | 3.1 | $ | 3.0 | $ | 6.4 | $ | 6.4 | ||||||||
Of the $6.4 million of Restructuring and Related Costs incurred in the second quarter of 2017, $5.0 million is recorded in the Electrical segment and $1.4 million is recorded in the Power segment. Of the $6.4 million of Restructuring and Related Costs incurred in the second quarter of 2016, $5.5 million is recorded in the Electrical segment and $0.9 million is recorded in the Power segment.
Our full year 2017 earnings per diluted share expectation anticipates (each net of tax) approximately $0.30 of Restructuring and Related Costs, of which $0.08 has been incurred in the second quarter of 2017 and $0.18 has been incurred the first six months of 2017 . Our full year expectation includes the impact of actions that have been initiated through June 30, 2017 as well as actions we expect to initiate in the remainder of 2017 as we continue to evaluate actions and pursue those that meet our required targets for returns and payback.
HUBBELL INCORPORATED-Form 10-Q 21
The following table reconciles our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
Three Months Ended June 30, | ||||||||||
2017 | % of Net sales | 2016 | % of Net sales | |||||||
Gross profit (GAAP measure) | $ | 294.7 | 31.1 | % | $ | 293.5 | 32.3 | % | ||
Restructuring and related costs | 3.3 | 3.4 | ||||||||
Adjusted gross profit | $ | 298.0 | 31.4 | % | $ | 296.9 | 32.7 | % | ||
S&A expenses (GAAP measure) | $ | 164.1 | 17.3 | % | $ | 161.4 | 17.8 | % | ||
Restructuring and related costs | 3.1 | 3.0 | ||||||||
Adjusted S&A expenses | $ | 161.0 | 17.0 | % | $ | 158.4 | 17.4 | % | ||
Operating income (GAAP measure) | $ | 130.6 | 13.8 | % | $ | 132.1 | 14.5 | % | ||
Restructuring and related costs | 6.4 | 6.4 | ||||||||
Adjusted operating income | $ | 137.0 | 14.4 | % | $ | 138.5 | 15.2 | % | ||
Net income attributable to Hubbell (GAAP measure) | $ | 79.1 | $ | 81.0 | ||||||
Restructuring and related costs, net of tax | 4.3 | 4.3 | ||||||||
Adjusted net income attributable to Hubbell | $ | 83.4 | $ | 85.3 | ||||||
Less: Earnings allocated to participating securities | (0.3 | ) | (0.3 | ) | ||||||
Adj. net income available to common shareholders | $ | 83.1 | $ | 85.0 | ||||||
Average number of diluted shares outstanding | 55.1 | 55.6 | ||||||||
ADJUSTED EARNINGS PER SHARE – DILUTED | $ | 1.51 | $ | 1.53 | ||||||
Net Sales
Net sales of $948.3 million in the second quarter of 2017 increased four percent compared to the second quarter of 2016 due to higher organic volume and the contribution of net sales from acquisitions, partially offset by headwinds from foreign currency translation. Organic volume, including the impact of pricing headwinds, added three percentage points to net sales and acquisitions contributed two percentage points, while foreign currency translation reduced net sales by one percentage point.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold increased to 68.9% in the second quarter of 2017 as compared to 67.7% in the second quarter of 2016. The increase was primarily due to price and material cost headwinds as well as a 40 basis point headwind from acquisitions, partially offset by greater realized savings from our restructuring and related actions.
Gross Profit
The gross profit margin in the second quarter of 2017 declined to 31.1% as compared to 32.3% in the second quarter of 2016. Restructuring and Related Costs in Cost of goods sold were $3.3 million in the second quarter of 2017, and were flat as compared to the same period of the prior year. Excluding Restructuring and Related Costs, the adjusted gross profit margin was 31.4% in the second quarter of 2017 as compared to 32.7% in the second quarter of 2016. The decrease in the adjusted gross profit margin was primarily due to price and material cost headwinds as well as acquisitions, which reduced gross profit margin by approximately 40 basis points in the second quarter of 2017, partially offset by greater realized savings from our restructuring and related actions.
Selling & Administrative Expenses
S&A expense in the second quarter of 2017 was $164.1 million as compared to $161.4 million in the same period of the prior year. Restructuring and Related Costs in S&A expense were $3.1 million in the second quarter of 2017, and slightly higher as compared to the same period of the prior year. S&A expense as a percentage of net sales declined by 50 basis points to 17.3% in the second quarter of 2017. Excluding Restructuring and Related Costs, adjusted S&A expense as a percentage of net sales declined by 40 basis points to 17.0% in the second quarter of 2017 primarily due to higher net sales volume and greater realized savings from our restructuring and related actions.
HUBBELL INCORPORATED-Form 10-Q 22
Total Other Expense
Total other expense was $13.9 million in the second quarter of 2017 compared to $15.3 million in the second quarter of 2016 and decreased primarily due to the write-off of an escrow receivable in the second quarter of 2016 associated with a prior acquisition, the effect of which was offset in income taxes by the release of a related liability.
Income Taxes
The effective tax rate in the second quarter of 2017 increased to 30.8% from 29.8% in the second quarter of 2016. The increase is primarily attributable to the release of a liability in the second quarter of 2016 caused by the expiration of certain statutes associated with an uncertain tax position from a prior acquisition, partially offset by favorable earnings mix in tax jurisdictions with lower tax rates.
Net Income Attributable to Hubbell and Earnings Per Diluted Share
Net income attributable to Hubbell was $79.1 million in the second quarter of 2017 and decreased two percent as compared to the second quarter of 2016. Excluding Restructuring and Related Costs, which were flat quarter over quarter, adjusted net income attributable to Hubbell was $83.4 million in the second quarter of 2017 and also decreased two percent as compared to the second quarter of the prior year. Earnings per diluted share in the second quarter of 2017 decreased one percent as compared to the second quarter of 2016. Adjusted earnings per diluted share in the second quarter of 2017 also decreased one percent as compared to the second quarter of 2016 and reflects the decline in adjusted net income, partially offset by a decline in the average number of diluted shares outstanding of 0.5 million as compared to the same period of the prior year.
Segment Results
ELECTRICAL
Three Months Ended June 30, | ||||||
(In millions) | 2017 | 2016 | ||||
Net sales | $ | 656.4 | $ | 641.4 | ||
Operating income | $ | 71.0 | $ | 77.1 | ||
Restructuring and related costs | 5.0 | 5.5 | ||||
Adjusted operating income | $ | 76.0 | $ | 82.6 | ||
Operating margin | 10.8 | % | 12.0 | % | ||
Adjusted operating margin | 11.6 | % | 12.9 | % | ||
Net sales in the Electrical segment in the second quarter of 2017 were $656.4 million, up approximately two percent as compared to the second quarter of 2016 due to higher organic volume, including the impact of pricing headwinds, and the contribution of net sales from acquisitions, partially offset by headwinds from foreign currency translation. Organic volume, including the impact of pricing headwinds added two percentage points and acquisitions added one percentage point, partially offset by a one percentage point headwind on net sales from foreign currency translation.
Within the segment, the aggregate net sales of our Commercial and Industrial and Construction and Energy business groups increased by three percentage points, due to three percentage points of organic growth, driven primarily by net sales growth of our products in the non-residential construction market, and two percentage points of net sales growth from acquisitions, partially offset by two percentage points of headwind from foreign currency translation. Net sales of our Lighting business group increased one percent in the second quarter of 2017 with three percentage points of volume growth, partially offset by a two percentage point headwind on pricing. Within the Lighting business group, organic net sales of residential lighting products increased by thirteen percent, while net sales of commercial and industrial lighting products declined by two percentage points, primarily due to headwinds on pricing.
Operating income in the Electrical segment for the second quarter of 2017 was $71.0 million and decreased eight percent compared to the second quarter of 2016. Operating margin in the second quarter of 2017 decreased by 120 basis points to 10.8% as compared to the same period of 2016. Excluding Restructuring and Related Costs, the adjusted operating margin decreased by 130 basis points to 11.6%. The decrease in the adjusted operating margin is primarily due to price and material cost headwinds as well as cost inflation that exceeded gains from our productivity initiatives in our Lighting business group. Acquisitions also reduced the adjusted operating margin, by approximately 70 basis points in the second quarter of 2017. The unfavorable impact of those items was partially offset by greater realized savings from our restructuring and related actions and incremental earnings from higher net sales volume.
HUBBELL INCORPORATED-Form 10-Q 23
POWER
Three Months Ended June 30, | ||||||
(In millions) | 2017 | 2016 | ||||
Net sales | $ | 291.9 | $ | 267.4 | ||
Operating income | $ | 59.6 | $ | 55.0 | ||
Restructuring and related costs | 1.4 | 0.9 | ||||
Adjusted operating income | $ | 61.0 | $ | 55.9 | ||
Operating margin | 20.4 | % | 20.6 | % | ||
Adjusted operating margin | 20.9 | % | 20.9 | % | ||
Net sales in the Power segment in the second quarter of 2017 were $291.9 million, up nine percent as compared to the second quarter of 2016 primarily due to higher organic volume and the net sales contribution from acquisitions. Organic volume contributed five percentage points, driven by growth in the transmission and distribution markets, and acquisitions contributed four percentage points to net sales growth.
Operating income in the Power segment increased eight percent to $59.6 million in the second quarter of 2017. Operating margin in the second quarter of 2017 decreased by 20 basis points to 20.4% as compared to the same period of 2016. Excluding Restructuring and Related Costs, the adjusted operating margin was 20.9% in the second quarter of 2017 and was flat as compared to the same period of 2016 as net gains from productivity initiatives exceeding cost inflation and incremental earnings from higher net sales volume were offset by price and material cost headwinds.
Results of Operations – Six Months Ended June 30, 2017 compared to the Six Months Ended June 30, 2016
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA):
Six Months Ended June 30, | ||||||||||
2017 | % of Net sales | 2016 | % of Net sales | |||||||
Net sales | $ | 1,800.6 | $ | 1,743.6 | ||||||
Cost of goods sold | 1,244.1 | 69.1 | % | 1,190.2 | 68.3 | % | ||||
Gross profit | 556.5 | 30.9 | % | 553.4 | 31.7 | % | ||||
Selling & administrative expense | 321.8 | 17.9 | % | 319.4 | 18.3 | % | ||||
Operating income | 234.7 | 13.0 | % | 234.0 | 13.4 | % | ||||
Net income attributable to Hubbell | 141.9 | 7.9 | % | 141.9 | 8.1 | % | ||||
EARNINGS PER SHARE – DILUTED | $ | 2.56 | $ | 2.53 | ||||||
The following table reconciles our restructuring costs to our Restructuring and Related Costs for the six months ended June 30, 2017 and 2016 (in millions):
Six Months Ended June 30, | ||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
Cost of goods sold | S&A expense | Total | ||||||||||||||||||
Restructuring costs (See Note 15 - Restructuring Costs) | $ | 7.4 | $ | 4.0 | $ | 2.8 | $ | 5.5 | $ | 10.2 | $ | 9.5 | ||||||||
Restructuring related costs | 0.8 | 1.6 | 3.7 | 2.0 | 4.5 | 3.6 | ||||||||||||||
Restructuring and related costs (non-GAAP measure) | $ | 8.2 | $ | 5.6 | $ | 6.5 | $ | 7.5 | $ | 14.7 | $ | 13.1 | ||||||||
Of the $14.7 million of Restructuring and Related Costs incurred in the first six months of 2017, $11.9 million is recorded in the Electrical segment and $2.8 million is recorded in the Power segment. Of the $13.1 million of Restructuring and Related Costs incurred in the first six months of 2016, $11.8 million is recorded in the Electrical segment and $1.3 million is recorded in the Power segment.
HUBBELL INCORPORATED-Form 10-Q 24
The following table reconciles our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
Six Months Ended June 30, | ||||||||||
2017 | % of Net sales | 2016 | % of Net sales | |||||||
Gross profit (GAAP measure) | $ | 556.5 | 30.9 | % | $ | 553.4 | 31.7 | % | ||
Restructuring and related costs | 8.2 | 5.6 | ||||||||
Adjusted gross profit | $ | 564.7 | 31.4 | % | $ | 559.0 | 32.1 | % | ||
S&A expenses (GAAP measure) | $ | 321.8 | 17.9 | % | $ | 319.4 | 18.3 | % | ||
Restructuring and related costs | 6.5 | 7.5 | ||||||||
Adjusted S&A expenses | $ | 315.3 | 17.5 | % | $ | 311.9 | 17.9 | % | ||
Operating income (GAAP measure) | $ | 234.7 | 13.0 | % | $ | 234.0 | 13.4 | % | ||
Restructuring and related costs | 14.7 | 13.1 | ||||||||
Adjusted operating income | $ | 249.4 | 13.9 | % | $ | 247.1 | 14.2 | % | ||
Net income attributable to Hubbell (GAAP measure) | $ | 141.9 | $ | 141.9 | ||||||
Restructuring and related costs, net of tax | 10.0 | 8.9 | ||||||||
Adjusted net income attributable to Hubbell | $ | 151.9 | $ | 150.8 | ||||||
Less: Earnings allocated to participating securities | (0.5 | ) | (0.5 | ) | ||||||
Adj. net income available to common shareholders | $ | 151.4 | $ | 150.3 | ||||||
Average number of diluted shares outstanding | 55.3 | 56.0 | ||||||||
ADJUSTED EARNINGS PER SHARE – DILUTED | $ | 2.74 | $ | 2.69 | ||||||
Net Sales
Net sales of $1.8 billion for the first six months of 2017 increased three percent compared to the first six months of 2016 primarily due to higher organic volume and the contribution of net sales from acquisitions, partially offset by headwinds from foreign currency translation. Organic volume, including the impact of pricing headwinds, contributed two percentage points and acquisitions contributed two percentage points to net sales growth, partially offset by the impact of foreign currency translation.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold increased to 69.1% for the first six months of 2017 compared to 68.3% for the first six months of 2016. The increase was primarily due to price and material cost headwinds as well as a 20 basis point headwind from acquisitions, partially offset by greater realized savings from our restructuring and related actions and gains from productivity initiatives that exceeded cost inflation.
Gross Profit
The gross profit margin was 30.9% in the first six months of 2017 compared to 31.7% in the first six months of 2016. Restructuring and Related Costs in Cost of goods sold in the first six months of 2017 were $2.6 million higher as compared to the same period of the prior year. Excluding Restructuring and Related Costs, the adjusted gross profit margin was 31.4% in the first six months of 2017 as compared to 32.1% in the same period of the prior year. The decrease in the adjusted gross profit margin was primarily due to price and material cost headwinds as well as a 20 basis point headwind from acquisitions, partially offset by greater realized savings from our restructuring and related actions and gains from productivity initiatives that exceeded cost inflation.
Selling & Administrative Expenses
S&A expense in the first six months of 2017 was $321.8 million and increased by $2.4 million compared the same period of the prior year. S&A expense as a percentage of net sales declined by 40 basis points to 17.9% in the first six months of 2017. Excluding Restructuring and Related Costs, adjusted S&A expense as a percentage of net sales also declined by 40 basis points to 17.5% in the first six months of 2017 primarily due to higher net sales volume and greater realized savings from our restructuring and related actions.
HUBBELL INCORPORATED-Form 10-Q 25
Total Other Expense
Total other expense was $27.1 million in the first six months of 2017 compared to $25.6 million in the first six months of 2016 and increased primarily due to higher interest expense in the first six months of 2017 related to the $400 million debt offering we completed in March 2016 and higher foreign exchange losses in the first six months of 2017, partially offset by the write-off of an escrow receivable in the second quarter of 2016 associated with a prior acquisition. This write off had no effect on net income of the prior year as it was offset in income taxes by the release of a related liability.
Income Taxes
The effective tax rate in the first six months of 2017 decreased to 30.3% from 30.9% in the first six months of 2016. The decrease is primarily attributable to favorable earnings mix in tax jurisdictions with lower tax rates as well as other discrete items including the settlement of a tax examination and the income tax effects of share-based awards, partially offset by the release of a liability in the second quarter of 2016 caused by the expiration of certain statutes associated with an uncertain tax position from a prior acquisition.
Net Income Attributable to Hubbell and Earnings Per Diluted Share
Net income attributable to Hubbell was $141.9 million in the first six months of 2017 and was flat as compared to the first six months of 2016. Excluding Restructuring and Related Costs, adjusted net income attributable to Hubbell was $151.9 million in the first six months of 2017 and increased one percent as compared to the first six months of the prior year. Earnings per diluted share in the first six months of 2017 increased one percent as compared to the first six months of 2016. Adjusted earnings per diluted share in the first six months of 2017 increased two percent as compared to the first six months of 2016 and reflects a decline in the average number of diluted shares outstanding of 0.7 million as compared to the same period of the prior year.
Segment Results
ELECTRICAL
Six Months Ended June 30, | ||||||
(In millions) | 2017 | 2016 | ||||
Net sales | $ | 1,243.9 | $ | 1,224.1 | ||
Operating income | $ | 121.0 | $ | 132.5 | ||
Restructuring and related costs | 11.9 | 11.8 | ||||
Adjusted operating income | $ | 132.9 | ||||