FORM 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 28, 2008
Hubbell Incorporated
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Connecticut
|
|
1-2958
|
|
06-0397030 |
|
|
|
|
|
(State or other jurisdiction
|
|
(Commission
|
|
(I.R.S. Employer |
of incorporation)
|
|
File Number)
|
|
Identification No.) |
|
|
|
|
|
584 Derby Milford Road, Orange,
|
|
|
|
06477 |
|
|
|
|
|
(Address of principal executive offices)
|
|
|
|
(Zip Code) |
Registrants telephone number, including area code: 203 799 4100
Not Applicable
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
o |
|
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|
o |
|
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
o |
|
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b)) |
|
o |
|
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) |
Item 8.01 Other Events.
We are herein providing updated financial information of Hubbell Incorporated for the three years
ended December 31, 2007. During the first quarter of 2008, the Company realigned its internal
organization and operating segments. This reorganization included combining the electrical products
business (included in the Electrical segment) and the industrial technology business (previously
its own reporting segment) into one business, as part of the Electrical reporting segment.
Following the reorganization, effective for the first quarter of 2008, the Companys reporting
segments consist of the Electrical segment and the Power segment. Accordingly, our historical
segment financial information and related disclosures have been reclassified to reflect our current
internal structure. Under generally accepted accounting principles, we are required to reclassify
amounts related to segment reporting on a basis comparable to our current presentation. The
historical financial information included in the Exhibits hereto, which Exhibits are incorporated
herein by reference, in particular, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, Item 8. Financial Statements and Supplementary Data,
specifically Note 1, Significant Accounting Policies, Note 3, Business Acquisitions, Note 6,
Goodwill and Other Intangible Assets and Note 20, Industry Segments and Geographic Area
Information, have been revised and updated from their original presentation in our Form 10-K filed
on February 25, 2008 to reflect our segment realignment during the first quarter of 2008.
No other changes or modifications have been made to these financial statements.
Item 9.01. Financial Statements and Exhibits.
|
|
|
Exhibit No. |
|
Document Description |
23.1
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
99.1
|
|
Updated Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations |
|
|
|
99.2
|
|
Updated Item 8. Financial Statements and Supplementary Data |
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
|
Hubbell Incorporated
|
|
May 28, 2008 |
By: |
/s/
Darrin S. Wegman
|
|
|
|
Name: |
Darrin S. Wegman |
|
|
|
Title: |
Vice President, Controller |
|
3
EXHIBIT INDEX
Item 9.01. Financial Statements and Exhibits.
|
|
|
Exhibit No. |
|
Document Description |
23.1
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
99.1
|
|
Updated Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations |
|
|
|
99.2
|
|
Updated Item 8. Financial Statements and Supplementary Data |
4
EX-23.1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8
(Nos. 333-108148, 333-101981, and 333-125788) of Hubbell Incorporated (the Company) of our report
dated February 22, 2008 except with respect to our opinion on the consolidated financial statements
insofar as it relates to the effects of the change in reportable segments discussed in Notes 1,3,6
and 20 as to which the date is May 28, 2008, relating to the Companys consolidated financial
statements, financial statement schedule and the effectiveness of internal control over financial
reporting, which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
May 28, 2008
1
EX-99.1
EXHIBIT 99.1
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE OVERVIEW OF THE BUSINESS
2007 was a year of recovery after a particularly challenging 2006. In 2007, we executed
against a business strategy with three primary areas of focus. We made significant progress this
year in increasing profitability as operating margin improved by 2.1 percentage points. We believe
the current strategy provides the means for us to continue to grow profits and deliver strong
returns to our shareholders. In 2008, we plan to continue to execute against this strategy with
additional focus on revenue growth.
During the past several years, we experienced significant increases in the cost of commodity raw
materials used in the production of our products including steel, copper, aluminum and zinc, as
well as in certain purchased electronic components such as ballasts. As a result, multiple
increases in the selling prices of our products were announced and implemented during this time
period. We believe that all or substantially all of these cost increases were recovered in 2007 and
we expect to maintain price and commodity cost parity in 2008. However, commodity costs and in
particular energy prices, remain volatile and may not be fully offset with pricing increases.
Global sourcing. We remain focused on expanding our global product and component sourcing and
supplier cost reduction program. We continue to consolidate suppliers, utilize reverse auctions,
and partner with vendors to shorten lead times, improve quality and delivery and reduce costs.
Product and component purchases representing approximately 23% of total purchases are currently
sourced from low cost countries.
Freight and Logistics. Transporting our products from suppliers, to warehouses, and ultimately to
our customers, is a major cost to our Company. During 2007, we were able to reduce these costs and
improve our service to customers. We also see opportunities to further reduce costs and increase
the effectiveness of our freight and logistics processes including capacity utilization and network
optimization in 2008.
During 2007, we began to realize benefits associated with the SAP system implementation, including
standardizing best practices in inventory management, production planning and scheduling to improve
manufacturing throughput and reduce costs. In addition, value-engineering efforts through Kaizen
events have also contributed to our productivity improvements. As a result, we experienced positive
productivity related to manufacturing and logistics. In addition, cash flow from operations was at
record levels in 2007 and more than double the previous year results. We plan to continue to
further reduce lead times and improve service levels to our customers.
Working Capital Efficiency. Working capital efficiency is principally measured as the percentage
of trade working capital (inventory plus accounts receivable, less accounts payable) divided by
annual net sales. In 2007, trade working capital as a percentage of net sales improved to 19.8%
compared to 22% in 2006 due primarily to improvements in inventory management. We will continue to
focus on improving our working capital efficiency with a continued emphasis in the inventory area.
Transformation of business processes. We will continue our long-term initiative of applying lean
process improvement techniques throughout the enterprise, with particular emphasis on reducing
supply chain complexity to eliminate waste and improve efficiency and reliability.
Organic Growth. The Company demonstrated a strong pricing discipline in the marketplace throughout
2007 in an effort to recover higher commodity costs. The pricing emphasis was critical to our
margin improvement in 2007, but did result in some loss of market
1
share. In 2008, we will maintain pricing discipline but also will look to expand market share
through a greater emphasis on new product introductions and better leverage of sales and marketing
efforts across the organization.
Acquisitions. We spent a total in 2007 of $52.9 million on acquisitions and related costs. All
2007 acquisitions were in the Power segment. In January of 2008, we acquired a lighting business
for approximately $100 million that will be added to our Electrical segment. These businesses are
expected to add approximately $72 million in annual net sales. Our ability to finance substantial
growth continues to be strong and we expect to pursue potential acquisitions that would enhance our
core electrical component businesses.
OUTLOOK
Our outlook for 2008 in key areas is as follows:
Markets and Sales
We anticipate an overall lower rate of growth in 2008 compared to 2007 in most of our major
end use markets. The residential market is expected to continue to decline significantly in 2008
due to the effects of tighter mortgage standards, the overall disrupted housing market and an
oversupply of inventory. Non-residential construction is expected to slow with lower commercial
construction activity partially offset by higher spending on industrial and institutional projects.
Domestic utility markets are expected to increase in 2008 with most of the growth coming from
transmission projects while distribution spending will expand in the low single digits due to
downward pressure from weaker residential markets. We also do not anticipate any significant
increase in demand for our power products in 2008 resulting from infrastructure changes in the
utility industry. This outlook for our markets assumes no further shocks to the economy, in
particular higher energy prices, which could dampen consumer spending and business investments. We
expect overall growth in 2008 sales versus 2007 to be in a range of 4%-6%, excluding any effects of
fluctuations in foreign currency exchange rates. The full year impact of acquisitions is expected
to contribute 2%-3% of these amounts. Sales increases compared to 2007 are expected to be
relatively balanced across our two segments. Within our Electrical segment, the acquisition of Kurt
Versen in the first quarter of 2008 will essentially offset the continuing decline in the
residential market in 2008. During 2007, we were focused on maintaining price in the market to
offset commodity cost increases and in some cases gave up market share to do so. In 2008, we will
continue to exercise pricing discipline but will also be focused on gaining market share through
new product introductions. The impact of price increases should comprise approximately 1%-2% of the
year-over-year sales growth.
Operating Results
Full year 2008 operating profit margin is expected to increase approximately one percentage
point compared to 2007. In 2008 we will continue to focus on the same objectives that resulted in
an improved operating margin in 2007; price, productivity and cost, as well as a focus on revenue
growth. We expect the pricing actions taken in 2007 as well as additional planned increases in 2008
will offset higher levels of raw material commodity costs and higher energy related costs. However,
commodity and energy costs, particularly oil, are expected to remain volatile and further increases
in these costs in 2008 may not be fully offset with price increases. In addition, productivity
efforts including expansion of global product sourcing initiatives, improved factory productivity
and lean process improvement projects are expected to benefit operating margins.
Taxation
We estimate the effective tax rate in 2008 will be approximately 30.5% compared with 26.7%
reported in 2007. The 2007 effective tax rate included a favorable tax benefit of 1.9 percentage
points as a result of the finalization of an IRS examination of the Companys 2004 and 2005 tax
returns. The additional increase in 2008 is due to an anticipated higher level of U.S. taxable
income and the expiration of the research and development (R&D) tax credit in 2007.
Earnings Per Share
Overall, earnings per diluted share is expected to be in the range of $3.70-$3.90.
Cash Flow
We expect to increase working capital efficiency in 2008 primarily as a result of improvements
in days supply of inventory. Capital spending in 2008 is expected to be approximately
$60-$70 million. We expect the combination of share repurchases and or acquisitions in 2008 to
approximate $200-$300 million. Total repurchases may vary depending upon the level of other
investing activities. Free cash flow (defined as cash flow from operations less capital spending)
in 2008 is expected to approximate net income.
2
Growth
Our growth strategy contemplates acquisitions in our core businesses. The rate and extent to
which appropriate acquisition opportunities become available, acquired companies are integrated and
anticipated cost savings are achieved can affect our future results. We anticipate investing in
2008 in acquisitions at a higher level than 2007, as evidenced by the $100 million dollar
acquisition of a lighting business in January 2008. However, actual spending may vary depending
upon the timing and availability of appropriate acquisition opportunities.
RESULTS OF OPERATIONS
Our operations are classified into two segments: Electrical and Power. For a complete
description of the Companys segments, see Part I, Item 1. of the 2007 Annual Report on Form 10-K.
Within these segments, Hubbell primarily serves customers in the commercial and residential
construction, industrial, utility, and telecommunications industries.
The table below approximates percentages of our total 2007 net sales generated by the markets
indicated.
Hubbells Served Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications/ |
|
|
Segment |
|
Commercial |
|
Residential |
|
Industrial |
|
Utility |
|
Other |
|
Total |
Electrical |
|
|
51 |
% |
|
|
14 |
% |
|
|
24 |
% |
|
|
4 |
% |
|
|
7 |
% |
|
|
100 |
% |
Power |
|
|
9 |
% |
|
|
3 |
% |
|
|
5 |
% |
|
|
78 |
% |
|
|
5 |
% |
|
|
100 |
% |
Hubbell Consolidated |
|
|
40 |
% |
|
|
11 |
% |
|
|
19 |
% |
|
|
23 |
% |
|
|
7 |
% |
|
|
100 |
% |
In 2007, our served markets have remained relatively consistent with the prior year, except
for the contraction of the residential market. Overall, we experienced growth in sales due to the
contributions of higher selling prices and acquisitions. Principal markets affecting the Electrical
segment were mixed as a strong worldwide oil and gas market, increased demand for high voltage
instrumentation and specialty communication products and a modest improvement in commercial
construction and industrial markets more than offset the contraction in the residential market.
Market conditions in the Power segment were mixed. Utility spending increased in 2007, however, the
growth was concentrated in transmission projects. The majority of our utility products relate to
distribution spending, which was flat in 2007 due in part to pressure from weaker residential
markets.
Summary of Consolidated Results (in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ending December 31, |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
2007 |
|
|
Sales |
|
|
2006 |
|
|
Sales |
|
|
2005 |
|
|
Sales |
|
Net sales |
|
$ |
2,533.9 |
|
|
|
|
|
|
$ |
2,414.3 |
|
|
|
|
|
|
$ |
2,104.9 |
|
|
|
|
|
Cost of goods sold |
|
|
1,798.1 |
|
|
|
|
|
|
|
1,757.5 |
|
|
|
|
|
|
|
1,509.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
735.8 |
|
|
|
29.0 |
% |
|
|
656.8 |
|
|
|
27.2 |
% |
|
|
595.0 |
|
|
|
28.3 |
% |
Selling & administrative expenses |
|
|
436.4 |
|
|
|
17.2 |
% |
|
|
415.6 |
|
|
|
17.2 |
% |
|
|
357.9 |
|
|
|
17.0 |
% |
Special charges, net |
|
|
|
|
|
|
|
|
|
|
7.3 |
|
|
|
0.3 |
% |
|
|
10.3 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
299.4 |
|
|
|
11.8 |
% |
|
|
233.9 |
|
|
|
9.7 |
% |
|
|
226.8 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
3.50 |
|
|
|
|
|
|
$ |
2.59 |
|
|
|
|
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Compared to 2006
Net Sales
Consolidated net sales for the year ended December 31, 2007 were $2.5 billion, an increase of
5% over the year ended December 31, 2006. The majority of the year-over-year increase is due to
higher selling prices and several acquisitions, partially offset by lower residential product
sales. We estimate that selling price increases and the impact of acquisitions accounted for
approximately four percentage points and two percentage points, respectively, of the year-over-year
increase in sales. Refer to the table above under Hubbells Served Markets for further details on
how the underlying market demand can impact each segments revenues. Also refer to Segment
Results within this Managements Discussion and Analysis for more detailed information on
performance by segment.
3
Gross Profit
The consolidated gross profit margin for 2007 increased to 29.0% compared to 27.2% in 2006.
The increase was primarily due to selling price increases and productivity improvements, including
lower freight and logistics costs and lower product costs from strategic sourcing initiatives.
These improvements in 2007 compared to 2006 were partially offset by the negative impact of an
unfavorable product sales mix due to lower sales of higher margin residential products.
Selling & Administrative Expenses
Selling and administrative (S&A) expenses increased 5% compared to 2006. The increase is
primarily due to S&A expenses of acquisitions and higher selling costs associated with increased
sales. As a percentage of sales, S&A expenses in 2007 of 17.2% were unchanged from the comparable
period of 2006. Numerous cost containment initiatives; primarily advertising, and lower spending on
the enterprise wide systems implementation of SAP were offset by expenses for certain strategic
initiatives related to reorganizing operations, including office moves, severance costs associated
with reductions in workforce and costs incurred to support new products sales.
Special Charges
Operating results in 2006 include pretax special charges related to our Lighting Business
Integration and Rationalization Program (the Program or Lighting Program). The Lighting Program
was approved following our acquisition of LCA in April 2002 and was undertaken to integrate and
rationalize the combined lighting operations. This Program was substantially completed by the end
of 2006. Any remaining costs in 2007 are being reflected in S&A expense or Cost of goods sold in
the Consolidated Statement of Income. At the end of 2006, one of the remaining actions within the
Lighting Program was the completion of construction of a new lighting headquarters. The
construction was completed in the early part of 2007. Cash capital expenditures of $13 million
related to the headquarters are reflected in the 2007 Consolidated Statement of Cash Flow. See
separate discussion of the 2006 and 2005 Special Charges under 2006 Compared to 2005 within this
Managements Discussion and Analysis.
Operating Income
Operating income increased 28% primarily due to higher sales and gross profit partially offset
by increased selling and administration costs. Operating margins of 11.8% in 2007 increased
compared to 9.7% in 2006 as a result of increased sales and higher gross profit margins.
Other Income/Expense
Interest expense was $17.6 million in 2007 compared to $15.4 million in 2006. The increase was
due to higher average outstanding commercial paper borrowings in 2007 compared to 2006. Investment
income decreased in 2007 versus 2006 due to lower average investment balances due to the funding of
two acquisitions in 2006 and one in 2007 as well as a higher amount of share repurchases. Other
expense, net in 2007 decreased $2.1 million versus 2006 primarily due to net foreign currency
transaction gains in 2007 compared to net foreign currency losses in 2006.
Income Taxes
Our effective tax rate was 26.7% in 2007 compared to 28.6% in 2006. In 2007, a favorable tax
settlement was recognized in connection with the closing of an IRS examination of the Companys
2004 and 2005 tax returns and this benefit reduced the effective tax rate by 1.9 percentage points
in 2007. Additional information related to our effective tax rate is included in Note 13 Income
Taxes in the Notes to Consolidated Financial Statements.
Net Income and Earnings Per Share
Net income and diluted earnings per share in 2007 increased 31.8% and 35.1%, respectively,
versus 2006 as a result of higher sales and gross profit, a lower tax rate and fewer diluted shares
outstanding.
4
\
Segment Results
Electrical Segment
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
(In millions) |
Net Sales |
|
$ |
1,897.3 |
|
|
$ |
1,840.6 |
|
Operating Income |
|
$ |
202.1 |
|
|
$ |
158.1 |
|
Operating Margin |
|
|
10.7 |
% |
|
|
8.6 |
% |
Net sales in the Electrical segment increased by 3% in 2007 versus the prior year due to
higher sales of electrical and wiring products and selling price
increases partially offset by lower
sales of residential lighting fixtures. Overall for the segment, higher selling prices increased
net sales by approximately three percentage points versus 2006. Within the segment, sales of
electrical products increased by approximately 14% in 2007 versus the comparable period of 2006 due
to strong demand for harsh and hazardous products, selling price increases and the impact of the
Austdac Pty Ltd. acquisition in November 2006. Wiring products experienced 6% higher sales in 2007
versus 2006 principally due to increased new product sales and higher selling prices. Sales of
residential lighting fixture products were lower in 2007 by approximately 22% versus the prior year
as a result of a decline in the U.S. residential construction market.
Operating income and operating margin in the segment improved in 2007 versus the prior year
primarily due to selling price increases, productivity gains and lower costs, including employee
benefits and SAP implementation cost reductions. We estimate that selling price increases exceeded
commodity cost increases by nearly two percentage points in 2007 compared to 2006. In addition,
productivity improvements including lower freight and logistics costs, strategic sourcing
initiatives and completed actions within our Lighting Program benefited results in 2007. These
improvements were partially offset by overall lower unit volume, specifically lower shipments of
higher margin residential lighting fixture products and costs associated with a product quality
issue within our wiring business.
Power Segment
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
(In millions) |
Net Sales |
|
$ |
636.6 |
|
|
$ |
573.7 |
|
Operating Income |
|
$ |
97.3 |
|
|
$ |
75.8 |
|
Operating Margin |
|
|
15.3 |
% |
|
|
13.2 |
% |
Power segment net sales increased 11% in 2007 versus the prior year due to the impact of
acquisitions and selling price increases. The acquisition of Hubbell Lenoir City, Inc. completed in
the second quarter of 2006 as well as PCORE in the fourth quarter of 2007 accounted for
approximately two-thirds of the sales increase in 2007 compared to the same period in 2006. Price
increases were implemented across most product lines throughout 2006 and into 2007 where costs have
risen due to increased metal and energy costs. We estimate that price increases accounted for
approximately five percentage points of the year-over-year sales increase. Operating income and
margins increased in 2007 versus 2006 as a result of acquisitions, selling price increases and
productivity improvements including strategic sourcing, factory efficiencies and lean programs. The
Hubbell Lenoir City, Inc. and PCORE acquisitions contributed approximately one-quarter of the
operating income increase in 2007 versus the prior year. In addition, increased sales of higher
margin new products and favorable product mix also contributed to the increase in operating margins
in 2007 versus 2006.
2006 Compared to 2005
Net Sales
Consolidated net sales for the year ended December 31, 2006 were $2.4 billion, an increase of
15% over the year ended December 31, 2005 with all segments contributing to the increase.
The majority of the year-over-year increase was due to strong end user demand as a result of
improved economic conditions in most of our served markets, contributions from current and prior
year acquisitions and higher selling prices. The impact of acquisitions accounted for approximately
four percentage points of the sales increase in 2006 compared to 2005. We estimated that selling
price increases accounted for approximately two percentage points of the year-over-year increase in
sales. Also refer to Segment Results within this Managements Discussion and Analysis for more
detailed information on performance by segment.
5
Gross Profit
The consolidated gross profit margin for 2006 decreased to 27.2% compared to 28.3% in 2005.
Production and delivery inefficiencies were experienced in certain businesses within both segments
compared to the prior year. Further, higher year-over-year costs throughout each segment in the
areas of commodity raw materials negatively impacted gross profit margins by approximately two and
one half percentage points. These items were partially offset by increased sales volume in 2006
compared to 2005, selling price increases, lower product costs from strategic sourcing initiatives
and completed actions within our Lighting Program.
In total, we estimated that price increases of approximately 2% of net sales were realized to
offset higher raw material and transportation cost increases of approximately 2.5% of sales,
resulting in net unrecovered cost increases of approximately $15 million. Higher costs of certain
raw materials, primarily copper, aluminum, zinc and nickel, were major challenges in 2006 as they
occurred across each of our businesses. These increases required us to increase selling prices
which were often not fully realized or required up to 90-120 days to become effective and begin to
offset the higher costs, which in many cases were immediate.
Selling & Administrative Expenses
S&A expenses increased 16% in 2006 compared to 2005 primarily due to higher selling and
commission expenses associated with increased sales, stock-based compensation and expenses
associated with new product launches. As a percentage of sales, S&A expenses increased to 17.2% in
2006 compared to 17.0% in 2005. The increase was primarily due to higher expenses associated with
stock-based compensation which increased S&A as a percentage of sales by approximately one-half of
one percentage point.
Special Charges
Full year operating results in 2006 and 2005 include pretax special charges related to (1) the
Lighting Program and (2) other capacity reduction actions, all within the Electrical segment.
The following table summarizes activity by year with respect to special charges for the years
ending December 31, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CATEGORY OF COSTS |
|
|
|
|
|
|
|
Facility Exit |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
|
and |
|
|
Asset |
|
|
Inventory |
|
|
|
|
Year/Program |
|
Other Benefit Costs |
|
|
Integration |
|
|
Impairments |
|
|
Write-Downs* |
|
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
$ |
2.8 |
|
|
$ |
1.6 |
|
|
$ |
2.9 |
|
|
$ |
0.2 |
|
|
$ |
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
$ |
5.7 |
|
|
$ |
2.7 |
|
|
$ |
1.2 |
|
|
$ |
0.4 |
|
|
$ |
10.0 |
|
Other capacity reduction |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.7 |
|
|
$ |
3.3 |
|
|
$ |
1.2 |
|
|
$ |
0.7 |
|
|
$ |
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in Cost of goods sold |
The Lighting Program
The integration and rationalization of our lighting operations was a multi-year initiative
that began in 2002 and was substantially completed in 2006. Individual projects within the Program
consisted of factory, office and warehouse closures, personnel realignments, and costs to
streamline and combine product offerings. From the start of the Program in 2002 through
December 31, 2006, amounts expensed totaled approximately $54 million and amounts capitalized have
been approximately $44 million. Capital expenditures were primarily related to the construction of
a new lighting headquarters. Program costs related to severance, asset impairments, and facility
closures in conjunction with exit activities were generally reflected as Special charges, net
within the Consolidated Statement of Income. Inventory write-downs related to exit activities were
recorded as a component of Cost of goods sold. Other costs associated with the Program were
recorded as Cost of goods sold or S&A expenses depending on the nature of the cost. State and local
incentives consisting primarily of property tax credits, job credits and site development funds
were available in various forms, and are expected to offset portions of both the cost of
construction and future operating costs of the lighting headquarters facility.
6
The Program was comprised of three phases. Program expenses by phase, including special
charges and other expense costs, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phase I |
|
|
Phase II |
|
|
Phase III |
|
|
Total |
|
2002 |
|
$ |
10.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10.3 |
|
2003 |
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
8.1 |
|
2004 |
|
|
5.5 |
|
|
|
6.2 |
|
|
|
|
|
|
|
11.7 |
|
2005 |
|
|
2.2 |
|
|
|
11.3 |
|
|
|
1.3 |
|
|
|
14.8 |
|
2006 |
|
|
0.2 |
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26.3 |
|
|
$ |
21.5 |
|
|
$ |
6.3 |
|
|
$ |
54.1 |
|
Phase I of the Program began in 2002 soon after the LCA acquisition was completed and
consisted of many individually identified actions. Phase I activities were focused on integrating
the acquired operations with Hubbells legacy lighting operations. In accordance with applicable
accounting rules, amounts were expensed either as actions were approved and announced or as costs
were incurred. Reorganization actions primarily consisted of factory closures, warehouse
consolidations and workforce realignment. These actions were completed as of December 31, 2006.
Phase II of the Program began in 2004. Many of the actions contemplated were similar to
actions completed or underway from Phase I. However, these actions were increasingly focused on
rationalizing the combined businesses. In the second quarter of 2004, a commercial products plant
closure was announced and charges were recorded, primarily for asset impairments. In the third
quarter of 2004, we announced two actions: (1) consolidation of selling, administrative and
engineering support functions within the commercial lighting businesses, and (2) the selection of
Greenville, South Carolina as the site for a new lighting headquarters facility to be constructed.
In addition, in the 2004 fourth quarter, a further move of commercial lighting manufacturing to
Mexico was approved.
In 2005, we announced the final Phase II action consisting of the consolidation and closure of
a commercial lighting leased office complex. No new Phase II actions were taken in 2006. In total,
Phase II costs expensed in 2006 totaled $4.0 million consisting primarily of severance and facility
integration in connection with the commercial products move to Mexico. Through December 31, 2006,
$21.5 million of total expenses have been recorded for plant consolidations and the consolidation
of support functions related to Phase II actions. Approximately 80% of the total amount expensed
has been associated with cash outlays. The new headquarters facility represented the largest
remaining capital cost.
In the fourth quarter of 2005, the first Phase III action was approved related to the
consolidation and relocation of administrative and engineering functions of a commercial lighting
facility to South Carolina. In connection with this approval, we recorded a non-cash pension
curtailment charge of approximately $1.3 million. Approximately 85 employees were affected by this
action. In 2006, $5.0 million of Phase III costs were expensed. During the fourth quarter of 2006,
the closure of a commercial products factory in Cincinnati, Ohio was announced and charges of
$3.0 million were recorded related to asset impairments and a portion of the severance and benefits
costs expected to be incurred. In addition, $2.0 million was recorded primarily related to
severance costs associated with the office closure.
Other Capacity Reduction Actions
In 2004, we announced the closure of a 92,000 square foot wiring device factory in Puerto
Rico. As a result, $7.2 million in special charges were recorded in 2004 in the Electrical segment.
During 2005, the factory closed and substantially all employees left the Company. In the second
quarter of 2005, we recorded an additional $0.9 million of special charges associated with this
closure, of which $0.3 million related to inventory write-downs and $0.6 million related to
additional facility exit costs. Annual pretax savings from these actions were approximately
$4 million in 2006, with the entire amount benefiting Cost of goods sold in the Electrical segment.
Net benefits actually realized in the segment were minimized as a result of cost increases and
other competitive pressures.
Additional information with respect to special charges is included in Note 2 Special Charges
included in the Notes to Consolidated Financial Statements.
Operating Income
Operating income increased $7.1 million, or 3% in 2006 compared to 2005 as a result of higher
sales levels and $3.4 million of lower pretax special charges (including amounts charged to Cost of
goods sold). Operating margins of 9.7% in 2006 declined compared to 10.8% in 2005 as a result of
lower gross profit margins and higher S&A expenses as a percentage of sales.
7
Other Income/Expense
In 2006, investment income decreased $4.4 million versus 2005 due to lower average investment
balances as a result of funding acquisitions in 2005 and 2006, as well as funding higher working
capital. Interest expense decreased $3.9 million in 2006 compared to 2005 due to a lower level of
fixed rate indebtedness in 2006 compared to 2005. In October 2005, we repaid $100 million of senior
notes upon maturity. Other expense, net in 2006 was $2.1 million of expense compared to
$1.3 million of expense in 2005 primarily due to higher net foreign currency transaction losses.
Income Taxes
Our effective tax rate was 28.6% in 2006 compared to 23.5% in 2005. The 2005 consolidated
effective tax rate reflected the impact of tax benefits of $10.8 million recorded in connection
with the closing of an IRS examination of the Companys 2002 and 2003 tax returns. This benefit
reduced the statutory tax rate by 5.1 percentage points in 2005. Adjusting for the IRS audit
settlement in 2005, the effective tax rate in 2006 was consistent with the prior year.
Net Income and Earnings Per Share
Net income and earnings per diluted share in 2006 declined versus 2005 as a result of lower
operating profit, higher income taxes and unfavorable other income/expense, partially offset by
lower special charges.
Segment Results
Electrical Segment
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
(In millions) |
Net Sales |
|
$ |
1,840.6 |
|
|
$ |
1,649.3 |
|
Operating Income |
|
$ |
158.1 |
|
|
$ |
162.6 |
|
Operating Margin |
|
|
8.6 |
% |
|
|
9.9 |
% |
Electrical segment net sales increased 12% in 2006 versus 2005 primarily as a result of
improved underlying demand in the commercial and industrial construction markets and higher selling
prices. Each of the businesses within the segment wiring products, electrical products and
lighting products experienced year-over-year increases. Higher selling prices were implemented and
have been realized in most of the businesses within the segment in an effort to recover cost
increases, primarily related to higher commodity raw material and freight costs.
Sales of lighting fixtures increased slightly below the overall segment percentage with the
majority of the growth from our commercial and industrial (C&I) application products and more
modest growth in residential products. The C&I lighting businesses increased due to higher levels
of commercial construction throughout the U.S. generating increases in lighting fixture project
sales. An industry-wide price increase within C&I lighting in June 2006 resulted in a spike in
order input in the second quarter of the year and, consequently, strong year-over-year shipments in
the second and third quarters. Sales of residential lighting fixture products were up modestly in
2006 versus 2005, consistent with underlying residential markets, as a majority of first half sales
increases year-over-year were offset by second half declines.
Wiring products sales increased year-over-year by more than 10% due to higher demand in both
industrial and commercial markets. Electrical product sales increased by approximately 20% as a
result of strong demand for harsh and hazardous products, higher selling prices and the impact of
2005 and 2006 acquisitions. Sales of harsh and hazardous products increased year-over-year
primarily due to higher oil and gas project shipments related to strong market conditions
worldwide.
Operating margin in the segment was lower in 2006 versus 2005 due to production and delivery
inefficiencies in certain lighting facilities affected by restructuring actions and the SAP system
implementation, which was partially offset by higher sales volume. In addition, higher commodity
raw material in excess of selling price increases negatively affected the segments operating
margin by approximately one percentage point. Savings from completed actions associated with the
lighting Program together with lower special charges in 2006 compared with 2005 were also more than
offset by higher S&A costs, including SAP related costs, and a non-recurring $4.9 million prior
year gain on sale of a building.
8
Power Segment
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
(In millions) |
Net Sales |
|
$ |
573.7 |
|
|
$ |
455.6 |
|
Operating Income |
|
$ |
75.8 |
|
|
$ |
68.8 |
|
Operating Margin |
|
|
13.2 |
% |
|
|
15.1 |
% |
Power segment net sales increased 26% in 2006 versus the prior year due to the impact of
acquisitions and higher levels of utility spending facilitated by higher levels of economic
activity in the U.S. and selling price increases. The acquisition of Fabrica de Pecas Electricas
Delmar Ltda. (Delmar) in the third quarter of 2005 as well as the Hubbell Lenoir City, Inc.
acquisition completed in the second quarter of 2006 accounted for approximately one half of the
sales increase in 2006 compared to 2005. Price increases were implemented across most product lines
throughout 2005 and into 2006 where costs have risen due to increased metal and energy costs. We
estimated that price increases accounted for approximately 4 percentage points of the
year-over-year sales increase. Operating margins decreased in 2006 versus 2005, despite an
approximate two percentage point improvement from higher sales, as a result of commodity cost
increases in excess of selling price increases, factory inefficiencies, higher SAP related costs
and increased transportation costs. The commodity cost increases, primarily steel, aluminum, copper
and zinc, outpaced our actions to increase selling prices. We estimate that the negative impact in
2006 of cost increases in excess of pricing actions resulted in a reduction of operating margin of
approximately two percentage points for this segment. In addition, the segment experienced factory
inefficiencies due in part to the disruption caused by the system implementation.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
335.2 |
|
|
$ |
139.9 |
|
|
$ |
184.1 |
|
Investing activities |
|
|
(105.7 |
) |
|
|
(66.7 |
) |
|
|
(30.4 |
) |
Financing activities |
|
|
(200.4 |
) |
|
|
(139.6 |
) |
|
|
(182.1 |
) |
Foreign exchange effect on cash |
|
|
3.1 |
|
|
|
1.1 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
32.2 |
|
|
$ |
(65.3 |
) |
|
$ |
(29.3 |
) |
|
|
|
|
|
|
|
|
|
|
2007 Compared to 2006
Cash provided by operating activities in 2007 was $195.3 million higher than cash provided by
operating activities in 2006 as a result of an increased focus in 2007 on working capital,
specifically inventory and improved profitability. Inventory decreased $24.2 million in 2007
compared to a build of inventory of $86.3 million in 2006 primarily attributable to a better
utilization of the SAP system, including standardizing best practices in inventory management,
production planning and scheduling. Accounts receivable balances decreased by $27.8 million in 2007
compared to an increase of $30.7 million in 2006 due to improved collection efforts related in part
to better utilization of the SAP system. Current liability balances in 2007 were higher than in
2006 primarily as a result of an increase in deferred revenue in 2007 due to cash received in
advance primarily related to the high voltage business and higher employee related compensation.
However, contributions to defined benefit pension plans resulted in an increased use of cash of
$20.7 million in 2007 compared to 2006.
Cash flows from investing activities used an additional $39 million of cash in 2007 compared
to 2006. Purchases and maturities/sales of investments used net cash of $2.6 million in 2007
compared to $163.8 million of net cash proceeds in 2006. Investing activities include capital
expenditures of $55.9 million in 2007 compared to $86.8 million in 2006. The $30.9 million decrease
is primarily the result of completion of the new lighting headquarters in early 2007 and lower
implementation costs associated with the enterprise-wide business system. Cash outlays to acquire
new businesses decreased $92.8 million in 2007 compared to 2006.
Financing activities used $200.4 million of cash in 2007 compared to $139.6 million in 2006.
During 2007, the Company repurchased approximately 3.6 million shares of its common stock for
$193.1 million compared to 2.1 million shares repurchased in 2006 for $95.1 million. Net borrowings
of short-term debt were $15.8 million in 2007 compared to net repayments of $8.9 million in 2006.
Proceeds from stock options were $48.0 million in 2007 compared to $38.5 million in 2006.
9
2006 Compared to 2005
Cash provided by operating activities in 2006 of $139.9 million was $44.2 million or 24% lower
than cash provided by operating activities in 2005 primarily as a result of higher levels of
inventory and accounts receivable. Cash used to fund an increase in inventory was $86.3 million in
2006 compared with $13.2 million in 2005. Accounts receivable balances increased by $30.7 million
in 2006 compared to an increase of $16.9 million in 2005. Partially offsetting these increases were
the lack of a contribution to our domestic, qualified, defined benefit pension plans in 2006
compared to a $28 million payment in 2005, and higher current liability balances resulting in a
source of cash of approximately $13.3 million in 2006 compared to $2 million in 2005. Inventory
balances increased in 2006 primarily due to a combination of business inefficiencies associated
with the system implementation and new product launches. Higher accounts receivable were due to a
higher level of sales in the fourth quarter of 2006 compared with the same period of 2005. Current
liability balances in 2006 were higher than in 2005 primarily as a result of higher customer
incentives and employee related compensation. Included within cash provided by operating activities
were income tax benefits from employee exercises of stock options of $7.8 million in 2005.
Cash flows from investing activities included capital expenditures of $86.8 million in 2006
compared to $73.4 million in 2005. The $13.4 million increase was attributed to higher expenditures
primarily in connection with construction of the new lighting headquarters for which expenditures
increased $14.2 million year-over-year. In addition, incremental investments in equipment were
partially offset by $7.6 million of lower capital expenditures for software, principally related to
the system implementation. Cash outlays to acquire new businesses totaled $145.7 million in 2006
compared to $54.3 million in 2005. Purchases and maturities/sales of investments provided net cash
proceeds of $163.8 million in 2006 compared to net cash proceeds of $81.1 million in 2005. Proceeds
from disposition of assets decreased to $0.6 million in 2006 compared to $14.6 million in 2005 with
the prior year amount reflecting proceeds from a building sale in the Electrical segment.
Financing cash flows used $139.6 million of cash in 2006 compared to $182.1 million in 2005.
Cash used in 2005 reflected the repayment of $100.0 million of senior notes at maturity. Net
repayments of short-term debt were $8.9 million in 2006 compared to net borrowings of $28.4 million
in 2005. The prior year included borrowings related to international acquisitions and dividend
repatriations. Purchases of common shares increased in 2006 to $95.1 million compared to
$62.7 million in 2005. Proceeds from stock options were $38.5 million in 2006 compared to
$32.8 million in 2005.
Investments in the Business
We define investments in our business to include both normal expenditures required to maintain
the operations of our equipment and facilities as well as expenditures in support of our strategic
initiatives.
Capital expenditures were $55.9 million for the year ending December 31, 2007. Additions to
property, plant, and equipment were $55.1 million in 2007 compared to $79.6 million in 2006 as a
result of lower investments made in buildings and equipment due to the completion of the new
lighting headquarters. We capitalized $8 million and $26 million in 2007 and 2006, respectively, in
connection with the new lighting headquarters. In 2007 and 2006, we capitalized $0.8 million and
$14.1 million of software, respectively, primarily in connection with our business information
system initiative (recorded in Intangible assets and other in the Consolidated Balance Sheet).
In 2007, we spent a total of $52.9 million on acquisitions, including $0.7 million from a
prior year acquisition. The 2007 acquisition of PCORE is expected to provide approximately
$28 million of annual net sales to our Power segment. In 2006, we completed two business
acquisitions, one in our Power segment and the other in our Electrical segment for a total of
$145.7 million, net of cash acquired and including $0.2 million from a 2005 acquisition. All of
these acquisitions are part of our core markets growth strategy.
In 2007, we spent a total of $193.1 million on the repurchase of common shares compared to
$95.1 million spent in 2006. These repurchases were executed under Board of Director approved stock
repurchase programs which authorized the repurchase of our Class A and Class B Common Stock up to
certain dollar amounts. In February 2007, the Board of Directors approved a stock repurchase
program and authorized the repurchase of up to $200 million of the Companys Class A and Class B
Common Stock to be completed over a two year period. In December 2007, the Board of Directors
approved a new stock repurchase program and authorized the repurchase of up to $200 million of
Class A and Class B Common Stock to be completed over a two year period. This program will be
implemented upon completion of the February 2007 program. Stock repurchases are being implemented
through open market and privately negotiated transactions. The timing of such transactions depends
on a variety of factors, including market conditions.
10
Additional information with respect to future investments in the business can be found under
Outlook within Managements Discussion and Analysis.
Capital Structure
Debt to Capital
Net debt as disclosed below is a non-GAAP measure that may not be comparable to definitions
used by other companies. We consider Net debt to be more appropriate than Total Debt for measuring
our financial leverage as it better measures our ability to meet our funding needs.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Total Debt |
|
$ |
236.1 |
|
|
$ |
220.2 |
|
Total Shareholders Equity |
|
|
1,082.6 |
|
|
|
1,015.5 |
|
|
|
|
|
|
|
|
Total Capitalization |
|
$ |
1,318.7 |
|
|
$ |
1,235.7 |
|
|
|
|
|
|
|
|
Debt to Total Capital |
|
|
18 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
Cash and Investments |
|
$ |
116.7 |
|
|
$ |
81.5 |
|
|
|
|
|
|
|
|
Net Debt (Total debt less cash and investments) |
|
$ |
119.4 |
|
|
$ |
138.7 |
|
|
|
|
|
|
|
|
Net debt defined as total debt less cash and investments decreased as a result of higher cash
and investments in 2007 compared to 2006.
Debt Structure
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Short-term debt |
|
$ |
36.7 |
|
|
$ |
20.9 |
|
Long-term debt |
|
|
199.4 |
|
|
|
199.3 |
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
236.1 |
|
|
$ |
220.2 |
|
|
|
|
|
|
|
|
At December 31, 2007, Short-term debt in our Consolidated Balance Sheet consisted of
$36.7 million of commercial paper. Commercial paper is used to help fund working capital needs, in
particular inventory purchases. At December 31, 2006, Short-term debt consisted of $15.8 million of
commercial paper and $5.1 million of a money market loan. The money market loan was drawn down
against a line of credit to borrow up to 5.0 million pounds sterling (U.S. $ equivalent at
December 31, 2006 was $9.8 million).
At December 31, 2007 and 2006, Long-term debt in our Consolidated Balance Sheet consisted of
$200 million, excluding unamortized discount, of senior notes with a maturity date of 2012. These
notes are fixed rate indebtedness, are not callable and are only subject to accelerated payment
prior to maturity if we fail to meet certain non-financial covenants, all of which were met at
December 31, 2007 and 2006. The most restrictive of these covenants limits our ability to enter
into mortgages and sale-leasebacks of property having a net book value in excess of $5 million
without the approval of the Note holders. In 2002, prior to the issuance of the $200 million notes,
we entered into a forward interest rate lock to hedge our exposure to fluctuations in treasury
interest rates, which resulted in a loss of $1.3 million in 2002. This amount was recorded in
Accumulated other comprehensive income (loss) and is being amortized over the life of the notes.
In October 2007, we entered into a revised five year, $250 million revolving credit facility
to replace the previous $200 million facility which was scheduled to expire in October 2009. There
have been no material changes from the previous facility other than the amount. The interest rate
applicable to borrowings under the new credit agreement is either the prime rate or a surcharge
over LIBOR. The covenants of the new facility require that shareholders equity be greater than
$675 million and that total debt not exceed 55% of total capitalization (defined as total debt plus
total shareholders equity). We were in compliance with all debt covenants at December 31, 2007 and
2006. Annual commitment fee requirements to support availability of the credit facility were not
material. This facility is used as a backup to our commercial paper program and was unused as of
December 31, 2007.
Although these facilities are not the principal source of our liquidity, we believe these
facilities are capable of providing adequate financing at reasonable rates of interest. However, a
significant deterioration in results of operations or cash flows, leading to deterioration in
financial condition, could either increase our future borrowing costs or restrict our ability to
sell commercial paper in
11
the open market. We have not entered into any other guarantees, commitments or obligations
that could give rise to unexpected cash requirements.
Liquidity
We measure our liquidity on the basis of our ability to meet short-term and long-term
operational funding needs, fund additional investments, including acquisitions, and make dividend
payments to shareholders. Significant factors affecting the management of liquidity are the level
of cash flows from operating activities, capital expenditures, access to bank lines of credit and
our ability to attract long-term capital with satisfactory terms.
Normal internal cash generation from operations together with currently available cash and
investments, available borrowing facilities, and an ability to access credit lines, if needed, are
expected to be more than sufficient to fund operations, the current rate of dividends, capital
expenditures, stock repurchases and any increase in working capital that would be required to
accommodate a higher level of business activity. We actively seek to expand by acquisition as well
as through the growth of our present businesses. While a significant acquisition may require
additional borrowings, we believe we would be able to obtain financing based on our favorable
historical earnings performance and strong financial position.
Pension Funding Status
We have a number of funded and unfunded non-contributory U.S. and foreign defined benefit
pension plans. Benefits under these plans are generally provided based on either years of service
and final average pay or a specified dollar amount per year of service. The funded status of our
qualified, defined benefit pension plans is dependant upon many factors including future returns on
invested pension assets, the level of market interest rates, employee earnings and employee
demographics.
Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158 which required
the Company to recognize the funded status of its defined benefit pension and postretirement plans
as an asset or liability in its Consolidated Balance Sheet. In 2007, the Company recorded a total
credit to equity through Accumulated other comprehensive income, net of tax, related to pension and
postretirement plans of $44.9 million, of which $42.0 million is related to pensions. In 2006, the
Company recorded a total charge of $36.8 million, net of tax, of which $36.1 million is related to
pension. Further details on the pretax impact of these items can be found in Note 11 Retirement
Benefits.
Changes in the value of the defined benefit plan assets and liabilities will affect the amount
of pension expense ultimately recognized. Although differences between actuarial assumptions and
actual results are no longer deferred for balance sheet purposes, deferral is still required for
pension expense purposes. Unrecognized gains and losses in excess of an annual calculated minimum
amount (the greater of 10% of the projected benefit obligation or 10% of the market value of
assets) are amortized and recognized in net periodic pension cost over our average remaining
service period of active employees, which approximates 13-15 years. During 2007, we recorded
$1.9 million of pension expense related to the amortization of these unrecognized losses. We expect
to record $1.3 million of expense related to unrecognized losses in 2008.
The actual return on our pension assets in the current year as well as the cumulative return
over the past five and ten year periods has exceeded our expected return for the same periods.
Offsetting these favorable returns has been a decline in long-term interest rates and a resulting
increase in our pension liabilities. These declines in long-term interest rates have had a negative
impact on the funded status of the plans. Consequently, we contributed approximately $28 million in
2007, $8 million in 2006 and $32 million in 2005 to both our foreign and domestic defined benefit
pension plans. These contributions along with favorable investment performance of the plan assets
have improved the funded status of all of our plans. We expect to make additional contributions of
approximately $7 million to our foreign plans during 2008 and no contributions are expected to be
made to the domestic defined benefit pension plans. This level of funding is not expected to have
any significant impact on our overall liquidity.
12
Assumptions
The following assumptions were used to determine projected pension and other benefit
obligations at the measurement date and the net periodic benefit costs for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Weighted-average assumptions used to determine benefit obligations at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.41 |
% |
|
|
5.66 |
% |
|
|
6.50 |
% |
|
|
5.75 |
% |
Rate of compensation increase |
|
|
4.58 |
% |
|
|
4.33 |
% |
|
|
N/A |
|
|
|
N/A |
|
Weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.66 |
% |
|
|
5.45 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
4.58 |
% |
|
|
4.33 |
% |
|
|
N/A |
|
|
|
N/A |
|
At the end of each year, we estimate the expected long-term rate of return on pension plan
assets based on the strategic asset allocation for our plans. In making this determination, we
utilize expected rates of return for each asset class based upon current market conditions and
expected risk premiums for each asset class. A one percentage point change in the expected
long-term rate of return on pension fund assets would have an impact of approximately $6.1 million
on 2008 pretax pension expense. The expected long-term rate of return is applied to the fair market
value of pension fund assets to produce the expected return on fund assets that is included in
pension expense. The difference between this expected return and the actual return on plan assets
was recognized at December 31, 2007 for balance sheet purposes, but continues to be deferred for
expense purposes. The net deferral of past asset gains (losses) ultimately affects future pension
expense through the amortization of gains (losses) with an offsetting adjustment to Shareholders
equity through Accumulated other comprehensive income.
At the end of each year, we determine the discount rate to be used to calculate the present
value of pension plan liabilities. The discount rate is an estimate of the current interest rate at
which the pension plans liabilities could effectively be settled. In estimating this rate, we look
to rates of return on high-quality, fixed-income investments with maturities that closely match the
expected funding period of our pension liability. The discount rate of 6.5% which we used to
determine the projected benefit obligation for our U.S. pension plans at December 31, 2007 was
determined using the Citigroup Pension Discount Curve applied to our expected annual future pension
benefit payments. An increase of one percentage point in the discount rate would lower 2008 pretax
pension expense by approximately $2.4 million. A discount rate decline of one percentage point
would increase pretax pension expense by approximately $5.4 million.
Other Post Employment Benefits (OPEB)
We had health care and life insurance benefit plans covering eligible employees who reached
retirement age while working for the Company. These benefits were discontinued in 1991 for
substantially all future retirees with the exception of certain operations in our Power segment
which still maintain a limited retiree medical plan for their union employees. These plans are not
funded and, therefore, no assumed rate of return on assets is required. The discount rate of 6.5%
used to determine the projected benefit obligation at December 31, 2007 was based upon the
Citigroup Pension Discount Curve as applied to our projected annual benefit payments for these
plans. In 2007 in accordance with SFAS No. 158 we recorded credits to Accumulated other
comprehensive income within Shareholders equity, net of tax, of $2.9 million. In 2006, we recorded
a charge of 0.7 million, net of tax, related to OPEB.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are defined as any transaction, agreement or other contractual
arrangement to which an entity that is not included in our consolidated results is a party, under
which we, whether or not a party to the arrangement, have, or in the future may have: (1) an
obligation under a direct or indirect guarantee or similar arrangement, (2) a retained or
contingent interest in assets or (3) an obligation or liability, including a contingent obligation
or liability, to the extent that it is not fully reflected in the financial statements.
We do not have any off-balance sheet arrangements as defined above which have or are likely to
have a material effect on financial condition, results of operations or cash flows.
13
Contractual Obligations
A summary of our contractual obligations and commitments at December 31, 2007 is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
Debt obligations |
|
$ |
236.7 |
|
|
$ |
36.7 |
|
|
$ |
|
|
|
$ |
200.0 |
|
|
$ |
|
|
Expected interest payments |
|
|
55.8 |
|
|
|
12.8 |
|
|
|
25.5 |
|
|
|
17.5 |
|
|
|
|
|
Operating lease obligations |
|
|
57.9 |
|
|
|
12.6 |
|
|
|
18.2 |
|
|
|
7.0 |
|
|
|
20.1 |
|
Purchase obligations |
|
|
134.2 |
|
|
|
125.7 |
|
|
|
7.7 |
|
|
|
0.8 |
|
|
|
|
|
Income tax payments |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under customer incentive programs |
|
|
25.2 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
510.4 |
|
|
$ |
213.6 |
|
|
$ |
51.4 |
|
|
$ |
225.3 |
|
|
$ |
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our purchase obligations include amounts committed under legally enforceable contracts or
purchase orders for goods and services with defined terms as to price, quantity, delivery and
termination liability. These obligations primarily consist of inventory purchases made in the
normal course of business to meet operational requirements, consulting arrangements and commitments
for equipment purchases. Other long-term liabilities reflected in our Consolidated Balance Sheet at
December 31, 2007 have been excluded from the table above and primarily consist of costs associated
with retirement benefits. See Note 11 Retirement Benefits in the Notes to Consolidated Financial
Statements for estimates of future benefit payments under our benefit plans. As of December 31,
2007, we have $8.7 million of uncertain tax positions. We are unable to make a reasonable estimate
regarding settlement of these uncertain tax positions, and as a result, they have been excluded
from the table. See Note 13 Income Taxes.
Critical Accounting Estimates
Note 1 of the Notes to Consolidated Financial Statements describes the significant accounting
policies used in the preparation of our financial statements.
Use of Estimates
We are required to make assumptions and estimates and apply judgments in the preparation of
our financial statements that affect the reported amounts of assets and liabilities, revenues and
expenses and related disclosures. We base our assumptions, estimates and judgments on historical
experience, current trends and other factors deemed relevant by management. We continually review
these estimates and their underlying assumptions to ensure they are appropriate for the
circumstances. Changes in estimates and assumptions used by us could have a significant impact on
our financial results. We believe that the following estimates are among our most critical in fully
understanding and evaluating our reported financial results. These items utilize assumptions and
estimates about the effect of future events that are inherently uncertain and are therefore based
on our judgment.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements and the SEC revisions in SEC Staff Accounting
Bulletin No. 104. Revenue is recognized when title to goods and risk of loss have passed to the
customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services
are rendered, the price is determinable and collectibility reasonably assured. Revenue is typically
recognized at the time of shipment. Further, certain of our businesses account for sales discounts
and allowances based on sales volumes, specific programs and customer deductions, as is customary
in electrical products markets. These items primarily relate to sales volume incentives, special
pricing allowances, and returned goods. This requires us to estimate at the time of sale the
amounts that should not be recorded as revenue as these amounts are not expected to be collected in
cash from customers. We principally rely on historical experience, specific customer agreements,
and anticipated future trends to estimate these amounts at the time of shipment. Also see Note 1
Significant Accounting Policies of the Notes to Consolidated Financial Statements.
Inventory Valuation
We routinely evaluate the carrying value of our inventories to ensure they are carried at the
lower of cost or market value. Such evaluation is based on our judgment and use of estimates,
including sales forecasts, gross margins for particular product groupings, planned dispositions of
product lines, technological events and overall industry trends. In addition, the evaluation is
based on changes in inventory management practices which may influence the timing of exiting
products and method of disposing of excess inventory.
14
Excess inventory is generally identified by comparing future expected inventory usage to
actual on-hand quantities. Reserves are provided for on-hand inventory in excess of pre-defined
usage forecasts. Forecast usage is primarily determined by projecting historical (actual) sales and
inventory usage levels forward to future periods. Application of this reserve methodology can have
the effect of increasing reserves during periods of declining demand and, conversely, reducing
reserve requirements during periods of accelerating demand. This reserve methodology is applied
based upon a current stratification of inventory, whether by commodity type, product family, part
number, stock keeping unit, etc. As a result of our lean process improvement initiatives, we
continue to develop improved information concerning demand patterns for inventory consumption. This
improved information is introduced into the excess inventory reserve calculation as it becomes
available and may impact required levels of reserves.
Customer Credit and Collections
We maintain allowances for doubtful accounts receivable in order to reflect the potential
uncollectibility of receivables related to purchases of products on open credit. If the financial
condition of our customers were to deteriorate, resulting in their inability to make required
payments, we may be required to record additional allowances for doubtful accounts.
Capitalized Computer Software Costs
We capitalize certain costs of internally developed software in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Capitalized costs include purchased materials and services, and payroll and payroll related
costs. General and administrative, overhead, maintenance and training costs, as well as the cost of
software that does not add functionality to the existing system, are expensed as incurred. The cost
of internally developed software is amortized on a straight-line basis over appropriate periods,
generally five years. The unamortized balance of internally developed software is included in
Intangible assets and other in the Consolidated Balance Sheet.
Employee Benefits Costs and Funding
We sponsor domestic and foreign defined benefit pension, defined contribution and other
postretirement plans. Major assumptions used in the accounting for these employee benefit plans
include the discount rate, expected return on the pension fund assets, rate of increase in employee
compensation levels and health care cost increase projections. These assumptions are determined
based on Company data and appropriate market indicators, and are evaluated each year as of the
plans measurement date. Further discussion on the assumptions used in 2007 and 2006 are included
above under Pension Funding Status and in Note 11 Retirement Benefits in the Notes to
Consolidated Financial Statements.
Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes and
FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes an interpretation
of FASB Statement No. 109. SFAS No. 109 requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences between the book and tax
basis of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The factors used to assess the likelihood of realization
of deferred tax assets are the forecast of future taxable income and available tax planning
strategies that could be implemented to realize the net deferred tax assets. Failure to achieve
forecasted taxable income can affect the ultimate realization of net deferred tax assets.
We operate within multiple taxing jurisdictions and are subject to audit in these
jurisdictions. The IRS and other tax authorities routinely review our tax returns. These audits can
involve complex issues, which may require an extended period of time to resolve. In accordance with
FIN 48, effective January 1, 2007, the Company records uncertain tax positions only when it has
determined that it is more-likely-than-not that a tax position will be sustained upon examination
by taxing authorities based on the technical merits of the position. The Company uses the criteria
established in FIN 48 to determine whether an item meets the definition of more-likely-than-not.
The Companys policy is to recognize these tax benefits when the more-likely-than-not threshold is
met, when the statute of limitations has expired or upon settlement. In managements opinion,
adequate provision has been made for potential adjustments arising from any examinations.
Contingent Liabilities
We are subject to proceedings, lawsuits, and other claims or uncertainties related to
environmental, legal, product and other matters. We routinely assess the likelihood of an adverse
judgment or outcome to these matters, as well as the range of potential losses. A determination of
the reserves required, if any, is made after careful analysis, including consultations with outside
advisors, where applicable. The required reserves may change in the future due to new developments.
15
Valuation of Long-Lived Assets
Our long-lived assets include land, buildings, equipment, molds and dies, software, goodwill
and other intangible assets. Long-lived assets, other than goodwill and indefinite-lived
intangibles, are depreciated over their estimated useful lives. We review depreciable long-lived
assets for impairment to assess recoverability from future operations using undiscounted cash
flows. For these assets, no impairment charges were recorded in 2007 or 2006, except for certain
assets affected by the Lighting Program as discussed under Special Charges within this
Managements Discussion and Analysis and in Note 2 Special Charges of the Notes to Consolidated
Financial Statements.
Goodwill and indefinite-lived intangible assets are reviewed annually for impairment unless
circumstances dictate the need for more frequent assessment under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. The identification and measurement of impairment of
goodwill involves the estimation of the fair value of reporting units. The estimates of fair value
of reporting units are based on the best information available as of the date of the assessment,
which primarily incorporates certain factors including our assumptions about operating results,
business plans, income projections, anticipated future cash flows, and market data. Future cash
flows can be affected by changes in industry or market conditions or the rate and extent to which
anticipated synergies or cost savings are realized from newly acquired entities and therefore
certain uncertainty. The identification and measurement of impairment of indefinite-lived
intangible assets involves testing which compares carrying values of assets to the estimated fair
values of assets. When appropriate, the carrying value of assets will be reduced to estimated fair
values.
Forward-Looking Statements
Some of the information included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this Form 10-K and in the Annual Report
attached hereto, which does not constitute part of this Form 10-K, contain forward-looking
statements as defined by the Private Securities Litigation Reform Act of 1995. These include
statements about capital resources, performance and results of operations and are based on our
reasonable current expectations. In addition, all statements regarding anticipated growth or
improvement in operating results, anticipated market conditions, and economic recovery are forward
looking. Forward-looking statements may be identified by the use of words, such as believe,
expect, anticipate, intend, depend, should, plan, estimated, could, may, subject
to, continues, growing, prospective, forecast, projected, purport, might, if,
contemplate, potential, pending, target, goals, scheduled, will likely be, and
similar words and phrases. Discussions of strategies, plans or intentions often contain
forward-looking statements. Factors, among others, that could cause our actual results and future
actions to differ materially from those described in forward-looking statements include, but are
not limited to:
|
|
|
Changes in demand for our products, market conditions, product quality, product
availability adversely affecting sales levels. |
|
|
|
|
Changes in markets or competition adversely affecting realization of price increases. |
|
|
|
|
Failure to achieve projected levels of efficiencies, cost savings and cost reduction
measures, including those expected as a result of our lean initiative and strategic sourcing
plans. |
|
|
|
|
The expected benefits and the timing of other actions in connection with our
enterprise-wide business system. |
|
|
|
|
Availability and costs of raw materials, purchased components, energy and freight. |
|
|
|
|
Changes in expected or future levels of operating cash flow, indebtedness and capital
spending. |
|
|
|
|
General economic and business conditions in particular industries or markets. |
|
|
|
|
Regulatory issues, changes in tax laws or changes in geographic profit mix affecting tax
rates and availability of tax incentives. |
|
|
|
|
A major disruption in one of our manufacturing or distribution facilities or
headquarters, including the impact of plant consolidations and relocations. |
|
|
|
|
Changes in our relationships with, or the financial condition or performance of, key
distributors and other customers, agents or business partners could adversely affect our
results of operations. |
|
|
|
|
Impact of productivity improvements on lead times, quality and delivery of product. |
16
|
|
|
Anticipated future contributions and assumptions including changes in interest rates and
plan assets with respect to pensions. |
|
|
|
|
Adjustments to product warranty accruals in response to claims incurred, historical
experiences and known costs. |
|
|
|
|
Unexpected costs or charges, certain of which might be outside of our control. |
|
|
|
|
Changes in strategy, economic conditions or other conditions outside of our control
affecting anticipated future global product sourcing levels. |
|
|
|
|
Ability to carry out future acquisitions and strategic investments in our core businesses
and costs relating to acquisitions and acquisition integration costs. |
|
|
|
|
Future repurchases of common stock under our common stock repurchase programs. |
|
|
|
|
Changes in accounting principles, interpretations, or estimates. |
|
|
|
|
The outcome of environmental, legal and tax contingencies or costs compared to amounts
provided for such contingencies. |
|
|
|
|
Adverse changes in foreign currency exchange rates and the potential use of hedging
instruments to hedge the exposure to fluctuating rates of foreign currency exchange on
inventory purchases. |
|
|
|
|
Other factors described in our SEC filings, including the Business and Risk Factors
Section in the 2007 Annual Report on Form 10-K for the year ended December 31, 2007. |
Any such forward-looking statements are not guarantees of future performance and actual
results, developments and business decisions may differ from those contemplated by such
forward-looking statements. The Company disclaims any duty to update any forward-looking statement,
all of which are expressly qualified by the foregoing, other than as required by law.
17
EX-99.2
EXHIBIT 99.2
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
HUBBELL INCORPORATED AND SUBSIDIARIES
Report on Managements Responsibility for Financial Statements
Our management is responsible for the preparation, integrity and fair presentation of its
published financial statements. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and include amounts based
on informed judgments made by management.
We believe it is critical to provide investors and other users of our financial statements
with information that is relevant, objective, understandable and timely, so that they can make
informed decisions. As a result, we have established and we maintain systems and practices and
internal control processes designed to provide reasonable, but not, absolute assurance that
transactions are properly executed and recorded and that our policies and procedures are carried
out appropriately. Management strives to recruit, train and retain high quality people to ensure
that controls are designed, implemented and maintained in a high-quality, reliable manner.
Our independent registered public accounting firm audited our financial statements and the
effectiveness of our internal control over financial reporting in accordance with Standards
established by the Public Company Accounting Oversight Board (United States). Their report appears
on the next page within the 2007 Annual Report on Form 10-K.
Our Board of Directors normally meets at least five times per year to provide oversight, to
review corporate strategies and operations, and to assess managements conduct of the business. The
Audit Committee of our Board of Directors (which meets approximately eleven times per year) is
comprised of at least three individuals all of whom must be independent under current New York
Stock Exchange listing standards and regulations adopted by the SEC under the federal securities
laws. The Audit Committee meets regularly with our internal auditors and independent registered
public accounting firm, as well as management to review, among other matters, accounting, auditing,
internal controls and financial reporting issues and practices. Both the internal auditors and
independent registered public accounting firm have full, unlimited access to the Audit Committee.
Managements Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate systems of internal
control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Management has assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007. In making this assessment,
management used the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management concluded that our internal control over financial reporting was effective as of
December 31, 2007.
The effectiveness of our internal control over financial reporting as of December 31, 2007 has
been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm as
stated in their report which is included on the next page within the
2007 Annual Report on Form 10-K.
|
|
|
/s/ Timothy H Powers
|
|
/s/ David G. Nord |
Timothy H. Powers
|
|
David G. Nord |
Chairman of the Board,
|
|
Senior Vice President and |
President & Chief Executive Officer
|
|
Chief Financial Officer |
1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hubbell Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of changes in shareholders equity and of cash flows present fairly, in all
material respects, the financial position of Hubbell Incorporated and its subsidiaries (the
Company) at December 31, 2007 and 2006, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 8 of Part II of the Hubbell
Incorporated Form 10-K for the year ended December 31, 2007 (not presented herein) presents fairly,
in all material respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Annual Report on Internal
Control over Financial Reporting appearing under Item 8 of the Companys Form 10-K for the year
ended December 31, 2007. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in 2006, and the manner in which it
accounts for defined benefit pension and other postretirement plans effective December 31, 2006.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
February 22, 2008, except with respect to our opinion on the consolidated financial statements
insofar as it relates to the effects of the change in reportable segments discussed in Notes 1, 3,
6 and 20 to the consolidated financial statements, as to which the date is May 28, 2008.
2
HUBBELL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In millions except |
|
|
|
per share amounts) |
|
Net sales |
|
$ |
2,533.9 |
|
|
$ |
2,414.3 |
|
|
$ |
2,104.9 |
|
Cost of goods sold |
|
|
1,798.1 |
|
|
|
1,757.5 |
|
|
|
1,509.9 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
735.8 |
|
|
|
656.8 |
|
|
|
595.0 |
|
Selling & administrative expenses |
|
|
436.4 |
|
|
|
415.6 |
|
|
|
357.9 |
|
Special charges, net |
|
|
|
|
|
|
7.3 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
299.4 |
|
|
|
233.9 |
|
|
|
226.8 |
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
2.4 |
|
|
|
5.1 |
|
|
|
9.5 |
|
Interest expense |
|
|
(17.6 |
) |
|
|
(15.4 |
) |
|
|
(19.3 |
) |
Other expense, net |
|
|
|
|
|
|
(2.1 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(15.2 |
) |
|
|
(12.4 |
) |
|
|
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
284.2 |
|
|
|
221.5 |
|
|
|
215.7 |
|
Provision for income taxes |
|
|
75.9 |
|
|
|
63.4 |
|
|
|
50.6 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
208.3 |
|
|
$ |
158.1 |
|
|
$ |
165.1 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.54 |
|
|
$ |
2.62 |
|
|
$ |
2.71 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
3.50 |
|
|
$ |
2.59 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
58.8 |
|
|
|
60.4 |
|
|
|
61.0 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
59.5 |
|
|
|
61.1 |
|
|
|
61.8 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
1.32 |
|
|
$ |
1.32 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
HUBBELL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
77.5 |
|
|
$ |
45.3 |
|
Short-term investments |
|
|
|
|
|
|
35.9 |
|
Accounts receivable, net |
|
|
332.4 |
|
|
|
354.3 |
|
Inventories, net |
|
|
322.9 |
|
|
|
338.2 |
|
Deferred taxes and other |
|
|
55.2 |
|
|
|
40.7 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
788.0 |
|
|
|
814.4 |
|
Property, Plant, and Equipment, net |
|
|
327.1 |
|
|
|
318.5 |
|
Other Assets |
|
|
|
|
|
|
|
|
Investments |
|
|
39.2 |
|
|
|
0.3 |
|
Goodwill |
|
|
466.6 |
|
|
|
436.7 |
|
Intangible assets and other |
|
|
242.5 |
|
|
|
181.6 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,863.4 |
|
|
$ |
1,751.5 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
36.7 |
|
|
$ |
20.9 |
|
Accounts payable |
|
|
154.0 |
|
|
|
160.5 |
|
Accrued salaries, wages and employee benefits |
|
|
58.6 |
|
|
|
49.2 |
|
Accrued insurance |
|
|
46.7 |
|
|
|
42.8 |
|
Dividends payable |
|
|
19.2 |
|
|
|
19.9 |
|
Other accrued liabilities |
|
|
104.3 |
|
|
|
89.0 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
419.5 |
|
|
|
382.3 |
|
Long-Term Debt |
|
|
199.4 |
|
|
|
199.3 |
|
Other Non-Current Liabilities |
|
|
161.9 |
|
|
|
154.4 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
780.8 |
|
|
|
736.0 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Common Shareholders Equity |
|
|
|
|
|
|
|
|
Common Stock, par value $.01 |
|
|
|
|
|
|
|
|
Class A authorized 50,000,000 shares, outstanding 7,378,408 and 8,177,234 shares |
|
|
0.1 |
|
|
|
0.1 |
|
Class B authorized 150,000,000 shares, outstanding 50,549,566 and 52,001,000 shares |
|
|
0.5 |
|
|
|
0.5 |
|
Additional paid-in capital |
|
|
93.3 |
|
|
|
219.9 |
|
Retained earnings |
|
|
962.7 |
|
|
|
827.4 |
|
Accumulated other comprehensive income (loss) |
|
|
26.0 |
|
|
|
(32.4 |
) |
|
|
|
|
|
|
|
Total Common Shareholders Equity |
|
|
1,082.6 |
|
|
|
1,015.5 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
1,863.4 |
|
|
$ |
1,751.5 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
HUBBELL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in millions) |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
208.3 |
|
|
$ |
158.1 |
|
|
$ |
165.1 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss on sale of assets |
|
|
(0.7 |
) |
|
|
0.9 |
|
|
|
(5.4 |
) |
Depreciation and amortization |
|
|
60.2 |
|
|
|
55.4 |
|
|
|
50.4 |
|
Deferred income taxes |
|
|
(3.7 |
) |
|
|
11.4 |
|
|
|
6.4 |
|
Non-cash special charges |
|
|
|
|
|
|
3.1 |
|
|
|
1.9 |
|
Stock-based compensation |
|
|
12.7 |
|
|
|
11.8 |
|
|
|
0.7 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
27.8 |
|
|
|
(30.7 |
) |
|
|
(16.9 |
) |
Decrease (increase) in inventories |
|
|
24.2 |
|
|
|
(86.3 |
) |
|
|
(13.2 |
) |
Increase in current liabilities |
|
|
42.1 |
|
|
|
13.3 |
|
|
|
2.0 |
|
Changes in other assets and liabilities, net |
|
|
(3.1 |
) |
|
|
14.0 |
|
|
|
17.7 |
|
Tax benefit from equity-based awards |
|
|
(6.9 |
) |
|
|
(6.0 |
) |
|
|
|
|
Contributions to defined benefit pension plans |
|
|
(28.4 |
) |
|
|
(7.7 |
) |
|
|
(31.6 |
) |
Other, net |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
335.2 |
|
|
|
139.9 |
|
|
|
184.1 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(52.9 |
) |
|
|
(145.7 |
) |
|
|
(54.3 |
) |
Proceeds from disposition of assets |
|
|
5.1 |
|
|
|
0.6 |
|
|
|
14.6 |
|
Capital expenditures |
|
|
(55.9 |
) |
|
|
(86.8 |
) |
|
|
(73.4 |
) |
Purchases of available-for-sale investments |
|
|
(41.2 |
) |
|
|
(153.2 |
) |
|
|
(293.0 |
) |
Proceeds from sale of available-for-sale investments |
|
|
38.6 |
|
|
|
296.0 |
|
|
|
356.9 |
|
Purchases of held-to-maturity investments |
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
Proceeds from maturities/sales of held-to-maturity investments |
|
|
|
|
|
|
21.4 |
|
|
|
17.2 |
|
Other, net |
|
|
0.6 |
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(105.7 |
) |
|
|
(66.7 |
) |
|
|
(30.4 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper borrowings, net |
|
|
20.9 |
|
|
|
15.8 |
|
|
|
|
|
Borrowings of other debt |
|
|
|
|
|
|
5.1 |
|
|
|
29.6 |
|
Payment of other debt |
|
|
(5.1 |
) |
|
|
(29.8 |
) |
|
|
(1.2 |
) |
Payment of senior notes |
|
|
|
|
|
|
|
|
|
|
(100.0 |
) |
Payment of dividends |
|
|
(78.4 |
) |
|
|
(80.1 |
) |
|
|
(80.6 |
) |
Acquisition of common shares |
|
|
(193.1 |
) |
|
|
(95.1 |
) |
|
|
(62.7 |
) |
Proceeds from exercise of stock options |
|
|
48.0 |
|
|
|
38.5 |
|
|
|
32.8 |
|
Tax benefit from equity-based awards |
|
|
6.9 |
|
|
|
6.0 |
|
|
|
|
|
Other, net |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(200.4 |
) |
|
|
(139.6 |
) |
|
|
(182.1 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
3.1 |
|
|
|
1.1 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
32.2 |
|
|
|
(65.3 |
) |
|
|
(29.3 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
45.3 |
|
|
|
110.6 |
|
|
|
139.9 |
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
77.5 |
|
|
$ |
45.3 |
|
|
$ |
110.6 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
HUBBELL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Years Ended December 31, 2007, 2006 and 2005 (in millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
Total |
|
|
|
Common |
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
Unearned |
|
|
Income |
|
|
Shareholders |
|
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Compensation |
|
|
(Loss) |
|
|
Equity |
|
Balance at December 31, 2004 |
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
$ |
280.7 |
|
|
$ |
664.5 |
|
|
$ |
|
|
|
$ |
(1.5 |
) |
|
$ |
944.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165.1 |
|
|
|
|
|
|
|
|
|
|
|
165.1 |
|
Minimum pension liability adjustment, net of
related tax effect of $1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
|
|
(2.2 |
) |
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.5 |
) |
|
|
(7.5 |
) |
Unrealized loss on investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Unrealized loss on cash flow hedge, net of $0.1 of
amortization, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155.8 |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
8.3 |
|
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
Issuance of common shares under compensation
arrangements |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Exercise of stock options, including tax benefit of
$7.8 |
|
|
|
|
|
|
|
|
|
|
40.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.6 |
|
Acquisition of common shares |
|
|
|
|
|
|
|
|
|
|
(62.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62.7 |
) |
Cash dividends declared ($1.32 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80.5 |
) |
|
|
|
|
|
|
|
|
|
|
(80.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
$ |
267.2 |
|
|
$ |
749.1 |
|
|
$ |
(8.0 |
) |
|
$ |
(10.8 |
) |
|
$ |
998.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158.1 |
|
|
|
|
|
|
|
|
|
|
|
158.1 |
|
Minimum pension liability adjustment, net of
related tax effect of $1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
2.1 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.4 |
|
|
|
12.4 |
|
Change in unrealized loss on investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
Unrealized gain on cash flow hedge including $0.1
of amortization, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173.3 |
|
Benefit plan adjustment to initially apply
SFAS No. 158, net of tax of $19.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.8 |
) |
|
|
(36.8 |
) |
Reversal of unearned compensation upon adoption of
SFAS No. 123(R) |
|
|
|
|
|
|
|
|
|
|
(8.0 |
) |
|
|
|
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.9 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
38.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.5 |
|
Tax benefits from stock plans |
|
|
|
|
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0 |
|
Acquisition/surrender of common shares |
|
|
|
|
|
|
|
|
|
|
(95.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95.7 |
) |
Cash dividends declared ($1.32 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79.8 |
) |
|
|
|
|
|
|
|
|
|
|
(79.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
$ |
219.9 |
|
|
$ |
827.4 |
|
|
$ |
|
|
|
$ |
(32.4 |
) |
|
$ |
1,015.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208.3 |
|
|
|
|
|
|
|
|
|
|
|
208.3 |
|
Adjustment to pension and other benefit plans, net
of tax of $27.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.9 |
|
|
|
44.9 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1 |
|
|
|
14.1 |
|
Unrealized gain on investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.2 |
|
Unrealized gain on cash flow hedge including $0.1
of amortization, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266.7 |
|
Adjustment to initially apply FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.7 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
48.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.0 |
|
Tax benefits from stock plans |
|
|
|
|
|
|
|
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.9 |
|
Acquisition/surrender of common shares |
|
|
|
|
|
|
|
|
|
|
(194.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194.2 |
) |
Cash dividends declared ($1.32 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77.7 |
) |
|
|
|
|
|
|
|
|
|
|
(77.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
$ |
93.3 |
|
|
$ |
962.7 |
|
|
$ |
|
|
|
$ |
26.0 |
|
|
$ |
1,082.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
6
HUBBELL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include all subsidiaries; all significant intercompany
balances and transactions have been eliminated. The Company has one active joint venture which is
accounted for using the equity method. In 2007, the Company entered into a new joint venture,
Hubbell Asia Limited, whose principal objective is to manage a wholly owned foreign manufacturing
company in the Peoples Republic of China beginning in 2008. The Company has contributed
$2.5 million for a 50% interest in the joint venture which has been consolidated in accordance with
the provisions of FIN 46, Consolidation of Variable Interest Entities.
During the first quarter of 2008, the Company realigned its internal organization and
operating segments. This reorganization included combining the electrical products business
(included in the Electrical segment) and the industrial technology business (previously its own
reporting segment) into one operating segment. This combined operating segment is part of the
Electrical reporting segment. Effective for the first quarter of 2008, the Companys reporting
segments consist of the Electrical segment and the Power segment. Accordingly, our historical
segment financial information and related disclosures have been reclassified to reflect our current
internal structure.
Certain other reclassifications have been made in prior year financial statements and notes to
conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts in the Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements. Actual results could differ from the estimates that are used.
Revenue Recognition
Revenue is recognized when title to the goods sold and the risk of loss have passed to the
customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services
are rendered, the price is determinable and collectibility is reasonably assured. Revenue is
typically recognized at the time of shipment as the Companys shipping terms are generally FOB
shipping point. The Company recognizes less than one percent of total annual consolidated net
revenue from post shipment obligations and service contracts, primarily within the Electrical
segment. Revenue is recognized under these contracts when the service is completed and all
conditions of sale have been met. In addition, within the Electrical segment, certain businesses
sell large and complex equipment which requires construction and assembly and has long lead times.
It is customary in these businesses to require a portion of the selling price to be paid in advance
of construction. These payments are treated as deferred revenue and are classified in Other accrued
liabilities in the Consolidated Balance Sheet. Once the equipment is shipped to the customer and
meets the revenue recognition criteria, the deferred revenue is recognized in the Consolidated
Statement of Income.
Further, certain of our businesses account for sales discounts and allowances based on sales
volumes, specific programs and customer deductions, as is customary in electrical products markets.
These items primarily relate to sales volume incentives, special pricing allowances, and returned
goods. Sales volume incentives represent rebates with specific sales volume targets for specific
customers. Certain distributors qualify for price rebates by subsequently reselling the Companys
products into select channels of end users. Following a distributors sale of an eligible product,
the distributor submits a claim for a price rebate. A number of distributors, primarily in the
Electrical segment, have a right to return goods under certain circumstances which are reasonably
estimable by affected businesses and have historically ranged from 1%-3% of gross sales. This
requires us to estimate at the time of sale the amounts that should not be recorded as revenue as
these amounts are not expected to be collected in cash from customers. The Company principally
relies on historical experience, specific customer agreements and anticipated future trends to
estimate these amounts at the time of shipment.
7
Shipping and Handling Fees and Costs
The Company records shipping and handling costs as part of Cost of goods sold in the
Consolidated Statement of Income. Any amounts billed to customers for reimbursement of shipping and
handling are included in Net sales in the Consolidated Statement of Income.
Foreign Currency Translation
The assets and liabilities of international subsidiaries are translated to U.S. dollars at
exchange rates in effect at the end of the year, and income and expense items are translated at
average exchange rates in effect during the year. The effects of exchange rate fluctuations on the
translated amounts of foreign currency assets and liabilities are included as translation
adjustments in Accumulated other comprehensive income within Shareholders equity. Gains and losses
from foreign currency transactions are included in income of the period.
Cash and Cash Equivalents
Cash equivalents consist of investments with original maturities of three months or less. The
carrying value of cash equivalents approximates fair value because of their short maturities.
Within the Consolidated Statement of Cash Flow for the year ending December 31, 2005, the beginning
of the year balance for cash and cash equivalents has been reclassified for book overdraft cash
balances which have been reflected in Accounts payable in order to conform to the 2006 and 2007
presentation.
Investments
The Company defines short-term investments as securities with original maturities of greater
than three months but less than one year. Investments in debt and equity securities are classified
by individual security as either available-for-sale or held-to-maturity. Municipal bonds and
variable rate demand notes are classified as available-for-sale investments and are carried on the
balance sheet at fair value with current period adjustments to carrying value recorded in
Accumulated other comprehensive income within Shareholders equity, net of tax. Other securities
which the Company has the positive intent and ability to hold to maturity, are classified as
held-to-maturity and are carried on the balance sheet at amortized cost. The effects of amortizing
these securities are recorded in current earnings. Realized gains and losses are recorded in income
in the period of sale.
Accounts Receivable and Allowances
Trade accounts receivable are recorded at the invoiced amount and generally do not bear
interest. The allowance for doubtful accounts is based on an estimated amount of probable credit
losses in existing accounts receivable. The allowance is calculated based upon a combination of
historical write-off experience, fixed percentages applied to aging categories and specific
identification based upon a review of past due balances and problem accounts. The allowance is
reviewed on at least a quarterly basis. Account balances are charged off against the allowance when
it is determined that internal collection efforts should no longer be pursued. The Company also
maintains a reserve for credit memos, cash discounts and product returns which are principally
calculated based upon historical experience, specific customer agreements, as well as anticipated
future trends.
Inventories
Inventories are stated at the lower of cost or market value. The cost of substantially all
domestic inventories (approximately 82% of total net inventory value) is determined utilizing the
last-in, first-out (LIFO) method of inventory accounting. The cost of foreign inventories and
certain domestic inventories is determined utilizing average cost or first-in, first-out (FIFO)
methods of inventory accounting.
Property, Plant, and Equipment
Property, plant, and equipment values are stated at cost less accumulated depreciation.
Maintenance and repair expenditures are charged to expense when incurred. Property, plant and
equipment placed in service prior to January 1, 1999 are depreciated over their estimated useful
lives, principally using accelerated methods. Assets placed in service subsequent to January 1,
1999 are depreciated over their estimated useful lives, using straight-line methods. Leasehold
improvements are amortized over the shorter of their economic lives or the lease term. Gains and
losses arising on the disposal of property, plant and equipment are included in Operating Income in
the Consolidated Statement of Income.
8
Capitalized Computer Software Costs
Qualifying costs of internal use software are capitalized in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Capitalized costs include purchased materials and services and payroll and payroll related
costs. General and administrative, overhead, maintenance and training costs, as well as the cost of
software that does not add functionality to existing systems, are expensed as incurred. The cost of
internal use software is amortized on a straight-line basis over appropriate periods, generally
five years. The unamortized balance of internal use software is included in Intangible assets and
other in the Consolidated Balance Sheet.
Capitalized computer software costs, net of amortization, were $28.1 million and $38.2 million
at December 31, 2007 and 2006, respectively. The Company recorded amortization expense of
$10.9 million, $9.1 million and $5.6 million in 2007, 2006, and 2005, respectively, relating to
capitalized computer software.
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of
acquired companies. Indefinite-lived intangible assets and goodwill are subject to annual
impairment testing using the specific guidance and criteria described in SFAS No. 142, Goodwill
and Other Intangible Assets. This testing compares carrying values to estimated fair values and
when appropriate, the carrying value of these assets will be reduced to estimated fair value. Fair
values were calculated using a range of estimated future operating results and primarily utilized a
discounted cash flow model. In the second quarter of 2007, the Company performed its annual
impairment testing of goodwill. This testing resulted in fair values for each reporting unit
exceeding the reporting units carrying value, including goodwill. The Company performed its annual
impairment testing of indefinite-lived intangible assets which resulted in no impairment. The
Companys policy is to perform its annual goodwill impairment assessment in the second quarter of
each year unless circumstances dictate the need for more frequent assessments. Intangible assets
with definite lives are being amortized over periods ranging from 7-30 years.
Other Long-Lived Assets
The Company evaluates the potential impairment of other long-lived assets when appropriate in
accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. If the carrying value of assets exceeds the sum of the estimated future
undiscounted cash flows, the carrying value of the asset is written down to estimated fair value.
The Company continually evaluates events and circumstances to determine if revisions to values or
estimates of useful lives are warranted.
Income Taxes
The Company operates within multiple taxing jurisdictions and is subject to audit in these
jurisdictions. The IRS and other tax authorities routinely review the Companys tax returns. These
audits can involve complex issues which may require an extended period of time to resolve. The
Company makes adequate provisions for best estimates of exposures on previously filed tax returns.
Deferred income taxes are recognized for the tax consequence of differences between financial
statement carrying amounts and the tax basis of assets and liabilities by applying the currently
enacted statutory tax rates in accordance with SFAS No. 109, Accounting for Income Taxes. The
effect of a change in statutory tax rates is recognized as income in the period that includes the
enactment date. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more-likely-than-not that some portion or all of the deferred tax asset will not
be realized. The Company uses factors to assess the likelihood of realization of deferred tax
assets such as the forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
On January 1, 2007, the Company adopted the provisions of FIN 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of the
tax position taken or expected to be taken in a tax return. For any amount of benefit to be
recognized, it must be determined that it is more-likely-than-not that a tax position will be
sustained upon examination by taxing authorities based on the technical merits of the position. The
amount of benefit to be recognized is based on the Companys assertion of the most likely outcome
resulting from an examination, including resolution of any related appeals or litigation processes.
At adoption, companies are required to adjust their financial statements to reflect only those tax
positions that are more-likely-than-not to be sustained. Details with respect to the impact on the
Consolidated financial statements of these uncertain tax positions and the adoption are included in
Note 13 Income Taxes.
9
Research, Development & Engineering
Research, development and engineering expenditures represent costs to discover and/or apply
new knowledge in developing a new product, process, or in bringing about a significant improvement
to an existing product or process. Research, development and engineering expenses are recorded as a
component of Cost of goods sold. Expenses for research, development and engineering were less than
1% of Cost of goods sold for each of the years 2007, 2006, and 2005.
Retirement Benefits
The Company maintains various defined benefit pension plans for some of its U.S. and foreign
employees. Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 required the Company to recognize the
funded status of its defined benefit pension and postretirement plans as an asset or liability in
the Consolidated Balance Sheet. Gains or losses, prior service costs or credits, and transition
assets or obligations that have not yet been included in net periodic benefit cost as of the end of
the year of adoption are recognized as components of Accumulated other comprehensive income, net of
tax, within Shareholders equity. The Companys policy is to fund pension costs within the ranges
prescribed by applicable regulations. In addition to providing defined benefit pension benefits,
the Company provides health care and life insurance benefits for some of its active and retired
employees. The Companys policy is to fund these benefits through insurance premiums or as actual
expenditures are made. The Company accounts for these benefits in accordance with SFAS No. 106
Employers Accounting for Postretirement Benefits Other Than Pensions. See also Note 11
Retirement Benefits.
Earnings Per Share
Basic earnings per share is calculated as net income divided by the weighted average number of
shares of common stock outstanding and earnings per diluted share is calculated as net income
divided by the weighted average number of shares outstanding of common stock and common stock
equivalents. See also Note 18 Earnings Per Share.
Stock-Based Employee Compensation
On January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment. The standard
requires expensing the value of all share-based payments, including stock options and similar
awards, based upon the awards fair value measurement on the grant date. SFAS No. 123(R) revises
SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). SFAS No. 123(R) is supplemented by SEC
SAB No. 107, Share-Based Payment. SAB No. 107 expresses the SEC staffs views regarding the
interaction between SFAS No. 123(R) and certain rules and regulations including the valuation of
share-based payment arrangements. The Company adopted the modified prospective transition method as
outlined in SFAS No. 123(R) and, therefore, 2005 amounts have not been restated. See also Note 17
Stock-Based Compensation.
Comprehensive Income
Comprehensive income is a measure of net income and all other changes in Shareholders equity
of the Company that result from recognized transactions and other events of the period other than
transactions with shareholders. See also the Consolidated Statement of Changes in Shareholders
Equity and Note 19 Accumulated Other Comprehensive Income (Loss).
Derivatives
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 proposed 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 or liability are recognized in income. Prior to the issuance in
2002 of $200 million, ten year non-callable notes, the Company entered into a forward interest rate
lock to hedge its exposure to fluctuations in treasury rates, which resulted in a loss of
approximately $1.3 million. This amount was recorded in Accumulated other comprehensive income
within Shareholders equity and is being amortized over the life of the notes.
10
During 2007 and 2006, the Company entered into a series of forward exchange contracts to
purchase U.S. dollars in order to hedge its exposure to fluctuating rates of exchange on
anticipated inventory purchases. These contracts, each for $1 million expire over the next
12 months through December 2008 and have been designated as cash flow hedges in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.
As of December 31, 2007 and 2006, the Company had $0.8 million of unrealized cash flow hedge
losses and $0.2 million of unrealized cash flow hedge gains, respectively, on foreign currency
hedges and $0.6 million and $0.7 million, respectively, of unamortized losses on a forward interest
rate lock arrangement recorded in Accumulated other comprehensive income. Amounts charged to income
in 2007 and 2006 were immaterial.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 provides enhanced guidance for using fair value to measure assets and
liabilities and expands disclosure with respect to fair value measurements. This statement is
effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued a
final Staff Position to allow a one-year deferral of adoption of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis. However, companies still need to comply with SFAS No. 157s
recognition and disclosure requirements for financial assets and financial liabilities or for
nonfinancial assets and nonfinancial liabilities that are measured at least annually. The Company
does not anticipate that this standard will have any immediate material impact on its financial
statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115. SFAS 159 provides
companies with an option to report selected financial assets and liabilities at fair value. This
statement is applicable to the Company on January 1, 2008. The Company does not plan to elect to
report any selected financial assets or liabilities at fair value.
In December 2007, the FASB issued SFAS No. 141(R) Business Combinations, which replaces
SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141R is to be applied prospectively to
business combinations for which the acquisition date is on or after an entitys fiscal year that
begins after December 15, 2008. The Company is currently evaluating the requirements of
SFAS No. 141R and the impact that this standard will have on its financial statements.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated
Financial Statements an amendment to ARB No. 51. SFAS No. 160 establishes accounting and
reporting standards that require the ownership interest in subsidiaries held by parties other than
the parent be clearly identified and presented in the consolidated balance sheet within equity, but
separate from the parents equity; the amount of consolidated net income attributable to the parent
and the noncontrolling interest be clearly identified and presented on the face of the consolidated
statement of earnings; and changes in a parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently. This statement will
be applicable to the Company on January 1, 2009. The Company is currently evaluating the impact
that this standard will have on its financial statements.
Note 2 Special Charges
Full year operating results in 2006 and 2005 include pretax special charges related to the
lighting business integration and rationalization program. 2005 special charges also include final
charges related to capacity reduction actions which resulted in a factory closure. The lighting
business integration and rationalization program was substantially completed as of December 31,
2006. Any remaining costs in 2007 have been recorded as S&A expense or Cost of goods sold in the
Consolidated Statement of Income. Both programs and all special charges for these years occurred
within the Electrical segment.
11
The following table summarizes activity by year with respect to special charges for 2006 and
2005, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CATEGORY OF COSTS |
|
|
|
|
|
|
|
Facility Exit |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
|
and |
|
|
Asset |
|
|
Inventory |
|
|
|
|
Year/Program |
|
Other Benefit Costs |
|
|
Integration |
|
|
Impairments |
|
|
Write-Downs* |
|
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
$ |
2.8 |
|
|
$ |
1.6 |
|
|
$ |
2.9 |
|
|
$ |
0.2 |
|
|
$ |
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
$ |
5.7 |
|
|
$ |
2.7 |
|
|
$ |
1.2 |
|
|
$ |
0.4 |
|
|
$ |
10.0 |
|
Other capacity reduction |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.7 |
|
|
$ |
3.3 |
|
|
$ |
1.2 |
|
|
$ |
0.7 |
|
|
$ |
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Recorded in Cost of goods sold |
Lighting Business Integration and Rationalization Program
Charges in connection with the Program were the result of a series of actions related to the
consolidation of manufacturing, sales, and administrative functions occurring throughout the
commercial and industrial lighting businesses and the relocation of the manufacturing and assembly
of commercial lighting fixture products to low cost countries.
In 2006, Special charges totaled $7.5 million including $0.2 million of inventory write-downs
reflected in Cost of goods sold. In total, $2.9 million of costs were expensed in connection with
actions initiated during the year and $4.6 million incurred in 2006 related to actions initiated
and announced in prior years. In the fourth quarter of 2006, an outdoor, commercial products plant
closure was announced and charges were recorded related to asset impairments of $2.4 million and
severance and benefits of $0.5 million, including a pension curtailment charge. In total,
approximately 100 people were affected by this announcement, all of which left the Company as of
the end of the first quarter of 2007. The severance costs were recorded over the service period of
the affected employees. The fixed asset write-downs represent (1) a reduction in the carrying value
of a building to fair market value and (2), machinery and equipment write-downs to salvage value
based upon the age and location of the equipment.
Charges of $10 million recorded in 2005 related to the Program consisted of $5.7 million of
severance and other employee benefit costs including a pension curtailment, $1.6 million for the
write-down of equipment to fair market value, the write-off of leasehold improvements and inventory
write-downs, and $2.7 million of other facility exit costs. A reduction of approximately
490 employees is expected as a result of projects initiated in 2005, of which approximately
250 employees have left the Company as of December 31, 2007 with the remainder expected by the end
of 2008. A portion of the severance costs were recorded based upon the affected employees
remaining service period following announcement of the programs. Asset write-downs primarily
consisted of the write-down of the assets of the outdoor, commercial facility to fair market value
and other equipment write-downs to record the equipment at estimated salvage value. In addition to
the above, the Company recorded expenses related to facility exit costs including plant shutdown
and facility remediation.
Closure of a Wiring Device Factory
In the second quarter of 2005, the Company closed a wiring device factory in Puerto Rico. The
closure of this factory was announced in 2004 and the Company recorded special charges related to
the closure at that time. Production activities were either outsourced or transferred to other
existing facilities. In 2005, the Company recorded additional pretax special charges of
$0.9 million associated with the closure, which consisted of $0.3 million of inventory write-downs
and $0.6 million of facility related exit costs. Approximately 200 employees were impacted by this
action, all of whom have left the Company as of December 31, 2006.
The following table sets forth the components of special charges recorded and accrued in 2005
and 2006, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
Cash |
|
Non-cash |
|
Accrued End |
|
|
of Year Balance |
|
Provision |
|
Expenditures |
|
Write-downs |
|
of Year Balance |
Lighting Business Integration Program: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
1.3 |
|
|
$ |
10.0 |
|
|
$ |
(5.9 |
) |
|
$ |
(1.6 |
) |
|
$ |
3.8 |
* |
2006 |
|
|
3.8 |
|
|
|
7.5 |
|
|
|
(2.2 |
) |
|
|
(3.1 |
) |
|
|
6.0 |
* |
Wiring Device Factory Closure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
2.0 |
|
|
$ |
0.9 |
|
|
$ |
(2.3 |
) |
|
$ |
(0.3 |
) |
|
$ |
0.3 |
|
2006 |
|
|
0.3 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
12
|
|
|
* |
|
Included in the accrued balance at December 31, 2006 and December 31,
2005 is $3.2 million and $3.0 million, respectively, of accrued
pension curtailment costs classified in Other Non-Current Liabilities
within the Consolidated Balance Sheet at December 31, 2006 and 2005. |
As of December 31, 2007, a remaining accrued balance of $5.3 million related to severance cost
and the pension curtailment in connection with the closure of one manufacturing facility. The
severance is expected to be paid out upon closure of this facility in late 2008. The pension
curtailment is included in long-term pension liability and is not expected to be paid out until
future years.
Note 3 Business Acquisitions
In October 2007, the Company purchased all of the outstanding common stock of PCORE for
$50.1 million in cash. PCORE has been added to the Power segment and the results of operations
after October 1, 2007 are included in the Consolidated Financial Statements. PCORE, located in
LeRoy, New York, is a leading manufacturer of high voltage condenser bushings. These products are
used in the electric utility infrastructure.
The Company is in the process of finalizing the determination of fair values of the underlying
assets and liabilities and, as a result, the allocations of purchase price related to the
acquisition discussed above could change. The following table summarizes the preliminary allocation
of the purchase price to estimated fair values of the assets acquired and liabilities assumed as of
the purchase date for PCORE, (in millions):
|
|
|
|
|
Total purchase price including transaction expenses, net of cash acquired |
|
$ |
50.1 |
|
|
|
|
|
Fair value assigned to assets acquired |
|
$ |
15.9 |
|
Fair value of liabilities assumed |
|
|
(3.3 |
) |
Amounts assigned to intangible assets |
|
|
15.5 |
|
Amount allocated to goodwill |
|
|
22.0 |
|
|
|
|
|
Total allocation |
|
$ |
50.1 |
|
|
|
|
|
The fair value assigned to net assets acquired primarily relates to accounts receivable,
inventory and fixed assets. Intangible assets identified primarily consist of tradenames and
customer lists. The tradenames are being amortized over a period of 30 years and customer lists are
being amortized over a period of 20 years. The excess of purchase price over the fair values of
assets acquired, liabilities assumed and identifiable intangible assets has been allocated to
goodwill. Goodwill is not expected to be deductible for tax purposes.
In March 2007, the Company purchased a small Brazilian manufacturing business for
$2.1 million. This acquisition has been added to the Power segment and has been integrated into the
Companys Brazilian operations.
In June 2006, the Company purchased all of the outstanding common stock of Strongwell Lenoir
City, Inc. (renamed Hubbell Lenoir City, Inc.) for $117.4 million in cash. Hubbell Lenoir City,
Inc., added to the Power segment, designs and manufactures precast polymer concrete products used
to house underground equipment and also has a line of surface drain products. These products are
sold to the electrical utility and telecommunications industries. Hubbell Lenoir City, Inc.
complements the existing product lines and shares a similar customer base to the existing
businesses within the Power segment.
In November 2006, the Company purchased all of the outstanding common stock of Austdac for
$28.8 million, net of $2.3 million of cash acquired. Austdac is based in New South Wales, Australia
and manufactures a wide range of products used in harsh and hazardous applications in a variety of
industries. Austdac was added to the Electrical segment. In 2007 the Company paid an additional
$0.7 million relating to this acquisition.
13
The accounting for the purchase of these businesses acquired in 2006, including adjustments
made in 2007, is complete as of December 31, 2007. The following table summarizes the final fair
values of the assets acquired and liabilities assumed as of December 31, 2007, (in millions):
|
|
|
|
|
|
|
|
|
|
|
Lenoir City |
|
|
Austdac |
|
Total purchase price including transaction expenses, net of cash acquired |
|
$ |
117.4 |
|
|
$ |
28.8 |
|
|
|
|
|
|
|
|
Fair value assigned to assets acquired |
|
$ |
34.6 |
|
|
$ |
9.0 |
|
Fair value of liabilities assumed |
|
|
(8.3 |
) |
|
|
(6.5 |
) |
Amounts assigned to intangible assets |
|
|
28.7 |
|
|
|
11.3 |
|
Amount allocated to goodwill |
|
|
62.4 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
Total allocation |
|
$ |
117.4 |
|
|
$ |
28.8 |
|
|
|
|
|
|
|
|
The fair values assigned to net assets acquired primarily relate to inventory and fixed
assets. Intangible assets identified primarily consist of tradenames and customer lists. The
tradenames are being amortized over a period of 30 years and customer lists are being amortized
over a period of 7-10 years. The excess of purchase price over the fair values of assets acquired,
liabilities assumed and identifiable intangible assets has been allocated to goodwill. All of the
goodwill is expected to be deductible for tax purposes. These acquisitions have been included in
the Companys Consolidated Financial Statements from their respective dates of acquisition.
Note 4 Receivables and Allowances
Receivables consist of the following components at December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Trade accounts receivable |
|
$ |
349.0 |
|
|
$ |
368.2 |
|
Non-trade receivables |
|
|
8.3 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
Accounts receivable, gross |
|
|
357.3 |
|
|
|
378.3 |
|
Allowance for credit memos, returns, and cash discounts |
|
|
(21.2 |
) |
|
|
(20.8 |
) |
Allowance for doubtful accounts |
|
|
(3.7 |
) |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
Total allowances |
|
|
(24.9 |
) |
|
|
(24.0 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
332.4 |
|
|
$ |
354.3 |
|
|
|
|
|
|
|
|
Note 5 Inventories
Inventories are classified as follows at December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Raw material |
|
$ |
106.6 |
|
|
$ |
106.6 |
|
Work-in-process |
|
|
62.2 |
|
|
|
63.5 |
|
Finished goods |
|
|
227.7 |
|
|
|
239.6 |
|
|
|
|
|
|
|
|
|
|
|
396.5 |
|
|
|
409.7 |
|
Excess of FIFO over LIFO cost basis |
|
|
(73.6 |
) |
|
|
(71.5 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
322.9 |
|
|
$ |
338.2 |
|
|
|
|
|
|
|
|
Note 6 Goodwill and Other Intangible Assets
Changes in the carrying amounts of goodwill for the years ended December 31, 2007 and 2006, by
segment, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
|
Power |
|
|
Total |
|
Balance December 31, 2005 |
|
$ |
229.4 |
|
|
$ |
122.1 |
|
|
$ |
351.5 |
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
16.4 |
|
|
|
61.8 |
|
|
|
78.2 |
|
Translation adjustments |
|
|
6.0 |
|
|
|
1.0 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
$ |
251.8 |
|
|
$ |
184.9 |
|
|
$ |
436.7 |
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
0.7 |
|
|
|
23.2 |
|
|
|
23.9 |
|
Translation adjustments |
|
|
3.9 |
|
|
|
2.1 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007 |
|
$ |
256.4 |
|
|
$ |
210.2 |
|
|
$ |
466.6 |
|
|
|
|
|
|
|
|
|
|
|
In 2007 and 2006 the Company recorded additions to goodwill in connection with the purchase
accounting for acquisitions. Included in 2007 acquisitions in the Power segment is $22.4 million of
goodwill from the acquisitions of PCORE and a product line
14
from a small Brazilian manufacturing business and $0.8 million related to a final adjustment
of acquisition costs related to the 2006 Hubbell Lenoir City, Inc. acquisition. Included in 2007
acquisitions in the Electrical segment is a $0.7 million adjustment to goodwill relating to the
2006 acquisition of Austdac. In 2006, acquisitions consisted of the purchase of two separate
businesses of which one was in the Power segment and the other was in the Electrical segment. See
also Note 3 Business Acquisitions.
Identifiable intangible assets are recorded in Intangible assets and other in the Consolidated
Balance Sheet. Identifiable intangible assets are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Gross Amount |
|
|
Amortization |
|
|
Gross Amount |
|
|
Amortization |
|
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks |
|
$ |
44.3 |
|
|
$ |
(4.6 |
) |
|
$ |
36.8 |
|
|
$ |
(1.7 |
) |
Other |
|
|
39.0 |
|
|
|
(8.6 |
) |
|
|
23.9 |
|
|
|
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
83.3 |
|
|
|
(13.2 |
) |
|
|
60.7 |
|
|
|
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and other |
|
|
20.6 |
|
|
|
|
|
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
103.9 |
|
|
$ |
(13.2 |
) |
|
$ |
82.1 |
|
|
$ |
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other definite-lived intangibles consist primarily of customer relationships and technology.
Amortization expense was $5.5 million, $3.5 million and $1.7 million in 2007, 2006 and 2005,
respectively. Amortization expense is expected to be $5.2 million in 2008, $5.0 million in 2009,
$4.8 in 2010 and 2011, and $4.6 million in 2012.
Note 7 Investments
At December 31, 2007, available-for-sale investments consisted of $33.0 million of municipal
bonds and $5.9 million of variable rate demand notes. At December 31, 2006, available-for-sale
investments consisted of $35.9 million of variable rate demand notes. These investments are stated
at fair market value based on current quotes. Variable rate demand notes are reset to current
interest rates weekly. At December 31, 2007 and 2006, held-to-maturity investments consisted of
Missouri state bonds. These held-to-maturity investments have been stated at amortized cost. There
were no securities during 2007 and 2006 that were classified as trading investments.
The following table sets forth selected data with respect to the Companys investments at
December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Carrying |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Carrying |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
Available-For-Sale
Investments |
|
$ |
38.5 |
|
|
$ |
0.5 |
|
|
$ |
(0.1 |
) |
|
$ |
38.9 |
|
|
$ |
38.9 |
|
|
$ |
35.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35.9 |
|
|
$ |
35.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity Investments |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
38.8 |
|
|
$ |
0.5 |
|
|
$ |
(0.1 |
) |
|
$ |
39.2 |
|
|
$ |
39.2 |
|
|
$ |
36.2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
36.2 |
|
|
$ |
36.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities of available-for-sale and held-to-maturity investments at December 31,
2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Available-For-Sale Investments |
|
|
|
|
|
|
|
|
After 1 year but within 5 years |
|
$ |
29.2 |
|
|
$ |
29.5 |
|
Due after 10 years |
|
|
9.3 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
38.5 |
|
|
$ |
38.9 |
|
|
|
|
|
|
|
|
Held-To-Maturity Investments |
|
|
|
|
|
|
|
|
Due within 1 year |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
After 1 year but within 5 years |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
15
In 2007 and 2006, the Company recorded credits of $0.2 million and $0.3 million, respectively,
to net unrealized gains on available-for-sale securities which have been included in Accumulated
other comprehensive income(loss), net of tax. The cost basis used in computing the gain or loss on
these securities was through specific identification. Realized gains and losses were immaterial in
2007, 2006 and 2005.
Note 8 Property, Plant, and Equipment
Property, plant, and equipment, carried at cost, is summarized as follows at December 31, (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
33.2 |
|
|
$ |
30.9 |
|
Buildings and improvements |
|
|
200.1 |
|
|
|
166.9 |
|
Machinery, tools and equipment |
|
|
579.2 |
|
|
|
526.2 |
|
Construction-in-progress |
|
|
18.7 |
|
|
|
65.7 |
|
|
|
|
|
|
|
|
Gross property, plant, and equipment |
|
|
831.2 |
|
|
|
789.7 |
|
Less accumulated depreciation |
|
|
(504.1 |
) |
|
|
(471.2 |
) |
|
|
|
|
|
|
|
Net property, plant, and equipment |
|
$ |
327.1 |
|
|
$ |
318.5 |
|
|
|
|
|
|
|
|
Depreciable lives on buildings range between 20-40 years. Depreciable lives on machinery,
tools, and equipment range between 3-20 years. The Company recorded depreciation expense of
$43.1 million, $42.3 million and $42.7 million for 2007, 2006 and 2005, respectively.
Note 9 Other Accrued Liabilities
Other Accrued Liabilities consists of the following at December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Accrued income taxes |
|
$ |
1.8 |
|
|
$ |
18.5 |
|
Customer program incentives |
|
|
25.2 |
|
|
|
28.1 |
|
Deferred revenue |
|
|
23.3 |
|
|
|
4.9 |
|
Other |
|
|
54.0 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
104.3 |
|
|
$ |
89.0 |
|
|
|
|
|
|
|
|
Note 10 Other Non-Current Liabilities
Other Non-Current Liabilities consists of the following at December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Pensions |
|
$ |
47.5 |
|
|
$ |
79.2 |
|
Other postretirement benefits |
|
|
30.1 |
|
|
|
33.6 |
|
Deferred tax liabilities |
|
|
51.9 |
|
|
|
22.0 |
|
Other |
|
|
32.4 |
|
|
|
19.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
161.9 |
|
|
$ |
154.4 |
|
|
|
|
|
|
|
|
Note 11 Retirement Benefits
The Company has funded and unfunded non-contributory U.S. and foreign defined benefit pension
plans. Benefits under these plans are generally provided based on either years of service and final
average pay or a specified dollar amount per year of service. The Company also maintains five
defined contribution pension plans.
Effective January 1, 2004, the defined benefit pension plan for U.S. salaried and
non-collectively bargained hourly employees was closed to employees hired on or after January 1,
2004. Effective January 1, 2006, the defined benefit pension plan for the Hubbell Canada salaried
employees was closed to existing employees who did not meet certain age and service requirements as
well as all new employees hired on or after January 1, 2006. Effective January 1, 2007 the defined
benefit pension plan for Hubbells U.K. operations was closed to all new employees hired on or
after January 1, 2007. These U.S., Canadian and U.K. employees are eligible instead for defined
contribution plans. Effective December 31, 2007, the Company closed its Retirement Plan for
Directors to active and future directors and transferred the present value liability to the
Deferred Compensation Plan for directors.
16
The Company also has a number of health care and life insurance benefit plans covering
eligible employees who reached retirement age while working for the Company. These benefits were
discontinued in 1991 for substantially all future retirees, with the exception of Anderson
Electrical Products which discontinued its plan for future retirees in 2004. A.B. Chance Company
and PCORE maintain limited retiree medical plans for their union employees. The Company anticipates
future cost-sharing changes for its active and discontinued plans that are consistent with past
practices.
None of the acquisitions made in 2006 impacted the defined benefit pension or other benefit
assets or liabilities. In connection with the acquisition of PCORE in October 2007, the Company
acquired its pension plans and other post employment plans.
The Company uses a December 31 measurement date for all of its plans. No amendments made in
2007 or 2006 to the defined benefit pension plans had a significant impact on the total pension
benefit obligation.
The following table sets forth the reconciliation of beginning and ending balances of the
benefit obligations and the plan assets for the Companys defined benefit pension and other benefit
plans at December 31, (in millions):
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
591.4 |
|
|
$ |
580.4 |
|
|
$ |
33.6 |
|
|
$ |
41.3 |
|
Service cost |
|
|
16.9 |
|
|
|
17.9 |
|
|
|
0.5 |
|
|
|
0.3 |
|
Interest cost |
|
|
32.7 |
|
|
|
30.9 |
|
|
|
1.7 |
|
|
|
2.1 |
|
Plan participants contributions |
|
|
0.9 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Amendments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
Curtailment and settlement loss |
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
0.4 |
|
Actuarial loss (gain) |
|
|
(38.4 |
) |
|
|
(11.2 |
) |
|
|
(4.6 |
) |
|
|
(7.5 |
) |
Acquisitions/Divestitures |
|
|
(1.5 |
) |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Currency impact |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
Benefits paid |
|
|
(27.4 |
) |
|
|
(27.9 |
) |
|
|
(2.6 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
577.2 |
|
|
$ |
591.4 |
|
|
$ |
30.1 |
|
|
$ |
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
531.6 |
|
|
$ |
481.9 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
69.9 |
|
|
|
66.2 |
|
|
|
|
|
|
|
|
|
Acquisitions/Divestitures |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
31.5 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
Plan participants contributions |
|
|
0.9 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Currency impact |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(27.4 |
) |
|
|
(27.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
609.1 |
|
|
$ |
531.6 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
31.9 |
|
|
$ |
(59.8 |
) |
|
$ |
(30.1 |
) |
|
$ |
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pensions (included in Intangible assets and other) |
|
$ |
82.6 |
|
|
$ |
22.5 |
|
|
$ |
|
|
|
$ |
|
|
Accrued benefit liability (short-term and long-term) |
|
|
(50.7 |
) |
|
|
(82.3 |
) |
|
|
(30.1 |
) |
|
|
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
31.9 |
|
|
$ |
(59.8 |
) |
|
$ |
(30.1 |
) |
|
$ |
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated other comprehensive (income) loss consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain) |
|
$ |
(9.9 |
) |
|
$ |
57.0 |
|
|
$ |
(1.1 |
) |
|
$ |
3.6 |
|
Prior service cost (credit) |
|
|
2.2 |
|
|
|
1.5 |
|
|
|
(2.2 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(7.7 |
) |
|
$ |
58.5 |
|
|
$ |
(3.3 |
) |
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $516.2 million
and $523.3 million at December 31, 2007 and 2006, respectively. Information with respect to plans
with accumulated benefit obligations in excess of plan assets is as follows, (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Projected benefit obligation |
|
$ |
49.5 |
|
|
$ |
64.4 |
|
Accumulated benefit obligation |
|
$ |
45.1 |
|
|
$ |
54.2 |
|
Fair value of plan assets |
|
$ |
0.4 |
|
|
$ |
8.0 |
|
The following table sets forth the components of pension and other benefits cost for the years
ended December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
16.9 |
|
|
$ |
17.9 |
|
|
$ |
16.1 |
|
|
$ |
0.5 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
Interest cost |
|
|
32.7 |
|
|
|
30.9 |
|
|
|
29.1 |
|
|
|
1.7 |
|
|
|
2.1 |
|
|
|
2.1 |
|
Expected return on plan assets |
|
|
(42.6 |
) |
|
|
(37.5 |
) |
|
|
(33.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
Amortization of actuarial losses |
|
|
1.9 |
|
|
|
3.8 |
|
|
|
2.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Curtailment and settlement losses |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
3.1 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
8.5 |
|
|
$ |
15.4 |
|
|
$ |
17.1 |
|
|
$ |
3.5 |
|
|
$ |
3.1 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes recognized in AOCI, before tax, (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year net actuarial loss/(gain) |
|
$ |
(66.0 |
) |
|
|
|
|
|
|
|
|
|
$ |
(4.8 |
) |
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current year prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Amortization of net actuarial (loss)/gain |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Other adjustments |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in accumulated other comprehensive income |
|
|
(67.5 |
) |
|
|
|
|
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic pension cost and accumulated other
comprehensive income |
|
$ |
(59.0 |
) |
|
|
|
|
|
|
|
|
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expected to be recognized through income during 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost/(credit) |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
Amortization of net loss/(gains) |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected to be recognized through income during next fiscal year |
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, certain of the Companys union employees participate in
multi-employer defined benefit plans. The total Company cost of these plans was $0.7 million in
both 2007 and 2006 and $0.5 million in 2005.
The Company also maintains five defined contribution pension plans (excluding an employer
match for the 401(k) plan). The total cost of these plans was $5.8 million in 2007, $5.6 million in
2006 and $3.6 million in 2005. This cost is not included in the above net periodic benefit cost for
the defined benefit pension plans.
Assumptions
The following assumptions were used to determine the projected benefit obligations at the
measurement date and the net periodic benefit cost for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
2007 |
|
2006 |
|
2005 |
|
2007 |
|
2006 |
|
2005 |
Weighted-average assumptions
used to determine benefit
obligations at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.41 |
% |
|
|
5.66 |
% |
|
|
5.45 |
% |
|
|
6.50 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
4.58 |
% |
|
|
4.33 |
% |
|
|
4.25 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Weighted-average assumptions
used to determine net
periodic benefit cost for
years ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.66 |
% |
|
|
5.45 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
4.58 |
% |
|
|
4.33 |
% |
|
|
4.25 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
At the beginning of each calendar year, the Company determines the appropriate expected return
on assets for each plan based upon its strategic asset allocation (see discussion below). In making
this determination, the Company utilizes expected returns for each asset class based upon current
market conditions and expected risk premiums for each asset class.
The assumed health care cost trend rates used to determine the projected postretirement
benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits |
|
|
2007 |
|
2006 |
|
2005 |
Assumed health care cost trend rates at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
Health care cost trend assumed for next year |
|
|
9.0 |
% |
|
|
9.0 |
% |
|
|
9.0 |
% |
Rate to which the cost trend is assumed to decline |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Year that the rate reaches the ultimate trend rate |
|
|
2015 |
|
|
|
2015 |
|
|
|
2015 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the
postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates
would have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
One Percentage |
|
One Percentage |
|
|
Point Increase |
|
Point Decrease |
Effect on total of service and interest cost |
|
$ |
0.1 |
|
|
$ |
(0.1 |
) |
Effect on postretirement benefit obligation |
|
$ |
1.6 |
|
|
$ |
(1.4 |
) |
19
Plan Assets
The Companys combined targeted and actual domestic and foreign pension plans weighted average
asset allocation at December 31, 2007 and 2006, and 2008 target allocation by asset category are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
|
|
|
Allocation |
|
Percentage of Plan Assets |
|
|
2008 |
|
2007 |
|
2006 |
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
53 |
% |
|
|
59 |
% |
|
|
71 |
% |
Debt Securities & Cash |
|
|
25 |
% |
|
|
26 |
% |
|
|
20 |
% |
Alternative investments |
|
|
20 |
% |
|
|
12 |
% |
|
|
8 |
% |
Other |
|
|
2 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a written investment policy and asset allocation guidelines for its domestic
and foreign pension plans. In establishing these policies, the Company has considered that its
various pension plans are a major retirement vehicle for most plan participants and has acted to
discharge its fiduciary responsibilities with regard to the plans solely in the interest of such
participants and their beneficiaries. The goal underlying the establishment of the investment
policies is to provide that pension assets shall be invested in a prudent manner and so that,
together with the expected contributions to the plans, the funds will be sufficient to meet the
obligations of the plans as they become due. To achieve this result, the Company conducts a
periodic strategic asset allocation study to form a basis for the allocation of pension assets
between various asset categories. Specific policy benchmark percentages are assigned to each asset
category with minimum and maximum ranges established for each. The assets are then tactically
managed within these ranges. At no time may derivatives be utilized to leverage the asset
portfolio.
Equity securities include Company common stock in the amounts of $18.5 million (3.4% of total
domestic plan assets) and $15.5 million (3% of total domestic plan assets) at December 31, 2007 and
2006, respectively.
The Companys other postretirement benefits are unfunded. Therefore, no asset information is
reported.
Cash Flows
Contributions
The Company does not expect to make a contribution to its qualified domestic defined benefit
pension plans in 2008. The Company expects to contribute approximately $7 million to its foreign
plans in 2008.
Estimated Future Benefit Payments
The following domestic and foreign benefit payments, which reflect future service, as
appropriate, are expected to be paid, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits |
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
|
|
Pension |
|
|
|
|
|
Part D |
|
|
|
|
Benefits |
|
Gross |
|
Subsidy |
|
Net |
2008 |
|
$ |
26.5 |
|
|
$ |
2.6 |
|
|
$ |
0.2 |
|
|
$ |
2.4 |
|
2009 |
|
$ |
28.1 |
|
|
$ |
2.6 |
|
|
$ |
0.2 |
|
|
$ |
2.4 |
|
2010 |
|
$ |
29.4 |
|
|
$ |
2.6 |
|
|
$ |
0.2 |
|
|
$ |
2.4 |
|
2011 |
|
$ |
31.4 |
|
|
$ |
2.6 |
|
|
$ |
0.2 |
|
|
$ |
2.4 |
|
2012 |
|
$ |
33.0 |
|
|
$ |
2.6 |
|
|
$ |
0.2 |
|
|
$ |
2.4 |
|
2013-2017 |
|
$ |
194.9 |
|
|
$ |
11.9 |
|
|
$ |
1.0 |
|
|
$ |
10.9 |
|
20
Note 12 Debt
The following table sets forth the components of the Companys debt structure at December 31,
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Short-Term |
|
Senior Notes |
|
|
|
|
|
Short-Term |
|
Senior Notes |
|
|
|
|
Debt |
|
(Long-Term) |
|
Total |
|
Debt |
|
(Long-Term) |
|
Total |
Balance at year end |
|
$ |
36.7 |
|
|
$ |
199.4 |
|
|
$ |
236.1 |
|
|
$ |
20.9 |
|
|
$ |
199.3 |
|
|
$ |
220.2 |
|
Highest aggregate month-end balance |
|
|
|
|
|
|
|
|
|
$ |
314.0 |
|
|
|
|
|
|
|
|
|
|
$ |
259.3 |
|
Average borrowings |
|
$ |
64.2 |
|
|
$ |
199.4 |
|
|
$ |
263.6 |
|
|
$ |
24.5 |
|
|
$ |
199.3 |
|
|
$ |
223.8 |
|
Weighted average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At year end |
|
|
5.30 |
% |
|
|
6.38 |
% |
|
|
6.21 |
% |
|
|
5.53 |
% |
|
|
6.38 |
% |
|
|
6.29 |
% |
Paid during the year |
|
|
5.25 |
% |
|
|
6.38 |
% |
|
|
6.10 |
% |
|
|
5.76 |
% |
|
|
6.38 |
% |
|
|
6.31 |
% |
At December 31, 2007 and 2006, the Company had $36.7 million and $20.9 million, respectively,
of debt reflected as Short-term debt in the Consolidated Balance Sheet. The 2007 short-term debt
consisted of $36.7 million of commercial paper. The 2006 short-term debt consisted of a
$5.1 million money market loan and $15.8 million of commercial paper. At December 31, 2007 and
2006, the Company had $199.4 million and $199.3 million, respectively, of senior notes reflected as
Long-Term Debt in the Consolidated Balance Sheet. Interest and fees paid related to total
indebtedness totaled $17.1 million for 2007, $14.8 million in 2006 and $18.6 million in 2005.
In May 2002, the Company issued ten year, non- callable notes due in 2012 at face value of
$200 million and a fixed interest rate of 6.375%. These notes are fixed rate indebtedness, are not
callable and are only subject to accelerated payment prior to maturity if the Company fails to meet
certain non-financial covenants, all of which were met at December 31, 2007 and 2006. The most
restrictive of these covenants limits our ability to enter into mortgages and sale-leasebacks of
property having a net book value in excess of $5 million without the approval of the Note holders.
In October 2007, the Company entered into a revised five year, $250 million revolving credit
facility to replace the previous $200 million facility which was scheduled to expire in October
2009. There have been no material changes from the previous facility other than the amount. The
interest rate applicable to borrowings under the new credit agreement is either the prime rate or a
surcharge over LIBOR. The expiration date of the new credit agreement is October 31, 2012. The
covenants of the new facility require that shareholders equity be greater than $675 million and
that total debt not exceed 55% of total capitalization (defined as total debt plus total
shareholders equity). The Company is in compliance with all debt covenants at December 31, 2007
and 2006. Annual commitment fee requirements to support availability of the credit facility were
not material. At December 31, 2007, the Company had approximately $19.5 million of letters of
credit outstanding.
The Company also has a five million pounds sterling revolving credit agreement with Barclays
Bank in the UK that will expire in July 2008. The interest rate applicable to borrowings under the
credit agreement is a surcharge over LIBOR. There are no annual commitment fees associated with
this credit agreement.
At December 31, 2007 and through the filing date of this Form 10-K, the Company had unused
bank credit commitments of $250 million and five million pounds sterling.
Note 13 Income Taxes
The following table sets forth selected data with respect to the Companys income tax
provisions for the years ended December 31, (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
191.9 |
|
|
$ |
151.1 |
|
|
$ |
178.8 |
|
International |
|
|
92.3 |
|
|
|
70.4 |
|
|
|
36.9 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
284.2 |
|
|
$ |
221.5 |
|
|
$ |
215.7 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
60.6 |
|
|
$ |
41.8 |
|
|
$ |
29.5 |
|
State |
|
|
7.7 |
|
|
|
5.0 |
|
|
|
5.1 |
|
International |
|
|
11.3 |
|
|
|
5.2 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
Total provision-current |
|
|
79.6 |
|
|
|
52.0 |
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Provision for income taxes deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(8.4 |
) |
|
$ |
7.8 |
|
|
$ |
8.7 |
|
State |
|
|
(0.7 |
) |
|
|
0.8 |
|
|
|
0.5 |
|
International |
|
|
5.4 |
|
|
|
2.8 |
|
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total provision deferred |
|
|
(3.7 |
) |
|
|
11.4 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
75.9 |
|
|
$ |
63.4 |
|
|
$ |
50.6 |
|
|
|
|
|
|
|
|
|
|
|
Beginning in 2006, the Companys Puerto Rico operations are classified as International for
tax purposes as these operations began conducting business as foreign corporations.
Deferred tax assets and liabilities result from differences in the basis of assets and
liabilities for tax and financial statement purposes. The components of the deferred tax
assets/(liabilities) at December 31, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventory |
|
$ |
8.8 |
|
|
$ |
3.1 |
|
Income tax credits |
|
|
4.8 |
|
|
|
2.3 |
|
Accrued liabilities |
|
|
15.9 |
|
|
|
14.6 |
|
Pension |
|
|
|
|
|
|
15.3 |
|
Postretirement and post employment benefits |
|
|
10.0 |
|
|
|
12.8 |
|
Stock-based compensation |
|
|
6.7 |
|
|
|
3.9 |
|
Foreign operating loss carryforward |
|
|
0.8 |
|
|
|
2.3 |
|
Miscellaneous other |
|
|
13.5 |
|
|
|
11.2 |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
$ |
60.5 |
|
|
$ |
65.5 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Acquisition basis difference |
|
|
30.1 |
|
|
|
22.0 |
|
Property, plant, and equipment |
|
|
32.2 |
|
|
|
34.7 |
|
Pension |
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
75.3 |
|
|
$ |
56.7 |
|
|
|
|
|
|
|
|
Total net deferred tax asset/(liability) |
|
$ |
(14.8 |
) |
|
$ |
8.8 |
|
|
|
|
|
|
|
|
Deferred taxes are reflected in the Consolidated Balance Sheet as follows (in millions): |
|
|
|
|
|
|
|
|
Current tax assets (included in Deferred taxes and other) |
|
$ |
34.8 |
|
|
$ |
22.6 |
|
Non-current tax assets (included in Intangible assets and other) |
|
|
2.3 |
|
|
|
8.2 |
|
Non-current tax liabilities (included in Other Non-current liabilities) |
|
|
(51.9 |
) |
|
|
(22.0 |
) |
|
|
|
|
|
|
|
Total net deferred tax asset/(liability) |
|
$ |
(14.8 |
) |
|
$ |
8.8 |
|
|
|
|
|
|
|
|
At December 31, 2007, income and withholding taxes have not been provided on approximately
$164.5 million of undistributed international earnings that are permanently reinvested in
international operations. If such earnings were not indefinitely reinvested, a tax liability of
approximately $28 million would be recognized.
Cash payments of income taxes were $79.7 million in 2007, $51.4 million in 2006 and
$41.7 million in 2005.
The Company files income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions. During 2007, the IRS completed an examination of the Companys U.S. income
tax returns for the years ended December 31, 2004 and 2005 (04/05 Exam). The Company has accepted
all of the IRS proposed adjustments from the 04/05 Exam, none of which were significant. It is
anticipated that the IRS will commence an examination of the Companys 2006 and 2007 U.S. income
tax returns during 2008. With few exceptions, the Company is no longer subject to state, local, or
non-U.S. income tax examinations by tax authorities for years prior to 2001.
The following tax years, by major jurisdiction, are still subject to examination by taxing
authorities:
|
|
|
|
|
Jurisdiction |
|
Open Years |
United States |
|
|
2006-2007 |
|
Canada |
|
|
2004-2007 |
|
United Kingdom |
|
|
2006-2007 |
|
22
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $4.7 million decrease in the liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of
retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in millions):
|
|
|
|
|
Balance as of January 1, 2007 |
|
$ |
24.2 |
|
Additions based on tax positions relating to the current year |
|
|
2.8 |
|
Reductions based on expiration of statute of limitations |
|
|
(1.3 |
) |
Reductions to tax positions relating to previous years |
|
|
(13.8 |
) |
Settlements |
|
|
(3.2 |
) |
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
8.7 |
|
|
|
|
|
Included in the balance at December 31, 2007 are $5.7 million of tax positions which, if in
the future are determined to be recognizable, would affect the annual effective income tax rate.
Also, included in the balance at December 31, 2007 is $0.8 million of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty as to the timing of
such deductibility. Because of the impact of deferred tax accounting, other than interest and
penalties, the disallowance of the shorter deductibility period would not affect the annual
effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier
period.
The Companys policy is to record interest and penalties associated with the underpayment of
income taxes within Provision for income taxes in the Condensed Consolidated Statement of Income.
During the year ended December 31, 2007, the Company recorded interest expense of $0.4 million
related to the 04/05 Exam. During the years ended December 31, 2006 and 2005, the Company did not
incur any material expenses for interest and penalties. The Company has $1.0 million accrued for
the payment of interest and penalties as of December 31, 2007.
The consolidated effective income tax rate varied from the United States federal statutory
income tax rate for the years ended December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
Federal statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal benefit |
|
|
1.8 |
|
|
|
1.7 |
|
|
|
1.7 |
|
Foreign income taxes |
|
|
(5.4 |
) |
|
|
(5.5 |
) |
|
|
(1.6 |
) |
Non-taxable income from Puerto Rico operations |
|
|
|
|
|
|
|
|
|
|
(4.4 |
) |
IRS audit settlement |
|
|
(1.9 |
) |
|
|
|
|
|
|
(5.1 |
) |
Other, net |
|
|
(2.8 |
) |
|
|
(2.6 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated effective income tax rate |
|
|
26.7 |
% |
|
|
28.6 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2007 consolidated effective income tax rate reflects the impact of tax benefits of
$5.3 million recorded in connection with the completion of an IRS examination of the Companys 2004
and 2005 tax returns. The 2005 consolidated effective income tax rate reflected the impact of tax
benefits of $10.8 million recorded in connection with the completion of an IRS examination of the
Companys 2002 and 2003 tax returns.
Note 14 Financial Instruments
Concentrations of Credit Risk: Financial instruments which potentially subject the Company to
concentrations of credit risk consist of trade receivables, cash and cash equivalents and
short-term investments. The Company grants credit terms in the normal course of business to its
customers. Due to the diversity of its product lines, the Company has an extensive customer base
including electrical distributors and wholesalers, electric utilities, equipment manufacturers,
electrical contractors, telephone operating companies and retail and hardware outlets. No single
customer accounted for more than 10% of total sales in any year during the three years ended
December 31, 2007. However, the Companys top 10 customers accounted for approximately 30% of the
accounts receivable balance at December 31, 2007. As part of its ongoing procedures, the Company
monitors the credit worthiness of its customers. Bad debt write-offs have historically been
minimal. The Company places its cash and cash equivalents with financial institutions and limits
the amount of exposure to any one institution.
Fair Value: The carrying amounts reported in the consolidated balance sheet for cash and cash
equivalents, short-term and long-term investments, receivables, bank borrowings, accounts payable
and accruals approximate their fair values given the immediate or short-term nature of these items.
See also Note 7 Investments.
23
The fair value of the senior notes classified as long-term debt was determined by reference to
quoted market prices of securities with similar characteristics and approximated $213.8 million and
$209.7 million at December 31, 2007 and 2006, respectively.
Note 15 Commitments and Contingencies
Environmental and Legal
The Company is subject to environmental laws and regulations which may require that it
investigate and remediate the effects of potential contamination associated with past and present
operations. The Company is also subject to various legal proceedings and claims, including those
relating to workers compensation, product liability and environmental matters, including, for
each, past production of product containing toxic substances, which have arisen in the normal
course of its operations or have been acquired through business combinations. Estimates of future
liability with respect to such matters are based on an evaluation of currently available facts.
Liabilities are recorded when it is probable that costs will be incurred and can be reasonably
estimated. Given the nature of matters involved, it is possible that liabilities will be incurred
in excess of amounts currently recorded. However, based upon available information, including the
Companys past experience, and reserves, management believes that the ultimate liability with
respect to these matters will not have a material affect on the consolidated financial position,
results of operations or cash flows of the Company.
In the fourth quarter of 2005, the Company adopted the provisions of FIN 47, Accounting for
Conditional Asset Retirement Obligations. FIN 47 clarifies the term conditional asset retirement
obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations to refer to a
legal obligation to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the control of the
Company. Accordingly, an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The impact of the Companys adoption of FIN 47 was not material. The liability recorded
was charged directly to income and was not reflected as a cumulative effect adjustment due to the
immaterial amount. In addition to the amount recorded, the Company identified other legal
obligations related to environmental clean up for which a settlement date could not be determined.
Management does not believe these items were material to the Companys results of operations,
financial position or cash flows as of December 31, 2007, 2006 and 2005. The Company continues to
monitor and revalue its liability as necessary and, as of December 31, 2007 the liability continues
to be immaterial.
Leases
Total rental expense under operating leases was $17.3 million in 2007, $17.7 million in 2006
and $16.6 million in 2005. The minimum annual rentals on non-cancelable, long-term, operating
leases in effect at December 31, 2007 are expected to approximate $12.6 million in 2008,
$10.4 million in 2009, $7.8 million in 2010, $4.2 million in 2011, $2.8 million in 2012 and
$20.1 million thereafter. The Company accounts for its leases in accordance with SFAS No. 13,
Accounting for Leases. The Companys leases consist of operating leases primarily for buildings
or equipment. The terms for building leases typically range from 5-25 years with 5-10 year renewal
periods.
Note 16 Capital Stock
Activity in the Companys common shares outstanding is set forth below for the three years
ended December 31, 2007, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Class A |
|
Class B |
Outstanding at December 31, 2004 |
|
|
9,351 |
|
|
|
51,864 |
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
1,306 |
|
Shares issued under compensation arrangements |
|
|
|
|
|
|
8 |
|
Non-vested shares issued under compensation arrangements |
|
|
|
|
|
|
130 |
|
Acquisition/surrender of shares |
|
|
(223 |
) |
|
|
(1,345 |
) |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
9,128 |
|
|
|
51,963 |
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
1,223 |
|
Shares issued under compensation arrangements |
|
|
|
|
|
|
2 |
|
Non-vested shares issued under compensation arrangements |
|
|
|
|
|
|
94 |
|
Acquisition/surrender of shares |
|
|
(951 |
) |
|
|
(1,281 |
) |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
8,177 |
|
|
|
52,001 |
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Class A |
|
Class B |
Exercise of stock options/SARs |
|
|
|
|
|
|
1,356 |
|
Shares issued under compensation arrangements |
|
|
|
|
|
|
2 |
|
Non-vested shares issued under compensation arrangements |
|
|
|
|
|
|
108 |
|
Acquisition/surrender of shares |
|
|
(799 |
) |
|
|
(2,917 |
) |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
7,378 |
|
|
|
50,550 |
|
|
|
|
|
|
|
|
|
|
Repurchased shares are retired when acquired and the purchase price is charged against par
value and additional paid-in capital. Shares may be repurchased through the Companys stock
repurchase program, acquired by the Company from employees under the Hubbell Incorporated Stock
Option Plan for Key Employees (Option Plan) or surrendered to the Company by employees in
settlement of their tax liability on vesting of restricted shares under the Hubbell Incorporated
2005 Incentive Award Plan, (the Award Plan). Voting rights per share: Class A Common twenty;
Class B Common one. In addition, the Company has 5.9 million authorized shares of preferred
stock; no preferred shares are outstanding.
The Company has a Stockholder Rights Agreement (Rights Agreement) under which holders of
Class A Common Stock have Class A Rights and holders of Class B Common Stock have Class B Rights
(collectively, Rights). These Rights become exercisable after a specified period of time only if
a person or group of affiliated persons acquires beneficial ownership of 20 percent or more of the
outstanding Class A Common Stock of the Company or announces or commences a tender or exchange
offer that would result in the offeror acquiring beneficial ownership of 20 percent or more of the
outstanding Class A Common Stock of the Company. Each Class A Right entitles the holder to purchase
from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock
(Series A Preferred Stock), without par value, at a price of $175.00 per one one-thousandth of a
share. Similarly, each Class B Right entitles the holder to purchase one one-thousandth of a share
of Series B Junior Participating Preferred Stock (Series B Preferred Stock), without par value,
at a price of $175.00 per one one-thousandth of a share. The Rights may be redeemed by the Company
for one cent per Right prior to the day a person or group of affiliated persons acquires 20 percent
or more of the outstanding Class A Common Stock of the Company. The Rights expire on December 31,
2008, unless earlier redeemed by the Company.
Shares of Series A Preferred Stock or Series B Preferred Stock purchasable upon exercise of
the Rights will not be redeemable. Each share of Series A Preferred Stock or Series B Preferred
Stock will be entitled, when, as and if declared, to a minimum preferential quarterly dividend
payment of $10.00 per share but will be entitled to an aggregate dividend of 1,000 times the
dividend declared per share of Common Stock. In the event of liquidation, the holders of the
Series A Preferred Stock or Series B Preferred Stock will be entitled to a minimum preferential
liquidation payment of $100 per share (plus any accrued but unpaid dividends) but will be entitled
to an aggregate payment of 1,000 times the payment made per share of Class A Common Stock or
Class B Common Stock, respectively. Each share of Series A Preferred Stock will have 20,000 votes
and each share of Series B Preferred Stock will have 1,000 votes, voting together with the Common
Stock. Finally, in the event of any merger, consolidation, transfer of assets or earning power or
other transaction in which shares of Common Stock are converted or exchanged, each share of
Series A Preferred Stock or Series B Preferred Stock will be entitled to receive 1,000 times the
amount received per share of Common Stock. These rights are protected by customary antidilution
provisions.
Upon the occurrence of certain events or transactions specified in the Rights Agreement, each
holder of a Right will have the right to receive, upon exercise, that number of shares of the
Companys common stock or the acquiring companys shares having a market value equal to twice the
exercise price.
Shares of the Companys common stock were reserved at December 31, 2007 as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Preferred |
|
|
Class A |
|
Class B |
|
Stock |
Exercise of outstanding stock options |
|
|
|
|
|
|
3,180 |
|
|
|
|
|
Future grant of stock-based compensation |
|
|
|
|
|
|
5,321 |
|
|
|
|
|
Exercise of stock purchase rights |
|
|
|
|
|
|
|
|
|
|
58 |
|
Shares reserved under other equity compensation plans |
|
|
2 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2 |
|
|
|
8,798 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the Class B amounts above are 0.9 million SARs which have exercise prices above
the market price of the Companys Class B Common Stock as of December 31, 2007, and therefore,
could not be converted to shares.
25
Note 17 Stock-Based Compensation
As of December 31, 2007, the Company had various stock-based awards outstanding which were
issued to executives and other key employees. These awards have been accounted for using
SFAS No. 123 (R) which was adopted on January 1, 2006. The Company recognizes the cost of these
awards on a straight line attribution basis over their respective vesting periods, net of estimated
forfeitures. The Company adopted the modified prospective transition method as outlined in SFAS 123
(R) and, therefore, prior year amounts have not been restated.
SFAS No. 123(R) requires that share-based compensation expense be recognized over the period
from the grant date to the date on which the award is no longer contingent on the employee
providing additional service (the substantive vesting period). In periods prior to the adoption
of SFAS No. 123(R), share-based compensation expense was recorded for retirement-eligible employees
over the awards stated vesting period. With the adoption of SFAS No. 123(R), the Company continues
to follow the stated vesting period for the unvested portions of awards granted prior to adoption
of SFAS No. 123(R) and follows the substantive vesting period for awards granted after the adoption
of SFAS No. 123(R).
In 2005, the Company adopted a new long-term incentive program for awarding stock-based
compensation using a combination of restricted stock, stock appreciation rights (SARs), and
performance shares on the Companys Class B Common Stock pursuant to the Award Plan. Under the
Companys Award Plan, the Company may authorize up to 5.9 million shares of Class B Common Stock in
settlement of restricted stock, performance shares, SARs or any post-2004 grants of stock options.
The Company issues new shares for settlement of any stock-based awards. In 2007, the Company issued
stock-based awards using a combination of restricted stock, SARs and performance shares.
In 2007 and 2006, the Company recorded $12.7 million and $11.9 million of stock-based
compensation costs, respectively. Of the total 2007 expense, $11.9 million was recorded to S&A
expense and $0.8 million was recorded to Cost of goods sold. In 2006, $11.3 million was recorded to
S&A expense and $0.5 million was recorded to Cost of goods sold. Stock-based compensation costs
capitalized to inventory were $0.1 million in both 2007 and 2006. In 2005, the Company recorded
total stock-based compensation of $0.7 million which was all recorded to S&A expense. The Company
recorded income tax benefits of approximately $4.8 million, $4.5 million, and $0.3 million in 2007,
2006, and 2005 respectively, related to stock-based compensation. At December 31, 2007, these
benefits are recorded as either a deferred tax asset in Deferred taxes and other or in Other
accrued liabilities in the Consolidated Balance Sheet. As of December 31, 2007, there was
$22.1 million, pretax, of total unrecognized compensation cost related to non-vested share-based
compensation arrangements. This cost is expected to be recognized through 2010.
Each of the compensation arrangements is discussed below.
Restricted Stock
The restricted stock granted to date is not transferable and is subject to forfeiture in the
event of the recipients termination of employment prior to vesting. The restricted stock will
generally vest in one-third increments annually for three years on each anniversary of the date of
grant or completely upon a change in control, termination of employment by reason of death or
disability. Recipients are entitled to receive dividends and voting rights on their non-vested
restricted stock. The fair values are measured using the average between the high and low trading
prices of the Companys Class B Common Stock on the most recent trading day immediately preceding
the grant date, (measurement date).
Stock Issued to Non-employee Directors
In 2005, the compensation program for non-employee directors was changed to include an annual
grant of 350 shares of Class B Common Stock of the Company. In 2005, shares received were not
subject to any restrictions on transfer and were fully vested at grant date. In 2006 and 2007, each
non-employee director received a grant of 350 shares of Class B Common Stock on the date of the
annual meeting of shareholders which vested or will vest at the following years annual meeting of
shareholders. These shares will be subject to forfeiture if the directors service terminates prior
to the date of the next regularly scheduled annual meeting of shareholders to be held in the
following calendar year. In 2007, the Company issued a total of 3,150 shares to non-employee
members of its Board of Directors.
26
Activity related to restricted stock for the year ended December 31, 2007 is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Value/share |
Non-vested restricted stock at December 31, 2006 |
|
|
177 |
|
|
|
51.05 |
|
Shares granted |
|
|
108 |
|
|
|
54.52 |
|
Shares vested |
|
|
(72 |
) |
|
|
50.69 |
|
Shares forfeited |
|
|
(7 |
) |
|
|
51.10 |
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2007 |
|
|
206 |
|
|
|
52.99 |
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of restricted stock granted during the years 2007,
2006 and 2005 was $54.52, $52.82 and $49.08, respectively.
Stock Appreciation Rights
The SARs granted to date entitle the recipient to the difference between the fair market value
of the Companys Class B Common Stock on the date of exercise and the grant price as determined
using the average between the high and the low trading prices of the Companys Class B Common Stock
on the measurement date. This amount is payable in shares of the Companys Class B Common Stock.
One-third of the SARs vest and become exercisable each year for three years on the anniversary of
the grant date and expire ten years after the grant date.
Activity related to SARs for the year ended December 31, 2007 is as follows (in thousands,
except exercise amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Rights |
|
|
Price |
|
|
Term |
|
|
Value |
|
Non-vested SARs at December 31, 2006 |
|
|
814 |
|
|
$ |
51.63 |
|
|
|
|
|
|
|
|
|
SARs granted |
|
|
440 |
|
|
|
54.56 |
|
|
|
|
|
|
|
|
|
SARs vested |
|
|
(315 |
) |
|
|
51.34 |
|
|
|
|
|
|
|
|
|
SARs forfeited |
|
|
(23 |
) |
|
|
50.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested SARs at December 31, 2007 |
|
|
916 |
|
|
$ |
53.16 |
|
|
9.2 years |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable SARs at December 31, 2007 |
|
|
471 |
|
|
$ |
50.82 |
|
|
8.2 years |
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, approximately 5,000 SARs were exercised. The intrinsic value of the SARs
exercised in 2007 was not material. There were no SARs exercised in 2006 and 2005.
The fair value of the SARs was measured using the Black-Scholes option pricing model. The
following table summarizes the related assumptions used to determine the fair value of the SARs
granted during the periods ended December 31, 2007, 2006 and 2005. Expected volatilities are based
on historical volatilities of the Companys stock and other factors. The Company uses historical
data as well as other factors to estimate exercise behavior and employee termination. The expected
term of SARs granted is based upon historical trends of stock option behavior as well as future
projections. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for the expected term of award.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
Dividend |
|
Expected |
|
Risk Free |
|
Expected |
|
Fair Value |
|
|
Yield |
|
Volatility |
|
Interest Rate |
|
Term |
|
of 1 SAR |
2007 |
|
|
2.6 |
% |
|
|
23.5 |
% |
|
|
3.5 |
% |
|
6 Years |
|
$ |
11.40 |
|
2006 |
|
|
2.9 |
% |
|
|
23.5 |
% |
|
|
4.3 |
% |
|
6 Years |
|
$ |
11.47 |
|
2005 |
|
|
2.7 |
% |
|
|
23.5 |
% |
|
|
4.3 |
% |
|
6 Years |
|
$ |
11.10 |
|
Performance Shares
In 2005, the Company granted 35,178 performance shares. These performance shares vest and
become deliverable upon satisfaction of performance criteria established by the Companys
Compensation Committee. The criteria are based upon the Companys average growth in earnings per
share compared to a peer group of electrical and electronic equipment companies over a three year
period. Performance at target will result in vesting and issuance of the performance shares.
Performance above or below target can result in
27
payment in the range of 0%-250% of the number of shares granted. The fair value of the
performance shares is $46.23, which was measured using the average between the high and low trading
prices of the Companys Class B Common Stock on the measurement date, discounted for the
non-payment of dividends during the requisite period. In 2007 and 2006, no stock-based compensation
was recorded related to this award due to the fact that the performance criteria was deemed not
probable of being met at the end of the vesting period. There were no performance shares granted in
2006.
In February and December 2007, the Company granted 34,783 and 30,292 performance shares,
respectively, which vest at the end of a three year period. Each performance share represents the
right to receive a share of the Companys Class B Common Stock subject to the achievement of
certain performance conditions. These performance conditions include both performance-based and
market-based criteria established by the Companys Compensation Committee. Performance at target
will result in vesting and issuance of the number of performance shares granted, equal to 100%
payout. Performance below or above target can result in payment in the range of 0%-200% of the
number of shares granted. Performance shares vest and become payable upon satisfactory completion
of the performance conditions determined by the Companys Compensation Committee at the end of the
performance period. No shares have vested or been forfeited during 2007, 2006 or 2005. In 2007,
stock-based compensation of $0.9 million was recorded related to performance shares. As of
December 31, 2007, a total of 100,253 performance shares were outstanding.
The fair value of the performance shares was calculated separately for the performance
criteria and the market-based criteria. The fair values of the performance criteria of $45.52 per
share and $50.94 per share for February and December 2007, respectively, were measured using the
average between the high and low trading prices of the Companys Class B Common Stock on the
measurement date, discounted for the non-payment of dividends during the requisite period. The fair
values of the market-based criteria were determined based upon a lattice model. The following table
summarizes the related assumptions used to determine the fair values of the performance shares with
respect to the market-based criteria. Expected volatilities are based on historical volatilities of
the Companys stock over a three year period. The risk free interest rate is based on the
U.S. Treasury yield curve in effect at the time of the grant for the expected term of award.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Price on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
Measurement |
|
Dividend |
|
Expected |
|
Risk Free |
|
Expected |
|
Grant Date |
|
|
Date |
|
Yield |
|
Volatility |
|
Interest Rate |
|
Term |
|
Fair Value |
February 2007 |
|
$ |
48.23 |
|
|
|
2.7 |
% |
|
|
21.3 |
% |
|
|
4.8 |
% |
|
3 Years |
|
$ |
55.20 |
|
December 2007 |
|
$ |
54.56 |
|
|
|
2.4 |
% |
|
|
21.1 |
% |
|
|
2.9 |
% |
|
3 Years |
|
$ |
63.69 |
|
Stock Option Awards
The Company granted options to officers and other key employees to purchase the Companys
Class B Common Stock in previous years. Options issued in 2004 and 2003 were partially vested on
January 1, 2006, the effective date of SFAS 123(R). All options granted had an exercise price equal
to the average between the high and low trading prices of the Companys Class B Common Stock on the
measurement date. These option awards generally vest annually over a three-year period and expire
after ten years. Exercises of existing stock option grants are expected to be settled in the
Companys Class B Common Stock as authorized in the Option Plan.
Stock option activity for the year ended December 31, 2007 is set forth below (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at December 31, 2006 |
|
|
4,552 |
|
|
$ |
39.61 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,356 |
) |
|
|
39.28 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(11 |
) |
|
|
47.95 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(5 |
) |
|
|
37.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
3,180 |
|
|
$ |
39.73 |
|
|
5.1 years |
|
$ |
37.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007 |
|
|
3,180 |
|
|
$ |
39.73 |
|
|
5.1 years |
|
$ |
37.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock option exercises during 2007, 2006 and 2005 was
$19.9 million, $16.9 million and $22.4 million, respectively.
The following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 for stock options in 2005 (in
millions, except per share amounts):
28
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
Net income, as reported |
|
$ |
165.1 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of related
tax effects |
|
|
(6.2 |
) |
|
|
|
|
Pro forma net income |
|
$ |
158.9 |
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic as reported |
|
$ |
2.71 |
|
|
|
|
|
Basic pro forma |
|
$ |
2.60 |
|
|
|
|
|
Diluted as reported |
|
$ |
2.67 |
|
|
|
|
|
Diluted pro forma |
|
$ |
2.58 |
|
|
|
|
|
Cash received from option exercises were $48.0 million, $38.5 million and $32.8 million for
2007, 2006 and 2005, respectively. The Company recorded a realized tax benefit from equity-based
awards of $6.9 million and $6.0 million for the periods ended December 31, 2007 and 2006,
respectively, which have been included in Cash Flows From Financing Activities in the Consolidated
Statement of Cash Flows as prescribed by SFAS No. 123(R). The Company recorded a realized tax
benefit from the exercise of stock options of $7.8 million for the year ended December 31, 2005
which has been included in Other, net within Cash Flows From Operating Activities in the
Consolidated Statement of Cash Flows.
The Company elected to adopt the shortcut method for determining the initial pool of excess
tax benefits available to absorb tax deficiencies related to stock-based compensation subsequent to
the adoption of SFAS 123(R) in accordance with the provisions of FASB Staff Position No. 123(R)-3,
Transition Election Related to Accounting for Tax Effect of Share-Based Payment Awards. The
shortcut method includes simplified procedures to establish the beginning balance of the pool of
excess tax benefits (the APIC Tax Pool) and to determine the subsequent effect on the APIC Tax
Pool and Consolidated Cash Flow Statements of the effects of employee stock-based compensation
awards.
Note 18 Earnings Per Share
The following table sets forth the computation of earnings per share for the three years ended
December 31, (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net Income |
|
$ |
208.3 |
|
|
$ |
158.1 |
|
|
$ |
165.1 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period |
|
|
58.8 |
|
|
|
60.4 |
|
|
|
61.0 |
|
Potential dilutive shares |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding (diluted) |
|
|
59.5 |
|
|
|
61.1 |
|
|
|
61.8 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.54 |
|
|
$ |
2.62 |
|
|
$ |
2.71 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
3.50 |
|
|
$ |
2.59 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
Certain common stock equivalents were not included in the full year computation of diluted
earnings per share because the effect would be anti-dilutive. Anti-dilutive common stock and common
stock equivalents excluded from the computation of diluted earnings per share were 0.4 million,
0.7 million, and 1.0 million, at December 31, 2007, 2006 and 2005, respectively. Additionally, the
Company had 1.3 million, 1.0 million and 0.6 million of stock appreciation rights, respectively,
which were also excluded as the effect would be anti-dilutive at December 31, 2007, 2006 and 2005.
29
Note 19 Accumulated Other Comprehensive Income (Loss)
The following table reflects the accumulated balances of other comprehensive income (loss) (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Pension/ |
|
|
Cumulative |
|
|
Unrealized Gain |
|
|
Cash Flow |
|
|
Other |
|
|
|
OPEB |
|
|
Translation |
|
|
(Loss) on |
|
|
Hedging |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Adjustment |
|
|
Investments |
|
|
Gain (Loss) |
|
|
Income (Loss) |
|
Balance at December 31, 2004 |
|
$ |
(1.9 |
) |
|
$ |
2.1 |
|
|
$ |
|
|
|
$ |
(1.7 |
) |
|
$ |
(1.5 |
) |
2005 activity |
|
|
(2.2 |
) |
|
|
(7.5 |
) |
|
|
(0.3 |
) |
|
|
0.7 |
|
|
|
(9.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
(4.1 |
) |
|
|
(5.4 |
) |
|
|
(0.3 |
) |
|
|
(1.0 |
) |
|
|
(10.8 |
) |
2006 activity |
|
|
(34.7 |
) |
|
|
12.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
(21.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
(38.8 |
) |
|
|
7.0 |
|
|
|
|
|
|
|
(0.6 |
) |
|
|
(32.4 |
) |
2007 activity |
|
|
44.9 |
|
|
|
14.1 |
|
|
|
0.2 |
|
|
|
(0.8 |
) |
|
|
58.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
6.1 |
|
|
$ |
21.1 |
|
|
$ |
0.2 |
|
|
$ |
(1.4 |
) |
|
$ |
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension liability adjustment for 2006 includes the reversal of a minimum pension liability
of $2.1 million and a charge of $36.8 million related to the adoption of SFAS No. 158.
Note 20 Industry Segments and Geographic Area Information
Nature of Operations
Hubbell Incorporated was founded as a proprietorship in 1888, and was incorporated in
Connecticut in 1905. Hubbell designs, manufactures and sells 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, Mexico, Italy, the United Kingdom, Brazil and
Australia. Hubbell also participates in joint ventures in Taiwan and the Peoples Republic of
China, and maintains sales offices in Singapore, the Peoples Republic of China, Mexico, South
Korea and the Middle East.
The Companys businesses are divided into two reportable segments: Electrical and Power.
Information regarding operating segments has been presented as required by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. During the first quarter of
2008, the Company realigned its internal organization and operating segments. This reorganization
included combining the electrical products business (included in the Electrical segment) and the
industrial technology business (previously its own reporting segment) into one operating segment.
This combined operating segment is part of the Electrical reporting segment. Effective for the
first quarter of 2008, the Companys reporting segments consist of the Electrical segment and the
Power segment. Accordingly, our historical segment financial information and related disclosures
have been reclassified to reflect our current internal structure.
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 and
lighting fixtures and controls, and other electrical equipment. The products are typically used in
and around industrial, commercial and institutional facilities by electrical contractors,
maintenance personnel, electricians, and telecommunications companies. In addition, certain
businesses design and manufacture a variety of high voltage test and measurement equipment,
industrial controls and communication systems used in the commercial, industrial and
telecommunications markets. Many of these products may also be found in the oil and gas (onshore
and offshore) and mining industries. Certain lighting fixtures, wiring devices and electrical
products also have residential applications. These products are primarily sold through electrical
and industrial distributors, home centers, some retail and hardware outlets, and lighting
showrooms. Special application products are sold primarily through wholesale distributors to
contractors, industrial customers and OEMs. High voltage products are also sold direct to customers
through its sales engineers.
The Power segment consists of operations that design and manufacture various transmission,
distribution, substation and telecommunications products used by the utility industry. In addition,
certain of these products are used in the civil construction and transportation industries.
Products are sold to distributors and directly to users such as electric utilities, mining
operations, industrial firms, construction and engineering firms.
30
Financial Information
Financial information by industry segment and geographic area for the three years ended
December 31, 2007, is summarized below (in millions). When reading the data the following items
should be noted:
|
|
|
Net sales comprise sales to unaffiliated customers inter-segment and inter-area sales
are not significant. |
|
|
|
|
Segment operating income consists of net sales less operating expenses, including total
corporate expenses, which are generally allocated to each segment on the basis of the
segments percentage of consolidated net sales. Interest expense and investment income and
other expense, net have not been allocated to segments. |
|
|
|
|
General corporate assets not allocated to segments are principally cash, prepaid
pensions, investments and deferred taxes. |
|
|
|
|
2006 and 2005 segment operating income results have been adjusted to reflect the
inclusion of stock-based compensation, consistent with the 2007 presentation. |
Industry Segment Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
1,897.3 |
|
|
$ |
1,840.6 |
|
|
$ |
1,649.3 |
|
Power |
|
|
636.6 |
|
|
|
573.7 |
|
|
|
455.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,533.9 |
|
|
$ |
2,414.3 |
|
|
$ |
2,104.9 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
202.1 |
|
|
$ |
165.6 |
|
|
$ |
173.5 |
|
Special charges, net |
|
|
|
|
|
|
(7.5 |
) |
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total Electrical |
|
|
202.1 |
|
|
|
158.1 |
|
|
|
162.6 |
|
Power |
|
|
97.3 |
|
|
|
75.8 |
|
|
|
68.8 |
|
Unusual item |
|
|
|
|
|
|
|
|
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
299.4 |
|
|
|
233.9 |
|
|
|
226.8 |
|
Interest expense |
|
|
(17.6 |
) |
|
|
(15.4 |
) |
|
|
(19.3 |
) |
Investment and other income, net |
|
|
2.4 |
|
|
|
3.0 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
284.2 |
|
|
$ |
221.5 |
|
|
$ |
215.7 |
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
1,106.7 |
|
|
$ |
1,103.2 |
|
|
$ |
940.0 |
|
Power |
|
|
510.0 |
|
|
|
478.5 |
|
|
|
322.2 |
|
General Corporate |
|
|
246.7 |
|
|
|
169.8 |
|
|
|
404.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,863.4 |
|
|
$ |
1,751.5 |
|
|
$ |
1,667.0 |
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
38.5 |
|
|
$ |
59.7 |
|
|
$ |
53.0 |
|
Power |
|
|
13.6 |
|
|
|
16.2 |
|
|
|
11.1 |
|
General Corporate |
|
|
3.8 |
|
|
|
10.9 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55.9 |
|
|
$ |
86.8 |
|
|
$ |
73.4 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
41.8 |
|
|
$ |
40.3 |
|
|
$ |
39.1 |
|
Power |
|
|
18.4 |
|
|
|
15.1 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60.2 |
|
|
$ |
55.4 |
|
|
$ |
50.4 |
|
|
|
|
|
|
|
|
|
|
|
31
Geographic Area Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2,175.9 |
|
|
$ |
2,109.2 |
|
|
$ |
1,866.5 |
|
International |
|
|
358.0 |
|
|
|
305.1 |
|
|
|
238.4 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,533.9 |
|
|
$ |
2,414.3 |
|
|
$ |
2,104.9 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
250.3 |
|
|
$ |
207.4 |
|
|
$ |
203.3 |
|
Special charges, net |
|
|
|
|
|
|
(7.5 |
) |
|
|
(10.9 |
) |
International |
|
|
49.1 |
|
|
|
34.0 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
299.4 |
|
|
$ |
233.9 |
|
|
$ |
226.8 |
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment, net: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
277.6 |
|
|
$ |
269.9 |
|
|
$ |
222.5 |
|
International |
|
|
49.5 |
|
|
|
48.6 |
|
|
|
45.3 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
327.1 |
|
|
$ |
318.5 |
|
|
$ |
267.8 |
|
|
|
|
|
|
|
|
|
|
|
On a geographic basis, the Company defines international as operations based outside of the
United States and its possessions. Sales of international units were 14%, 13% and 11% of total
sales in 2007, 2006 and 2005, respectively, with Canadian and United Kingdom markets representing
approximately 63% collectively of the 2007 total. Long-lived assets of international subsidiaries
were 15% of the consolidated total in 2007 and 2006, and 17% in 2005, with the Canadian and United
Kingdom markets representing approximately 11% and 19%, respectively, of the 2007 total. Export
sales directly to customers or through electric wholesalers from United States operations were
$145.8 million in 2007, $131.2 million in 2006 and $120.6 million in 2005.
Note 21 Quarterly Financial Data (Unaudited)
The table below sets forth summarized quarterly financial data for the years ended
December 31, 2007 and 2006 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
625.7 |
|
|
$ |
640.8 |
|
|
$ |
652.7 |
|
|
$ |
614.7 |
|
Gross Profit |
|
$ |
173.0 |
|
|
$ |
187.3 |
|
|
$ |
194.6 |
|
|
$ |
180.9 |
|
Net Income |
|
$ |
41.7 |
|
|
$ |
53.3 |
|
|
$ |
65.3 |
|
|
$ |
48.0 |
(1) |
Earnings Per Share Basic |
|
$ |
0.70 |
|
|
$ |
0.90 |
|
|
$ |
1.12 |
|
|
$ |
0.83 |
|
Earnings Per Share Diluted |
|
$ |
0.69 |
|
|
$ |
0.89 |
|
|
$ |
1.10 |
|
|
$ |
0.82 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
573.0 |
|
|
$ |
603.2 |
|
|
$ |
649.0 |
|
|
$ |
589.0 |
|
Gross Profit |
|
$ |
158.5 |
(2) |
|
$ |
165.7 |
|
|
$ |
180.9 |
|
|
$ |
151.6 |
|
Net Income |
|
$ |
39.7 |
(2) |
|
$ |
41.6 |
(2) |
|
$ |
47.6 |
(2) |
|
$ |
29.2 |
(2)(3) |
Earnings Per Share Basic |
|
$ |
0.66 |
|
|
$ |
0.68 |
|
|
$ |
0.79 |
|
|
$ |
0.49 |
|
Earnings Per Share Diluted |
|
$ |
0.65 |
|
|
$ |
0.67 |
|
|
$ |
0.78 |
|
|
$ |
0.48 |
|
|
|
|
(1) |
|
Net Income in the fourth quarter of 2007 included an income tax
benefit of $5.3 million related to the completion of IRS examinations
for tax years 2004 and 2005. |
|
(2) |
|
In the first, second, third and fourth quarters of 2006, Net Income
included $1.7 million, $1.4 million, $0.7 million and $3.7 million of
pretax special charges, respectively. These charges relate to the
integration of the Companys lighting operations in the Electrical
segment. Included in the amounts above are inventory write-down costs
which are recorded in Cost of goods sold for the first quarter of 2006
of $0.2 million, thereby reducing Gross Profit on a pretax basis. |
|
(3) |
|
Net Income in the fourth quarter of 2006 includes a tax benefit of
$1.9 million which reflects the full year benefit associated with the
reinstatement of the Federal research and development tax credit. |
32
Note 22 Guarantees
The Company accrues for costs associated with guarantees when it is probable that a liability
has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred
is 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.
The Company records a liability equal to the fair value of guarantees in the Consolidated
Balance Sheet in accordance with FIN 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. As of December 31, 2007 and
2006, the fair value and maximum potential payment related to the Companys guarantees were not
material. The Company may enter into various hedging instruments which are subject to disclosure in
accordance with FIN 45. As of December 31, 2007, the Company had 18 individual forward exchange
contracts outstanding each for the purchase of $1.0 million U.S. dollars which expire through
December 2008. These contracts were entered into in order to hedge the exposure to fluctuating
rates of exchange on anticipated inventory purchases. These contracts have been designated as cash
flow hedges in accordance with SFAS No. 133, as amended.
The Company offers a product warranty which covers defects on most of its products. These
warranties primarily apply to products that are properly used for their intended purpose, installed
correctly, and properly maintained. The Company generally accrues estimated warranty costs at the
time of sale. Estimated warranty expenses are based upon historical information such as past
experience, product failure rates, or the number of units repaired or replaced. Adjustments are
made to the product warranty accrual as claims are incurred or as historical experience indicates.
The product warranty accrual is reviewed for reasonableness on a quarterly basis and is adjusted as
additional information regarding expected warranty costs become known. Changes in the accrual for
product warranties in 2007 are set forth below (in millions):
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
4.2 |
|
Current year provision |
|
|
2.9 |
|
Expenditures/other |
|
|
(1.0 |
) |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
6.1 |
|
|
|
|
|
Note 23 Subsequent Event
On January 11, 2008, the Company acquired Kurt Versen, Inc. for approximately $100 million in
cash. Located in Westwood, New Jersey, Kurt Versen, Inc. manufactures specification-grade lighting
fixtures for a full range of office, commercial, retail, government, entertainment, hospitality and
institution applications with annual sales of approximately $44 million. The acquisition enhances
the Companys position in the key spec-grade downlighting market and will be added to the Companys
Electrical segment.
33