# HUBBELL INC (HUBB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HUBBELL INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/48898/000162828022002255/hubb-20211231.htm
Accession: 0001628280-22-002255
Filing date: 2022-02-11
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HUBB/
All MD&A years: /company/HUBB/mda/
Next year: /company/HUBB/mda/fy2022/ (FY 2022)

ITEM 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview of the Business

Hubbell is a global manufacturer of quality electrical products and utility solutions for a broad range of customer and end market applications. We provide utility and electrical solutions that enable our customers to operate critical infrastructure reliably and efficiently, and we empower and energize communities through innovation solutions supporting energy infrastructure In Front of the Meter, on The Edge, and Behind the Meter. In Front of the Meter is where utilities transmit and distribute energy to their customers. The Edge connects utilities with owner/operators and allows energy and data to be distributed back and forth. Behind the Meter is where owners and operators of building and other critical infrastructure consume energy. Products are either sourced complete, manufactured or assembled by subsidiaries in the United States, Canada, Puerto Rico, Mexico, China, the UK, Brazil, Australia, Spain and Ireland. The Company also participates in joint ventures in Hong Kong and the Philippines, and maintains offices in Singapore, Italy, China, India, Mexico, South Korea, Chile, and countries in the Middle East. The Company employed approximately 19,300 individuals worldwide as of December 31, 2021.

The Company’s reporting segments consist of the Electrical Solutions segment (previously named Electrical until January 1, 2021) and the Utility Solutions segment (formerly named the Power segment). In the first quarter of 2020 our former Power segment was re-named Utility Solutions to reflect the depth and breadth of our industry-leading offering for electric, water, gas and telecom utilities ranging from a wide variety of critical infrastructure components to full-scale smart grid solutions. Results for 2021, 2020 and 2019 by segment are included under “Segment Results” within this Management’s Discussion and Analysis.

The Company's long-term strategy is to serve its customers with reliable and innovative electrical and related infrastructure solutions with desired brands and high-quality service, delivered through a competitive cost structure; to complement organic revenue growth with acquisitions that enhance its product offerings; and to allocate capital effectively to create shareholder value.

Our strategy to complement organic revenue growth with acquisitions is focused on acquiring assets that extend our capabilities, expand our product offerings, and present opportunities to compete in core, adjacent or complementary markets. Our acquisition strategy also provides the opportunity to advance our revenue growth objectives during periods of weakness or inconsistency in our end-markets.

Our strategy to deliver products through a competitive cost structure has resulted in past and ongoing restructuring and related activities. Our restructuring and related efforts include the consolidation of manufacturing and distribution facilities, and workforce actions, as well as streamlining and consolidating our back-office functions. The primary objectives of our restructuring and related activities are to optimize our manufacturing footprint, cost structure, and effectiveness and efficiency of our workforce.

Productivity improvement also continues to be a key area of focus for the Company and efforts to drive productivity complement our restructuring and related activities to minimize the impact of rising material costs and other administrative cost inflation. Because material costs are approximately two thirds of our cost of goods sold, volatility in this area can significantly impact profitability. Our goal is to have pricing and productivity programs that offset material and other inflationary cost increases as well as pay for investments in key growth areas.

Productivity programs affect virtually all functional areas within the Company by reducing or eliminating waste and improving processes. We continue to expand our efforts surrounding global product and component sourcing and supplier cost reduction programs. Value engineering efforts, product transfers and the use of lean process improvement techniques are expected to continue to increase manufacturing efficiency. In addition, we continue to build upon the benefits of our enterprise resource planning system across all functions.

Disposition of the Commercial and Industrial Lighting Business

On October 26, 2021, Hubbell entered into a definitive agreement to sell its Commercial and Industrial Lighting business to GE Current, a Daintree company, for a cash purchase price of $350 million, subject to customary adjustments with respect to working capital and net indebtedness. The Commercial and Industrial Lighting business had sales of approximately $509 million in 2021 as part of the Electrical Solutions segment and designs, manufactures, and sells LED lighting and control solutions for commercial and industrial customers. As a result of the agreement, the Commercial and Industrial Lighting business met the criteria for presentation as a discontinued operation. The current and prior period results presented within continuing operations exclude the results of the Commercial and Industrial Lighting business, transaction and separation costs, and tax effects of the transaction, which are presented within discontinued operations. On February 1, 2022 we completed the previously announced sale. See Note 2 - Discontinued Operations, in the Notes to the Consolidated Financial Statements for further details.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","21"]]
[[/GREPCENT_TABLE]]

Organizational Changes

Effective January 1, 2021 the Company consolidated the three business groups within its Electrical segment, and renamed the segment as Hubbell Electrical Solutions ("Electrical Solutions"). The Electrical Solutions segment unites businesses with similar operating models, products, and go to market strategies under one operating banner and common leadership to drive synergies and long-term growth opportunities.

Also effective January 1, 2021 the Company moved its Hubbell Gas Connectors and Accessories business, from the Electrical Solutions segment to the Utility Solutions segment to create synergies with the existing gas products already offered within the Utility Solutions segment and to better serve its utility customers. The Hubbell Gas Connectors and Accessories business represented approximately $157.1 million of Net sales and $19.4 million of operating profit in 2020. The information provided in the Consolidated Financial Statements and related notes reflects the impact of this change for all periods presented.

Impact of the COVID-19 Pandemic

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). U.S. federal, state, local, and foreign governments reacted to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economies, including the shutdown of large portions of, or imposition of restrictions on, the U.S. and global economies. Notwithstanding a general improvement in conditions and reduction of adverse effects from the pandemic, as of December 31, 2021 there continues to be significant uncertainty around the scope, severity, and duration of the pandemic, as well as the breadth and duration of business disruptions related to it and the overall impact on the U.S., global economies, and our operating results in future periods.

The COVID-19 pandemic continues to pose the risk that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities, partially or completely, for an indefinite period of time, including due to the continued emergence of new strains of COVID-19, such as the Delta and Omicron variants and resulting shutdowns that may be requested or mandated by governmental authorities or imposed by our management, or that the pandemic may otherwise interrupt or impair business activities. President Biden has announced an executive order mandating COVID-19 vaccination of U.S. based employees of companies that work on, or in support for, federal contracts which was blocked by the U.S. Supreme Court in January 2022, and the Occupational Safety and Health Administration (OSHA) issued an emergency testing standard (ETS), which required employers with 100 or more employees to enforce a mandatory COVID-19 vaccination policy, unless they adopt a policy requiring employees to choose to either be vaccinated or undergo regular COVID-19 testing. Although the ETS was withdrawn effective January 26, 2022, OSHA is not withdrawing the ETS as a proposed rule. On December 7, 2021, a judge in the U.S. District Court for the Southern District of Georgia issued a preliminary injunction, halting the government's enforcement of the federal contractor vaccine mandate nationwide. We cannot currently predict the impact that the OSHA proposed rule, if adopted would have on our workforce, our ability to secure skilled labor in the future, or the cost of implementation and compliance with such rule and the executive order.

Additionally, as economies have re-opened, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions have, in certain cases, affected our ability to ship products in a timely manner. These supply chain disruptions and the increase in demand have also led to increased freight, labor and commodity cost that affected our operating margin in 2021, and those disruptions and increased cost may persist through 2022.

Further quantification and discussion of these pandemic related effects are included in the discussion of results of operations below.

[[GREPCENT_TABLE]]
[["22","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

Results of Operations

Our operations are classified into two reportable segments: Electrical Solutions and Utility Solutions. For a complete description of the Company’s segments, see Part I, Item 1 of this Annual Report on Form 10-K. Within these segments, Hubbell serves customers in five primary end markets: utility T&D components, utility communications and controls, non-residential, residential, and industrial.

In 2021, Net sales increased by 13.9 percent or $511.6 million and organic Net sales(1) increased by 9.7 percent or $356 million on favorable price realization along with higher volumes, as further discussed in segment results below. Operating margin declined in 2021, by 70 basis points and adjusted operating margin(1) declined by 90 basis points, driven by material cost inflation that exceeded favorable price realization, and higher freight, logistics and manufacturing costs, partially offset by higher volumes and savings from our restructuring and related actions and productivity initiatives. Net income attributable to Hubbell increased by 10.6 percent in 2021 compared to the prior year and diluted earnings per share increased by 10.3 percent. Adjusted net income attributable to Hubbell(1) increased by 13.1 percent in 2021 compared to the prior year and adjusted diluted earnings per share(1) increased by 12.7 percent in 2021.

Free cash flow(2) was lower in 2021 at $423.5 million as compared to $520.1 million in the prior year. In 2021 we paid $216.9 million in shareholder dividends, an increase of 7.7 percent as compared to the prior year, while also reducing our debt by $144.8 million.

(1) Organic Net sales, adjusted operating margin, adjusted net income attributable to Hubbell and adjusted diluted earnings per share are non-GAAP financial measures. See "Adjusted Operating Measures" below for a reconciliation to the comparable GAAP financial measures.

(2) Free cash flow is a non-GAAP financial measure. See "Adjusted Operating Measures" and "Financial Condition, Liquidity and Capital Resources - Cash Flow" below for a reconciliation to the comparable GAAP financial measure.

SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA)

[[GREPCENT_TABLE]]
[["","For the Year Ending December 31,"],["","2021","% of Net sales","2020","% of Net sales","2019","% of Net sales"],["Net sales","$","4,194.1","","","$","3,682.5","","","$","3,946.6"],["Cost of goods sold","3,042.6","","72.5","%","2,596.7","","70.5","%","2,775.0","","70.3","%"],["Gross profit","1,151.5","","27.5","%","1,085.8","","29.5","%","1,171.6","","29.7","%"],["Selling & administrative expenses","619.2","","14.8","%","591.3","","16.1","%","644.9","","16.3","%"],["Operating income","532.3","","12.7","%","494.5","","13.4","%","526.7","","13.3","%"],["Net income from continuing operations","371.1","","8.8","%","334.7","","9.1","%","368.0","","9.3","%"],["Less: Net income from continuing operations attributable to noncontrolling interest","(6.1)","","(0.1)","%","(4.7)","","(0.1)","%","(6.5)","","(0.2)","%"],["Net Income From Continuing Operations Attributable to Hubbell Incorporated","365.0","","8.7","%","330.0","","9.0","%","361.5","","9.2","%"],["Income from discontinued operations, net of tax","34.5","","0.8","%","21.2","","0.6","%","39.4","","1.0","%"],["Net income attributable to Hubbell Incorporated","399.5","","9.5","%","351.2","","9.5","%","400.9","","10.2","%"],["Less: Earnings allocated to participating securities","(1.2)","","","(1.2)","","","(1.4)"],["Net income available to common shareholders","398.3","","","350.0","","","399.5"],["Average number of diluted shares outstanding","54.7","","","54.5","","","54.7"],["DILUTED EARNINGS PER SHARE - CONTINUING OPERATIONS","$","6.66","","","$","6.04","","","$","6.59"],["DILUTED EARNINGS PER SHARE - DISCONTINUED OPERATIONS","$","0.62","","","$","0.39","","","$","0.72"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","23"]]
[[/GREPCENT_TABLE]]

Adjusted Operating Measures

In the following discussion of results of operations, we refer to "adjusted" operating measures. We believe those adjusted measures, which exclude the impact of certain costs, gains and losses, may provide investors with useful information regarding our underlying performance from period to period and allow investors to understand our results of operations without regard to items we do not consider a component of our core operating performance.

Adjusted operating measures exclude amortization of all intangible assets associated with our business acquisitions, including inventory step-up amortization associated with those acquisitions. The intangible assets associated with our business acquisitions arise from the allocation of the purchase price using the acquisition method of accounting in accordance with Accounting Standards Codification 805, “Business Combinations.” These assets consist primarily of customer relationships, developed technology, trademarks and tradenames, and patents, as reported in Note 7 – Goodwill and Other Intangible Assets, under the heading “Total Definite-Lived Intangibles" within the Notes to Consolidated Financial Statements.

The Company believes that the exclusion of these non-cash expenses (i) enhances management’s and investors’ ability to analyze underlying business performance, (ii) facilitates comparisons of our financial results over multiple periods, and (iii) provides more relevant comparisons of our results with the results of other companies as the amortization expense associated with these assets may fluctuate significantly from period to period based on the timing, size, nature, and number of acquisitions. Although we exclude amortization of these acquired intangible assets and inventory step-up from our non-GAAP results, we believe that it is important for investors to understand that revenue generated, in part, from such intangibles is included within revenue in determining adjusted net income from continuing operations.

Adjusted operating measures also exclude the following:

•2021 - A $16.8 million pre-tax loss on the early extinguishment of long-term debt from the redemption of all of the Company's outstanding 3.625% Senior Notes due 2022 in the aggregate principal amount of $300 million and a $6.9 million loss on the disposal of a business.

•2020 - A pension settlement charge of $7.6 million.

•2019 - A $21.7 million gain on the disposition of the Haefely business and a $5.0 million investment loss.

•Income tax effects of the above adjustments which are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction, unless otherwise noted

These items are reported in Total other expense (below Operating income) in the Consolidated Statement of Income. The Company excludes these non-core items because we believe it enhances management's and investors' ability to analyze underlying business performance and facilitates comparisons of our financial results over multiple periods. Refer to the reconciliation of non-GAAP measures presented below, Note 4 – Business Acquisitions and Dispositions, Note 12 – Retirement Benefits, and Note 13 – Debt in the Notes to Consolidated Financial Statements, for additional information.

Organic Net sales, a non-GAAP measure, represents Net sales according to U.S. GAAP, less Net sales from acquisitions and divestitures during the first twelve months of ownership or divestiture, respectively, less the effect of fluctuations in Net sales from foreign currency exchange. The period-over-period effect of fluctuations in Net sales from foreign currency exchange is calculated as the difference between local currency Net sales of the prior period translated at the current period exchange rate as compared to the same local currency Net sales translated at the prior period exchange rate. We believe this measure provides management and investors with a more complete understanding of the underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, dispositions and foreign currency as these activities can obscure underlying trends. When comparing Net sales growth between periods excluding the effects of acquisitions, business dispositions and currency exchange rates, those effects are different when comparing results for different periods. For example, because Net sales from acquisitions are considered inorganic from the date we complete an acquisition through the end of the first year following the acquisition, Net sales from such acquisition are reflected as organic Net sales thereafter.

There are limitations to the use of non-GAAP measures. Non-GAAP measures do not present complete financial results. We compensate for this limitation by providing a reconciliation between our non-GAAP financial measures and the respective most directly comparable financial measure calculated and presented in accordance with GAAP. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. These financial measures should not be considered in isolation from, as substitutes for, or alternative measures of, reported GAAP financial results, and should be viewed in conjunction with the most comparable GAAP financial measures and the provided reconciliations thereto. We believe, however, that these non-GAAP financial measures, when viewed together with our GAAP results and related reconciliations, provide a more complete understanding of our business. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not rely on any single financial measure.

[[GREPCENT_TABLE]]
[["24","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

The following table reconciles our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2021","% of Net sales","2020","% of Net sales","2019","% of Net sales"],["Gross profit (GAAP measure)","$","1,151.5","","27.5%","$","1,085.8","","29.5%","$","1,171.6","","29.7%"],["Amortization of acquisition-related intangible assets","27.5","","","26.1","","","24.0"],["Adjusted gross profit","$","1,179.0","","28.1%","$","1,111.9","","30.2%","$","1,195.6","","30.3%"],["S&A expenses (GAAP measure)","$","619.2","","14.8%","$","591.3","","16.1%","$","644.9","","16.3%"],["Amortization of acquisition-related intangible assets","50.2","","","46.5","","","44.9"],["Adjusted S&A expenses","$","569.0","","13.6%","$","544.8","","14.8%","$","600.0","","15.2%"],["Operating income (GAAP measure)","$","532.3","","12.7%","$","494.5","","13.4%","$","526.7","","13.3%"],["Amortization of acquisition-related intangible assets","77.7","","","72.6","","","68.9"],["Adjusted operating income","$","610.0","","14.5%","$","567.1","","15.4%","$","595.6","","15.1%"],["Net income from continuing operations attributable to Hubbell (GAAP measure)","$","365.0","","","$","330.0","","","$","361.5"],["Amortization of acquisition-related intangible assets","77.7","","","72.6","","","68.9"],["Loss (gain) on disposition of business","6.9","","","\u2014","","","(21.7)"],["Loss on extinguishment of debt","16.8","","","\u2014","","","\u2014"],["Pension charge","\u2014","","","7.6","","","\u2014"],["Loss on investment","\u2014","","","\u2014","","","5.0"],["Total pre-tax adjustments to net income","101.4","","","80.2","","","52.2"],["Income tax effects(1)","24.7","","","19.8","","","16.2"],["Adjusted net income from continuing operations","$","441.7","","","$","390.4","","","$","397.5"],["Less: Earnings allocated to participating securities","(1.4)","","","(1.4)","","","(1.5)"],["Adjusted net income available to common shareholders","$","440.3","","","$","389.0","","","$","396.0"],["Average number of diluted shares outstanding","54.7","","","54.5","","","54.7"],["ADJUSTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS\u2014 DILUTED","$","8.05","","","$","7.14","","","$","7.25"]]
[[/GREPCENT_TABLE]]

(1) The income tax effects are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction, unless otherwise noted. For 2019, the gain on the disposition of business was not taxable in the jurisdiction of sale but resulted in additional U.S. and Canadian tax and adjustments were made accordingly. Furthermore, no tax effects are reflected for the loss on investment because the Company recorded a full valuation allowance against the loss based on its evaluation that it is more likely than not that the benefit of the realized loss will not be recognized for tax purposes.

The following table reconciles our Organic Net sales to the directly comparable GAAP financial measure (in millions and percentage change):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2021","Inc/(Dec) %","2020","Inc/(Dec) %"],["Net sales growth (decline) (GAAP measure)","$","511.6","","13.9","","$","(264.0)","","(6.7)"],["Impact of acquisitions","144.6","","3.9","","44.8","","1.1"],["Impact of divestitures","(5.7)","","(0.2)","","(20.3)","","(0.5)"],["Foreign currency exchange","16.5","","0.5","","(10.8)","","(0.3)"],["Organic Net sales growth (decline) (non-GAAP measure)","$","356.2","","9.7","","$","(277.7)","","(7.0)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","25"]]
[[/GREPCENT_TABLE]]

2021 Compared to 2020

Net Sales

Net sales of $4,194.1 million in 2021 increased by $511.6 million, or 13.9% compared to 2020. Organic Net sales increased by 9.7% due to favorable price realization along with higher unit volume. Net sales increased by 3.9% from acquisitions and by a 0.5% from foreign exchange.

Cost of Goods Sold

As a percentage of Net sales, Cost of goods sold was 72.5% of Net sales in 2021 as compared to 70.5% in 2020. The increase was primarily driven by material cost inflation that exceeded favorable price realization, and higher freight, logistics and manufacturing costs, partially offset by higher volumes, savings from our restructuring and related actions and productivity initiatives.

Gross Profit

The gross profit margin in 2021 was 27.5% of Net sales as compared to 29.5% in 2020. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 28.1% in 2021 as compared to 30.2% in 2020. The decline in adjusted gross profit margin was primarily driven by material cost inflation that exceeded favorable price realization, and higher freight, logistics and manufacturing costs, partially offset by higher volumes, savings from our restructuring and related actions and productivity initiatives.

Selling & Administrative Expenses

S&A expense in 2021 was $619.2 million and increased by $27.9 million compared to the prior year period. S&A expense as a percentage of Net sales declined by 130 basis points to 14.8% in 2021. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales declined by 120 basis points to 13.6% in 2021. The decrease in adjusted S&A expense as a percentage of Net sales is primarily due to higher organic sales and a reduction of bad debt expense in 2021 compared to 2020, partially offset by the impact of compensation actions and other cost reductions in the second quarter of 2020 due to the COVID-19 pandemic that did not repeat in 2021 as operations normalized.

Operating Income

Operating income in 2021 was $532.3 million and increased 7.6% compared to 2020, and operating margin declined by 70 basis points to 12.7%. Excluding amortization of acquisition-related intangible assets, adjusted operating income increased by 7.6% percent in 2021 to $610.0 million and adjusted operating margin declined by 90 basis points to 14.5% in 2021. The decrease in adjusted operating margin is primarily due to increased material cost in excess of price realization, higher freight, logistics and manufacturing costs, partially offset by higher volume and savings from restructuring and related actions, and productivity initiatives.

Total Other Expense

Total other expense increased by $3.0 million in 2021 to $73.0 million compared to the prior year primarily due to a $16.8 million pre-tax loss on the early extinguishment of long-term debt recognized in the second quarter of 2021 from the redemption of the Company's $300 million long-term notes, which were scheduled to mature in 2022, partially offset by $5.4 million reduction in interest expense and lower non-service pension costs.

Income Taxes

The effective tax rate was 19.2% in 2021 as compared to 21.2% in 2020. The decrease in the effective tax rate is primarily due to favorable tax effects from stock based compensation and statute of limitation expirations on certain tax reserves as compared to 2020.

Net Income From Continuing Operations Attributable to Hubbell and Earnings Per Diluted Share From Continuing Operations

Net income from continuing operations attributable to Hubbell was $365.0 million in 2021 and increased 10.6% as compared to 2020. Adjusted net income from continuing operations attributable to Hubbell was $441.7 million in 2021 and increased 13.1% as compared to 2020 primarily as a result of higher operating income, driven by higher Net sales, a decrease in the effective tax rate, and lower non-service pension costs and interest expense. As a result, earnings per diluted share from continuing operations in 2021 increased 10.3% compared to 2020. Adjusted earnings per diluted share from continuing operations in 2021 increased 12.7% as compared to 2020.

[[GREPCENT_TABLE]]
[["26","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

Income From Discontinued Operations, Net of Tax

The operating results of the Commercial and Industrial Lighting business have been reflected as discontinued operations. In addition, the year ended December 31, 2021 includes pre-tax separation and transactions costs of $7.0 million and a one-time tax benefit of $25.1 million related to the realization of book to tax basis differences.

Segment Results 

Electrical Solutions

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2021","2020"],["Net sales","$","1,859.7","","$","1,603.1"],["Operating income (GAAP measure)","$","248.2","","$","188.9"],["Amortization of acquisition-related intangible assets","13.3","","14.4"],["Adjusted operating income","$","261.5","","$","203.3"],["Operating margin (GAAP measure)","13.3","%","11.8","%"],["Adjusted operating margin","14.1","%","12.7","%"]]
[[/GREPCENT_TABLE]]

The following table reconciles our Organic Net sales to the directly comparable GAAP financial measure (in millions and percentage change):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["Electrical Solutions","2021","Inc/(Dec) %","2020","Inc/(Dec) %"],["Net sales growth (decline) (GAAP measure)","$","256.6","","16.0","","$","(173.6)","","(9.8)"],["Impact of acquisitions","21.3","","1.3","","18.8","","1.1"],["Impact of divestitures","\u2014","","\u2014","","(20.3)","","(1.2)"],["Foreign currency exchange","13.6","","0.9","","(2.3)","","(0.1)"],["Organic Net sales growth (decline) (non-GAAP measure)","$","221.7","","13.8","","$","(169.8)","","(9.6)"]]
[[/GREPCENT_TABLE]]

Net sales of the Electrical Solutions segment in 2021 were $1.9 billion and increased by $256.6 million, or 16.0% as compared to 2020. Organic Net sales in 2021 increased by 13.8% as compared to the prior year primarily due to favorable price realization and higher unit volume. Net sales also increased by 1.3% from acquisitions and by a 0.9% from foreign exchange. Higher unit volume was primarily driven by strong growth in the industrial markets during the 2021 period.

Operating income of the Electrical Solutions segment in 2021 was $248.2 million and increased approximately 31.4% compared to 2020, while operating margin in 2021 increased by 150 basis points as compared to the prior year to 13.3%. Excluding amortization of acquisition-related intangibles, adjusted operating margin increased by 140 basis points to 14.1% in 2021 as compared to 2020. The increase in the adjusted operating margin in 2021 is primarily due to higher Net sales volume and higher savings from restructuring and related actions in 2021, including a gain on the sale of a facility, and productivity initiatives, partially offset by material cost inflation that was greater than favorable price realization and higher freight, logistics and manufacturing costs. Acquisitions contributed 20 basis points to adjusted operating margin in 2021 as compared to the prior year.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","27"]]
[[/GREPCENT_TABLE]]

Utility Solutions

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2021","2020"],["Net sales","$","2,334.4","","$","2,079.4"],["Operating income","$","284.1","","$","305.6"],["Amortization of acquisition-related intangible assets","64.4","","58.2"],["Adjusted operating income","$","348.5","","$","363.8"],["Operating margin (GAAP measure)","12.2","%","14.7","%"],["Adjusted operating margin","14.9","%","17.5","%"]]
[[/GREPCENT_TABLE]]

The following table reconciles our Organic Net sales to the directly comparable GAAP financial measure (in millions and percentage change):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["Utility Solutions","2021","Inc/(Dec) %","2020","Inc/(Dec) %"],["Net sales growth (decline) (GAAP measure)","$","255.0","","12.3","","$","(90.4)","","(4.2)"],["Impact of acquisitions","123.3","","5.9","","26.0","","1.2"],["Impact of divestitures","(5.7)","","(0.2)","","\u2014","","\u2014"],["Foreign currency exchange","2.9","","0.1","","(8.5)","","(0.4)"],["Organic Net sales growth (decline) (non-GAAP measure)","$","134.5","","6.5","","$","(107.9)","","(5.0)"]]
[[/GREPCENT_TABLE]]

Net sales in the Utility Solutions segment in 2021 were $2.3 billion, and increased by 12.3% as compared to 2020, due to a 6.5% increase in Organic Net sales due to favorable price realization and higher unit volume. Acquisitions, net of divestitures contributed 5.7% to Net sales growth in 2021 and foreign exchange was slightly favorable by 0.1%.

Within the Utility Solutions segment, Net sales of our Utility T&D components business increased by approximately 16.2% as compared to the prior year, primarily driven by 10.5% Organic Net sales growth, and 5.7% Net sales growth from acquisitions. Net sales of our Utility communications and controls business increased by 3.2% as compared to the prior year primarily due to Net sales growth from acquisitions net of divestitures of 5.7% and a 0.3% increase in Net sales from foreign exchange, partially offset by a 2.8% decline in Organic Net sales.

Operating income in the Utility Solutions segment in 2021 decreased by 7.0% to $284.1 million as compared to 2020. Operating margin in 2021 decreased to 12.2% as compared to 14.7% in 2020. Excluding amortization of acquisition-related intangibles the adjusted operating margin in 2021 decreased by 260 basis points to 14.9% as compared to the prior year. The year-over-year decrease in adjusted operating margin was primarily driven by increased material cost in excess of price realization, higher freight, logistics and manufacturing costs, partially offset by savings from restructuring and related actions, productivity initiatives and higher volumes. Adjusted operating income increased from acquisitions, but contributed 60 basis points to the decline in adjusted operating margin, due to higher manufacturing costs.

[[GREPCENT_TABLE]]
[["28","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

2020 Compared to 2019

Net Sales

Net sales of $3,682.5 million in 2020 decreased by $264.1 million compared to 2019. Organic Net sales declined by 7.0% due to lower unit volume primarily driven by the unfavorable effects of the COVID-19 pandemic on demand, as well as restrictions on project deployments and installations within our Aclara business associated with the COVID-19 pandemic. The impact of lower unit volume was partially offset by an increase in Net sales of less than one percentage point from the effect of acquisitions net of dispositions and favorable price realization.

Cost of Goods Sold

As a percentage of Net sales, Cost of goods sold was 70.5% of Net sales in 2020 as compared to 70.3% in 2019. The increase primarily reflects cost increases that exceeded savings from productivity initiatives, inefficiencies related to the COVID-19 pandemic and lower sales volume, partially offset by favorable price realization and material costs, higher savings from our restructuring and related actions, and a favorable impact from acquisitions.

Gross Profit

The gross profit margin in 2020 was 29.5% of Net sales as compared to 29.7% in 2019. Excluding amortization of acquisition-related intangible assets, the adjusted gross profit margin was 30.2% in 2020 as compared to 30.3% in 2019. The decline in adjusted gross profit margin primarily reflects cost increases that exceeded savings from productivity initiatives, inefficiencies related to the COVID-19 pandemic and lower sales volume, partially offset by favorable price realization and material costs, higher savings from our restructuring and related actions, and a favorable impact from acquisitions.

Selling & Administrative Expenses

S&A expense in 2020 was $591.3 million and decreased by $53.6 million compared to the prior year period. S&A expense as a percentage of Net sales declined by 20 basis points to 16.1% in 2020. Excluding amortization of acquisition-related intangible assets, adjusted S&A expense as a percentage of Net sales declined by 40 basis points to 14.8% in 2020. The decrease in S&A expense as a percentage of Net sales in 2020 as compared to the 2019 is primarily due to the impact of compensation actions taken in the second quarter of 2020 in response to lower Net sales volumes associated with the pandemic as well as other cost reductions associated with lower volume and the COVID-19 pandemic, including lower travel and entertainment costs. These decreases were partially offset by the deleveraging effect of lower sales volume and the timing of stock-based compensation expense associated with our annual grant, which shifted from the fourth quarter of 2019 to the first quarter of 2020.

Operating Income

Operating income decreased 6.1% in 2020 to $494.5 million compared to 2019, and operating margin increased by 10 basis points to 13.4%. Excluding amortization of acquisition-related intangible assets, adjusted operating income declined by 4.8% percent in 2020 to $567.1 million and adjusted operating margin increased by 30 basis points to 15.4% in 2020. The decrease in adjusted operating income is primarily due to the effect on gross margin of lower volume and higher costs, including inefficiencies related to the COVID-19 pandemic, partially offset by lower S&A expense due to the factors described above.

Total Other Expense

Total other expense increased by $12.5 million in 2020 to $70.0 million compared to the prior year primarily due to a $21.7 million gain recognized on the disposal of the Haefely business in 2019 and higher losses on foreign exchange revaluations in the current year, partially offset by a $5.0 million loss on an investment in an available-for-sale debt security in 2019 that did not repeat in 2020, as well as lower non-service pension costs and interest expense in the current year.

Income Taxes

The effective tax rate was 21.2% in 2020 compared to 21.6% in 2019. The decrease in the tax rate was due to the state effective tax rate and favorable tax effects from stock based compensation, partially offset by the absence in 2020 of favorable adjustments related to the disposition in 2019.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","29"]]
[[/GREPCENT_TABLE]]

Net Income From Continuing Operations Attributable to Hubbell and Earnings Per Diluted Share From Continuing Operations

Net income from continuing operations attributable to Hubbell was $330.0 million in 2020 and decreased 8.7% as compared to 2019. Adjusted net income attributable to Hubbell was $390.4 million in 2020 and decreased 1.8% as compared to 2019 primarily as a result of lower operating income, driven by lower Net sales volumes and other COVID-19 pandemic effects (as detailed above), partially offset by lower non-service pension costs and interest expense. As a result, earnings per diluted share from continuing operations in 2020 decreased 8.3% compared to 2019. Adjusted earnings per diluted share from continuing operations in 2020 decreased 1.5% as compared to 2019.

Income From Discontinued Operations Net of Tax

The operating results of the Commercial and Industrial Lighting business have been reflected as discontinued operations.

Segment Results 

Electrical Solutions

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2020","2019"],["Net sales","$","1,603.1","","$","1,776.7"],["Operating income (GAAP measure)","$","188.9","","$","236.1"],["Amortization of acquisition-related intangible assets","14.4","","13.7"],["Adjusted operating income","$","203.3","","$","249.8"],["Operating margin (GAAP measure)","11.8","%","13.3","%"],["Adjusted operating margin","12.7","%","14.1","%"]]
[[/GREPCENT_TABLE]]

 The following table reconciles our Organic Net sales to the directly comparable GAAP financial measure (in millions and percentage change):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["Electrical Solutions","2020","Inc/(Dec) %"],["Net sales growth (decline) (GAAP measure)","$","(173.6)","","(9.8)"],["Impact of acquisitions","18.8","","1.1"],["Impact of divestitures","(20.3)","","(1.2)"],["Foreign currency exchange","(2.3)","","(0.1)"],["Organic Net sales growth (decline) (non-GAAP measure)","$","(169.8)","","(9.6)"]]
[[/GREPCENT_TABLE]]

Net sales of the Electrical Solutions segment in 2020 were $1.6 billion and decreased by $173.6 million, or 9.8% as compared to 2019. Organic Net sales in 2020 declined by 9.6% as compared to the same prior year period due to lower unit volume, primarily driven by the unfavorable effects of the COVID-19 pandemic on demand.

Operating income of the Electrical Solutions segment in 2020 was $188.9 million and decreased approximately 20.0% compared to 2019, while operating margin in 2020 decreased by 150 basis points to 11.8%. Excluding amortization of acquisition-related intangibles, adjusted operating margin decreased by 140 basis points to 12.7% in 2020 as compared to 2019. The decrease in operating income and operating margin in 2020 is primarily due to lower Net sales volume and inefficiencies related to the pandemic and higher stock based compensation expense due to the change in timing of our annual equity grants. These items were partially offset by favorable price realization and material costs, higher savings from our restructuring and related activities, savings from productivity initiatives and lower costs due in part to the impact of compensation actions and other cost reductions associated with the COVID-19 pandemic.

[[GREPCENT_TABLE]]
[["30","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

Utility Solutions

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2020","2019"],["Net sales","$","2,079.4","","$","2,169.7"],["Operating income","$","305.6","","$","290.5"],["Amortization of acquisition-related intangible assets","58.2","","55.2"],["Adjusted operating income","$","363.8","","$","345.7"],["Operating margin (GAAP measure)","14.7","%","13.4","%"],["Adjusted operating margin","17.5","%","15.9","%"]]
[[/GREPCENT_TABLE]]

The following table reconciles our Organic Net sales to the directly comparable GAAP financial measure (in millions and percentage change):

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["Utility Solutions","2020","Inc/(Dec) %"],["Net sales growth (decline) (GAAP measure)","$","(90.4)","","(4.2)"],["Impact of acquisitions","26.0","","1.2"],["Impact of divestitures","\u2014","","\u2014"],["Foreign currency exchange","(8.5)","","(0.4)"],["Organic Net sales growth (decline) (non-GAAP measure)","$","(107.9)","","(5.0)"]]
[[/GREPCENT_TABLE]]

Net sales in the Utility Solutions segment in 2020 were $2.1 billion, down 4.2% as compared to 2019, due to a 5.0% decline in Organic Net sales resulting from restrictions associated with the pandemic on project deployments and installations, partially offset by higher end-market demand in the electrical transmission and distribution markets, an increase in storm-related sales as compared to the prior year, and favorable price realization. Acquisitions contributed 1.2% to Net sales growth in 2020 and foreign exchange was slightly unfavorable by 0.4%.

Within the Utility Solutions segment, Net sales of our Utility T&D components business in 2020 increased by approximately 2% as compared to the prior year driven by domestic demand in the utility transmission and distribution markets as well as Net sales growth from acquisitions and higher storm-related sales as compared to the prior year. Net sales of our Utility communications and controls business in 2020 decreased by approximately 14% as compared to the prior year primarily driven by restrictions associated with the pandemic on project deployments and installations.

Operating income in the Utility Solutions segment in 2020 increased by 5.2% to $305.6 million as compared to 2019. Operating margin in 2020 increased to 14.7% as compared to 13.4% in 2019. Excluding amortization of acquisition-related intangibles the adjusted operating margin in 2020 increased by 160 basis points to 17.5% as compared to the prior year. That increase was primarily driven by savings from our productivity initiatives and lower cost inflation, due in part to the impact of compensation actions and other cost reductions associated with the COVID-19 pandemic, favorable price realization, higher savings from restructuring programs and lower restructuring and related costs, and favorable Net sales mix. Those favorable items were partially offset by the impact of lower volume, COVID-19 pandemic related inefficiencies and higher stock based compensation expense due to the change in timing of our annual equity grants.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","31"]]
[[/GREPCENT_TABLE]]

Financial Condition, Liquidity and Capital Resources

In October 2021, the Company entered into a definitive agreement to sell its Commercial and Industrial Lighting business for cash consideration of $350 million, subject to customary adjustments with respect to working capital and net indebtedness. As a result of the agreement, the Commercial and Industrial Lighting business met the criteria for presentation as a discontinued operation. The current and prior period results presented below represent the results of our continuing operations, and exclude the results of the Commercial and Industrial Lighting business which are presented within cash provided by discontinued operations. See Note 2 - Discontinued Operations, in the Notes to the Consolidated Financial Statements for further details.

Cash Flow

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2021","2020","2019"],["Net cash provided by (used in):"],["Operating activities from continuing operations","$","513.7","","$","602.9","","$","516.8"],["Investing activities from continuing operations","(72.1)","","(323.3)","","(121.9)"],["Financing activities from continuing operations","(433.0)","","(244.2)","","(471.0)"],["Cash provided by discontinued operations","24.4","","39.6","","67.8"],["Effect of foreign currency exchange rate changes on cash and cash equivalents","(3.0)","","2.6","","1.3"],["NET CHANGE IN CASH AND CASH EQUIVALENTS","$","30.0","","$","77.6","","$","(7.0)"]]
[[/GREPCENT_TABLE]]

The following table reconciles our cash flows from operating activities to free cash flows for 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in millions)","2021","2020","2019"],["Net cash provided by operating activities - Continuing Operations (GAAP measure)","$","513.7","$","602.9","$","516.8"],["Less: Capital expenditures - Continuing Operations","(90.2)","(82.8)","(86.7)"],["Free cash flow - Continuing Operations","$","423.5","$","520.1","$","430.1"],["Free cash flow as a percent of net income - continuing operations attributable to Hubbell","116.0","%","157.6","%","119.0","%"]]
[[/GREPCENT_TABLE]]

Free cash flow is a non-GAAP measure that we define as cash flow from operations less capital expenditures. Management believes that free cash flow provides useful information regarding Hubbell’s ability to generate cash without reliance on external financing. In addition, management uses free cash flow to evaluate the resources available for investments in the business, strategic acquisitions and further strengthening the balance sheet.

2021 Compared to 2020

Cash provided by operating activities from continuing operations was $513.7 million in 2021 compared to $602.9 million in 2020. The decrease compared to the prior year is primarily due to changes in the components of working capital. In 2021 we invested in working capital to serve customer demand and growth in our order backlog, resulting in increased accounts receivable and inventories, partially offset by an increase in accounts payable, as compared to a lower investment in working capital in 2020 due to lower sales volume reflecting the impacts of COVID-19.

Cash used for investing activities was $72.1 million in 2021 compared to cash used of $323.3 million in 2020. The decrease was driven by cash used for acquisitions in 2020, partially offset by a $7.4 million increase in capital expenditures in the current year and proceeds received in conjunction with the disposal of the Consumer Analytics Solutions business in 2021.

Cash used in financing activities was $433.0 million in 2021 as compared to cash used of $244.2 million in 2020. The change in cash flows from financing activities primarily reflects the change in short-term debt in 2021 compared to 2020, a $15.5 million increase in dividends paid and a $16.0 million make whole premium incurred in 2021 due to the redemption of the 2022 Notes (as defined below). These changes were partially offset by a $30.1 million reduction in the acquisition of common shares as compared to 2020.

The unfavorable impact of foreign currency exchange rates on cash was $3.0 million in 2021 as compared to a favorable effect of $2.6 million in 2020. The unfavorable impact in 2021 was primarily related to a weaker Mexican Peso and Australian Dollar, compared to the U.S. Dollar.

[[GREPCENT_TABLE]]
[["32","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

2020 Compared to 2019

Cash provided by operating activities in 2020 was $602.9 million compared to cash provided by operating activities of $516.8 million in 2019 and increased primarily due to changes in the components of working capital, including accounts receivable and inventories, as well as the deferral in 2020 of the employer portion of certain payroll taxes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, partially offset by decreases in current liabilities in 2020 as compared to 2019.

Cash used for investing activities was $323.3 million in 2020 compared to cash used of $121.9 million in 2019 and primarily reflects an increase in cash used for acquisitions in 2020 and the absence of the net proceeds for the sale of the Haefely business in 2019, partially offset by lower cash used for capital expenditures in 2020.

Cash used in financing activities was $244.2 million in 2020 as compared to cash used of $471.0 million in 2019. The change in cash flows from financing activities primarily reflects the settlement of the remaining principal amount under the Term Loan in 2020.

The favorable impact of foreign currency exchange rates on cash was $2.6 million in 2020 as compared to a favorable effect of $1.3 million in 2019. The favorable impact in 2020 was primarily related to a stronger Canadian Dollar, British Pound, Australian Dollar and Chinese Yuan versus the U.S. Dollar, partially offset by a weaker Mexican Peso and Brazilian Real.

Investments in the Business 

Investments in our business include cash outlays for the acquisition of businesses as well as expenditures to maintain the operation of our equipment and facilities and invest in restructuring activities.

In the fourth quarter of 2020, the Company acquired all of the issued and outstanding shares of Armorcast Products Company, Inc. (“Armorcast”) for $136.3 million, all of the issued and outstanding shares of Beckwith Electric Co., Inc., (“Beckwith”) for $54.7 million and all of the issued and outstanding shares of AccelTex Solutions, LLC (“AccelTex”) for $45.1 million, net of cash acquired in all cases.

In the fourth quarter of 2019, the Company acquired all of the issued and outstanding shares of Cantega Technologies Inc., including its wholly owned subsidiary Greenjacket Inc., and all of the issued and outstanding shares of Reliaguard Inc. (collectively “Cantega”) for $38.4 million, net of cash acquired, and the Company also acquired substantially all of the assets of Connector Products, Incorporated (“CPI”) for $27.9 million.

We continue to invest in restructuring and related programs to maintain a competitive cost structure, to drive operational efficiencies and to mitigate the impact of rising material costs and administrative cost inflation. We expect our investment in restructuring and related activities to continue in 2022 as we continue to invest in previously initiated actions and initiate further footprint consolidation and other cost reduction initiatives.

In connection with our restructuring and related actions, we have incurred restructuring costs as defined by U.S. GAAP, which are primarily severance and employee benefits, asset impairments, accelerated depreciation, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. We also incurred restructuring-related costs, which are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining of our processes, and certain other costs and gains associated with restructuring actions. We refer to these costs on a combined basis as "restructuring and related costs", which is a non-GAAP measure. We believe this non-GAAP measure provides investors with useful information regarding our underlying performance from period to period. Restructuring costs are predominantly settled in cash from our operating activities and are generally settled within one year, with the exception of asset impairments, which are non-cash.

The table below presents the restructuring and related costs incurred in 2021, additional expected costs, and the expected completion date of restructuring actions that have been initiated as of December 31, 2021 and in prior years (in millions):

[[GREPCENT_TABLE]]
[["","Costs Incurred in 2021","Additional Expected Costs","Expected Completion Date"],["2021 Restructuring Actions","$","2.4","","$","6.8","","2022"],["2020 and Prior Restructuring Actions","1.5","","2.6","","2022"],["Restructuring cost (GAAP measure)","$","3.9","","$","9.4"],["Restructuring-related costs","5.9","","1.5"],["Restructuring and related costs (Non-GAAP)","$","9.8","","$","10.9"]]
[[/GREPCENT_TABLE]]

During 2021, we invested $90.2 million in capital expenditures, an increase of $7.4 million as compared to 2020 as we were selective with our 2020 capital expenditures as a result of the general slowdown in economic activity associated with the COVID-19 pandemic.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","33"]]
[[/GREPCENT_TABLE]]

Stock Repurchase Program

On October 23, 2020 the Board of Directors approved a new stock repurchase program (the “October 2020 program”) that authorized the repurchase of up to $300 million of common stock and expires in October 2023. At December 31, 2021 our remaining share repurchase authorization under the October 2020 program is $288.8 million. The Company repurchased $11.2 million and $41.3 million of shares of common stock, in 2021 and 2020, respectively. All of the repurchases in 2020 were completed prior to the expiration of the prior program. Subject to numerous factors, including market conditions and alternative uses of cash, we may conduct discretionary repurchases through open market or privately negotiated transactions, which may include repurchases under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.

Debt to Capital

At December 31, 2021 and 2020, the Company had $1,435.5 million and $1,436.9 million, respectively, of long-term debt outstanding, net of unamortized discount and the unamortized balance of capitalized debt issuance costs. At December 31, 2021 and December 31, 2020 the Company had no long-term debt with maturities due within the next twelve months.

Borrowings under Revolving Credit Facility

On March 12, 2021, the Company, as borrower, and its subsidiaries Hubbell Power Holdings S.à r.l. and Harvey Hubbell Holdings S.à r.l., each as a subsidiary borrower (collectively, the “Subsidiary Borrowers”) entered into a new five-year credit agreement with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provides a $750 million committed revolving credit facility (the “2021 Credit Facility"). Commitments under the 2021 Credit Facility may be increased to an aggregate amount not to exceed $1.25 billion. The 2021 Credit Facility includes a $50 million sub-limit for the issuance of letters of credit. The sum of the dollar amount of loans and letters of credits to the Subsidiary Borrowers under the 2021 Credit Facility may not exceed $75 million. There were no borrowings outstanding under the 2021 Credit Facility at December 31, 2021.

The interest rate applicable to borrowings under the 2021 Credit Facility is (i) either the alternate base rate (as defined in the 2021 Credit Facility) or (ii) the adjusted LIBOR rate (as defined in the 2021 Credit Facility) plus an applicable margin based on the Company’s credit ratings. All revolving loans outstanding under the 2021 Credit Facility will be due and payable on March 12, 2026.

The 2021 Credit Facility contains a financial covenant requiring that, as of the last day of each fiscal quarter, the ratio of total indebtedness to total capitalization shall not be greater than 65%. The Company was in compliance with this covenant as of December 31, 2021. As of December 31, 2021, the 2021 Credit Facility was undrawn.

In connection with entry into the 2021 Credit Facility, the Company terminated all commitments under the existing credit facility dated as of January 31, 2018 (the "2018 Credit Facility"). In March 2020, the Company borrowed $100.0 million under the 2018 Credit Facility and subsequently repaid those borrowings in the second quarter of 2020.

Term Loan Agreement

The Company was also a party to a Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of lenders under which the Company borrowed $500 million on an unsecured basis to partially finance the Aclara acquisition on February 2, 2018. During the third quarter of 2020, the Company repaid in full the remaining principal outstanding under the Term Loan Agreement. The Company paid $90.7 million in cash, composed of $90.6 million of principal and $0.1 million of accrued interest, also resulting in a $0.2 million loss on extinguishment of debt (recorded within Interest expense in the Consolidated Statement of Income) primarily related to the write-off of capitalized debt issuance costs.

Unsecured Senior Notes

On March 12, 2021, the Company completed a public offering of $300 million aggregate principal amount of its 2.300% Senior Notes due 2031 (the “2031 Notes” and collectively with those described below, the "Notes"). The net proceeds from the offering were approximately $295.5 million after deducting the underwriting discount and estimated offering expenses payable by the Company. The 2031 Notes bear interest at a rate of 2.300% per annum from March 12, 2021. Interest on the 2031 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The 2031 Notes will mature on March 15, 2031.

[[GREPCENT_TABLE]]
[["34","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

The Company used the net proceeds from the offering of the 2031 Notes, together with cash on hand, on April 2, 2021 to redeem in full all of the Company’s outstanding 3.625% Senior Notes due in 2022 for an aggregate principal amount of $300 million, which had a stated maturity date of November 15, 2022, and to pay the premium and accrued interest in respect thereof. The redemption of the 2022 Notes resulted in a $16.8 million loss on extinguishment that was recognized in the second quarter of 2021.

At December 31, 2020, the Company had outstanding unsecured, senior notes in principal amounts of $300 million due in 2022 (the "2022 Notes"), $400 million due in 2026, $300 million due in 2027, and $450 million due in 2028. At December 31, 2021 the 2026, 2027 and 2028 notes were still outstanding in addition to the principal amounts of the 2031 Notes of $300 million.

The carrying value of the Notes, net of unamortized discount and the unamortized balance of capitalized debt issuance costs, was $1,435.5 million and $1,436.9 million at December 31, 2021 and December 31, 2020, respectively.

The Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of default, or upon a change in control triggering event as defined in the indenture governing the Notes, as supplemented. The Company was in compliance with all covenants (none of which are financial) as of December 31, 2021.

Short-term Debt

At December 31, 2021 and 2020, the Company had $9.7 million and $153.1 million, respectively, of short-term debt outstanding composed of:

◦$150.0 million of commercial paper borrowings outstanding at December 31, 2020. There was no commercial paper borrowings outstanding as of December 31, 2021.

◦$1.6 million at December 31, 2021 and $3.1 million at December 31, 2020, respectively, of borrowings to support our international operations in China as well as $8.1 million of other short term debt at December 31, 2021 to support operations.

Net debt, defined as total debt less cash and investments, is a non-GAAP measure that may not be comparable to definitions used by other companies. We consider net debt to be a useful measure of our financial leverage for evaluating the Company’s ability to meet its funding needs.

The following table sets forth the reconciliation of net debt at December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","December 31,"],["(in millions)","2021","2020"],["Total Debt","$","1,445.2","","$","1,590.0"],["Total Hubbell Incorporated Shareholders\u2019 Equity","2,229.8","","2,070.0"],["TOTAL CAPITAL","$","3,675.0","","$","3,660.0"],["Total Debt to Total Capital","39","%","43","%"],["Cash and Investments","$","364.7","","$","339.0"],["NET DEBT","$","1,080.5","","$","1,251.0"],["Net Debt to Total Capital","29","%","34","%"]]
[[/GREPCENT_TABLE]]

Liquidity 

We measure liquidity on the basis of our ability to meet short-term and long-term operational funding needs, to fund additional investments, including acquisitions, and to make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividend payments, stock repurchases, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms.

In 2021, we returned capital to our shareholders through dividends and share repurchases. These activities were funded primarily with cash flows from operations, however a portion of our fourth quarter 2020 acquisitions were funded by short-term commercial paper borrowings, which were repaid during 2021.

◦In 2021, cash used for share repurchases was $11.2 million.

◦Dividends paid on our Common Stock in 2021 were $216.9 million.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","35"]]
[[/GREPCENT_TABLE]]

We also require cash outlays to fund our operations, capital expenditures, and working capital requirements to accommodate anticipated levels of business activity, as well as our rate of cash dividends and potential future acquisitions. We have contractual obligations for long-term debt, operating leases, purchase obligations, and certain other long-term liabilities, including defined benefit retirement obligations and other benefits. Refer to Note 13 - Debt and Note 24 - Leases in the Notes to the Consolidated Financial Statements for further details on anticipated cash outflows. As a result of the TCJA, we also have an obligation to fund, by annual installments through 2025, the Company's liability for the transition tax on the deemed repatriation of foreign earnings. Contractual purchase obligations for years subsequent to December 31, 2021 include $630.7 million in 2022. Contractual purchase obligations beyond 2022 are not significant.

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 and commitments for equipment purchases. As of December 31, 2021, we have $41.2 million of uncertain tax positions reflected in our Consolidated Balance Sheet. We are unable to make a reasonable estimate regarding the timing of settlement of these uncertain tax positions and, as a result, they have been excluded from the table. See Note 14 — Income Taxes in the Notes to Consolidated Financial Statements.

Our sources of funds and available resources to meet these funding needs are as follows:

◦Cash flows from operating activities and existing cash resources: In additional to our cash flows from operating activities, was also had $286.2 million of cash and cash equivalents at December 31, 2021, of which approximately 7% was held inside the United States and the remainder held internationally.

◦Our 2021 Credit Facility provides a $750.0 million committed revolving credit facility and commitments under the 2021 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.250 billion. Annual commitment fees to support availability under the 2021 Credit Facility are not material. Although not the principal source of liquidity, we believe our 2021 Credit Facility is capable of providing significant financing flexibility at reasonable rates of interest and is an attractive alternative source of funding in the event that commercial paper markets experience disruption. However, an increase in usage of the 2021 Credit Facility related to growth or a significant deterioration in the results of our operations or cash flows could cause our borrowing costs to increase and/or our ability to borrow could be restricted. We have not entered into any guarantees that could give rise to material unexpected cash requirements. The full $750.0 million of borrowing capacity under the 2021 Credit Facility was available to the Company at December 31, 2021.

◦In addition to our commercial paper program and existing revolving credit facility, we also have the ability to obtain additional financing through the issuance of long-term debt. Considering our current credit rating, historical earnings performance, and financial position we believe that we would be able to obtain additional long-term debt financing on attractive terms.

◦The Company also maintains other lines of credit that are primarily used to support the issuance of letters of credit. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. At December 31, 2021 and 2020, total availability under these lines was $30.0 million and $32.1 million, respectively, of which $23.2 million and $19.3 million was utilized to support letters of credit and the remaining amount was unused. The annual commitment fees associated with these lines of credit are not material.

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 dependent upon many factors including future returns on invested pension assets, the level of market interest rates, employee earnings and employee demographics.

In 2020, the Company recognized a $7.6 million settlement loss relating to retirees that elected to receive lump-sum distributions from the Company's defined benefit pension plans. This charge was the result of lump-sum payments which exceeded the threshold for settlement accounting under U.S. GAAP for 2020.

In 2019, the Company approved amendments to one of its domestic qualified defined benefit pension plans, that froze service accruals for nearly all active participants within the plan effective January 1, 2020. As a result of the amendments, the Company recognized a $0.3 million curtailment charge, net of tax.

[[GREPCENT_TABLE]]
[["36","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

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 permitted 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) have been amortized and recognized in net periodic pension cost. Effective January 1, 2020, the amortization of unrecognized gains and losses of all of the Company's qualified defined benefit pension plans is recognized over the remaining life expectancy of participants, as all participants are considered inactive as a result of plan amendments. During 2021 and 2020, we recorded $10.8 million and $9.8 million, respectively, of pension expense related to the amortization of these unrecognized losses.

In 2021, 2020 and 2019, we contributed $0.1 million, $23.2 million, and $10.4 million, respectively, to our qualified foreign and domestic defined benefit pension plans. These contributions have improved the funded status of those plans. Although not required by ERISA and the Internal Revenue Code, the Company may elect to make a voluntary contribution to its qualified domestic defined benefit pension plan in 2022. The anticipated level of pension funding in 2022 is not expected to have a significant impact on our overall liquidity.

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:

[[GREPCENT_TABLE]]
[["","Pension Benefits","","Other Benefits"],["","2021","2020","","2021","2020"],["Weighted-average assumptions used to determine benefit obligations at December 31,"],["Discount rate","2.79","%","2.47","%","","2.90","%","2.50","%"],["Rate of compensation increase","0.08","%","0.24","%","","3.87","%","3.99","%"],["Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31,"],["Discount rate","2.47","%","3.17","%","","2.50","%","3.30","%"],["Expected return on plan assets","4.66","%","4.69","%","","N/A","N/A"],["Rate of compensation increase","0.24","%","2.94","%","","3.99","%","4.00","%"]]
[[/GREPCENT_TABLE]]

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 $7.6 million on 2022 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, 2021 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 Hubbell shareholders’ equity through Accumulated other comprehensive loss.

At the end of each year, we determine the discount rate to be used to calculate the present value of our pension plan liabilities. For our U.S. and Canadian pension plans, this discount rate is determined by matching the expected cash flows associated with our benefit obligations to the expected cash flows of a hypothetical portfolio of high quality, fixed income debt instruments with maturities that closely match the expected funding period of our pension liabilities. As of December 31, 2021, we used a discount rate of 2.90% for our U.S. pension plans compared to a discount rate of 2.60% used in 2020. For our Canadian pension plan, we used a discount rate of 2.98% in 2021, compared to a 2.55% discount rate used in 2020.

For our UK pension plan the discount rate was derived using a full yield curve and uses plan specific cash flows. The derived discount rate is the single discount rate equivalent to discounting these liability cash flows at the term-dependent spot rates of AA corporate bonds. This methodology resulted in a December 31, 2021 discount rate for the UK pension plan of 1.80% as compared to a discount rate of 1.40% used in 2020. 

A decrease of one percentage point in the discount rate would lower our 2022 pretax pension expense by approximately $0.3 million. A discount rate increase of one percentage point would increase our 2022 pretax pension expense by less than $0.1 million.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","37"]]
[[/GREPCENT_TABLE]]

In 2019 we changed the mortality table used to calculate the present value of our pension plan liabilities from the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2018 to the Pri-2012 mortality table, with generational projection from 2012 using Scale MP-2019. In 2020 we used the Pri-2012 mortality table and adopted the MP-2020 projection scale and in 2021 we used the Pri-2012 mortality table and adopted the MP-2021 projection scale The Pri-2012 mortality table with adjustment for collar as appropriate and generational projection from 2012 using Scale MP-2021 was chosen as the best estimate based on the observed and anticipated experience of the plans after considering alternative tables. These changes did not have a material impact to the projected benefit obligation of our U.S. plans upon re-measurement.

Other Post Employment Benefits (“OPEB”) 

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 have been discontinued for substantially all future retirees. These plans are not funded and, therefore, no assumed rate of return on assets is required. We use a similar methodology to derive the discount rate for our post employment benefit plan obligations that we use for our pension plans. As of December 31, 2021, the Company used a discount rate of 2.90% to determine the projected benefit obligation compared to a discount rate of 2.50% used in 2020.

In accordance with the accounting guidance for retirement benefits, we recorded to Accumulated other comprehensive loss, within Hubbell shareholders’ equity, a benefit, net of tax, of approximately $3.4 million in 2021 and a charge, net of tax, of approximately $0.6 million in 2020, related to the annual remeasurement of the OPEB plans and the amortization of prior service credits and net actuarial gains.

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 transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets, (3) an obligation or liability, including a contingent obligation or liability, under a contract that would be accounted for as a derivative instrument, except that it is excluded from the scope of FASB ASC Topic 815, or (4) an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the Company, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with, the Company.

We do not have any off-balance sheet arrangements as defined above which have or are likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, capital resources or cash flows.

[[GREPCENT_TABLE]]
[["38","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

Critical Accounting Estimates 

Note 1 — Significant Accounting Policies in 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, such as projections of future performance. 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 material impact on our financial results, and actual results could differ significantly from those estimates. We believe that the following estimates are among the 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 based on our judgment.

Revenue Recognition

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for products, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with products is recognized at a point in time when the product is shipped to the customer, with a relatively small amount of transactions in the Utility Solutions segment recognized upon delivery of the product at the contractually specified destination. Revenue from service contracts and post-shipment performance obligations is approximately three percent of total annual consolidated net revenue and those service contracts and post-shipment obligations are primarily within the Utility Solutions segment. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and on occasion will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.

The Company has certain arrangements that require us to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of the product to be returned. The Company principally relies on historical experience, specific customer agreements and anticipated future trends to estimate these amounts at the time of shipment and to reduce the transaction price. These arrangements include sales discounts and allowances based on sales volumes, specific programs and special pricing allowances, and returned goods, as are customary in the electrical products industry. Customer returns have historically been approximately one percent of gross sales.

Inventory Valuation

Inventories in the U.S. are primarily valued at the lower of LIFO cost or market, while non-U.S. inventories are valued at the lower of FIFO cost or market. We routinely evaluate the carrying value of our inventories to ensure they are carried at the lower of LIFO or FIFO 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.

Excess inventory is generally identified by comparing future expected inventory usage to actual on-hand quantities. Inventory values are reduced 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. Changes in these estimates may necessitate future adjustments to inventory values.

Accrued Insurance

We retain a significant portion of the risks associated with workers’ compensation, medical, automobile and general liability insurance. We estimate self-insurance liabilities using a number of factors, including historical claims experience, demographic factors, severity factors and other actuarial assumptions. The accrued liabilities associated with these programs are based on our estimates of ultimate costs to settle known claims as well as claims incurred but not reported as of the balance sheet date. These assumptions are periodically reviewed with a third-party actuary to determine the adequacy of these self-insurance reserves. Changes in these assumptions may necessitate future adjustments to these self-insurance liabilities.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","39"]]
[[/GREPCENT_TABLE]]

Employee Benefits Costs and Funding

We sponsor domestic and foreign defined benefit pension, defined contribution and other postretirement plans. Significant 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 dates. Further discussion of the assumptions used in 2021 and 2020 are included above under “Pension Funding Status” and in Note 12 — Retirement Benefits in the Notes to Consolidated Financial Statements.

Taxes

We account for income taxes in accordance with the applicable accounting guidance which 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. Additionally, deferred tax assets are required to be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of a 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, available tax planning strategies that could be implemented to realize the net deferred tax assets, and future reversals of deferred tax liabilities. 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 Internal Revenue Service (“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. The Company records uncertain tax positions when it has determined that it is more-likely-than-not that a tax position will not be sustained upon examination by taxing authorities based on the technical merits of the position. The Company uses the criteria established in the accounting guidance to determine whether an item meets the definition of more-likely-than-not. The Company’s policy is to recognize these uncertain tax positions when the more-likely-than-not threshold is met, when the statute of limitations has expired or upon settlement. In management’s opinion, adequate provision has been made for potential adjustments arising from any examinations. See Note 14 — Income Taxes in the Notes to Consolidated Financial Statements.

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. We record a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. A determination of the reserves required, if any, is made after careful analysis, including consultations with outside advisors, where applicable. Where no amount within a range of estimates is more likely, the minimum is accrued. The required reserves may change in the future due to new developments.

Warranty

The Company offers product warranties that cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates.

Valuation of Long-Lived Assets, Goodwill, and Indefinite-Lived Intangible Assets

Our long-lived assets include land, buildings, equipment, molds and dies, software, goodwill and other intangible assets. Long-lived assets, other than land, goodwill and indefinite-lived intangibles, are depreciated over their estimated useful lives. The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents purchase price in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets primarily consist of patents, tradenames, developed technology and customer related intangibles.

Goodwill and indefinite-lived intangible assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. We perform our annual goodwill impairment testing as of April 1st of each year. The accounting guidance provides entities an option of performing a qualitative assessment (the "Step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the goodwill is not impaired, the entity would not need to proceed to the quantitative goodwill impairment testing process as prescribed in the guidance. If the Company does not elect to complete the qualitative assessment, the Company completes the quantitative assessment whereby the estimated fair value of each reporting unit is compared to its carrying value.

[[GREPCENT_TABLE]]
[["40","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

The organizational changes within Electrical Solutions effective January 1, 2021 resulted in a change in the Company’s reporting units. As a result, the Company performed an interim goodwill impairment assessment as of January 1, 2021. The Company applied the Step-zero test to one of its five reporting units. Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of this reporting unit substantially exceeded its carrying value and, therefore, further quantitative analysis was not required. For the other four reporting units, the Company elected to utilize the quantitative goodwill impairment testing process, as permitted in the accounting guidance, by comparing the estimated fair value of the reporting units to their carrying values. As of January 1, 2021, the impairment testing resulted in implied fair values for each reporting unit that significantly exceeded such reporting unit’s carrying value, including goodwill. The Company did not have any reporting units at risk of failing the quantitative impairment test as the excess of the implied fair value significantly exceeded the carrying value of each of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts.

The Company also completed its annual goodwill impairment test as of April 1, 2021. The Company applied the Step-zero test to one of its five reporting units. Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of this reporting unit substantially exceeded its carrying value and, therefore, further quantitative analysis was not required. For the other four reporting units, the Company elected to utilize the quantitative goodwill impairment testing process, as permitted in the accounting guidance, by comparing the estimated fair value of the reporting units to their carrying values. As of April 1, 2021, the impairment testing resulted in implied fair values for each reporting unit that significantly exceeded such reporting unit’s carrying value, including goodwill. The Company did not have any reporting units at risk of failing the quantitative impairment test as the excess of the implied fair value significantly exceeded the carrying value of each of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts.

The goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future discounted cash flows, determining appropriate discount rates and other assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. We use internal discounted cash flow models to estimate fair value. These cash flow estimates are derived from historical experience, third-party end market data, and future long-term business plans and include assumptions of future sales growth, gross margin, operating margin, terminal growth rate, and the application of an appropriate discount rate. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We corroborate the values determined from our discounted cash flow models by reconciling the sum of the estimated fair values of each reporting unit to our market capitalization at the testing date, including consideration of a control premium. We have not recorded any goodwill impairments since the initial adoption of the accounting guidance in 2002.

The identification and measurement of impairment of indefinite-lived intangible assets involves either an assessment of qualitative factors to determine whether events or circumstances indicate that it is more-likely-than-not that an indefinite-lived intangible asset is impaired or a quantitative assessment whereby the estimated fair value of each indefinite-lived intangible asset is compared to its carrying value. If it is more-likely-than-not that the asset is impaired, the fair value of the indefinite lived intangibles will be determined using discounted cash flow estimates. If the carrying value of these assets exceeds the estimated fair value, the carrying value will be reduced to the estimated fair value. For the Company’s annual impairment test as of April 1, 2021, the Company elected to utilize the quantitative impairment testing process as permitted in the accounting guidance. The fair value was determined utilizing an income approach (relief from royalty method). Significant judgment is required to estimate the fair value of the indefinite-lived intangible assets including assumptions for future revenues, discount rates, royalty rates, and other assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. Significant changes in these estimates and assumptions could affect the determination of fair value and/or impairment for each indefinite-lived intangible asset. As of April 1, 2021, the impairment testing resulted in fair values for each indefinite-lived intangible asset that significantly exceeded the carrying values and there were no indefinite-lived intangible assets at risk of failing the quantitative impairment test. We did not record any impairments related to indefinite-lived intangible assets in 2021, 2020, or 2019.

Stock-Based Compensation

We determine the grant date fair value of certain stock-based compensation awards using either a lattice model or the Black-Scholes option pricing model. Both of these models require management to make certain assumptions with respect to selected model inputs. These inputs include assumptions for the expected term, stock volatility, dividend yield and risk-free interest rate. Changes in these inputs impact fair value and could impact our stock-based compensation expense in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those awards expected to meet the service and performance vesting conditions. If our actual forfeiture rate is different from our estimate, adjustments to stock-based compensation expense may be required. We review the potential achievement of our performance awards on a recurring basis and update compensation expense based on the probability that the related performance metrics will be satisfied. See also Note 18 — Stock-Based Compensation in the Notes to Consolidated Financial Statements.

[[GREPCENT_TABLE]]
[["HUBBELL INCORPORATED - Form 10-K","41"]]
[[/GREPCENT_TABLE]]

Forward-Looking Statements 

Some of the information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-K, contain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These include statements about our expected capital resources, liquidity, financial performance, pension funding, and results of operations and are based on our reasonable current expectations. In addition, all statements regarding the expected financial impact of the integration of acquisitions and completion of certain divestitures, adoption of updated accounting standards and any expected effects of such adoption, restructuring plans and expected associated costs and benefits, intent to repurchase shares of common stock, and change in operating results, anticipated market conditions and productivity initiatives are forward looking. Forward-looking statements may be identified by the use of words, such as “believe”, “expect”, “anticipate”, “intend”, “depend”, “should”, “plan”, “estimated”, “predict”, “could”, “may”, “subject to”, “continues”, “growing”, “prospective”, “forecast”, “projected”, “purport”, “might”, “if”, “contemplate”, “potential”, “pending,” “target”, “goals”, “scheduled”, “will likely be”, and similar words and phrases. Discussions of strategies, plans or intentions often contain forward-looking statements. Important factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include, but are not limited to:

•Availability, cost and quantity of raw materials, purchased components, energy and freight, particularly as global economic activity recovers from the effects to the COVID-19 pandemic.

•The scope, duration or resurgence of the novel coronavirus, or COVID-19 (including any variants thereof), global pandemic and its impact on global economic systems, our employees, sites, operations, customers, and supply chain.

•Changes in demand for our products, market conditions, product quality, or product availability adversely affecting sales levels.

•Ability to effectively develop and introduce new products.

•Changes in markets or competition adversely affecting realization of price increases.

•Failure to achieve projected levels of efficiencies, cost savings and cost reduction measures, including those expected as a result of our lean initiatives and strategic sourcing plans.

•Impacts of trade tariffs, import quotas or other trade restrictions or measures taken by the U.S., U.K. and other countries, including the recent and potential changes in U.S. trade policies.

•Failure to comply with import and export laws.

•Changes relating to impairment of our goodwill and other intangible assets.

•Inability to access capital markets or failure to maintain our credit ratings.

•Changes in expected or future levels of operating cash flow, indebtedness and capital spending.

•General economic and business conditions in particular industries, markets or geographic regions, as well as inflationary trends.

•Regulatory issues, changes in tax laws including, or changes in geographic profit mix affecting tax rates and availability of tax incentives.

•A major disruption in one or more of our manufacturing or distribution facilities or headquarters, including the impact of plant consolidations and relocations.

•Changes in our relationships with, or the financial condition or performance of, key distributors and other customers, agents or business partners which could adversely affect our results of operations.

•Impact of productivity improvements on lead times, quality and delivery of product.

•Anticipated future contributions and assumptions including changes in interest rates and plan assets with respect to pensions and other retirement benefits, as well as pension withdrawal liabilities.

•Adjustments to product warranty accruals in response to claims incurred, historical experiences and known costs.

•Unexpected costs or charges, certain of which might be outside of our control.

•Changes in strategy, economic conditions or other conditions outside of our control affecting anticipated future global product sourcing levels.

•Ability to carry out future acquisitions and strategic investments in our core businesses as well as the acquisition related costs.

•Ability to successfully execute, manage and integrate key acquisitions, mergers, and other transactions, as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition.

•The impact of certain divestitures, including the consummation and timing of, and the benefits and costs of, the pending sale of the Commercial and Industrial Lighting business to GE Current.

•The ability to effectively implement Enterprise Resource Planning systems without disrupting operational and financial processes.

•The ability of government customers to meet their financial obligations.

•Political unrest in foreign countries.

•The impact of Brexit and other world economic and political issues.

•The impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, on our financial condition and results of operations.

•Failure of information technology systems, security breaches, cyber threats, malware, phishing attacks, break-ins and similar events resulting in unauthorized disclosure of confidential information or disruptions or damage to information technology systems that could cause interruptions to our operations or adversely affect our internal control over financial reporting.

•Incurring significant and/or unexpected costs to avoid manage, defend and litigate intellectual property matters.

•Future repurchases of common stock under our common stock repurchase program.

[[GREPCENT_TABLE]]
[["42","HUBBELL INCORPORATED - Form 10-K"]]
[[/GREPCENT_TABLE]]

•Changes in accounting principles, interpretations, or estimates.

•Failure to comply with any laws and regulations, including those related to data privacy and information security, environmental and conflict-free minerals.

•The outcome of environmental, legal and tax contingencies or costs compared to amounts provided for such contingencies, including contingencies or costs with respect to pension withdrawal liabilities.

•Improper conduct by any of our employees, agents or business partners that damages our reputation or subjects us to civil or criminal liability.

•Our ability to hire, retain and develop qualified personnel.

•Adverse changes in foreign currency exchange rates and the potential use of hedging instruments to hedge the exposure to fluctuating rates of foreign currency exchange on inventory purchases.

•Transitioning from LIBOR to a replacement alternative reference rate.

•Other factors described in our Securities and Exchange Commission filings, including the “Business”, “Risk Factors” and “Quantitative and Qualitative Disclosures about Market Risk” sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Any such forward-looking statements are not guarantees of future performances and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. The Company disclaims any duty to update any forward-looking statement, all of which are expressly qualified by the foregoing, other than as required by law.