A Letter to
Hubbell is about connection—to the energy that drives our lives and to each other. As I reflect on 2016, I continue to be proud of what Hubbell has accomplished.
While staying true to our core mission of exceeding our customers' expectations with reliable, electrical solutions, 2016 was our first full year with the current leadership team in place and a single-class equity structure. We adapted to changing market conditions by entering new target markets, launching innovative products, and implementing cost reduction initiatives. We earned numerous awards for our products, grew via acquisition by adding three companies to our family, and realized meaningful cost savings from both our ongoing productivity efforts as well as our restructuring program. And we increased our dividend for the ninth consecutive year. All while continuing to energize communities and cities, enlighten homes and businesses, and empower our employees and customers.
Customer Service Excellence Regardless of Market Conditions
End markets were varied and challenging in 2016. We saw growth in non-residential and residential markets. We also saw continued declines in core industrial and oil markets, although less severe than we faced in 2015. Transmission and distribution markets were flat.
In total, our organic sales were up one percent. Seeking topline growth, our businesses pushed beyond our traditional markets and into adjacent ones. We provided Harsh & Hazardous explosion-proof devices outside of oil markets and into chemical plants and distilleries. We modified certain wiring products that had historically been used solely in industrial applications and provided them to the residential market through big box retailers. Through a small acquisition in China, we better positioned the Company to further support international growth.
The changing landscape of technology has been an important, ongoing theme across our businesses. We are transforming old products with new ideas, making them even more dependable and energy efficient. In Lighting, the shift to LED technology over the last several years has transformed the industry, with LED-related products now comprising more than 50% of Hubbell's Lighting sales. Additionally, with the evolving need to manage outdoor lighting with flexible control strategies, our Lighting business introduced SiteSync™. This product combines award-winning LED luminaires with wireless technology, delivering a solution that reduces the total cost of ownership.
The demand for technological innovation has also inﬂuenced our Power, our Construction and Energy, and our Commercial and Industrial businesses. We responded with new and improved products such as Power's line post sensors that act as both an insulator and voltage/current monitor, Construction and Energy's Roto-Lug™ electrical connector that protects against wire bending in tight spaces and Commercial and Industrial's smaller, faster and more versatile Type C Charger. The Commercial and Industrial business also optimized technology and enhanced e-tours to help customers evaluate a broad range of product applications and solutions.
Our products and service were recognized for their high quality and performance in the marketplace as well. We won various accolades, including LEDs Magazine Sapphire Award, IMARK's Excellence in Product Management and Performance, and Consulting-Specifying Engineer Magazine product of the year award, in which their 400,000 plus readers voted to determine the winners.
Continued Achievement of Operational Improvements
While pursuing topline growth, our bottom line is always a priority. Our productivity focus continued in 2016 with facility consolidation and business process streamlining to reduce structural costs and achieve greater efficiencies. As part of the restructuring program we began in late 2014, we have realized more than $0.45 per diluted share of cumulative savings.
Beyond restructuring, operational discipline continued across the Company in 2016. Implementing laser-guided automated vehicles to increase throughput in Power's distribution center in Missouri is one example. Additionally, Lighting opened a new, more efficient centralized warehouse and distribution facility in Georgia to help streamline operations.
The savings from cost actions and productivity measures helped support our operating margin, which was impacted by headwinds from sales mix and price. On a reported basis, our operating margin was 13.6%, 40 basis points below the prior year. The growth of lower margin businesses coupled with contraction of higher margin businesses created a mix challenge to overcome. While we expect some of this to continue, it should subside as a result of more consistent growth across end markets. In addition, pricing has significantly pressured margins, namely in Lighting, where competitive market dynamics are driving pricing decisions beyond the typical relationship with commodity cost trends.
Growth of the Enterprise Through Effective Capital Deployment
Free cash flow performance was strong in 2016 at greater than 100% of net income, fueled by our focus on working capital management. We also issued $400 million of 10-year Senior Notes and put our balance sheet to work. We repurchased approximately $250 million of shares, invested almost $70 million in capital expenditures, and increased our dividend by eleven percent. And we acquired three companies in attractive markets as part of our programmatic acquisition strategy.
R.W. Lyall™ bolsters our main-to-meter offering in the natural gas distribution market, complementing prior acquisitions of GasBreaker™ and Continental™. The outlook for this market is bright, driven by the replacement of an aging infrastructure and safety regulations.
Electric Motion Company (EMC™) is an innovative provider of engineering solutions to the growing communications industry.
Longbow™, a polymer insulator manufacturer, supports Power's international growth strategy by enabling access to the large Chinese utility market.
These three acquisitions in total contributed approximately three percentage points to 2016 sales growth.
Ongoing Development of Our People
As I previously mentioned, 2016 was the first full year with our current leadership team in place. But Hubbell is about much more than the leadership...it is about the more than 17,000 dedicated employees who are guided by our Code of Business Conduct and Ethics and give their best every day to make Hubbell what it is — a company to be proud of. I am humbled by the capabilities and integrity of the entire Hubbell team, and I fully support our training initiatives, development programs, and networking opportunities to cultivate an even more vibrant and energized workforce.
Looking Back, Looking Forward
As I look forward, I am excited by the boundless potential Hubbell offers to energize, enlighten and empower with reliable, electrical solutions. Quality products and strong customer relationships, a competitive cost structure, and a disciplined acquisition program, all supported by talented employees, position us for continued success well into the future.