A Letter to Our Shareholders
2017 was another productive year for Hubbell…
We grew sales by 5%, added five companies to our portfolio, announced the largest transaction in our history, drove productivity throughout the enterprise, and increased our dividend by 10%.
As a company that takes great pride in our heritage of innovation, starting with our founder Harvey Hubbell and his most notable inventions of the “pull chain lamp socket” and “separable plug and receptacle” over a century ago, Hubbell continually evolves to find new ways to provide connection to the energy that drives our lives.
Our strategy remains the same: to be a trusted provider of reliable, electrical and related infrastructure solutions primarily in North America with desired brands, high quality service, and a competitive cost structure. We aim to grow at twice the market rate via organic sales and acquisitions and to deliver high single digit earnings growth plus dividends to shareholders.
Evolving your home and our products
This year, we launched Hubbell Integrated Solutions focused on creating energy solutions through intelligent Hubbell products that will seamlessly integrate with existing customer ecosystems. As industry and technology changes at an increasingly rapid pace, we continue to broaden the scope of our solutions and the talents that develop them.
In April 2017, Hubbell acquired iDevices,® a leading brand in the connected home industry. The combination of the iDevices® team’s cutting edge expertise in connected devices with Hubbell’s technology and vast product portfolio will drive the next wave of innovation in our industry.
Organic Growth —
End Markets and New Product Development
Our well recognized portfolio of brands is positioned to capitalize on positive market trends. In 2017, Hubbell’s net sales grew 5%, with 3% coming from organic growth. The consistency of growth across our five primary end markets — Non-Residential, Electrical Transmission & Distribution (T&D), Industrial, Oil & Gas, and Residential — was welcomed. The stabilization of higher margin businesses that had seen declines over the last couple of years, combined with growth in other key businesses, led to margins that were in line with 2016 on an adjusted basis.(1) Electrical T&D was another highlight, with small to mid-sized projects spurring transmission growth and utility capital spend contributing to expansion of the distribution market, as did recovery efforts related to Hurricanes Harvey, Irma, and Maria. The storms provided some challenges, but our resilience allowed us to showcase our commitment to service, reliability, and partnership with our customers.
Continuous improvements in product design and customer interface fuel the innovation that is happening across Hubbell. Safety and ease of use inspire us. From long-standing, explosion-proof lighting and communications devices in harsh and hazardous environments to new product debuts in 2017 of UL-listed Marine Isolation Transformers that ensure on-board power is safe and products that use LEDs to communicate the electrical status of a switch without removing the cover, safety is a priority.
Whether it be keeping people connected on-the-go with convenient charging stations for seats and electric vehicles or making it easier for customers to learn about and buy our products through our new website, Hubbell seeks to harness energy to better serve our customers.
We also continue to work on identifying vertical market solutions that combine Hubbell’s product breadth with our growing software capabilities. iDevices®, acquired in 2017 (see below), continues to be one of the only home automation product lines that works with Apple HomeKit™, Amazon Alexa, and the Google Assistant and can be controlled via both iOS and Android™ devices. iDevices’® Internet-of-Things (“IoT”) expertise provides the foundation to enhance Hubbell’s broad base of products with communications and connectivity capabilities beyond residential applications and into institutional and utility applications.
In addition to organic growth, Hubbell grew via acquisitions in 2017, which is a key component of our long-term growth strategy. Acquisitions complement our portfolio of products and solutions, facilitate penetration of core markets and strategic adjacent markets, and provide opportunities for operational efficiencies.
In 2017, the acquisitions we completed better position us for further expansion geographically (GTMS, a substation and distribution switch manufacturer in Brazil); broader coverage in the verticals of telecom (Windsor Communications, a domestic supplier of fiber splice enclosures and hardware for telecommunications), gas distribution (Advance Engineering Corporation “AEC™”, a domestic gas components manufacturer), and electric power (Meramec®, a manufacturer of current measurement devices); and acceleration of IoT technology (iDevices®, a domestic developer with embedded firmware and app development expertise with custom-built Cloud infrastructure).
Late in the year, we also announced a definitive agreement to acquire Aclara Technologies, LLC for $1.1 billion, the largest acquisition in Hubbell history. This acquisition is expected to strengthen and broaden Hubbell Power Systems’ competitive position across utility markets by providing the opportunity to integrate Aclara’s strong customer relationships and smart infrastructure solutions into the Hubbell portfolio and accelerate ongoing innovation efforts to address utility customer demand for data and integrated solutions. In February 2018, we officially announced the closing of the transaction.
I am enthusiastic about these additions to our Company and the complementary capabilities, expertise, and opportunities they each bring.
Our focus on productivity and cost discipline continued in 2017. One example of ongoing productivity is the continued push towards automation in our factories, such as Power’s implementation of robotic grinding, which increases safety and delivers a more consistent process as compared to manual grinding. Construction & Energy also prioritized automation, one example being implementation of a custom-designed semi-automated machine for color-coded connectors, which reduces annual throughput processing time by 80% and improves product consistency, ergonomics, and machine setup time. It’s these types of high return projects that pave the way for continuous cost improvement and efficiencies.
Our broader restructuring program has also provided benefits in terms of savings. We began this critical program of elevated restructuring spend in late 2014 with the objective of improving the competitiveness of our cost structure. And it has tracked to expectations, contributing meaningful and recurring savings from headcount reduction, footprint consolidation, and business process streamlining.
Our Lighting business, in particular, has undertaken numerous restructuring actions, including consolidation of multiple facilities, which have been necessary to align its cost structure with the highly competitive Lighting market. As you know, we struggled throughout much of 2017 with the production moves across manufacturing sites and the launch of a greenfield, national distribution center. I am pleased that we made significant progress to overcome these challenges, and by year-end, Lighting’s manufacturing and distribution performance stabilized. The remediation efforts addressed the restructuring-driven inefficiencies; the resulting improved service levels, streamlined cost structure, and more disciplined business planning and operational process position us well going forward. A testament to these improvements is Progress Lighting, which was awarded Supplier of the Year by a major distribution customer in the over $10 million category. It is always good when customers acknowledge our commitment and performance, especially after a challenging year.
Returns to Shareholders
As our actions demonstrate, we remain focused on returns to shareholders. In 2017, our Board approved a 10% increase in our quarterly dividend to $0.77 per share, as well as a new authorization for a three-year share repurchase program of up to $400 million. We also lowered our interest expense by taking advantage of favorable capital markets to issue $300 million of new debt and use the proceeds to redeem higher interest notes that were coming due in 2018.
Reflecting on 2017
In summary, 2017 was a productive year for Hubbell, as we continue to evolve and address our customers’ needs while positioning ourselves for continued success. And as a result of U.S. tax reform, we expect to have more opportunities to invest in our business and our people, recognizing that none of these achievements could have happened without the efforts of our talented employees. I would like to thank them for their commitment and contributions. Looking ahead, I am excited by the prospect of what the future holds and all that we will achieve.
(1) Adjusted figures exclude restructuring and related costs, costs associated with the reclassification of common stock, Aclara transaction costs, the impact of US tax reform, and refinancing costs, and are non-GAAP measures. Reconciliations of these non-GAAP measures to the comparable GAAP measures can be found in Management’s Discussion and Analysis in the Company’s 2017 Form 10-K.