Item 1. Financial Statements
Item 1. Financial Statements
BELDEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27, 2020 December 31, 2019
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 391,497 $ 407,480
Receivables, net 331,232 334,634
Inventories, net 244,815 231,333
Other current assets 39,211 29,172
Current assets of discontinued operations — 375,135
Total current assets 1,006,755 1,377,754
Property, plant and equipment, less accumulated depreciation 347,668 345,918
Operating lease right-of-use assets 57,380 62,251
Goodwill 1,247,432 1,243,669
Intangible assets, less accumulated amortization 294,592 339,505
Deferred income taxes 29,845 25,216
Other long-lived assets 52,410 12,446
$ 3,036,082 $ 3,406,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 211,269 $ 268,466
Accrued liabilities 246,513 283,799
Current liabilities of discontinued operations — 170,279
Total current liabilities 457,782 722,544
Long-term debt 1,500,716 1,439,484
Postretirement benefits 130,581 136,227
Deferred income taxes 48,896 48,725
Long-term operating lease liabilities 49,209 55,652
Other long-term liabilities 50,311 38,308
Stockholders’ equity:
Common stock 503 503
Additional paid-in capital 818,661 811,955
Retained earnings 446,198 518,004
Accumulated other comprehensive loss ( 137,458 ) ( 63,418 )
Treasury stock ( 335,508 ) ( 307,197 )
Total Belden stockholders’ equity 792,396 959,847
Noncontrolling interests 6,191 5,972
Total stockholders’ equity 798,587 965,819
$ 3,036,082 $ 3,406,759
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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BELDEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands, except per share data)
Revenues $ 475,839 $ 533,098 $ 1,364,176 $ 1,581,590
Cost of sales ( 308,247 ) ( 334,293 ) ( 876,143 ) ( 990,857 )
Gross profit 167,592 198,805 488,033 590,733
Selling, general and administrative expenses ( 85,037 ) ( 98,245 ) ( 275,129 ) ( 298,654 )
Research and development expenses ( 30,324 ) ( 23,992 ) ( 81,633 ) ( 72,014 )
Amortization of intangibles ( 16,104 ) ( 19,026 ) ( 48,306 ) ( 56,258 )
Operating income 36,127 57,542 82,965 163,807
Interest expense, net ( 15,607 ) ( 14,002 ) ( 43,188 ) ( 41,951 )
Non-operating pension benefit 680 544 2,079 1,684
Income from continuing operations before taxes 21,200 44,084 41,856 123,540
Income tax expense ( 631 ) ( 6,053 ) ( 3,223 ) ( 16,179 )
Income from continuing operations 20,569 38,031 38,633 107,361
Loss from discontinued operations, net of tax ( 6,231 ) ( 335,046 ) ( 103,395 ) ( 336,908 )
Gain on disposal of discontinued operations, net of tax 2,743 — 2,743 —
Net income (loss) 17,081 ( 297,015 ) ( 62,019 ) ( 229,547 )
Less: Net income (loss) attributable to noncontrolling interest 85 ( 6 ) 79 60
Net income (loss) attributable to Belden 16,996 ( 297,009 ) ( 62,098 ) ( 229,607 )
Less: Preferred stock dividends — 971 — 18,437
Net income (loss) attributable to Belden common stockholders $ 16,996 $ ( 297,980 ) $ ( 62,098 ) $ ( 248,044 )
Weighted average number of common shares and equivalents:
Basic 44,567 44,444 44,834 41,090
Diluted 44,709 44,610 44,968 41,299
Basic income (loss) per share attributable to Belden common stockholders:
Continuing operations attributable to Belden common stockholders $ 0.46 $ 0.83 $ 0.86 $ 2.16
Discontinued operations attributable to Belden common stockholders ( 0.14 ) ( 7.54 ) ( 2.31 ) ( 8.20 )
Disposal of discontinued operations attributable to Belden common stockholders 0.06 — 0.06 —
Net income (loss) per share attributable to Belden common stockholders $ 0.38 $ ( 6.70 ) $ ( 1.39 ) $ ( 6.04 )
Diluted income (loss) per share attributable to Belden common stockholders:
Continuing operations attributable to Belden common stockholders $ 0.46 $ 0.83 $ 0.86 $ 2.15
Discontinued operations attributable to Belden common stockholders ( 0.14 ) ( 7.54 ) ( 2.31 ) ( 8.20 )
Disposal of discontinued operations attributable to Belden common stockholders 0.06 — 0.06 —
Net income (loss) per share attributable to Belden common stockholders $ 0.38 $ ( 6.70 ) $ ( 1.39 ) $ ( 6.04 )
Comprehensive loss attributable to Belden $ ( 34,921 ) $ ( 263,530 ) $ ( 136,138 ) $ ( 183,811 )
Common stock dividends declared per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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BELDEN INC.
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
Nine Months Ended
September 27, 2020 September 29, 2019
(In thousands)
Cash flows from operating activities:
Net loss $ ( 62,019 ) $ ( 229,547 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Asset impairment of discontinued operations 113,007 342,146
Depreciation and amortization 80,620 108,328
Share-based compensation 13,650 12,115
Gain on disposal of business ( 2,743 ) —
Changes in operating assets and liabilities, net of the effects of currency exchange rate changes, acquired businesses and disposals:
Receivables 35,645 6,002
Inventories ( 9,327 ) 32,261
Accounts payable ( 69,579 ) ( 78,346 )
Accrued liabilities ( 11,646 ) ( 70,368 )
Income taxes ( 30,416 ) ( 19,650 )
Other assets 1,860 ( 9,088 )
Other liabilities ( 20,363 ) ( 4,336 )
Net cash provided by operating activities 38,689 89,517
Cash flows from investing activities:
Capital expenditures ( 56,809 ) ( 74,068 )
Cash from business acquisitions, net of cash acquired 590 ( 50,951 )
Proceeds from disposal of tangible assets 3,090 19
Proceeds from disposal of business, net of cash sold 50,051 —
Net cash used for investing activities ( 3,078 ) ( 125,000 )
Cash flows from financing activities:
Borrowings on revolver 190,000 —
Payments under borrowing arrangements ( 190,000 ) —
Payments under share repurchase program ( 35,000 ) ( 50,000 )
Payment of earnout consideration ( 29,300 ) —
Cash dividends paid ( 6,800 ) ( 32,153 )
Withholding tax payments for share-based payment awards ( 1,331 ) ( 2,063 )
Other ( 154 ) ( 232 )
Net cash used for financing activities ( 72,585 ) ( 84,448 )
Effect of foreign currency exchange rate changes on cash and cash equivalents 2,586 ( 3,937 )
Decrease in cash and cash equivalents ( 34,388 ) ( 123,868 )
Cash and cash equivalents, beginning of period 425,885 420,610
Cash and cash equivalents, end of period $ 391,497 $ 296,742
For all periods presented, the Condensed Consolidated Cash Flow Statement includes the results of the Grass Valley disposal group up to the disposal date, July 2, 2020.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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BELDEN INC.
CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY STATEMENTS
(Unaudited)
Belden Inc. Stockholders
Additional Accumulated
Other Non-controlling
Common Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Shares Amount Income (Loss) Interests Total
(In thousands)
Balance at December 31, 2019 50,335 $ 503 $ 811,955 $ 518,004 ( 4,877 ) $ ( 307,197 ) $ ( 63,418 ) $ 5,972 $ 965,819
Cumulative effect of change in accounting principle — — — ( 2,916 ) — — — — ( 2,916 )
Net loss — — — ( 11,189 ) — — — ( 30 ) ( 11,219 )
Other comprehensive income (loss), net of tax — — — — — — 22,323 ( 150 ) 22,173
Exercise of stock options, net of tax withholding forfeitures — — ( 542 ) — 7 370 — — ( 172 )
Conversion of restricted stock units into common stock, net of tax withholding forfeitures — — ( 2,631 ) — 29 1,800 — — ( 831 )
Share repurchase program — — — — ( 592 ) ( 21,239 ) — — ( 21,239 )
Share-based compensation — — 3,708 — — — — — 3,708
Common stock dividends ($ 0.05 per share)
— — — ( 2,288 ) — — — — ( 2,288 )
Balance at March 29, 2020 50,335 $ 503 $ 812,490 $ 501,611 ( 5,433 ) $ ( 326,266 ) $ ( 41,095 ) $ 5,792 $ 953,035
Net income (loss) — — — ( 67,905 ) — — — 24 ( 67,881 )
Other comprehensive income (loss), net of tax — — — — — — ( 44,446 ) 147 ( 44,299 )
Conversion of restricted stock units into common stock, net of tax withholding forfeitures — — ( 1,598 ) — 27 1,543 — — ( 55 )
Share repurchase program — — — — ( 384 ) ( 13,761 ) — — ( 13,761 )
Share-based compensation — — 5,090 — — — — — 5,090
Common stock dividends ($ 0.05 per share)
— — — ( 2,247 ) — — — — ( 2,247 )
Balance at June 28, 2020 50,335 $ 503 $ 815,982 $ 431,459 ( 5,790 ) $ ( 338,484 ) $ ( 85,541 ) $ 5,963 $ 829,882
Net income — — — 16,996 — — — 85 17,081
Other comprehensive income (loss), net of tax — — — — — — ( 51,917 ) 143 ( 51,774 )
Retirement Savings Plan stock contributions — — ( 747 ) — 33 1,823 — — 1,076
Conversion of restricted stock units into common stock, net of tax withholding forfeitures — — ( 1,426 ) — 17 1,153 — — ( 273 )
Share-based compensation — — 4,852 — — — — — 4,852
Common stock dividends ($ 0.05 per share)
— — — ( 2,257 ) — — — — ( 2,257 )
Balance at September 27, 2020 50,335 $ 503 $ 818,661 $ 446,198 ( 5,740 ) $ ( 335,508 ) $ ( 137,458 ) $ 6,191 $ 798,587
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Belden Inc. Stockholders
Mandatory Convertible Additional Accumulated
Other Non-controlling
Preferred Stock Common Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Shares Amount Capital Earnings Shares Amount Income (Loss) Interests Total
(In thousands)
Balance at December 31, 2018 52 $ 1 50,335 $ 503 $ 1,139,395 $ 922,000 ( 10,939 ) $ ( 599,845 ) $ ( 74,907 ) $ 441 $ 1,387,588
Net income (loss) — — — — — 25,202 — — — ( 24 ) 25,178
Other comprehensive income, net of tax — — — — — — — — 29,009 1 29,010
Exercise of stock options, net of tax withholding forfeitures — — — — ( 54 ) — 1 16 — — ( 38 )
Conversion of restricted stock units into common stock, net of tax withholding forfeitures — — — — ( 2,570 ) — 58 668 — — ( 1,902 )
Share-based compensation — — — — 2,216 — — — — — 2,216
Preferred stock dividends ($ 168.75 per share)
— — — — — ( 8,733 ) — — — — ( 8,733 )
Common stock dividends ($ 0.05 per share)
— — — — — ( 1,990 ) — — — — ( 1,990 )
Balance at March 31, 2019 52 $ 1 50,335 $ 503 $ 1,138,987 $ 936,479 ( 10,880 ) $ ( 599,161 ) $ ( 45,898 ) $ 418 $ 1,431,329
Net income — — — — — 42,200 — — — 90 42,290
Other comprehensive income (loss), net of tax — — — — — — — — ( 16,693 ) 40 ( 16,653 )
Acquisition of business with noncontrolling interest — — — — — — — — — 4,775 4,775
Exercise of stock options, net of tax witholding forfeitures — — — — ( 10 ) — — 2 — — ( 8 )
Conversion of restricted stock units into common stock, net of tax witholding forfeitures — — — — ( 861 ) — 29 807 — — ( 54 )
Share repurchase program — — — — — — ( 397 ) ( 22,815 ) — — ( 22,815 )
Share-based compensation — — — — 5,378 — — — — — 5,378
Preferred stock dividends ($ 168.75 per share)
— — — — — ( 8,733 ) — — — — ( 8,733 )
Common stock dividends ($ 0.05 per share)
— — — — — ( 1,976 ) — — — — ( 1,976 )
Balance at June 30, 2019 52 $ 1 50,335 $ 503 $ 1,143,494 $ 967,970 ( 11,248 ) $ ( 621,167 ) $ ( 62,591 ) $ 5,323 $ 1,433,533
Net income — — — — — ( 297,009 ) — — — ( 6 ) ( 297,015 )
Other comprehensive income, net of tax — — — — — — — — 33,480 373 33,853
Adjustment to acquisition of business with noncontrolling interest — — — — — — — — — 420 420
Exercise of stock options, net of tax witholding forfeitures — — — — ( 25 ) — 1 11 — — ( 14 )
Conversion of restricted stock units into common stock, net of tax witholding forfeitures — — — — ( 115 ) — 2 70 — — ( 45 )
Share repurchase program — — — — — — ( 493 ) ( 27,185 ) — — ( 27,185 )
Share-based compensation — — — — 4,521 — — — — — 4,521
Preferred stock conversion ( 52 ) ( 1 ) — — ( 340,788 ) — 6,857 340,789 — — —
Preferred stock dividends ($ 18.76 per share)
— — — — — ( 971 ) — — — — ( 971 )
Common stock dividends ($ 0.05 per share)
— — — — — ( 2,287 ) — — — — ( 2,287 )
Balance at September 29, 2019 — $ — 50,335 $ 503 $ 807,087 $ 667,703 ( 4,881 ) $ ( 307,482 ) $ ( 29,111 ) $ 6,110 $ 1,144,810
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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BELDEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include Belden Inc. and all of its subsidiaries (the Company, us, we, or our). We eliminate all significant affiliate accounts and transactions in consolidation.
The accompanying Condensed Consolidated Financial Statements presented as of any date other than December 31, 2019:
• Are prepared from the books and records without audit, and
• Are prepared in accordance with the instructions for Form 10-Q and do not include all of the information required by accounting principles generally accepted in the United States for complete statements, but
• Include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial statements.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Supplementary Data contained in our 2019 Annual Report on Form 10-K .
Business Description
We are a global supplier of specialty networking solutions built around two global business platforms - Enterprise Solutions and Industrial Solutions. Our comprehensive portfolio of solutions enables customers to transmit and secure data, sound, and video for mission critical applications across complex enterprise and industrial environments.
Effective January 1, 2020, we transferred our West Penn Wire business and multi-conductor product lines from the Enterprise Solutions segment to the Industrial Solutions segment as a result of a shift in responsibilities among the segments. We have recast the prior period segment information to conform to the change in the composition of reportable segments.
Reporting Periods
Our fiscal year and fiscal fourth quarter both end on December 31. Our fiscal first quarter ends on the Sunday falling closest to 91 days after December 31, which was March 29, 2020, the 89th day of our fiscal year 2020. Our fiscal second and third quarters each have 91 days. The nine months ended September 27, 2020 and September 29, 2019 included 271 and 272 days, respectively.
Fair Value Measurement
Accounting guidance for fair value measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
• Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
• Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant inputs are observable, either directly or indirectly; and
• Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the three and nine months ended September 27, 2020 and September 29, 2019, we utilized Level 1 inputs to determine the fair value of cash equivalents, and we utilized Level 2 and Level 3 inputs to determine the fair value of net assets acquired in business combinations (see Note 3) and for impairment testing (see Notes 4 and 10). We did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended September 27, 2020 and September 29, 2019.
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Cash and Cash Equivalents
We classify cash on hand and deposits in banks, including commercial paper, money market accounts, and other investments with an original maturity of three months or less, that we hold from time to time, as cash and cash equivalents. We periodically have cash equivalents consisting of short-term money market funds and other investments. As of September 27, 2020, we did not have any such cash equivalents on hand. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations. We do not enter into investments for trading or speculative purposes.
During the nine months ended September 27, 2020, we paid the sellers of Snell Advanced Media (SAM) the full earnout consideration of $ 31.4 million in cash in accordance with the purchase agreement. SAM was acquired on February 8, 2018 and is included in the Grass Valley disposal group.
Due to the initial uncertainties arising from the COVID-19 pandemic and out of an abundance of caution, we borrowed $ 190.0 million on our Revolver at the beginning of the second quarter. As a result of improving and sufficient cash flow and liquidity throughout the year, we subsequently repaid the entire $ 190.0 million during the nine months ended September 27, 2020; $ 90.0 million of which was during the three months ended September 27, 2020. See Note 12.
Contingent Liabilities
We have established liabilities for environmental and legal contingencies that are probable of occurrence and reasonably estimable, the amounts of which are currently not material. We accrue environmental remediation costs based on estimates of known environmental remediation exposures developed in consultation with our environmental consultants and legal counsel. We are, from time to time, subject to routine litigation incidental to our business. These lawsuits primarily involve claims for damages arising out of the use of our products, allegations of patent or trademark infringement, and litigation and administrative proceedings involving employment matters and commercial disputes. Based on facts currently available, we believe the disposition of the claims that are pending or asserted will not have a material adverse effect on our financial position, results of operations, or cash flow.
As of September 27, 2020, we were party to standby letters of credit, bank guaranties, and surety bonds totaling $ 5.9 million, $ 4.1 million, and $ 3.3 million, respectively.
Revenue Recognition
We recognize revenue consistent with the principles as outlined in the following five step model: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) each performance obligation is satisfied. See Note 2.
Subsequent Events
We evaluated subsequent events after the balance sheet date through the financial statement issuance date for appropriate accounting and disclosure.
Noncontrolling Interest
We have a 51 % ownership percentage in a joint venture with Shanghai Hi-Tech Control System Co, Ltd (Hite). The purpose of the joint venture is to develop and provide certain Industrial Solutions products and integrated solutions to customers in China. Belden and Hite are committed to fund $ 1.53 million and $ 1.47 million, respectively, to the joint venture in the future. The joint venture is determined to not have sufficient equity at risk; therefore, it is considered a variable interest entity. We have determined that Belden is the primary beneficiary of the joint venture, due to both our ownership percentage and our control over the activities of the joint venture that most significantly impact its economic performance based on the terms of the joint venture agreement with Hite. Because Belden is the primary beneficiary of the joint venture, we have consolidated the joint venture in our financial statements. The results of the joint venture attributable to Hite’s ownership are presented as net income (loss) attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations. The joint venture is not material to our Condensed Consolidated financial statements as of or for the periods ended September 27, 2020 and September 29, 2019.
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Furthermore, certain subsidiaries of our Opterna business, which we acquired in April of 2019 include noncontrolling interests. Because we have a controlling financial interest in these subsidiaries, they are consolidated into our financial statements. The results of these subsidiaries were consolidated into our financial statements as of the acquisition date. The results that are attributable to the noncontrolling interest holders are presented as net income attributable to noncontrolling interests in the Condensed Consolidated Statements of Operations. An immaterial amount of Opterna's annual revenues are generated from transactions with the noncontrolling interests. The subsidiaries of Opterna that include noncontrolling interests are not material to our Condensed Consolidated financial statements as of or for the periods ended September 27, 2020 and September 29, 2019.
Current-Year Adoption of Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses . Under the new standard, we are required to recognize estimated credit losses expected to occur over the estimated life or remaining contractual life of an asset (which includes losses that may be incurred in future periods) using a broader range of information including past events, current conditions, and reasonable and supportable forecasts about future economic conditions. We adopted ASU 2016-13 on January 1, 2020, which resulted in an increase to our allowance for doubtful accounts for continuing operations of $ 1.0 million, and an increase for discontinued operations of $ 1.9 million. See further discussion as well as adjustments to the allowance for doubtful accounts under the new credit loss model in Note 7.
Note 2: Revenues
Revenues are recognized when control of the promised goods or services is transferred to our customers and in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Taxes collected from customers and remitted to governmental authorities are not included in our revenues.
The following tables present our revenues disaggregated by major product category.
Broadband & 5G Cyber-security Industrial Automation Smart Buildings Total
Revenues
Three Months Ended September 27, 2020 (In thousands)
Enterprise Solutions $ 115,149 $ — $ — $ 113,948 $ 229,097
Industrial Solutions — 27,384 219,358 — 246,742
Total $ 115,149 $ 27,384 $ 219,358 $ 113,948 $ 475,839
Three Months Ended September 29, 2019
Enterprise Solutions $ 107,067 $ — $ — $ 140,169 $ 247,236
Industrial Solutions — 29,760 256,102 — 285,862
Total $ 107,067 $ 29,760 $ 256,102 $ 140,169 $ 533,098
Nine Months Ended September 27, 2020
Enterprise Solutions $ 318,765 $ — $ — $ 325,919 $ 644,684
Industrial Solutions — 78,829 640,663 — 719,492
Total $ 318,765 $ 78,829 $ 640,663 $ 325,919 $ 1,364,176
Nine Months Ended September 29, 2019
Enterprise Solutions $ 287,338 $ — $ — $ 412,306 $ 699,644
Industrial Solutions — 96,054 785,892 — 881,946
Total $ 287,338 $ 96,054 $ 785,892 $ 412,306 $ 1,581,590
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The following tables present our revenues disaggregated by geography, based on the location of the customer purchasing the product.
Americas EMEA APAC Total Revenues
Three Months Ended September 27, 2020 (In thousands)
Enterprise Solutions $ 170,734 $ 30,185 $ 28,178 $ 229,097
Industrial Solutions 148,421 59,180 39,141 246,742
Total $ 319,155 $ 89,365 $ 67,319 $ 475,839
Three Months Ended September 29, 2019
Enterprise Solutions $ 183,183 $ 36,065 $ 27,988 $ 247,236
Industrial Solutions 175,869 68,386 41,607 285,862
Total $ 359,052 $ 104,451 $ 69,595 $ 533,098
Nine Months Ended September 27, 2020
Enterprise Solutions $ 481,007 $ 92,197 $ 71,480 $ 644,684
Industrial Solutions 429,461 182,406 107,625 719,492
Total $ 910,468 $ 274,603 $ 179,105 $ 1,364,176
Nine Months Ended September 29, 2019
Enterprise Solutions $ 508,616 $ 106,823 $ 84,205 $ 699,644
Industrial Solutions 544,780 219,105 118,061 881,946
Total $ 1,053,396 $ 325,928 $ 202,266 $ 1,581,590
We generate revenues primarily by selling products that provide secure and reliable transmission of data, sound, and video for mission critical applications. We also generate revenues from providing support and professional services. We sell our products to distributors, end-users, installers, and directly to original equipment manufacturers. At times, we enter into arrangements that involve the delivery of multiple performance obligations. For these arrangements, revenue is allocated to each performance obligation based on its relative selling price and recognized when or as each performance obligation is satisfied. Most of our performance obligations related to the sale of products are satisfied at a point in time when control of the product is transferred based on the shipping terms of the arrangement. Generally, we determine relative selling price using the prices charged to customers on a standalone basis.
The amount of consideration we receive and revenue we recognize varies due to rebates, returns, and price adjustments. We estimate the expected rebates, returns, and price adjustments based on an analysis of historical experience, anticipated sales demand, and trends in product pricing. We adjust our estimate of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed. Adjustments to revenue for performance obligations satisfied in prior periods were not significant during the three and nine months ended September 27, 2020 and September 29, 2019.
The following table presents estimated and accrued variable consideration:
September 27, 2020 September 29, 2019
(in thousands)
Accrued rebates $ 25,085 $ 29,430
Accrued returns 12,001 10,292
Price adjustments recognized against gross accounts receivable 27,234 29,908
Depending on the terms of an arrangement, we may defer the recognition of some or all of the consideration received because we have to satisfy a future obligation. Consideration allocated to support services under a support and maintenance contract is typically paid in advance and recognized ratably over the term of the service. Consideration allocated to professional services is typically recognized when or as the services are performed depending on the terms of the arrangement. As of September 27, 2020, total deferred revenue was $ 70.2 million, and of this amount, $ 46.1 million is expected to be recognized within the next twelve months, and the remaining $ 24.1 million is long-term and is expected to be recognized over a period greater than twelve months.
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The following table presents deferred revenue activity:
2020 2019
(In thousands)
Beginning balance $ 70,070 $ 72,358
New deferrals 23,830 26,033
Revenue recognized ( 24,415 ) ( 32,168 )
Balance at March 29, 2020 69,485 66,223
New deferrals 21,322 21,892
Revenue recognized ( 22,200 ) ( 24,807 )
Balance at June 28, 2020 68,607 63,308
New deferrals 22,243 21,937
Revenue recognized ( 20,649 ) ( 25,063 )
Balance at September 27, 2020 $ 70,201 $ 60,182
We expense sales commissions as incurred when the duration of the related revenue arrangement is one year or less. We capitalize sales commissions in other current and long-lived assets on our balance sheet when the original duration of the related revenue arrangement is longer than one year, and we amortize it over the related revenue arrangement period.
Total capitalized sales commissions was $ 4.6 million as of September 27, 2020 and $ 3.0 million as of September 29, 2019. The following table presents sales commissions that are recorded within selling, general and administrative expenses:
Three Months ended Nine Months ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Sales commissions $ 4,240 $ 4,535 $ 12,270 $ 14,079
Note 3: Acquisitions
Special Product Company
On December 6, 2019, we purchased substantially all the assets, and assumed certain specified liabilities of Special Product Company (SPC) for a preliminary purchase price of $ 22.5 million. SPC, based in Kansas City, Kansas, is a leading designer, manufacturer, and seller of outdoor cabinet products for optical fiber cable installations. The results of SPC have been included in our Condensed Consolidated Financial Statements from December 6, 2019, and are reported within the Enterprise Solutions segment. The acquisition of SPC was not material to our financial position or results of operations.
Opterna International Corp.
We acquired 100 % of the shares of Opterna International Corp. (Opterna) on April 15, 2019 for a purchase price, net of cash acquired, of $ 51.7 million. Of the $ 51.7 million purchase price, $ 45.9 million was paid with cash on hand. The acquisition included a potential earnout, which is based upon future Opterna financial targets through April 15, 2021. The maximum earnout consideration is $ 25.0 million, but based upon a third party valuation specialist using certain assumptions in a discounted cash flow model, the estimated fair value of the earnout included in the purchase price is $ 5.8 million. Opterna is an international fiber optics solutions business based in Sterling, Virginia, which designs and manufactures a range of complementary fiber connectivity, cabinet, and enclosure products used in optical networks. The results of Opterna have been included in our Condensed Consolidated Financial Statements from April 15, 2019, and are reported within the Enterprise Solutions segment. Certain subsidiaries of Opterna include noncontrolling interests. Because Opterna has a controlling financial interest in these subsidiaries, they are consolidated into our financial statements. The results that are attributable to the noncontrolling interest holders are presented as net income attributable to noncontrolling interests in the Condensed Consolidated Statements of Operations. An immaterial amount of Opterna's annual revenues are generated from transactions with the noncontrolling interests. On October 25, 2019, we purchased the noncontrolling interest of one subsidiary for a purchase price of $ 0.8 million; of which $ 0.4 million was paid at closing and the remaining $ 0.4 million will be paid in 2021.
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The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed as of April 15, 2019 (in thousands):
Receivables $ 5,308
Inventory 7,359
Prepaid and other current assets 566
Property, plant, and equipment 1,328
Intangible assets 28,000
Goodwill 35,057
Deferred income taxes 80
Operating lease right-to-use assets 2,204
Other long-lived assets 2,070
Total assets acquired $ 81,972
Accounts payable $ 4,847
Accrued liabilities 4,301
Long-term deferred tax liability 6,813
Long-term operating lease liability 1,923
Other long-term liabilities 7,152
Total liabilities assumed $ 25,036
Net assets 56,936
Noncontrolling interests 5,195
Net assets attributable to Belden $ 51,741
We did not record any material measurement-period adjustments in the nine months ended September 27, 2020.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments we have used in estimating the fair values assigned to each class of acquired assets and assumed liabilities could materially affect the results of our operations.
The fair value of acquired receivables is $ 5.3 million, which is equivalent to its gross contractual amount.
For purposes of the above allocation, we based our estimate of the fair values for the acquired inventory, intangible assets, and noncontrolling interests on valuation studies performed by a third party valuation firm. We have estimated a fair value adjustment for inventories based on the estimated selling price of the work-in-process and finished goods acquired at the closing date less the sum of the costs to complete the work-in-process, the costs of disposal, and a reasonable profit allowance for our post acquisition selling efforts. We used various valuation methods including discounted cash flows, lost income, excess earnings, and relief from royalty to estimate the fair value of the identifiable intangible assets (Level 3 valuation). Our estimate of the fair values for the noncontrolling interests were based on the comparable EBITDA multiple valuation technique (Level 3 valuation).
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Goodwill and other intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill is primarily attributable to expansion of product offerings in the optical fiber market. Our tax basis in the acquired goodwill is zero . The intangible assets related to the acquisition consisted of the following:
Fair Value Amortization Period
(In thousands) (In years)
Intangible assets subject to amortization:
Developed technologies
$ 3,400 5.0
Customer relationships
22,800 15.0
Sales backlog
1,300 0.5
Trademarks
500 2.0
Total intangible assets subject to amortization
$ 28,000
Intangible assets not subject to amortization:
Goodwill
$ 35,057 n/a
Total intangible assets not subject to amortization
$ 35,057
Total intangible assets
$ 63,057
Weighted average amortization period 12.9
The amortizable intangible assets reflected in the table above were determined by us to have finite lives. The useful life for the developed technology intangible asset was based on the estimated time that the technology provides us with a competitive advantage and thus approximates the period and pattern of consumption of the intangible asset. The useful life for the customer relationship intangible asset was based on our forecasts of estimated sales from recurring customers. The useful life of the backlog intangible asset was based on our estimate of when the ordered items would ship and control of the items transfers. The useful life for the trademarks was based on the period of time we expect to continue to go to market using the trademarks.
The following table illustrates the unaudited pro forma effect on operating results as if the Opterna acquisition had been completed as of January 1, 2018.
Three Months Ended Nine Months Ended
September 29, 2019 September 29, 2019
(In thousands, except per share data)
(Unaudited)
Revenues $ 533,098 $ 1,590,206
Net income from continuing operations attributable to Belden common stockholders 39,721 91,459
Diluted income from continuing operations per share attributable to Belden common stockholders $ 0.89 $ 2.21
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results of operations would have been had we completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.
FutureLink
We acquired the FutureLink product line and related assets from Suttle, Inc. on April 5, 2019 for a purchase price of $ 5.0 million, which was funded with cash on hand. The acquisition of FutureLink allows us to offer a more complete set of fiber product offerings. The results from the acquisition of FutureLink have been included in our Condensed Consolidated Financial Statements from April 5, 2019, and are reported within the Enterprise Solutions segment. The acquisition of FutureLink was not material to our financial position or results of operations.
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Note 4: Discontinued Operations
We classify assets and liabilities as held for sale (disposal group) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
During the fourth quarter of 2019, we committed to a plan to sell Grass Valley, and at such time, met all of the criteria to classify the assets and liabilities of this business as held for sale. Furthermore, we determined a divestiture of Grass Valley represented a strategic shift that is expected to have a major impact on our operations and financial results. As a result, the Grass Valley disposal group, which was included in our Enterprise Solutions segment, is reported within discontinued operations. The Grass Valley disposal group excludes certain Grass Valley pension liabilities that we retained. We also ceased depreciating and amortizing the assets of the disposal group once they met the held for sale criteria during the fourth quarter of 2019.
We wrote down the carrying value of Grass Valley and recognized asset impairments totaling $ 113.0 million and $ 342.1 million in the nine months e nded September 27, 2020 and September 29, 2019, respectively. We determined the estimated fair values of the assets and of the reporting unit by calculating the present values of their estimated future cash flows.
We completed the sale of Grass Valley to Black Dragon Capital on July 2, 2020 and recognized a gain of $ 2.7 million, net of a $ 2.0 million income tax benefit. The terms of the sale included gross cash consideration of $ 120.0 million, or approximately $ 59.5 million net of cash delivered with the business and certain preliminary working capital adjustments. The sale also included deferred consideration consisting of a $ 175.0 million seller’s note that matures in 2025, up to $ 88 million in PIK (payment-in-kind) interest on the seller’s note, and $ 178.0 million in potential earnout payments. Based upon a third party valuation specialist using certain assumptions in a Monte Carlo analysis, the estimated fair value of the seller’s note is $ 34.9 million, which we recorded in Other Long-Lived Assets. We accounted for the earnout under a loss recovery approach and did not record an asset as of the disposal date. Any subsequent recognition of an earnout will be based on the gain contingency guidance.
As part of the transaction, we also invested $ 3.0 million for a 9 % equity interest in Grass Valley with the right to put the equity back to Black Dragon Capital at any time on or before October 31, 2020. On October 23, 2020, we notified Black Dragon Capital that we are exercising our right to put the equity back to them. We expect to finalize the sale of our equity interest during the fourth quarter of 2020. We deconsolidated Grass Valley as of July 2, 2020 and are accounting for our equity interest under the cost method. Our equity interest is recorded in Other Long-Lived Assets.
The seller’s note accrues PIK interest at an annual rate of 8.5 %. During the three months ended September 27, 2020, the seller’s note accrued interest of $ 3.6 million, which we reserved for based on our expected loss allowance methodology.
We are performing certain services for Grass Valley under a transition services agreement. During the three months ended September 27, 2020, the amount of transition services totaled $ 1.0 million, which we expect to collect in 2021.
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The following table summarizes the operating results of the disposal group up to the July 2, 2020 disposal date for the three and nine months ended September 27, 2020 and September 29, 2019, respectively:
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Revenues $ 1,334 $ 87,221 $ 109,195 $ 263,434
Cost of sales ( 1,008 ) ( 50,622 ) ( 70,199 ) ( 153,012 )
Gross profit 326 36,599 38,996 110,422
Selling, general and administrative expenses ( 574 ) ( 21,924 ) ( 37,435 ) ( 66,785 )
Research and development expenses ( 610 ) ( 7,360 ) ( 15,083 ) ( 28,526 )
Amortization of intangibles — ( 3,218 ) — ( 11,695 )
Asset impairment of discontinued operations — ( 342,146 ) ( 113,007 ) ( 342,146 )
Interest expense, net ( 12 ) ( 198 ) ( 432 ) ( 611 )
Non-operating pension benefit (cost) 27 ( 55 ) ( 169 ) ( 166 )
Loss before taxes $ ( 843 ) $ ( 338,302 ) $ ( 127,130 ) $ ( 339,507 )
The disposal group had capital expenditures of approximately $ 0.3 million and $ 16.7 million during the three and nine months ended September 27, 2020, respectively; and $ 8.3 million and $ 22.8 million during the three and nine months ended September 29, 2019, respectively.
The disposal group recognized credits to stock-based compensation of $ 0.0 million and $ 0.9 million during the three and nine months ended September 27, 2020, respectively. The disposal group incurred stock based compensation expense of $ 0.2 million and $ 0.8 million during the three and nine months ended September 29, 2019, respectively.
The disposal group did not have any significant non-cash charges for investing activities during the three and nine months ended September 27, 2020 or September 29, 2019 .
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The following table provides the major classes of assets and liabilities of the disposal group as of December 31, 2019:
December 31, 2019
(In thousands)
Assets:
Cash and cash equivalents $ 18,405
Receivables, net 117,386
Inventories, net 55,002
Other current assets 35,187
Plant, property, and equipment, less accumulated depreciation 61,233
Operating lease right-of-use assets 16,902
Goodwill 26,707
Intangible assets, less accumulated depreciation 143,459
Deferred income taxes 59,560
Other long-lived assets 21,652
Impairment of disposal group ( 180,358 )
Total Assets of discontinued operations $ 375,135
Liabilities:
Accounts payable $ 52,425
Accrued liabilities 83,349
Postretirement benefits 6,224
Deferred income taxes 2,740
Long-term operating lease liabilities 20,459
Other long-term liabilities 5,082
Total Liabilities of discontinued operations $ 170,279
The disposal group also had $ 42.3 million of accumulated other comprehensive losses as of December 31, 2019.
Note 5: Reportable Segments
We are organized around two global business platforms: Enterprise Solutions and Industrial Solutions. Each of the global business platforms represents a reportable segment.
Effective January 1, 2020, we transferred our West Penn Wire business and multi-conductor product lines from the Enterprise Solutions segment to the Industrial Solutions segment as a result of a shift in responsibilities among the segments. We have recast the prior period segment information to conform to the change in the composition of reportable segments.
The key measures of segment profit or loss are Segment Revenues and Segment EBITDA. Segment Revenues represent non-affiliate revenues and include revenues that would have otherwise been recorded by acquired businesses as independent entities but were not recognized in our Condensed Consolidated Statements of Operations and Comprehensive Income due to the effects of purchase accounting and the associated write-down of acquired deferred revenue to fair value. Segment EBITDA excludes certain items, including depreciation expense; amortization of intangibles; asset impairment; severance, restructuring, and acquisition integration costs; purchase accounting effects related to acquisitions, such as the adjustment of acquired inventory and deferred revenue to fair value; and other costs. We allocate corporate expenses to the segments for purposes of measuring Segment EBITDA. Corporate expenses are allocated on the basis of each segment’s relative EBITDA prior to the allocation.
Our measure of segment assets does not include cash, goodwill, intangible assets, deferred tax assets, or corporate assets. All goodwill is allocated to reporting units of our segments for purposes of impairment testing.
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Enterprise Solutions Industrial Solutions Total Segments
(In thousands)
As of and for the three months ended September 27, 2020
Segment revenues $ 229,097 $ 246,742 $ 475,839
Affiliate revenues 231 10 241
Segment EBITDA 26,250 38,391 64,641
Depreciation expense 5,005 5,450 10,455
Amortization of intangibles 5,408 10,696 16,104
Amortization of software development intangible assets 73 456 529
Severance, restructuring, and acquisition integration costs 1,337 20 1,357
Segment assets 519,142 486,110 1,005,252
As of and for the three months ended September 29, 2019
Segment revenues $ 247,236 $ 285,862 $ 533,098
Affiliate revenues 753 2 755
Segment EBITDA 35,868 54,849 90,717
Depreciation expense 4,919 5,060 9,979
Amortization of intangibles 6,269 12,757 19,026
Amortization of software development intangible assets 49 36 85
Severance, restructuring, and acquisition integration costs 3,047 — 3,047
Purchase accounting effects of acquisitions ( 186 ) — ( 186 )
Segment assets 517,448 501,278 1,018,726
As of and for the nine months ended September 27, 2020
Segment revenues $ 644,684 $ 719,492 $ 1,364,176
Affiliate revenues 940 30 970
Segment EBITDA 73,193 100,367 173,560
Depreciation expense 15,208 15,861 31,069
Amortization of intangibles 16,266 32,040 48,306
Amortization of software development intangible assets 184 1,061 1,245
Severance, restructuring, and acquisition integration costs 6,310 3,138 9,448
Purchase accounting effects of acquisitions 125 — 125
Segment assets 519,142 486,110 1,005,252
As of and for the nine months ended September 29, 2019
Segment revenues $ 699,644 $ 881,946 $ 1,581,590
Affiliate revenues 3,190 19 3,209
Segment EBITDA 93,074 165,257 258,331
Depreciation expense 14,576 15,414 29,990
Amortization of intangibles 16,694 39,564 56,258
Amortization of software development intangible assets 120 87 207
Severance, restructuring, and acquisition integration costs 5,566 — 5,566
Purchase accounting effects of acquisitions 532 — 532
Segment assets 517,448 501,278 1,018,726
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The following table is a reconciliation of the total of the reportable segments’ Revenues and EBITDA to consolidated revenues and consolidated income from continuing operations before taxes, respectively.
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Total Segment and Consolidated Revenues $ 475,839 $ 533,098 $ 1,364,176 $ 1,581,590
Total Segment EBITDA $ 64,641 $ 90,717 $ 173,560 $ 258,331
Amortization of intangibles ( 16,104 ) ( 19,026 ) ( 48,306 ) ( 56,258 )
Depreciation expense ( 10,455 ) ( 9,979 ) ( 31,069 ) ( 29,990 )
Severance, restructuring, and acquisition integration costs (1) ( 1,357 ) ( 3,047 ) ( 9,448 ) ( 5,566 )
Amortization of software development intangible assets ( 529 ) ( 85 ) ( 1,245 ) ( 207 )
Purchase accounting effects related to acquisitions (2) — 186 ( 125 ) ( 532 )
Eliminations ( 69 ) ( 1,224 ) ( 402 ) ( 1,971 )
Consolidated operating income 36,127 57,542 82,965 163,807
Interest expense, net ( 15,607 ) ( 14,002 ) ( 43,188 ) ( 41,951 )
Total non-operating pension benefit 680 544 2,079 1,684
Consolidated income from continuing operations before taxes $ 21,200 $ 44,084 $ 41,856 $ 123,540
(1) See Note 11, Severance, Restructuring, and Acquisition Integration Activities, for details.
(2) During the nine months ended September 27, 2020, we recognized cost of sales related to purchase accounting adjustments of acquired inventory to fair value for the SPC acquisition. For the three and nine months ended September 29, 2019, we recognized cost of sales for the adjustment of acquired inventory to fair value related to the Opterna and FutureLink acquisitions.
Note 6: Income (loss) per Share
The following table presents the basis for the income (loss) per share computations:
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Numerator:
Income from continuing operations $ 20,569 $ 38,031 $ 38,633 $ 107,361
Less: Net income (loss) attributable to noncontrolling interest 85 ( 6 ) 79 60
Less: Preferred stock dividends — 971 — 18,437
Income from continuing operations attributable to Belden common stockholders 20,484 37,066 38,554 88,864
Add: Loss from discontinued operations, net of tax ( 6,231 ) ( 335,046 ) ( 103,395 ) ( 336,908 )
Add: Gain on disposal of discontinued operations, net of tax 2,743 — 2,743 —
Net income (loss) attributable to Belden common stockholders $ 16,996 $ ( 297,980 ) $ ( 62,098 ) $ ( 248,044 )
Denominator:
Weighted average shares outstanding, basic 44,567 44,444 44,834 41,090
Effect of dilutive common stock equivalents 142 166 134 209
Weighted average shares outstanding, diluted 44,709 44,610 44,968 41,299
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For the three and nine months ended September 27, 2020, diluted weighted average shares outstanding exclude outstanding equity awards of 1.6 million and 1.5 million, respectively, which are anti-dilutive. In addition, for both the three and nine months ended September 27, 2020, diluted weighted average shares outstanding do not include outstanding equity awards of 0.4 million because the related performance conditions have not been satisfied.
For the three and nine months ended September 29, 2019, diluted weighted average shares outstanding exclude outstanding equity awards of 1.4 million and 1.2 million, respectively, which are anti-dilutive. In addition, for both the three and nine months ended September 29, 2019, diluted weighted average shares outstanding do not include outstanding equity awards of 0.3 million because the related performance conditions have not been satisfied. Furthermore, for the three and nine months ended September 29, 2019, diluted weighted average shares outstanding do not include the impact of preferred shares that were converted into 1.1 million and 4.9 million common shares, because deducting the preferred stock dividends from net income was more dilutive.
For purposes of calculating basic earnings per share, unvested restricted stock units are not included in the calculation of basic weighted average shares outstanding until all necessary conditions have been satisfied and issuance of the shares underlying the restricted stock units is no longer contingent. Necessary conditions are not satisfied until the vesting date, at which time holders of our restricted stock units receive shares of our common stock.
For purposes of calculating diluted earnings per share, unvested restricted stock units are included to the extent that they are dilutive. In determining whether unvested restricted stock units are dilutive, each issuance of restricted stock units is considered separately.
Once a restricted stock unit has vested, it is included in the calculation of both basic and diluted weighted average shares outstanding.
Note 7: Credit Losses
Effective January 1, 2020, we adopted ASU 2016-13 , Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments prospectively. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. Upon adoption, we recorded a noncash cumulative effect adjustment to retained earnings of $ 2.9 million. Of this amount, $ 1.0 million related to our continuing operations and $ 1.9 million related to our discontinued operations.
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
Estimates are used to determine the allowance, which is based upon an assessment of anticipated payments as well as other historical, current and future information that is reasonably available. The following table presents the activity in the allowance for doubtful accounts for our continuing operations for the three and nine months ended September 27, 2020 (in thousands).
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Balance at December 31, 2019 $ 2,569
Adoption adjustment 1,011
Current period provision ( 172 )
Recoveries collected ( 9 )
Fx impact ( 213 )
Balance at March 29, 2020 $ 3,186
Current period provision 2,621
Writeoffs ( 52 )
Recoveries collected ( 100 )
Fx impact 37
Balance at June 28, 2020 $ 5,692
Current period provision ( 108 )
Writeoffs ( 76 )
Fx impact 29
Balance at September 27, 2020 $ 5,537
Note 8: Inventories
The major classes of inventories were as follows:
September 27, 2020 December 31, 2019
(In thousands)
Raw materials $ 112,957 $ 98,530
Work-in-process 34,348 34,717
Finished goods 125,774 119,331
Gross inventories 273,079 252,578
Excess and obsolete reserves ( 28,264 ) ( 21,245 )
Net inventories $ 244,815 $ 231,333
Note 9: Leases
We have operating and finance leases for properties, including manufacturing facilities, warehouses, and office space; as well as vehicles and certain equipment. We make certain judgments in determining whether a contract contains a lease in accordance with ASU 2016-02. Our leases have remaining lease terms of less than 1 year to 16 years; some of which include extension and termination options for an additional 15 years or within 1 year, respectively. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably certain as of the commencement date of the lease. Our lease agreements do not contain any material residual value guarantees or material variable lease payments.
We have entered into various short-term operating leases with an initial term of twelve months or less. These leases are not recorded on our balance sheet, and for the three and nine months ended September 27, 2020 and September 29, 2019, the rent expense for short-term leases was not material.
We have certain property and equipment lease contracts that may contain lease and non-lease components, and we have elected to utilize the practical expedient to account for these components together as a single combined lease component.
As the rate implicit in most of our leases is not readily determinable, we use the incremental borrowing rate to determine the present value of the lease payments, which is unique to each leased asset, and is based upon the term of the lease, commencement date of the lease, local currency of the leased asset, and the credit rating of the legal entity leasing the asset.
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The components of lease expense were as follows:
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Operating lease cost $ 3,571 $ 3,432 $ 10,512 $ 10,872
Finance lease cost
Amortization of right-of-use asset $ 35 $ 37 $ 101 $ 104
Interest on lease liabilities 4 6 13 16
Total finance lease cost $ 39 $ 43 $ 114 $ 120
Supplemental cash flow information related to leases was as follows:
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 3,891 $ 3,528 $ 11,352 $ 10,770
Operating cash flows from finance leases 4 6 13 20
Financing cash flows from finance leases 43 64 130 210
Supplemental balance sheet information related to leases was as follows:
September 27, 2020 December 31, 2019
(In thousands, except lease term and discount rate)
Operating leases:
Total operating lease right-of-use assets
$ 57,380 $ 62,251
Accrued liabilities $ 14,657 $ 13,900
Long-term operating lease liabilities 49,209 55,652
Total operating lease liabilities $ 63,866 $ 69,552
Finance leases:
Other long-lived assets, at cost $ 759 $ 823
Accumulated depreciation ( 449 ) ( 391 )
Other long-lived assets, net $ 310 $ 432
Weighted Average Remaining Lease Term
Operating leases 5 years 6 years
Finance leases 2 years 3 years
Weighted Average Discount Rate
Operating leases 6.6 % 6.9 %
Finance leases 6.0 % 6.2 %
The following table summarizes maturities of lease liabilities as of September 27, 2020 (in thousands):
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2020 $ 5,080
2021 19,129
2022 16,220
2023 12,446
2024 9,436
Thereafter 17,433
Total $ 79,744
The following table summarizes maturities of lease liabilities as of December 31, 2019 (in thousands):
2020 $ 19,086
2021 16,988
2022 14,128
2023 11,598
2024 9,032
Thereafter 16,655
Total $ 87,487
Note 10: Long-Lived Assets
Depreciation and Amortization Expense
We recognized depreciation expense of $ 10.5 million and $ 31.1 million in the three and nine months ended September 27, 2020, respectively. We recognized depreciation expense of $ 10.0 million and $ 30.0 million in the three and nine ended September 29, 2019, respectively.
We recognized amortization expense related to our intangible assets of $ 16.6 million and $ 49.6 million in the three and nine months ended September 27, 2020, respectively. We recognized amortization expense related to our intangible assets of $ 19.1 million and $ 56.5 million in the three and nine ended September 29, 2019, respectively.
Interim Impairment Test
Due to equity market conditions during the nine months ended September 27, 2020, we conducted an interim impairment test. We determined that the carrying values of our definite-lived assets were recoverable; therefore, we did not record any impairment charges related to these assets. Goodwill is tested for impairment at the reporting unit level, and we conducted a quantitative interim impairment test for one of our reporting units. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our reportable segments (Enterprise Solutions and Industrial Solutions) represents an operating segment. Within those operating segments, we have identified reporting units based on whether there is discrete financial information prepared that is regularly reviewed by segment management.
When we evaluate goodwill for impairment using a quantitative assessment, we compare the fair value of each reporting unit to its carrying value. We determine the fair value using an income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows using growth rates and discount rates that are consistent with current market conditions in our industry. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. In addition to the income approach, we calculate the fair value of our reporting units under a market approach. The market approach measures the fair value of a reporting unit through analysis of financial multiples of comparable businesses. Consideration is given to the financial conditions and operating performance of the reporting unit being valued relative to those publicly-traded companies operating in the same or similar lines of business. Significant judgment is required when applying the market approach as there is a range of financial multiples of comparable businesses.
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Based on our interim goodwill impairment test, we determined that the fair value of the reporting unit was in excess of its carrying value by approximately 2 %; therefore, we did not record any goodwill impairment. The significant assumptions used to estimate fair value included sales growth, profitability, and related cash flows, along with cash flows associated with taxes and capital spending. To estimate the fair value, we used a 10.5 % discount rate that reflected the economic conditions in effect at the time of the impairment test. We also considered assumptions that market participants may use. In our quantitative assessment, the 2020 to 2029 compounded annual revenue growth rate was 6.0 % and the revenue growth rate beyond 2029 was 3.0 %. By their nature, these assumptions involve risks and uncertainties. Furthermore, uncertainties associated with current market conditions increase the inherent risk associated with using an income approach to estimate fair values. While we have adjusted our key assumptions to reflect the current economic conditions, we have also assumed that economic conditions will improve beyond 2020. If current conditions persist and actual results are different from our estimates or assumptions, we may have to recognize an impairment charge that could be material.
Note 11: Severance, Restructuring, and Acquisition Integration Activities
Cost Reduction Program: 2019
During the fourth quarter of 2019, we began a cost reduction program to improve performance and enhance margins by streamlining the organizational structure and investing in technology to drive productivity. We recognized $ 0.2 million and $ 3.2 million of severance and other restructuring costs for this program during the three and nine months ended September 27, 2020, respectively. These costs were incurred by both the Enterprise Solutions and Industrial Solutions segments. The cost reduction program is expected to deliver an estimated $ 60.0 million reduction in selling, general, and administrative expenses on an annual basis, of which $ 40.0 million is expected to be realized in 2020, with the full benefit materializing in 2021. We expect to incur incremental costs of approximately $ 9.6 million for this program.
SPC, Opterna and FutureLink Integration Program: 2019
In 2019, we began a restructuring program to integrate SPC, Opterna and FutureLink with our existing businesses. The restructuring and integration activities were focused on achieving desired cost savings by consolidating existing and acquired facilities and other support functions. We recognized $ 0.9 million and $ 4.0 million of severance and other restructuring costs for this program during the three and nine months ended September 27, 2020, respectively. We recognized $ 3.1 million and $ 5.6 million of severance and other restructuring costs for this program during the three and nine months ended September 29, 2019. These costs were incurred by the Enterprise Solutions segment. We expect to incur incremental costs of approximately $ 0.6 million for this program.
The following table summarizes the costs by segment of the programs described above as well as other immaterial programs and acquisition integration activities during the three and nine months ended September 27, 2020 and September 29, 2019:
Severance Other
Restructuring and
Integration Costs Total Costs
Three Months Ended September 27, 2020 (In thousands)
Enterprise Solutions $ 327 $ 1,010 $ 1,337
Industrial Solutions 314 ( 294 ) 20
Total $ 641 $ 716 $ 1,357
Three Months Ended September 29, 2019
Enterprise Solutions $ 269 $ 2,778 $ 3,047
Industrial Solutions — — —
Total $ 269 $ 2,778 $ 3,047
Nine Months Ended September 27, 2020
Enterprise Solutions $ 1,162 $ 5,148 $ 6,310
Industrial Solutions 1,132 2,006 3,138
Total $ 2,294 $ 7,154 $ 9,448
Nine Months Ended September 29, 2019
Enterprise Solutions $ 269 $ 5,297 $ 5,566
Industrial Solutions — — —
Total $ 269 $ 5,297 $ 5,566
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The other restructuring and integration costs primarily consisted of equipment transfer, costs to consolidate operating and support facilities, retention bonuses, relocation, travel, legal, and other costs. The majority of the other restructuring and integration costs related to these actions were paid as incurred or are payable within the next 60 days.
The following table summarizes the costs of the various programs described above as well as other immaterial programs and acquisition integration activities by financial statement line item in the Condensed Consolidated Statement of Operations:
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In Thousands)
Cost of sales $ 85 $ 792 $ 222 $ 1,092
Selling, general and administrative expenses 1,272 2,255 9,226 4,474
Total $ 1,357 $ 3,047 $ 9,448 $ 5,566
Accrued Severance
The table below sets forth severance activity that occurred for the Cost Reduction Program as well as the SPC, Opterna and FutureLink Integration Program described above. The balances below are included in accrued liabilities (in thousands).
Balance at December 31, 2019 $ 19,575
New charges 2,529
Cash payments ( 4,483 )
Foreign currency translation ( 89 )
Other adjustments ( 4,147 )
Balance at March 29, 2020 13,385
New charges 4,660
Cash payments ( 4,795 )
Foreign currency translation ( 132 )
Other adjustments ( 1,420 )
Balance at June 28, 2020 11,698
New charges 2,060
Cash payments ( 3,968 )
Foreign currency translation ( 156 )
Other adjustments ( 1,541 )
Balance at September 27, 2020 $ 8,093
The other adjustments were the result of changes in estimates. We experienced higher than expected voluntary turnover, and as a result, certain approved severance actions were not taken.
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Note 12: Long-Term Debt and Other Borrowing Arrangements
The carrying values of our long-term debt were as follows:
September 27, 2020 December 31, 2019
(In thousands)
Revolving credit agreement due 2022 $ — $ —
Senior subordinated notes:
3.875 % Senior subordinated notes due 2028
408,835 392,910
3.375 % Senior subordinated notes due 2027
525,645 505,170
4.125 % Senior subordinated notes due 2026
233,620 224,520
2.875 % Senior subordinated notes due 2025
350,430 336,780
Total senior subordinated notes 1,518,530 1,459,380
Less unamortized debt issuance costs ( 17,814 ) ( 19,896 )
Long-term debt $ 1,500,716 $ 1,439,484
Revolving Credit Agreement due 2022
Our Revolving Credit Agreement provides a $ 400.0 million multi-currency asset-based revolving credit facility (the Revolver). The borrowing base under the Revolver includes eligible accounts receivable; inventory; and property, plant and equipment of certain of our subsidiaries in the U.S., Canada, Germany, and the Netherlands. The maturity date of the Revolver is May 16, 2022. Interest on outstanding borrowings is variable, based upon LIBOR or other similar indices in foreign jurisdictions, plus a spread that ranges from 1.25 %- 1.75 %, depending upon our leverage position. We pay a commitment fee on our available borrowing capacity of 0.25 %. In the event we borrow more than 90 % of our borrowing base, we are subject to a fixed charge coverage ratio covenant.
Due to the initial uncertainties arising from the COVID-19 pandemic and out of an abundance of caution, we borrowed $ 190.0 million on our Revolver at the beginning of the second quarter. As a result of improving and sufficient cash flow and liquidity throughout the year, we subsequently repaid $ 100.0 million and the remaining $ 90.0 million during the second and third quarter, respectively. As of September 27, 2020, our available borrowing capacity was $ 265.2 million.
Senior Subordinated Notes
We have outstanding € 350.0 million aggregate principal amount of 3.875 % senior subordinated notes due 2028 (the 2028 Notes). The carrying value of the 2028 Notes as of September 27, 2020 is $ 408.8 million. The 2028 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2028 Notes rank equal in right of payment with our senior subordinated notes due 2027, 2026, and 2025 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on March 15 and September 15 of each year.
We have outstanding € 450.0 million aggregate principal amount of 3.375 % senior subordinated notes due 2027 (the 2027 Notes). The carrying value of the 2027 Notes as of September 27, 2020 is $ 525.6 million. The 2027 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2027 Notes rank equal in right of payment with our senior subordinated notes due 2028, 2026, and 2025 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on January 15 and July 15 of each year.
We have outstanding € 200.0 million aggregate principal amount of 4.125 % senior subordinated notes due 2026 (the 2026 Notes). The carrying value of the 2026 Notes as of September 27, 2020 is $ 233.6 million. The 2026 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2026 Notes rank equal in right of payment with our senior subordinated notes due 2028, 2027, and 2025 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on April 15 and October 15 of each year.
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We have outstanding € 300.0 million aggregate principal amount of 2.875 % senior subordinated notes due 2025 (the 2025 Notes). The carrying value of the 2025 Notes as of September 27, 2020 is $ 350.4 million. The 2025 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2025 Notes rank equal in right of payment with our senior subordinated notes due 2028, 2027, and 2026 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on March 15 and September 15 of each year.
Fair Value of Long-Term Debt
The fair value of our senior subordinated notes as of September 27, 2020 was approximately $ 1,500.2 million based on quoted prices of the debt instruments in inactive markets (Level 2 valuation). This amount represents the fair value of our senior subordinated notes with a carrying value of $ 1,518.5 million as of September 27, 2020.
Note 13: Net Investment Hedge
All of our euro denominated notes were issued by Belden Inc., a USD functional currency entity. As of September 27, 2020, € 767.8 million of our outstanding foreign denominated debt is designated as a net investment hedge on the foreign currency risk of our net investment in our euro foreign operations. The objective of the hedge is to protect the net investment in the foreign operation again st adverse changes in the euro exchange rate. The transaction gain or loss is reported in the translation adjustment section of other comprehensive income. For the nine months ended September 27, 2020 and September 29, 2019, the transaction gain/(loss) associated with the net investment hedge reported in other comprehensive income was $( 13.1 ) million and $ 62.1 million, respectively. During the nine months ended September 27, 2020, we de-designated € 532.2 million of our outstanding debt that was previously designated as a net investment hedge. After the de-designation, transaction gains or losses associated with this € 532.2 million of debt are reported in income from continuing operations.
Note 14: Income Taxes
For the three and nine months ended September 27, 2020, we recognized income tax expense of $ 0.6 million and $ 3.2 million, respectively, representing an effective tax rate of 3.0 % and 7.7 %, respectively. The effective tax rates were impacted by income tax benefits for certain foreign tax credits of $ 0.9 million and $ 2.1 million in the three and nine months ended September 27, 2020, respectively. In March 2020, the Coronavirus Relief and Economic Security Act (CARES Act) was signed into law in the United States. We are still analyzing the provisions of the CARES Act to determine if there will be any impact to our income tax provision for the year.
For the three and nine months ended September 29, 2019, we recognized income tax expense of $ 6.1 million and $ 16.2 million, respectively, representing an effective tax rate of 13.7 % and 13.1 %, respectively. The effective tax rates were impacted by an income tax benefit of $ 5.7 million as a result of changes in our estimated valuation allowance requirement related to foreign tax credits due to the restructuring of certain foreign operations. These effective rates are also reflective of the impact of more favorable statutory tax rates applied to the earnings of these foreign operations due to the restructuring efforts.
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Note 15: Pension and Other Postretirement Obligations
The following table provides the components of net periodic benefit costs for our pension and other postretirement benefit plans:
Pension Obligations Other Postretirement Obligations
Three Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Service cost $ 885 $ 978 $ 8 $ 10
Interest cost 2,493 2,901 202 273
Expected return on plan assets ( 4,091 ) ( 3,841 ) — —
Amortization of prior service cost (credit) 47 ( 143 ) — —
Actuarial losses (gains) 688 292 ( 19 ) ( 25 )
Net periodic benefit cost
$ 22 $ 187 $ 191 $ 258
Nine Months Ended
Service cost $ 2,709 $ 2,952 $ 24 $ 29
Interest cost 7,240 8,779 599 815
Expected return on plan assets ( 12,035 ) ( 11,978 ) — —
Amortization of prior service cost (credit) 136 ( 117 ) — —
Actuarial losses (gains) 2,038 894 ( 57 ) ( 76 )
Net periodic benefit cost
$ 88 $ 530 $ 566 $ 768
Note 16: Comprehensive Income and Accumulated Other Comprehensive Income (Loss)
The following table summarizes total comprehensive income (losses):
Three Months Ended Nine Months Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
(In thousands)
Net income (loss) $ 17,081 $ ( 297,015 ) $ ( 62,019 ) $ ( 229,547 )
Foreign currency translation adjustments, net of $ 0.0 million, $ 0.2 million, $ 1.0 million, and $ 0.6 million tax, respectively
( 52,910 ) 33,732 ( 75,791 ) 45,619
Adjustments to pension and postretirement liability, net of $ 0.1 million, $ 0.0 million, $ 0.3 million, and $ 0.2 million tax, respectively
1,136 120 1,891 591
Total comprehensive loss ( 34,693 ) ( 263,163 ) ( 135,919 ) ( 183,337 )
Less: Comprehensive income attributable to noncontrolling interests 228 367 219 474
Comprehensive loss attributable to Belden $ ( 34,921 ) $ ( 263,530 ) $ ( 136,138 ) $ ( 183,811 )
The accumulated balances related to each component of other comprehensive income (loss), net of tax, are as follows:
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Foreign Currency Translation Component Pension and Other
Postretirement
Benefit Plans Accumulated Other
Comprehensive Income (Loss)
(In thousands)
Balance at December 31, 2019 $ ( 18,225 ) $ ( 45,193 ) $ ( 63,418 )
Other comprehensive loss attributable to Belden before reclassifications ( 86,076 ) — ( 86,076 )
Amounts reclassified from accumulated other comprehensive income (loss) 10,145 1,891 12,036
Net current period other comprehensive gain (loss) attributable to Belden ( 75,931 ) 1,891 ( 74,040 )
Balance at September 27, 2020 $ ( 94,156 ) $ ( 43,302 ) $ ( 137,458 )
The following table summarizes the effects of reclassifications from accumulated other comprehensive income (loss) for the nine months ended September 27, 2020:
Amount Reclassified from Accumulated Other
Comprehensive Income Affected Line Item in the
Consolidated Statements
of Operations and
Comprehensive Income
(In thousands)
Amortization of pension and other postretirement benefit plan items:
Actuarial losses $ 1,408 (1)
Accumulated losses of Grass Valley disposal group 771 (2)
Prior service cost 62 (1)
Total before tax 2,241
Tax benefit ( 350 )
Total net of tax $ 1,891
(1) The amortization of these accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit costs (see Note 15). The amounts in the table above include both continuing and discontinued operations.
(2) In addition, we reclassified $ 10.1 million of accumulated foreign currency translation losses associated with the Grass Valley disposal group that are included in the calculation of the gain on disposal of discontinued operations.
Note 17: Preferred Stock
In 2016, we issued 5.2 million depositary shares, each of which represented 1/100th interest in a share of 6.75 % Series B Mandatory Convertible Preferred Stock (the Preferred Stock), for an offering price of $ 100 per depositary share. We received approximately $ 501 million of net proceeds from this offering, which were used for general corporate purposes. On July 15, 2019, all outstanding Preferred Stock was automatically converted into shares of Belden common stock at the conversion rate of 132.50 , resulting in the issuance of approximately 6.9 million shares of Belden common stock. Upon conversion, the Preferred Stock was automatically extinguished and discharged, is no longer deemed outstanding for all purposes, and delisted from trading on the New York Stock Exchange. During the three and nine months ended September 29, 2019, dividends on the Preferred Stock were $ 1.0 million and $ 18.4 million, respectively.
Note 18: Share Repurchase
On November 29, 2018, our Board of Directors authorized a share repurchase program, which allows us to purchase up to $ 300.0 million of our common stock through open market repurchases, negotiated transactions, or other means, in accordance with applicable securities laws and other restrictions. This program is funded with cash on hand and cash flows from operating activities. During the nine months ended September 27, 2020, we repurchased 1.0 million shares of our common stock under the share repurchase program for an aggregate cost of $ 35.0 million at an average price per share of $ 35.83 . During the three months ended September 29, 2019, we repurchased 0.5 million shares of our common stock under the share repurchase program for an aggregate cost of $ 27.2 million and an average price per share of $ 55.17 . During the nine months ended September 29, 2019, we repurchased 0.9 million shares of our common stock under the share repurchase program for an aggregate cost of $ 50.0 million and an average price per share of $ 56.19 .
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.