Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a global supplier of specialty networking solutions built around two global business platforms – Enterprise Solutions and Industrial Solutions. Our comprehensive portfolio of signal transmission solutions provides industry leading secure and reliable transmission of data, sound, and video for mission critical applications. 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.
We strive to create shareholder value by:
• Delivering highly engineered signal transmission solutions for mission-critical applications in a diverse set of global markets;
• Maintaining a balanced product portfolio across end markets, applications, and geographies that allows for a disciplined approach to growth;
• Capturing additional market share by using our Market Delivery System to improve channel and end-user relationships and to concentrate sales efforts on customers in higher growth geographies and vertical end-markets;
• Managing our product portfolio to provide innovative and complete end-to-end solutions for our customers in applications for which we have operational expertise and can drive customer loyalty;
• Acquiring leading companies with innovative product portfolios and opportunities for synergies which fit within our strategic framework;
• Continuously improving our processes and systems through scalable, flexible, and sustainable business systems for talent management, Lean enterprise, and acquisition cultivation and integration; and
• Protecting and enhancing the value of the Belden brands.
We believe our business system, balance across markets and geographies, systematic go-to-market approach, extensive portfolio of innovative solutions, commitment to Lean principles, and improving margin profile present a unique value proposition for our shareholders.
We consider adjusted revenue growth on a constant currency basis, adjusted EBITDA margin, free cash flow, and return on invested capital to be our key operating performance indicators. Our current business goals are to:
• Grow adjusted revenues on a constant currency basis by 5-7% per year, from a combination of end market growth, market share capture, and contributions from acquisitions;
• Achieve adjusted EBITDA margins in the range of 20-22%;
• Achieve free cash flow growth in the range of 13-15%; and
• Realize return on invested capital of 13-15%.
Significant Trends and Events in 2020
The following trends and events during 2020 had varying effects on our financial condition, results of operations, and cash flows.
Global Pandemic
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of the novel coronavirus (COVID-19) a pandemic. We expect the outbreak of COVID-19 will continue to result in significant economic disruption and will continue to adversely affect our business in the future. As compared to the year ago period, we expect to continue to experience reductions in customer demand in several of our end-markets. We expect that the social distancing measures, the reduced operational status of some of our suppliers and reductions in production at certain facilities will continue to have an adverse impact on our operations, and general business uncertainty will continue to negatively impact demand in several of our end-markets in the near future.
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Our foremost focus has been on the health and safety of our employees and customers. In response to the outbreak, we have modified practices at our manufacturing locations and offices to adhere to guidance from the WHO, the U.S. Centers for Disease Control and Prevention and other local health and governmental authorities with respect to social distancing, physical separation, personal protective equipment and sanitization. We are approaching our response to this outbreak with a recognition that we provide essential and important products and services upon which our customers rely upon daily to support critical functions. Therefore, most, but not all, of our U.S. and global facilities have remained substantially operational during the outbreak while implementing enhanced safety protocols designed to protect the well-being of our employees.
The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time. We will continue to proactively respond to the situation and may take further actions that alter our business operations as may be required by governmental authorities, or that we determine are in the best interests of our employees and customers.
Data Security Incident
In November 2020, our information technology network was impacted by a data incident. We took immediate steps to contain the incident as well as notified law enforcement and cybersecurity experts. This matter did not impact production at our manufacturing plants nor shipping and quality control. The personal information of current and former employees, as well as limited company information of some of our business partners was accessed. We timely notified the impacted individuals and companies in addition to the appropriate governmental data privacy authorities. Impacted individuals were offered credit monitoring and/or identity protection services, where available, at no charge. We do not believe that the incident will have a material impact on our business or financial condition. Security, in all forms, remains a critical priority, and we will continue to take all appropriate measures to further safeguard the integrity of our information technology infrastructure.
Foreign currency
Our exposure to currency rate fluctuations primarily relates to exchange rate movements between the U.S. dollar and the euro, Canadian dollar, Hong Kong dollar, Chinese yuan, Mexican peso, Australian dollar, British pound, Indian rupee, and Brazilian real. Generally, as the U.S. dollar strengthens against these foreign currencies, our revenues and earnings are negatively impacted as our foreign denominated revenues and earnings are translated into U.S. dollars at a lower rate. Conversely, as the U.S. dollar weakens against foreign currencies, our revenues and earnings are positively impacted. Because all of our senior subordinated notes are denominated in euros, interest expense on the notes is affected by exchange rate movements between the U.S. dollar and the euro.
In addition to the translation impact described above, currency rate fluctuations have an economic impact on our financial results. As the U.S. dollar strengthens or weakens against foreign currencies, it results in a relative price increase or decrease for certain of our products that are priced in U.S. dollars in a foreign location.
Commodity Prices
Our operating results can be affected by changes in prices of commodities, primarily copper and compounds, which are components in some of the products we sell. Generally, as the costs of inventory purchases increase due to higher commodity prices, we raise selling prices to customers to cover the increase in costs, resulting in higher sales revenue but a lower gross profit percentage. Conversely, a decrease in commodity prices would result in lower sales revenue but a higher gross profit percentage. Selling prices of our products are affected by many factors, including end market demand, capacity utilization, overall economic conditions, and commodity prices. Importantly, however, there is no exact measure of the effect of changing commodity prices, as there are thousands of transactions in any given quarter, each of which has various factors involved in the individual pricing decisions. Therefore, all references to the effect of copper prices or other commodity prices are estimates.
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Channel Inventory
Our operating results also can be affected by the levels of Belden products purchased and held as inventory by our channel partners and customers. Our channel partners and customers purchase and hold our products in their inventory in order to meet the service and on-time delivery requirements of their customers. Generally, as our channel partners and customers change the level of Belden products owned and held in their inventory, it impacts our revenues. Comparisons of our results between periods can be impacted by changes in the levels of channel inventory. We are dependent upon our channel partners to provide us with information regarding the amount of our products that they own and hold in their inventory. As such, all references to the effect of channel inventory changes are estimates.
Market Growth and Market Share
The markets in which we operate can generally be characterized as highly competitive and highly fragmented, with many players. Based on available data for our served markets, we estimate that our market share across our segments is significant, ranging from approximately 5% - 20%. A substantial acquisition in one of our served markets would be necessary to meaningfully change our estimated market share percentage. We monitor available data regarding market growth, including independent market research reports, publicly available indices, and the financial results of our direct and indirect peer companies, in order to estimate the extent to which our served markets grew or contracted during a particular period. We generally expect that our unit sales volume will increase or decrease consistently with the market growth rate. Our strategic goal is to utilize our Market Delivery System to target faster growing geographies, applications, and trends within our end markets, in order to achieve growth that is higher than the general market growth rate. To the extent that we exceed the market growth rates, we consider it to be the result of capturing market share.
Grass Valley Disposal
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. As a result, the Grass Valley disposal group, which was included in our Enterprise Solutions segment, has been reported within discontinued operations as of such time, and the comparable prior period information has been recast accordingly to exclude the Grass Valley disposal group from continuing operations, with the exception of the Consolidated Cash Flow Statements. The Grass Valley disposal group excludes certain Grass Valley pension plans retained by Belden. Prior to the divestiture, we wrote down the carrying value of Grass Valley and recognized asset impairments totaling $113.0 million during 2020. We completed the sale of Grass Valley to Black Dragon Capital on July 2, 2020 and recognized a loss of $9.9 million, net of $7.5 million income tax expense. The terms of the sale included gross cash consideration of $120.0 million, approximately $56.2 million net of cash delivered with the business. The sale also included deferred consideration consisting of a $175.0 million seller’s note that is set to mature 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. The seller’s note accrues PIK interest at an annual rate of 8.5%. During the year ended December 31, 2020, the seller’s note accrued interest of $7.8 million, which we reserved for based on our expected loss allowance methodology. 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. 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. We exercised our right during the fourth quarter of 2020 and sold our 9% equity interest in Grass Valley to Black Dragon Capital for $2.7 million. We deconsolidated Grass Valley as of July 2, 2020 and accounted for our equity interest under the cost method for the period that we owned a 9% interest in Grass Valley. We are performing certain services for Grass Valley under a transition services agreement. During 2020, the amount of transition services totaled $2.0 million, which we expect to collect in 2021. As of December 31, 2020, we do not own any interest in Grass Valley. Grass Valley's operating results for periods after July 2, 2020 are not included in our Consolidated Financial Statements. See Note 5.
Earnout Consideration Payment
During the year ended December 31, 2020 and prior to the Grass Valley disposal, 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 was included in the Grass Valley disposal group. See Notes 1 and 5.
Segment Transfer
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. See Note 6.
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Cost Reduction Program
During 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 $ 4.0 million of severance and other restructuring costs for this program during 2020. These costs were incurred by both the Enterprise Solutions and Industrial Solutions segments. The cost reduction program is expected to deliver an estimated $ 60 million reduction in selling, general, and administrative expenses on an annual basis; approximately $ 40 million of which was realized in 2020, and the full benefit is expected to be materialized in 2021. We also expect to incur incremental costs of approximately $ 8 million for this program in 2021. See Note 15.
FutureLink, Opterna, and SPC Integration Program
In 2019, we began a restructuring program to integrate FutureLink, Opterna, and SPC 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 $ 4.9 million of severance and other restructuring costs for this program during 2020. These costs were incurred by the Enterprise Solutions segment. We expect to incur incremental costs of approximately $ 1 million for this program in 2021. See Note 15.
Revolving Credit Agreement
Due to the initial uncertainties arising from the COVID-19 pandemic and out of an abundance of caution, in April 2020 we borrowed $ 190.0 million on our Revolver, which we fully repaid by December 31, 2020 as a result of improved and sufficient liquidity and cash flow. Our Revolving Credit Agreement provides a $400.0 million multi-currency asset-based revolving credit facility and matures on 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. As of December 31, 2020, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $ 230.2 million. See Note 16.
Share Repurchase Program
In 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 year ended December 31, 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. See Note 24.
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Results of Operations
Consolidated Income from Continuing Operations before Taxes
Years Ended December 31,
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except percentages)
Revenues $ 1,862,716 $ 2,131,278 $ 2,165,702 (12.6) % (1.6) %
Gross profit 663,289 793,505 829,911 (16.4) % (4.4) %
Selling, general and administrative expenses 366,188 417,329 411,352 (12.3) % 1.5 %
Research and development expenses 107,296 94,360 91,552 13.7 % 3.1 %
Amortization of intangibles 64,395 74,609 75,140 (13.7) % (0.7) %
Gain from patent litigation — — 62,141 n/a (100.0) %
Operating income 125,410 207,207 314,008 (39.5) % (34.0) %
Interest expense, net 58,888 55,814 60,839 5.5 % (8.3) %
Non-operating pension benefit (cost) (395) 1,017 (99) (138.8) % 1,127.3 %
Loss on debt extinguishment — — 22,990 n/a (100.0) %
Income from continuing operations before taxes 66,127 152,410 230,080 (56.6) % (33.8) %
2020 Compared to 2019
Revenues decreased $268.6 million from 2019 to 2020 due to the following factors:
• Lower sales volume, including the impact of changes in channel inventory, contributed $302.7 million to the decrease in revenues.
• Currency translation had a $1.9 million unfavorable impact on revenues.
• Acquisitions increased revenues by $34.3 million.
• Copper prices had a $1.7 million favorable impact on revenues.
Gross profit decreased $130.2 million from 2019 to 2020 due to the decreases in revenues discussed above as well as unfavorable mix; partially offset by the impact of acquisitions.
Selling, general and administrative expenses decreased $51.1 million from 2019 to 2020. Benefits realized from our Cost Reduction Program coupled with productivity improvement initiatives contributed an estimated $43.1 million decline in selling, general and administrative expenses. A decrease in severance, restructuring and acquisition integration costs; decreases in commission costs; and currency translation contributed an estimated $11.6 million; $3.5 million; and $0.5 million decline in selling, general and administrative expenses, respectively. These decreases were partially offset by a $7.6 million increase from acquisitions.
Research and development expenses increased $12.9 million from 2019 to 2020 primarily due to increased investments in R&D projects as we continue our commitment to growth initiatives.
Amortization of intangibles decreased $10.2 million from 2019 to 2020 primarily due to certain intangible assets becoming fully amortized.
Operating income decreased $81.8 million from 2019 to 2020 primarily as a result of the decline in gross profit discussed above.
Net interest expense increased $3.1 million from 2019 to 2020. The increase is primarily the result of interest accrued on the Revolver borrowings during 2020 coupled with currency translation. During 2020, we borrowed $190.0 million on our Revolver, which we fully repaid by December 31, 2020. See Note 16.
Income from continuing operations before taxes decreased $86.3 million from 2019 to 2020 primarily due to the decline in operating income discussed above.
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2019 Compared to 2018
Revenues decreased $34.4 million from 2018 to 2019 due to the following factors:
• Currency translation had a $28.0 million unfavorable impact on revenues.
• Lower sales volume, including the impact of changes in channel inventory and weaker industrial markets, resulted in a $21.6 million decrease in revenues.
• Lower copper costs resulted in a $17.2 million decrease in revenues.
• Acquisitions increased revenues by $32.4 million.
Gross profit decreased $36.4 million from 2018 to 2019. The decrease in gross profit is primarily attributable to the decrease in revenues discussed above as well as unfavorable product mix and the impact of lower production volumes. Gross profit for 2019 included $3.4 million of severance, restructuring, and acquisition integration costs; $0.6 million of cost of sales arising from the adjustment of inventory to fair value related to acquisitions; and $0.5 million for the amortization of software development intangible assets. Gross profit for 2018 included $18.0 million of severance, restructuring, and acquisition integration costs and $0.1 million for the amortization of software development intangible assets.
Selling, general and administrative expenses increased $6.0 million from 2018 to 2019 primarily due to an $18.5 million increase in severance, restructuring, and acquisition integration costs and a $5.4 million increase from acquisitions. These increases were partially offset by the impact of productivity improvement initiatives, currency translation, decrease in costs related to patent litigation, and purchase accounting effects of acquisitions, which attributed to a decline in selling, general and administrative expenses of $9.5 million, $4.1 million, $2.6 million, and $1.7 million, respectively.
Research and development expenses increased $2.8 million from 2018 to 2019 primarily due to investments in research and development as well as acquisitions, which contributed $3.9 million and $0.3 million, respectively. These increases were partially offset by currency translation of $1.4 million.
Amortization of intangibles decreased $0.5 million from 2018 to 2019 primarily due to certain intangible assets becoming fully amortized, partially offset by the amortization expense for intangible assets from the acquisitions of SPC and Opterna. See Note 4.
The $62.1 million gain from patent litigation in 2018 is for judgments received in 2018 from the patent infringement case filed in 2011 by our wholly-owned subsidiary, PPC, against Corning alleging they willfully infringed upon two patents. After years of post-trial motions and appeals, the District Court ruled in favor of PPC and required Corning to pay judgments of $62.1 million in 2018 to PPC. See Note 2.
Operating income decreased $106.8 million from 2018 to 2019 primarily due to the gain from the patent litigation in 2018, decrease in gross profit discussed above, and changes in operating expenses discussed above.
Net interest expense decreased $5.0 million from 2018 to 2019 as a result of our debt refinancing during 2018. In March 2018, we issued €350.0 million aggregate principal amount of new senior subordinated notes due 2028 at an interest rate of 3.875%, and used the net proceeds of this offering and cash on hand to repurchase all of our outstanding €200.0 million 5.5% senior subordinated notes due 2023 as well as all of our outstanding $200.0 million 5.25% senior subordinated notes due 2024.
The loss on debt extinguishment recognized in 2018 represents the premium paid to the bond holders to retire the 2023 and 2024 notes as well as the unamortized debt issuance costs that were written-off.
Income from continuing operations before taxes decreased $77.7 million from 2018 to 2019 primarily due to the decrease in operating income, partially offset by the decrease in interest expense and loss on debt extinguishment discussed above.
Income Taxes
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except percentages)
Income from continuing operations before taxes $ 66,127 $ 152,410 $ 230,080 (56.6) % (33.8) %
Income tax expense (11,724) (42,519) (62,936) (72.4) % (32.4) %
Effective tax rate 17.7 % 27.9 % 27.4 %
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2020
We recognized income tax expense of $11.7 million in 2020, representing an effective tax rate of 17.7%. The effective tax rate was impacted by foreign tax rate differences, which resulted in an income tax benefit of $25.3 million in 2020. Additionally, in 2020, our income tax expense was reduced by $4.0 million due to a tax holiday for our operations in St. Kitts. The tax holiday in St. Kitts is scheduled to expire in 2022. Partially offsetting these benefits, we recognized income tax expense of $22.4 million in 2020 from domestic permanent differences and tax credits primarily associated with our foreign income inclusions.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in the United States. The Company generated a loss in the U.S. which will be carried back to prior years, as permitted by the CARES Act. The net impact to the tax provision as a result of the net operating loss carry back was a benefit of $1.2 million, primarily associated with the re-rate of the net operating loss carry back period.
If we were to repatriate foreign cash to the U.S., we may be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. However, it is our intent to permanently reinvest the earnings of our non-U.S. subsidiaries in those operations and for continued non-U.S. growth opportunities. As a result, as of December 31, 2020, we have not made a provision for U.S. or additional foreign withholding taxes. See Note 18
2019
We recognized income tax expense of $42.5 million in 2019, representing an effective tax rate of 27.9%. The effective tax rate was primarily impacted by a change in valuation allowance on certain deferred tax assets and foreign tax rate differences. During the fourth quarter of 2019, the United States Treasury issued final and proposed regulations with respect to certain aspects related to the Tax Cuts and Jobs Act of 2017 (the “Act”). Additional guidance provided in these regulations resulted in a tax adjustment in the fourth quarter of 2019. Our income tax expense was also impacted by foreign tax rate differences, which reduced our income tax expense by approximately $13.1 million in 2019.
As of December 31, 2019, we maintained a valuation allowance on our deferred tax assets of $50.4 million. Of this amount, approximately $43.0 million relates to deferred tax assets for certain U.S foreign tax credits and U.S. state net operating losses and tax credits. The $33.9 million valuation allowance on the foreign tax credits is a direct result of the regulations issued by the United States Treasury in the fourth quarter of 2019, the Act and the impact of classifying a business as discontinued operations. The remaining $9.1 million valuation allowance primarily relates to state net operating losses and tax credits. While we have positive evidence in the form of projected sources of income, we determined that these state carryforward assets were not realizable as of December 31, 2019 due to a history of net operating losses and tax credits expiring without being utilized in certain states and because the current forecast of income is not sufficient to utilize all of these state net operating losses and tax credits prior to expiration.
2018
We recognized income tax expense of $62.9 million in 2018, representing an effective tax rate of 27.4%. The effective tax rate was impacted by the Act, Staff Accounting Bulletin No. 118 (“SAB 118”), and foreign tax rate differences. On December 22, 2018, the measurement period ended for SAB 118, which was issued to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act resulting in additional SAB 118 tax expense of $10.0 million for the year ended December 31, 2018.
The total tax expense for the year ended December 31, 2018 included $8.0 million of tax expense associated with an increase in the valuation allowance against foreign tax credit carryovers that we no longer expected to be able to realize based upon the new tax law, a $2.4 million benefit from foreign tax rate differences, a $1.3 million tax expense adjustment to the transition tax on the deemed repatriation of cumulative foreign earnings, $1.1 million of tax expense resulting from a valuation allowance established on the deferred tax assets associated with stock options of covered employees, and a $0.4 million income tax benefit associated with a remeasurement adjustment of certain deferred tax assets and liabilities.
Our income tax expense and effective tax rate in future periods may be impacted by many factors, including our geographic mix of income and changes in tax laws.
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Consolidated Adjusted EBITDA
Years Ended December 31,
2020 2019 2018
(In thousands, except percentages)
GAAP and adjusted revenues $ 1,862,716 $ 2,131,278 $ 2,165,702
GAAP net income (loss) $ (55,058) $ (376,776) $ 160,711
Loss from discontinued operations, net of tax 99,513 486,667 6,433
Loss on disposal of discontinued operations, net of tax 9,948 — —
Amortization of intangible assets 64,395 74,609 75,140
Amortization of software development intangible assets 1,821 525 79
Depreciation expense 42,470 40,409 38,309
Interest expense, net 58,888 55,814 60,839
Severance, restructuring, and acquisition integration costs (1)
12,258 26,544 22,625
Income tax expense 11,724 42,519 62,936
Non-operating pension settlement loss 3,153 — 1,342
Purchase accounting effects related to acquisitions (2)
125 592 1,690
Loss on debt extinguishment — — 22,990
Costs related to patent litigation — — 2,634
Loss on sale of assets (3)
— — 94
Gain from patent litigation — — (62,141)
Adjusted EBITDA $ 249,237 $ 350,903 $ 393,681
GAAP net income (loss) margin (3.0) % (17.7) % 7.4 %
Adjusted EBITDA margin 13.4 % 16.5 % 18.2 %
(1) See Note 15, Severance, Restructuring, and Acquisition Integration Activities, for details .
(2) In 2020 and 2019, we collectively recognized $0.1 million and $0.6 million, respectively, of cost of sales related to purchase accounting adjustments of acquired inventory to fair value for both our SPC and Opterna acquisitions. In 2018, we made a $1.7 million adjustment to increase the earn-out liability associated with an acquisition.
(3) In 2018, we recognized a $0.1 million loss on sale of assets for the sale of our MCS business and Hirschmann JV. See Note 2.
Use of Non-GAAP Financial Information
Adjusted Revenues, Adjusted EBITDA, Adjusted EBITDA margin, and free cash flow are non-GAAP financial measures. In addition to reporting financial results in accordance with accounting principles generally accepted in the United States, we provide non-GAAP operating results adjusted for certain items, including: asset impairments; accelerated depreciation expense due to plant consolidation activities; purchase accounting effects related to acquisitions, such as the adjustment of acquired inventory and deferred revenue to fair value, and transaction costs; severance, restructuring, and acquisition integration costs; gains (losses) recognized on the disposal of businesses and tangible assets; amortization of intangible assets; gains (losses) on debt extinguishment; certain revenues and gains (losses) from patent settlements; discontinued operations; and other costs. We adjust for the items listed above in all periods presented, unless the impact is clearly immaterial to our financial statements. When we calculate the tax effect of the adjustments, we include all current and deferred income tax expense commensurate with the adjusted measure of pre-tax profitability.
We utilize the adjusted results to review our ongoing operations without the effect of these adjustments and for comparison to budgeted operating results. We believe the adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees our business operations on a day-to-day basis. As an example, we adjust for the purchase accounting effect of recording deferred revenue at fair value in order to reflect the revenues that would have otherwise been recorded by acquired businesses had they remained as independent entities. We believe this presentation is useful in evaluating the underlying performance of acquired companies. Similarly, we adjust for other acquisition-related expenses, such as amortization of intangibles and other impacts of fair value adjustments because they generally are not related to the acquired businesses' core business performance. As an additional example, we exclude the costs of restructuring programs, which can occur from time to time for our current businesses and/or recently acquired businesses. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted
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measures, accompanied by the disclosure of the costs of these programs, provides valuable insight. Adjusted results should be considered only in conjunction with results reported according to accounting principles generally accepted in the United States.
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except percentages)
Adjusted Revenues $ 1,862,716 $ 2,131,278 $ 2,165,702 (12.6) % (1.6) %
Adjusted EBITDA 249,237 350,903 393,681 (29.0) % (10.9) %
as a percent of adjusted revenues 13.4 % 16.5 % 18.2 %
2020 Compared to 2019
Revenues decreased $268.6 million from 2019 to 2020 due to the following factors:
• Lower sales volume, including the impact of changes in channel inventory, contributed $302.7 million to the decrease in revenues.
• Currency translation had a $1.9 million unfavorable impact on revenues.
• Acquisitions increased revenues by $34.3 million.
• Copper prices had a $1.7 million favorable impact on revenues.
Adjusted EBITDA decreased $101.7 million in 2020 from 2019 primarily due to the decrease in revenues discussed above, partially offset by the benefits realized from our SG&A Cost Reduction Program.
2019 Compared to 2018
Revenues decreased $34.4 million from 2018 to 2019 due to the following factors:
• Currency translation had a $28.0 million unfavorable impact on revenues.
• Lower sales volume, including the impact of changes in channel inventory and weaker industrial markets, resulted in a $21.6 million decrease in revenues.
• Lower copper costs resulted in a $17.2 million decrease in revenues.
• Acquisitions increased revenues by $32.4 million.
Adjusted EBITDA decreased $42.8 million in 2019 from 2018 primarily due to the decrease in revenues discussed above as well as unfavorable product mix and the impact of lower production volumes.
Segment Results of Operations
For additional information regarding our segment measures, see Note 6 to the Consolidated Financial Statements.
Enterprise Solutions
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except percentages)
Segment Revenues $ 872,415 $ 946,041 $ 957,501 (7.8) % (1.2) %
Segment EBITDA 99,333 126,925 156,790 (21.7) % (19.0) %
as a percent of segment revenues 11.4 % 13.4 % 16.4 %
2020 Compared to 2019
Enterprise revenues decreased $73.6 million in 2020 as compared to 2019. Decreases in volume, including changes in channel inventory, and unfavorable currency translation contributed $108.1 million and $0.3 million, respectively, to the decline in revenues; partially offset by acquisitions and higher copper prices which grew revenues by $34.3 million and $0.5 million, respectively.
Enterprise EBITDA decreased $27.6 million in 2020 as compared to 2019 primarily due to the decreases in revenues discussed above, partially offset by the benefits realized from our SG&A Cost Reduction Program.
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2019 Compared to 2018
Enterprise revenues decreased $11.5 million in 2019 as compared to 2018 primarily due to decreases in volume, including changes in channel inventory; lower copper prices; and unfavorable currency translation, which contributed $28.5 million, $8.4 million, and $7.0 million, respectively, to the decrease in revenues over the year ago period; partially offset by the impact of acquisitions which grew revenues $32.4 million.
Enterprise EBITDA decreased $29.9 million in 2019 as compared to 2018 primarily due to the decreases in revenues discussed above as well as the impact of lower production volumes.
Industrial Solutions
Percentage Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except percentages)
Segment Revenues $ 990,301 $ 1,185,237 $ 1,208,201 (16.4) % (1.9) %
Segment EBITDA 147,626 226,110 237,870 (34.7) % (4.9) %
as a percent of segment revenues 14.9 % 19.1 % 19.7 %
2020 Compared to 2019
Industrial Solutions revenues decreased $194.9 million in 2020 as compared to 2019 primarily due to decreases in volum e, including changes in channel inventory, and unfavorable currency translation, which contributed $194.5 million and $1.6 million, respectively, to the decrease in revenues; partially offset by increases in copper prices, which grew revenues $1.2 million.
Industrial EBITDA decreased $78.5 million in 2020 as compared to 2019 primarily as a result of the decline in revenues discussed above and increased investments in R&D projects as we co ntinue our commitment to growth initiatives, partially offset by the benefits realized from our SG&A Cost Reduction Program.
2019 Compared to 2018
Industrial Solutions revenues decreased $22.9 million in 2019 as compared to 2018 primarily due to unfavorable currency translation and lower copper prices, which contributed $21.0 million and $8.8 million, respectively, to the decrease in revenues over the year ago period; partially offset by increases in volume, which grew revenues $6.9 million year-over-year.
Industrial EBITDA decreased $11.8 million in 2019 as compared to 2018 primarily due to the decline in revenues discussed above and the impact of lower production volumes.
Liquidity and Capital Resources
Significant factors affecting our cash liquidity include (1) cash provided by operating activities, (2) disposals of businesses and tangible assets, (3) cash used for acquisitions, restructuring actions, capital expenditures, share repurchases, dividends, and senior subordinated note repurchases, and (4) our available credit facilities and other borrowing arrangements. We expect our operating activities to generate cash in 2021 and believe our sources of liquidity are sufficient to fund current working capital requirements, capital expenditures, contributions to our retirement plans, share repurchases, senior subordinated note repurchases, quarterly dividend payments, and our short-term operating strategies. However, we may require external financing were we to complete a significant acquisition. Our ability to continue to fund our future needs from business operations could be affected by many factors, including, but not limited to: economic conditions worldwide, customer demand, competitive market forces, customer acceptance of our product offerings, and commodities pricing.
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The following table is derived from our Consolidated Cash Flow Statements and includes the results and cash flow activity of Grass Valley through the disposal date of July 2, 2020 consistent with the Consolidated Cash Flow Statements:
Years Ended December 31,
2020 2019
(In thousands)
Net cash provided by (used for):
Operating activities $ 173,364 $ 276,893
Investing activities (31,643) (184,369)
Financing activities (74,911) (86,948)
Effects of currency exchange rate changes on cash and cash equivalents 9,299 (301)
Increase in cash and cash equivalents 76,109 5,275
Cash and cash equivalents, beginning of year 425,885 420,610
Cash and cash equivalents, end of year $ 501,994 $ 425,885
Net cash provided by operating activities totaled $173.4 million for 2020 compared to $276.9 million for 2019. Operating cash flows declined $103.5 million compared to the prior year primarily due to the decreases in revenues and income discussed above. Changes in receivables generated $70.7 million of cash in 2020 compared to $22.9 million in 2019 as days sales outstanding improved from 51.8 days in the fourth quarter of 2019 to 49.6 days in the fourth quarter of 2020. The improvement in receivables was offset by changes in inventory, which was a use of cash of $8.5 million in 2020 compared to a source of cash of $44.5 million in 2019.
Net cash used for investing activities totaled $31.6 million for 2020 compared to $184.4 million for 2019. Investing activities for 2020 included capital expenditures of $90.2 million and proceeds of $54.8 million, $3.2 million, and $0.6 million from the sale of the Grass Valley disposal group, the sale of tangible property, and a working capital adjustment related to the SPC acquisition, respectively. Investing activities for 2019 included capital expenditures of $110.0 million and payments, net of cash acquired, for acquisitions of $74.4 million.
Net cash flows used for financing activities totaled $74.9 million for 2020 compared to $86.9 million for 2019. Financing activities for 2020 included payments under our share repurchase program of $35.0 million, acquisition earnout consideration payments of $29.3 million, cash dividend payments of $9.0 million, and net payments related to share based compensation activities of $1.4 million. Financing activities for 2019 included payments under our share repurchase program of $50.0 million; cash dividend payments of $34.4 million, net payments related to share based compensation activities of $2.1 million; and interest payments on our financing leases of $0.4 million.
Our cash and cash equivalents balance was $502.0 million as of December 31, 2020. Of this amount, $214.1 million was held outside of the U.S. in our foreign operations. Substantially all of the foreign cash and cash equivalents are readily convertible into U.S. dollars or other foreign currencies. Our strateg ic plan does not require the repatriation of foreign cash in order to fund our operations in the U.S., and it is our current intention to permanently reinvest the foreign cash and cash equivalents outside of the U.S. If we were to repatriate the foreign cash to the U.S., we may be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. See Note 18, Income Taxes in the accompanying notes to our consolidated financial statements.
Our outstanding debt obligations as of December 31, 2020 consisted of $1.6 billion of senior subordinated notes. As of December 31, 2020, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $230.2 million. Additional discussion regarding our various borrowing arrangements is included in Note 16 to the Consolidated Financial Statements.
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Contractual obligations outstanding at December 31, 2020, have the following scheduled maturities:
Total Less than
1 Year 1-3
Years 4-5
Years More than
5 Years
(In thousands)
Long-term debt payment obligations (1)(2)
$ 1,590,810 $ — $ — $ 367,110 $ 1,223,700
Interest payments on long-term debt obligations 349,309 55,831 111,663 109,024 72,791
Operating lease obligations (3)
75,958 19,557 29,204 18,296 8,901
Purchase obligations (4)
16,007 16,007 — — —
Other commitments (5)
8,574 1,675 5,594 1,305 —
Pension and other postemployment obligations 79,965 12,902 22,479 17,839 26,745
Total $ 2,120,623 $ 105,972 $ 168,940 $ 513,574 $ 1,332,137
(1) As described in Note 16 to the Consolidated Financial Statements.
(2) Amounts do not include accrued and unpaid interest. Accrued and unpaid interest related to long-term debt obligations is reflected on the line entitled, "Interest payments on long-term debt obligations" in the table.
(3) As described in Note 12 to the Consolidated Financial Statements.
(4) Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.
(5) Does not include accounts payable reflected in the financial statements. Includes obligations for uncertain tax positions (see Notes 18 to the Consolidated Financial Statements).
Our commercial commitments expire or mature as follows:
Total Less than
1 Year 1-3
Years 3-5
Years More than
5 Years
(In thousands)
Standby financial letters of credit $ 8,486 $ 7,853 $ 633 $ — $ —
Bank guarantees 4,071 2,738 1,333 — —
Surety bonds 3,311 3,311 — — —
Total $ 15,868 $ 13,902 $ 1,966 $ — $ —
Standby financial letters of credit, bank guarantees, and surety bonds are generally issued to secure obligations we have for a variety of commercial reasons such as workers compensation self-insurance programs in several states and the importation and exportation of product. We expect to replace most of these when they expire or mature.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows that are or would be considered material to investors.
Current-Year Adoption of Recent Accounting Pronouncements
Discussion regarding our adoption of accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.
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Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S. (GAAP). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2 of our Consolidated Financial Statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
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 3.
At the time of sale, we establish an estimated reserve for trade, promotion, and other special price reductions such as contract pricing, discounts to meet competitor pricing, and on-time payment discounts. We also reserve for, among other things, correction of billing errors, incorrect shipments, and settlement of customer disputes. Customers are allowed to return inventory if and when certain conditions regarding the functionality of the inventory and our approval of the return are met. Certain distribution customers are allowed to return inventory at original cost, in an amount not to exceed three percent of the prior year’s purchases, in exchange for an order of equal or greater value. Until we can process these reductions, corrections, and returns (together, the Changes) through individual customer records, we estimate the amount of outstanding Changes and recognize them by reducing revenues. We determine our estimate based on our historical Changes as a percentage of revenues and the average time period between the original sale and the issuance of the Changes. We adjust other current assets and cost of sales for the estimated level of returns.
We base these estimates on historical and anticipated sales demand, trends in product pricing, and historical and anticipated Changes patterns. We make revisions to these estimates in the period in which the facts that give rise to each revision become known. Future market conditions and product transitions might require us to take actions to further reduce prices and increase customer return authorizations. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to measure the Changes. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our sales reserve for such Changes as of December 31, 2020 would have affected net income by approximately $2 million in 2020.
At times, we enter into arrangements that involve the delivery of multiple promised goods or services. For these arrangements, when the promised goods or services can be separated, the revenue is allocated to each distinct good or service based on that performance obligation’s relative standalone selling price and recognized based upon transfer of control for each performance obligation. Generally, we determine standalone selling price using the adjusted market assessment approach. For software licenses with highly variable standalone selling prices sold with either support or professional services, we generally determine the standalone selling price of the software license using the residual approach.
Revenue allocated to support services under our support contracts is typically recognized ratably over the term of the service. Revenue allocated to distinct professional services is recognized when (or as) the performance obligation is satisfied depending on the terms of the arrangement. When professional services are not distinct from goods, the professional services and goods are combined into one performance obligation, and revenue allocated to that performance obligation is recognized when (or as) the performance obligation is satisfied.
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Income Taxes
We recognize deferred tax assets resulting from tax credit carryforwards, net operating loss carryforwards, and deductible temporary differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred tax assets generally represent future tax benefits to be received when these carryforwards can be applied against future taxable income or when expenses previously reported in our Consolidated Financial Statements become deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or all of the deferred tax assets may not be realized. We are required to estimate taxable income in future years or develop tax strategies that would enable tax asset realization in each taxing jurisdiction and use judgment to determine whether to record a deferred tax asset valuation allowance for part or all of a deferred tax asset.
We consider the weight of all available evidence, both positive and negative, in assessing the realizability of the deferred tax assets associated with net operating losses. We consider the reversals of existing taxable temporary differences as well as projections of future taxable income. We consider the future reversals of existing taxable temporary differences to the extent they were of the same character as the temporary differences giving rise to the deferred tax assets. We also consider whether the future reversals of existing taxable temporary differences will occur in the same period and jurisdiction as the temporary differences giving rise to the deferred tax assets. The assumptions utilized to estimate our future taxable income are consistent with those assumptions utilized for purposes of testing goodwill for impairment, as well as with our budgeting and strategic planning processes.
Significant judgment is required in evaluating our uncertain tax positions. We establish accruals for uncertain tax positions when we believe that the full amount of the associated tax benefit may not be realized. In the future, if we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves, there could be a material effect on our income tax provisions in the period in which such determination is made.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”) which removes certain exceptions for investments, intraperiod allocations and interim tax calculations, and adds guidance to reduce the complexity in accounting for income taxes. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in ASU 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending upon the amendment. The Company did not early adopt this pronouncement and is in the process of evaluating the impact of this amendment on our consolidated financial statements; however, it is not anticipated to be material.
See Note 18, Income Taxes, to the consolidated financial statements for further information regarding income taxes.
Goodwill and Indefinite-Lived Intangible Assets
We test our goodwill and other indefinite-lived intangible assets not subject to amortization for impairment on an annual basis during the fourth quarter or when indicators of impairment exist. We base our estimates on assumptions we believe to be reasonable, but which are not predictable with precision and therefore are inherently uncertain. Actual future results could differ from these estimates.
We test goodwill annually for impairment at the reporting unit level. 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. As a result of this evaluation, we have identified from our continuing operations, three reporting units within Enterprise Solutions and seven reporting units within Industrial Solutions for purposes of goodwill impairment testing.
The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Such an evaluation is made based on the weight of all available evidence and the significance of all identified events and circumstances that may influence the fair value of a reporting unit. If it is more likely than not that the fair value is less than the carrying value, then a quantitative assessment is required for the reporting unit, as described in the paragraph below. In 2020, we did not perform a qualitative assessment over any of our reporting units.
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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.
For our annual impairment test in 2020, we performed a quantitative assessment for all ten of our reporting units included in continuing operations, none of which proved to be impaired during 2020. Based on our annual goodwill impairment test, the excess of the fair values over the carrying values of our ten reporting units tested under a quantitative income approach ranged from 4% - 345%. The assumptions used to estimate fair values were based on the past performance of the reporting unit as well as the projections incorporated in our strategic plan. Significant assumptions included sales growth, profitability, and related cash flows, along with cash flows associated with taxes and capital spending. The discount rate used to estimate fair value was risk adjusted in consideration of the economic conditions in effect at the time of the impairment test. We also considered assumptions that market participants may use. In our quantitative assessments, the discount rates ranged from 10.0% to 12.2%, the 2021 to 2030 compounded annual revenue growth rates ranged from 2.5% to 5.8%, and the revenue growth rates beyond 2030 ranged from 2.0% to 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. 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.
We test our indefinite-lived intangible assets, which consist pri marily of trademarks, for impairment on an annual basis during the fourth quarter. The accounting guidance related to impairment testing for such intangible assets allows for the performance of an optional qualitative assessment, similar to that described above for goodwill. We did not perform any qualitative assessments as part of our indefinite-lived intangible asset impairment testing for 2020. Rather, we performed a quantitative assessment for each of our indefinite-lived trademarks in 2020. Under the quantitative assessments, we determined the fair value of each trademark using a relief from royalty methodology and compared the fair value to the carrying value. We determined that none of our trademarks were impaired during 2020. Significant assumptions to determine fair value included sales growth, royalty rates, and discount rates.
As noted above, we also test our goodwill and other indefinite-lived intangible assets not subject to amortization for impairment when indicators of impairment exist. Due to its overall financial performance and discontinued operations classification, we performed impairment tests on the Grass Valley disposal group which resulted in total asset impairments of $113.0 million in 2020. We completed the sale of Grass Valley to Black Dragon Capital on July 2, 2020. The operating results of Grass Valley are not included in our Consolidated Financial Statements after the July 2, 2020 disposal date. As of December 31, 2020, we do not own any interest in Grass Valley. See Note 5.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit costs and obligations are dependent on the various actuarial assumptions used in calculating such amounts. These assumptions relate to discount rates, salary growth, long-term return on plan assets, health care cost trend rates, mortality tables, and other factors. We base the discount rate assumptions on current investment yields on high-quality corporate long-term bonds. The salary growth assumptions reflect our long-term actual experience and future or near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management’s expectation of the future economic environment. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Our key assumptions are described in further detail in Note 18 to the Consolidated Financial Statements. Actual results that differ from our assumptions are accumulated and, if in excess of the lesser of 10% of the projected benefit obligation or the fair market value of plan assets, amortized over the estimated future working life of the plan participants.
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As a sensitivity measure, the effect of a 50 basis point decline in the assumed discount rate would have resulted in an increase in the 2020 net periodic benefit cost and projected benefit obligations as of December 31, 2020 of approximately $0.7 million and $41.4 million, respectively. A 50 basis point decline in the expected return on plan assets would have resulted in an increase in the 2020 net periodic benefit cost of approximately $1.7 million.
Conversely, the effect of a 50 basis point increase in the assumed discount rate would have resulted in an increase i n the 2020 net periodic benefit cost of approximately $0.1 million and a decrease in the projected benefit obligation of approximately $36.6 million as of December 31, 2020. A 50 basis point increase in the expected return on plan assets would have resulted in a decrease in the 2020 net periodic benefit cost of approximately $1.7 million.
Business Combination Accounting
We allocate the consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the consideration over the amount allocated to the assets and liabilities, if any, is recorded to goodwill. We use all available information to estimate fair values. We typically engage third party valuation specialists to assist in the fair value determination of inventories, tangible long-lived assets, and intangible assets other than goodwill. The carrying values of acquired receivables and accounts payable have historically approximated their fair values as of the business combination date. As necessary, we may engage third party specialists to assist in the estimation of fair value for certain liabilities. We adjust the preliminary acquisition accounting, as necessary, typically up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our acquisition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
If actual results are materially different than the assumptions we used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on our net earnings.
See Note 4 to the Consolidated Financial Statements for the acquisition-related information associated with significant acquisitions completed in the last three fiscal years.