What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 71 added, 59 removed, 164 unchanged (44% of the section changed)

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

(the Company, us, we, or our) is a leading global supplier of network infrastructure solutions built around 2 global businesses - Enterprise Solutions and Industrial Automation Solutions.

(the Company, us, we, or our) is a leading global supplier of network infrastructure and digitization solutions built around 2 global businesses - Enterprise Solutions and Industrial Automation Solutions.

Our mission is to build the foundation for a digital world that makes the digital journey simpler, smarter and secure.

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dollar weakens against foreign currencies, our revenues and earnings are positively impacted.

Approximately 43% of our consolidated revenues during the quarter ended July 2, 2023 were to customers outside of the U.S.

Approximately 46% of our consolidated revenues during the quarter ended October 1, 2023 were to customers outside of the U.S.

In addition to the translation impact described above, currency rate fluctuations have an economic impact on our financial results.

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To the extent that we exceed the market growth rates, we consider it to be the result of capturing market share.

CloudRail Acquisition

On August 31, 2023, we acquired CloudRail with cash on hand for $9.2 million, net of cash acquired.

CloudRail, based in Mannheim, Germany, spec ializes in sensor to cloud data solutions allowing end users to quickly connect sensors on their machinery to cloud providers to drive business insights and improve outcomes.

CloudRail is reported within the Industrial Automation Solutions segment.

Sichert Acquisition

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Sichert is reported within the Enterprise Solutions segment.

Gain on Sale of Assets

In September 2023, we sold our property in Ontario, Canada as part of a sale and leaseback transaction for $13.8 million and recognized a $12.1 million pre-tax gain on sale.

This gain on sale was excluded from Segment EBITDA.

Share Repurchase Program

During the three months ended July 2, 2023, our Board of Directors authorized an additional $300.0 million under the share repurchase program, and we repurchased 0.4 million shares of our common stock for an aggregate cost of $36.2 million at an average price per share of $92.01.

During the three months ended October 1, 2023 , we repurchased 0.7 million shares of our common stock for an aggregate cost of $63.8 million at an average price per share of $92.46.

During the nine months ended October 1, 2023 , we repurchased 1.7 million shares of our common stock for an aggregate cost of $150.0 million at an average price per share of $89.42.

Sale and Deconsolidation of Hite

During the three months ended July 2, 2023 , we sold our 51% ownership interest in Shanghai Hi-Tech Control System Co, Ltd to (Hite) for $0.9 million and recognized a $0.4 million pretax gain on sale.

On April 28, 2023, we sold our 51% ownership interest in Shanghai Hi-Tech Control System Co, Ltd to (Hite) for $0.9 million and recognized a $0.4 million pretax gain on sale.

The sale also includes $0.6 million of potential earnout payments.

The joint venture developed and provided certain Industrial Automation Solutions products and integrated solutions to customers in China.

As Belden was the primary beneficiary of the joint venture, due to both our ownership percentage and control over the activities of the joint venture, we consolidated the joint venture in our financial statements and presented the results of the joint venture attributable to Hite’s ownership as net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations up to April 28, 2023 when we sold and deconsolidated the entity.

As Belden was the primary beneficiary of the joint venture, due to both our ownership percentage and control over the activities of the joint venture, we consolidated the joint venture in our financial statements and presented the results of the joint venture attributable to Hite’s ownership as net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations up to the disposal date when we sold and deconsolidated the entity.

Off-Balance Sheet Arrangements

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Critical Accounting Policies

During the six months ended July 2, 2023:

During the nine months ended October 1, 2023:

• We did not change any of our existing critical accounting policies from those listed in our 2022 Annual Report on Form 10-K;

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Consolidated Income before Taxes

Three Months Ended % Change Six Months Ended % Change

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

Three Months Ended % Change Nine Months Ended % Change

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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Amortization of intangibles (9,526) (10,105) (5.7) % (30,262) (28,099) 7.7 %

Gain on sale of assets 12,056 37,891 (68.2) % 12,056 37,891 (68.2) %

Operating income 95,429 129,648 (26.4) % 273,563 285,105 (4.0) %

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Income from continuing operations before taxes 87,177 119,791 (27.2) % 249,432 245,439 1.6 %

Revenues increased $25.7 million and $57.1 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 due to the following factors:

• Higher sales volume and favorable pricing resulted in a $31.3 million and $72.2 million increase in revenues, respectively.

Revenues decreased $43.7 million and increased $13.4 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 due to the following factors:

• Sales volume resulted in a $60.1 million decline and $12.1 million increase in revenues, respectively.

• Acquisitions, net of divestitures contributed an estimated $12.7 million and $27.6 million in revenues, respectively.

• Copper pass-through pricing had an $11.5 million and $20.1 million unfavorable impact on revenues, respectively.

• Currency translation had a $1.1 million and $9.9 million unfavorable impact on revenues, respectively.

Gross profit increased $39.0 million and $76.3 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 due to the increases in revenues discussed above and favorable product mix .

Gross profit margins were robust, expanding 440 and 420 basis points to 37.8% and 38.0% in the three and six months ended July 2, 2023 from 33.4% and 33.8% in the comparable periods of 2022, respectively .

Selling, general and administrative expenses increased $21.4 million and $39.9 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022.

• Copper pass-through pricing had a $0.7 million favorable and $19.4 million unfavorable impact on revenues, respectively.

• Currency translation had a $3.0 million favorable and $6.9 million unfavorable impact on revenues, respectively.

Gross profit increased $2.5 million and $78.8 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 primarily due to favorable product mix and pricing .

Gross profit margins were robust, expanding 290 and 380 basis points to 38.5% and 38.2% in the three and nine months ended October 1, 2023 from 35.6% and 34.4% in the comparable periods of 2022, respectively .

Selling, general and administrative expenses increased $7.6 million and $47.5 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022.

The increase in selling, general and administrative expenses is primarily attributable to strategic investments to enhance our solution selling capabilities as well as increases from acquisitions.

Research and development expenses increased $5.0 million and $10.9 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 primarily due to increased investments as we further strengthen our product offering and continue our commitment to growth initiatives.

Amortization of intangibles increased $1.9 million and $2.7 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 primarily due to acquisitions.

Operating income increased $10.7 million and $22.7 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 due to the increase in gross profit, partially offset by increases in operating expenses as discussed above.

Net interest expense decreased $2.5 million and $8.7 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 due to the retirement of the 2026 Notes during 2022 and an increase in interest income.

Research and development expenses increased $3.9 million and $14.8 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 primarily due to increased investments as we further strengthen our product offering and continue our commitment to growth initiatives.

Amortization of intangibles decreased $0.6 million and increased $2.2 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 primarily due to acquisitions.

The decrease in the three months ended October 1, 2023 was primarily due to fair value adjustments during the quarter related to intangible assets from the Sichert acquisition.

The $12.1 million and $37.9 million pre-tax gain on sale of assets in 2023 and 2022, respectively, represents the gain on certain real estate sold in Canada and the United States for $13.8 million and $42.2 million, respectively.

Operating income decreased $34.2 million and increased $11.5 million in the three and nine ended October 1, 2023 from the comparable periods of 2022 primarily due to the changes in revenues as discussed above.

Net interest expense decreased $1.3 million and $10.0 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 due to the retirement of the 2026 Notes during 2022 and an increase in interest income.

See further discussion below.

The $6.4 million loss on debt extinguishment in the six months ended July 3, 2022 represents the premium paid to the bond holders to retire the 2026 Notes and the write-off of the unamortized debt issuance costs associated with the 2026 Notes.

Income from continuing operations before taxes increased $12.7 million and $36.6 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 primarily due to the increase in operating income and decrease in debt costs as discussed above.

Three Months Ended % Change Six Months Ended % Change

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

The $6.4 million loss on debt extinguishment in the nine months ended October 2, 2022 represents the premium paid to the bond holders to retire the 2026 Notes and the write-off of the unamortized debt issuance costs associated with the 2026 Notes.

Income from continuing operations before taxes decreased $32.6 million and increased $4.0 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 primarily due to the changes in operating income and decrease in debt costs as discussed above.

Three Months Ended % Change Nine Months Ended % Change

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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Effective tax rate 17.0 % 13.4 % 18.2 % 15.9 %

For the three and six months ended July 2, 2023, we recognized income tax expense of $15.7 million and $30.5 million, representing an effective tax rate of 18.5% and 18.8%, respectively.

For the three and nine months ended October 1, 2023, we recognized income tax expense of $14.9 million and $45.4 million, representing an effective tax rate of 17.0% and 18.2%, respectively.

The effective tax rate was primarily impacted by the effect of our foreign operations, including statutory tax rates differences and foreign tax credits.

Consolidated Adjusted EBITDA

Three Months Ended % Change Six Months Ended % Change

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

Three Months Ended % Change Nine Months Ended % Change

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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as a percent of revenues 18.4 % 17.6 % 17.8 % 16.9 %

Adjusted EBITDA increased $12.2 million and $24.2 million in the three and six months ended July 2, 2023, respectively, from the comparable periods of 2022 primarily due to leverage on higher sales volume and favorable product mix , as discussed above.

Accordingly, Adjusted EBITDA margins in the three and six months ended July 2, 2023 expanded to 17.8% and 17.6% from 16.6% and 16.5% in the comparable periods of 2022, respectively.

Adjusted EBITDA decreased $2.9 million and increased $21.3 million in the three and nine months ended October 1, 2023, respectively, from the comparable periods of 2022 primarilly due to the fluctuations in revenues as discussed above.

Furthermore, Adjusted EBITDA margins in the three and nine months ended October 1, 2023 expanded to 18.4% and 17.8% from 17.6% and 16.9% in the comparable periods of 2022, respectively, due to favorable product mix.

Use of Non-GAAP Financial Information

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The following tables reconcile our GAAP results to our non-GAAP financial measures:

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

Three Months Ended Nine Months Ended

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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Severance, restructuring, and acquisition integration costs (1) 6,075 4,560 11,846 14,140

Loss on debt extinguishment — — — 6,392

Amortization of software development intangible assets 1,963 868 5,235 2,856

Non-operating pension settlement loss — 954 — 954

Adjustments related to acquisitions and divestitures (2) 495 (2,023) 1,042 (1,447)

Loss on debt extinguishment — — — 6,392

Gain on sale of assets (12,056) (37,891) (12,056) (37,891)

Adjusted EBITDA $ 115,202 $ 118,094 $ 349,832 $ 328,555

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Adjusted EBITDA margin 18.4 % 17.6 % 17.8 % 16.9 %

(1) Severance, restructuring, and acquisition integration costs for the three and six months ended July 2, 2023 and July 3, 2022 included costs related to our Acquisition Integration program.

(1) Severance, restructuring, and acquisition integration costs for the three and nine months ended October 1, 2023 and October 2, 2022 included costs related to our Acquisition Integration program.

(2) Adjustments related to acquisitions and divestitures included fair value adjustments of acquired inventory and investments as well as gains associated with the sales of businesses.

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Enterprise Solutions

Three Months Ended % Change Six Months Ended % Change

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

Three Months Ended % Change Nine Months Ended % Change

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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as a percent of segment revenues 13.3 % 14.4 % 13.6 % 13.3 %

Enterprise Solutions revenues increased $5.1 million and $12.0 million in the three and six months ended July 2, 2023 from the comparable periods of 2022, respectively.

The increase in revenues in the three months ended July 2, 2023 was primarily due to increases in volume and favorable pricing of $3.5 million and acquisitions of $7.2 million, partially offset by unfavorable currency translation of $1.6 million and lower copper pass-through pricing of $4.0 million.

The increase in revenues in the six months ended July 2, 2023 was primarily due to increases in volume and favorable pricing of $12.3 million and acquisitions of $11.2 million, partially offset by unfavorable currency translation of $4.6 million and lower copper pass-through pricing of $6.9 million.

Enterprise Solutions EBITDA increased $2.1 million and $8.5 million in the three and six months ended July 2, 2023 from the comparable periods of 2022, respectively, primarily as a result of the increase in revenues discussed above .

Accordingly, for the three and six months ended July 2, 2023, Segment EBITDA margins expanded 50 and 120 basis points to 14.1% and 13.8% from 13.6% and 12.6% over the year ago periods, respectively.

Enterprise Solutions revenues decreased $35.3 million and $23.3 million in the three and nine months ended October 1, 2023 from the comparable periods of 2022, respectively.

The decrease in revenues in the three months ended October 1, 2023 was primarily due to decreases in volume, lower copper pass-through pricing, and unfavorable currency translation of $46.1 million, $2.0 million, and $0.4 million, respectively, partially offset by $13.2 million from acquisitions.

The decrease in revenues in the nine months ended October 1, 2023 was primarily due to decreases in volume, lower copper pass-through pricing, and unfavorable currency translation of $33.8 million, $8.9 million, and $5.0 million, respectively, partially offset by acquisitions of $24.4 million.

Enterprise Solutions EBITDA decreased $8.4 million in the three months ended October 1, 2023 from the comparable period of 2022 primarily as a result of the decrease in revenues discussed above and remained relatively flat in the nine months ended October 1, 2023 from the comparable period of 2022 .

Industrial Automation Solutions

Three Months Ended % Change Six Months Ended % Change

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

Three Months Ended % Change Nine Months Ended % Change

October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022

(In thousands, except percentages)

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as a percent of segment revenues 22.5 % 20.2 % 21.1 % 19.6 %

Industrial Automation Solutions revenues increased $20.6 million and $45.1 million in the three and six months ended July 2, 2023 from the comparable periods of 2022, respectively.

The increase in revenues in the three months ended July 2, 2023 was primarily due to increases in volume and favorable pricing of $27.8 million and favorable currency translation of $0.5 million, partially offset by lower copper pass-through pricing of $7.5 million and divestitures of $0.2 million.

The increase in revenues in the six months ended July 2, 2023 was primarily due to increases in volume and favorable pricing of $59.9 million and acquisitions, net of divestitures of $3.7 million, partially offset by unfavorable currency translation of $5.3 million and lower copper pass-through pricing of $13.2 million.

Industrial Automation Solutions EBITDA increased $10.6 million and $16.8 million in the three and six months ended July 2, 2023 from the comparable periods of 2022, respectively, primarily as a result of the increase in revenues discussed above, including solid operating leverage on volume growth and favorable mix.

Accordingly, for the three and six months ended July 2, 2023, Segment EBITDA margins expanded to 20.7% and 20.4% from 19.0% and 19.3% over the year ago periods, respectively.

Industrial Automation Solutions revenues decreased $8.4 million in the three months ended October 1, 2023 from the comparable period of 2022 and increased $36.7 million in the nine months ended October 1, 2023 from the comparable period of 2022.

The decrease in revenues in the three months ended October 1, 2023 was primarily due to decreases in volume of $14.0 million and divestitures, net of acquisitions of $0.5 million, partially offset by favorable currency translation and higher copper pass-through pricing of $3.4 million and $2.7 million, respectively.

The increase in revenues in the nine months ended October 1, 2023 was primarily due to increases in volume and favorable pricing of $45.9 million and acquisitions, net of divestitures of $3.2 million, partially offset by lower copper pass-through pricing and unfavorable currency translation of $10.5 million and $1.9 million, respectively.

Industrial Automation Solutions EBITDA increased $6.2 million and $23.0 million in the three and nine months ended October 1, 2023 from the comparable periods of 2022, respectively, primarily as a result of favorable product mix.

Accordingly, for the three and nine months ended October 1, 2023, Segment EBITDA margins expanded to 22.5% and 21.1% from 20.2% and 19.6% over the year ago periods, respectively.

Liquidity and Capital Resources

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economic conditions worldwide, customer demand, competitive market forces, customer acceptance of our product mix, and commodities pricing.

The following table is derived from our Condensed Consolidated Cash Flow Statements, and for the six months ended July 3, 2022, includes the results of discontinued operations up to the February 22, 2022 disposal date :

Six Months Ended

July 2, 2023 July 3, 2022

The following table is derived from our Condensed Consolidated Cash Flow Statements and includes the results of discontinued operations up to the February 22, 2022 disposal date :

Nine Months Ended

October 1, 2023 October 2, 2022

(In thousands)

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Cash and cash equivalents, end of period $ 530,971 $ 547,466

Net cash provided by operating activities totaled $54.7 million in the six months ended July 2, 2023, compared to a use of cash of $8.6 million in the prior year.

Operating cash flows improved $63.3 million compared to the prior year primarily due to a $37.2 million increase in net income and $24.8 million improvement in operating assets and liabilities.

Net cash provided by operating activities totaled $160.0 million in the nine months ended October 1, 2023, compared to $78.8 million in the prior year.

Operating cash flows improved $81.2 million compared to the prior year primarily due to an $11.2 million increase in net income and a $55.8 million improvement in operating assets and liabilities.

Inventories experienced the biggest improvement as we continue to reduce the outstanding backlog.

Net cash from investing activities was a use of cash of $121.0 million in the six months ended July 2, 2023, compared to a source of cash of $205.0 million in the prior year.

Investing activities for the six months ended July 2, 2023 included $97.6 million primarily for the acquisition of Sichert and $32.7 million for capital expenditures, partially offset by $9.3 million received from the disposals of businesses.

Investing activities for the six months ended July 3, 2022 included cash receipts of $338.7 million for the Tripwire disposal, partially offset by payments of $104.1 million for acquisitions and $31.0 million for capital expenditures.

Net cash used for financing activities totaled $105.9 million for the six months ended July 2, 2023, compared to $303.3 million in the prior year.

Financing activities for the six months ended July 2, 2023 included payments under our share repurchase program of $86.2 million, payments related to share based compensation activities of $16.9 million, cash dividend payments of $4.3 million, and proceeds from the issuance of common stock of $1.6 million.

Financing activities for the six months ended July 3, 2022 included payments under borrowing arrangements of $230.6 million, payments under our share repurchase program of $66.6 million, payments related to share based compensation activities of $5.2 million, cash dividend payments of $4.5 million, and proceeds from the issuance of common stock of $3.7 million.

Our cash and cash equivalents balance was $514.8 million as of July 2, 2023.

Net cash from investing activities was a use of cash of $145.5 million in the nine months ended October 1, 2023, compared to a source of cash of $223.4 million in the prior year.

Investing activities for the nine months ended October 1, 2023 included $106.7 million primarily for the acquisitions of Sichert and Cloudrail and $61.9 million for capital expenditures, partially offset by $13.8 million for asset sales and $9.3 million received from the disposals of businesses.

Investing activities for the nine months ended October 2, 2022 included cash receipts of $334.6 million primarily for the Tripwire disposal and $43.5 million for asset sales, partially offset by payments of $104.5 million for acquisitions and $50.3 million for capital expenditures.

Net cash used for financing activities totaled $167.4 million for the nine months ended October 1, 2023, compared to $376.7 million in the prior year.

Financing activities for the nine months ended October 1, 2023 included payments under our share repurchase program of $150.0 million, payments related to share based compensation activities of $17.3 million, cash dividend payments of $6.4 million, financing lease payments of $0.3 million, and proceeds from the issuance of common stock of $6.6 million.

Financing activities for the nine months ended October 2, 2022 included payments under borrowing arrangements of $230.6 million, payments under our share repurchase program of $136.3 million, cash dividend payments of $6.8 million, net payments related to share based compensation activities of $6.5 million, and proceeds from the issuance of common stock of $3.7 million.

Our cash and cash equivalents balance was $531.0 million as of October 1, 2023.

Of this amount, $237.6 million was held outside of the U.S.

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Upon distribution of those earnings in the form of dividends or otherwise, we may be subject to withholding taxes payable to the respective foreign countries.

Our outstanding debt obligations as of July 2, 2023 consisted of $1,199.0 million of senior subordinated notes.

Our outstanding debt obligations as of October 1, 2023 consisted of $1,157.1 million of senior subordinated notes.

Additional discussion regarding our various borrowing arrangements is included in Note 12 to the Condensed Consolidated Financial Statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis