BELDEN INC. 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Belden Inc. (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. Belden is moving beyond connectivity, from what we make to what we make possible through a performance-driven portfolio, forward-thinking expertise and purpose-built solutions. We are aligned with attractive secular growth markets, positioned to provide comprehensive solutions that drive customer outcomes, focused on new product innovation and technology leadership, and committed to sustainable ESG practices. Our current business goals are to: • Drive organic revenue growth in excess of GDP; • Deliver incremental Adjusted EBITDA margins of approximately 30%; • Generate free cash flow of approximately $1 billion cumulatively from 2022 through 2025; • Execute a disciplined capital allocation strategy while maintaining net leverage of approximately 1.5x; and • Drive Adjusted EPS to at least $8.00 by 2025. Trends and Events The following trends and events during 2023 have had varying effects on our financial condition, results of operations, and cash flows. 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 Swiss franc. 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. 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. 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. Inflation D uring periods of inflation, if we are unable to raise prices timely and sufficiently to recover our material costs, our earnings could decline. Furthermore, inflation may impact labor, energy, and other costs. We monitor inflation pressures and proactively implement selling price increases or cost control measures as appropriate. 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. T here 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. 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 the products they bought from us 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 products they buy from us and hold 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 use information provided to us by our channel partners and make certain assumptions based on our sales to them to determine the amount of products they bought from us and hold in their inventory. As such, all references to the effect of channel inventory changes are estimates. -22- Market Growth and Market Share The markets in which we operate can generally be characterized as highly competitive and highly fragmented, with many players. 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 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. 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. See Note 3. Sichert Acquisition On April 17, 2023, we acquired Sichert with cash on hand for $97.5 million, net of cash acquired. Sichert, based in Berlin Germany, designs and manufactures a portfolio of polycarbonate street cabinets utilized in outside plant passive optical networks (“PON”) and 5G networks. Sichert is reported within the Enterprise Solutions segment. See Note 3. 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. See Note 10. Share Repurchase Program 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. See Note 17. Sale and Deconsolidation of Hite 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 the disposal date when we sold and deconsolidated the entity. See Note 1. 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. Critical Accounting Policies 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; • No existing accounting policies became critical accounting policies because of an increase in the materiality of associated transactions or changes in the circumstances to which associated judgments and estimates relate; and • There were no significant changes in the manner in which critical accounting policies were applied or in which related judgments and estimates were developed. -23- Results of Operations Consolidated Income before Taxes Three Months Ended % Change Nine Months Ended % Change October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Revenues $ 626,807 $ 670,491 (6.5) % $ 1,960,841 $ 1,947,413 0.7 % Gross profit 241,168 238,646 1.1 % 748,601 669,811 11.8 % Selling, general and administrative expenses (118,079) (110,478) 6.9 % (366,288) (318,747) 14.9 % Research and development expenses (30,190) (26,306) 14.8 % (90,544) (75,751) 19.5 % 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) % Interest expense, net (8,580) (9,883) (13.2) % (25,593) (35,570) (28.0) % Non-operating pension benefit 328 26 1,161.5 % 1,462 2,296 (36.3) % Loss on debt extinguishment — — n/a — (6,392) (100.0) % Income from continuing operations before taxes 87,177 119,791 (27.2) % 249,432 245,439 1.6 % 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 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 $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. See Note 10. 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. -24- 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 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. See Note 12. 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. Income Taxes Three Months Ended % Change Nine Months Ended % Change October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Income from continuing operations before taxes $ 87,177 $ 119,791 (27.2) % $ 249,432 $ 245,439 1.6 % Income tax expense 14,850 16,104 (7.8) % 45,385 39,014 16.3 % Effective tax rate 17.0 % 13.4 % 18.2 % 15.9 % 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. See Note 14. Consolidated Adjusted EBITDA Three Months Ended % Change Nine Months Ended % Change October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Revenues $ 626,807 $ 670,491 (6.5) % $ 1,960,841 $ 1,947,413 0.7 % Adjusted EBITDA 115,202 118,094 (2.4) % 349,832 328,555 6.5 % as a percent of revenues 18.4 % 17.6 % 17.8 % 16.9 % 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 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; acquisition-related expenses, such as the adjustment of acquired inventory to fair value, and transaction costs; severance, restructuring, and acquisition integration costs; gains (losses) recognized on the disposal of businesses and assets; amortization of intangible assets; gains (losses) on debt extinguishment; certain 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. -25- 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 acquisition-related expenses, such as amortization of intangibles and impacts of fair value adjustments because they generally are not related to the acquired business' core operating 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 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. The following tables reconcile our GAAP results to our non-GAAP financial measures: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Revenues $ 626,807 $ 670,491 $ 1,960,841 $ 1,947,413 GAAP income from continuing operations $ 72,327 $ 103,687 $ 204,047 $ 206,425 Income tax expense 14,850 16,104 45,385 39,014 Depreciation expense 13,442 11,847 38,478 34,443 Amortization of intangible assets 9,526 10,105 30,262 28,099 Interest expense, net 8,580 9,883 25,593 35,570 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) Gain on sale of assets (12,056) (37,891) (12,056) (37,891) Adjusted EBITDA $ 115,202 $ 118,094 $ 349,832 $ 328,555 GAAP income from continuing operations margin 11.5 % 15.5 % 10.4 % 10.6 % Adjusted EBITDA margin 18.4 % 17.6 % 17.8 % 16.9 % (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. See Note 11. (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. Segment Results of Operations For additional information regarding our segment measures, see Note 5 to the Condensed Consolidated Financial Statements. Enterprise Solutions Three Months Ended % Change Nine Months Ended % Change October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Segment Revenues $ 283,905 $ 319,201 (11.1) % $ 871,777 $ 895,075 (2.6) % Segment EBITDA 37,693 46,110 (18.3) % 118,854 118,818 — % as a percent of segment revenues 13.3 % 14.4 % 13.6 % 13.3 % -26- 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 Nine Months Ended % Change October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except percentages) Segment Revenues $ 342,902 $ 351,290 (2.4) % $ 1,089,064 $ 1,052,338 3.5 % Segment EBITDA 77,244 71,055 8.7 % 229,662 206,643 11.1 % as a percent of segment revenues 22.5 % 20.2 % 21.1 % 19.6 % 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 Significant factors affecting our cash liquidity include (1) cash from 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 2023 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 in the event we 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 mix, and commodities pricing. -27- 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) Net cash provided by (used for): Operating activities $ 159,993 $ 78,800 Investing activities (145,497) 223,377 Financing activities (167,403) (376,677) Effects of currency exchange rate changes on cash and cash equivalents (3,798) (21,791) Decrease in cash and cash equivalents (156,705) (96,291) Cash and cash equivalents, beginning of period 687,676 643,757 Cash and cash equivalents, end of period $ 530,971 $ 547,466 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 $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. in our foreign operations. Substantially all of the foreign cash and cash equivalents are readily convertible into U.S. dollars or other foreign currencies. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and accordingly, no provision for any withholding taxes has been recorded. 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 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. -28- Forward-Looking Statements Statements in this report other than historical facts are “forward-looking statements.” Forward-looking statements include statements regarding future financial performance (including revenues, expenses, earnings, margins, cash flows, dividends, capital expenditures and financial condition), plans and objectives, and related assumptions. These forward-looking statements reflect management’s current beliefs and expectations and are not guarantees of future performance. Actual results may differ materially from those suggested by any forward-looking statements based on a number of factors. These factors include, among others, those set forth in Part II, Item 1A and in other documents that we file with the SEC. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.