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 - Smart Infrastructure Solutions and Automation Solutions. As Belden continues to advance forward with solutions focused on data infrastructure, we renamed our two reportable segments during the three months ended September 29, 2024 from Enterprise Solutions and Industrial Automation Solutions to Smart Infrastructure Solutions and Automation Solutions, respectively. The composition of the segments did not change as a result of these name changes. 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: • Achieve mid-single-digit annual revenue growth; • Deliver incremental Adjusted EBITDA margins between 25% to 30%; • Generate free cash flow margin approaching 10%; • Execute a disciplined capital allocation strategy while maintaining net leverage around 1.5x; and • Drive Adjusted EPS to at least $8.00 by 2025 with annual growth of 10% to 12% thereafter. Trends and Events The following trends and events during 2024 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 41% of our consolidated revenues during the quarter ended September 29, 2024 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. -21- 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. 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 generally expect that our unit sales volume will increase or decrease consistently with the market growth rate. Our strategic goal is to transition to a solutions provider and 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. Voleatech GmbH Acquisition On September 16, 2024, we acquired Voleatech for €5.0 million ($5.6 million), net of cash acquired. The acquisition includes a potential earn-out up to €3.0 million based upon certain targets over three years, which will be accounted for as compensation cost. Voleatech, based in Germany, is known for their VT AIR Next Gen Firewall and expands Belden's Firewall product portfolio and overall planning of security in OT networking. Voleatech is reported within the Automation Solutions segment. See Note 3. Precision Optical Technologies Acquisition On June 30, 2024, we acquired Precision for $289.6 million, net of cash acquired. Precision, based in New York, is a leading supplier of value-added optical transceivers with proprietary software, firmware configurations, and related components. Precision is reported within the Enterprise Solutions segment. See Note 3. Share Repurchase Program During the three months ended September 29, 2024 , we repurchased 0.2 million shares of our common stock for an aggregate cost of $20.1 million at an average price per share of $110.84. During the nine months ended September 29, 2024 , we repurchased 0.9 million shares of our common stock for an aggregate cost of $78.0 million at an average price per share of $90.98. See Note 15. 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 September 29, 2024: • We did not change any of our existing critical accounting policies from those listed in our 2023 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. -22- Results of Operations Consolidated Income before Taxes Three Months Ended % Change Nine Months Ended % Change September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Revenues $ 654,926 $ 626,807 4.5 % $ 1,794,937 $ 1,960,841 (8.5) % Gross profit 244,004 241,168 1.2 % 672,406 748,601 (10.2) % Selling, general and administrative expenses (126,976) (118,079) 7.5 % (357,241) (366,288) (2.5) % Research and development expenses (27,941) (30,190) (7.4) % (83,397) (90,544) (7.9) % Amortization of intangibles (13,738) (9,526) 44.2 % (34,487) (30,262) 14.0 % Gain on sale of assets — 12,056 (100.0) % — 12,056 (100.0) % Operating income 75,349 95,429 (21.0) % 197,281 273,563 (27.9) % Interest expense, net (10,855) (8,580) 26.5 % (27,454) (25,593) 7.3 % Non-operating pension benefit 286 328 (12.8) % 747 1,462 (48.9) % Income before taxes 64,780 87,177 (25.7) % 170,574 249,432 (31.6) % Revenues increased $28.1 million and decreased $165.9 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 due to the following factors: • Acquisitions contributed $34.5 million and $42.1 million in revenues, respectively. • Copper pass-through pricing had an $10.2 million and $17.1 million favorable impact on revenues, respectively. • Lower sales volume resulted in a $15.2 million and $218.9 million decline in revenues, respectively. • Currency translation had a $1.4 million and $5.8 million unfavorable impact on revenues, respectively. • Divestitures had a $0.0 million and $0.4 million unfavorable impact on revenues, respectively. Gross profit increased $2.8 million and decreased $76.2 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 primarily due to the changes in revenues discussed above. Selling, general and administrative expenses increased $8.9 million and decreased $9.0 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023. The increase in the three months ended September 29, 2024 was primarily attributable to expenses from the operations of companies acquired in 2024. The decrease in the nine months ended September 29, 2024 was primarily attributable to the benefits realized from our productivity initiatives. Research and development expenses decreased $2.2 million and $7.1 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 primarily due to the timing of projects. Amortization of intangibles increased $4.2 million in both the three and nine months ended September 29, 2024 from the comparable periods of 2023 primarily due to acquisitions. The $12.1 million pre-tax gain on sale of assets during the three and nine months ended October 1, 2023 represents the gain on certain real estate sold in Canada for $13.8 million. See Note 9. Operating income decreased $20.1 million and $76.3 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 primarily due to the fluctuations in revenues; selling, general and administrative expenses; and the pre-tax gain on sale of assets discussed above. Net interest expense increased $2.3 million and $1.9 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 due to fluctuations in interest income and foreign currency translation. Income before taxes decreased $22.4 million and $78.9 million in the three and nine months ended September 29, 2024, respectively, from the comparable periods of 2023 primarily due to the changes in operating income discussed above. -23- Income Taxes Three Months Ended % Change Nine Months Ended % Change September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Income before taxes $ 64,780 $ 87,177 (25.7) % $ 170,574 $ 249,432 (31.6) % Income tax expense 11,091 14,850 (25.3) % 30,542 45,385 (32.7) % Effective tax rate 17.1 % 17.0 % 17.9 % 18.2 % For the three and nine months ended September 29, 2024, we recognized income tax expense of $11.1 million and $30.5 million representing effective tax rates of 17.1% and 17.9%, respectively. The effective tax rates were primarily impacted by the effect of our foreign operations, including statutory tax rates differences and foreign tax credits. See Note 12. Consolidated Adjusted EBITDA Three Months Ended % Change Nine Months Ended % Change September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Revenues $ 654,926 $ 626,807 4.5 % $ 1,794,937 $ 1,960,841 (8.5) % Adjusted EBITDA 112,530 115,202 (2.3) % 296,692 349,832 (15.2) % as a percent of revenues 17.2 % 18.4 % 16.5 % 17.8 % Adjusted EBITDA decreased $2.7 million in the three months ended September 29, 2024 from the comparable period of 2023 primarily due to an increase in incentive compensation, partially offset by earnings from acquisitions and benefits realized from our productivity improvement initiatives. Adjusted EBITDA decreased $53.1 million in the nine months ended September 29, 2024 from the comparable period of 2023 primarily due to the decline in revenues as discussed above, partially offset by favorable mix and benefits realized from our productivity improvement initiatives. 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. 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: -24- Three Months Ended Nine Months Ended September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Revenues $ 654,926 $ 626,807 $ 1,794,937 $ 1,960,841 GAAP net income $ 53,689 $ 72,327 $ 140,032 $ 204,047 Depreciation expense 14,655 13,442 41,697 38,478 Amortization of intangible assets 13,738 9,526 34,487 30,262 Income tax expense 11,091 14,850 30,542 45,385 Interest expense, net 10,855 8,580 27,454 25,593 Severance, restructuring, and acquisition integration costs (1) 5,263 6,075 13,468 11,846 Amortization of software development intangible assets 2,678 1,963 7,855 5,235 Adjustments related to acquisitions and divestitures (2) 561 495 1,157 1,042 Gain on sale of assets — (12,056) — (12,056) Adjusted EBITDA $ 112,530 $ 115,202 $ 296,692 $ 349,832 GAAP net income margin 8.2 % 11.5 % 7.8 % 10.4 % Adjusted EBITDA margin 17.2 % 18.4 % 16.5 % 17.8 % (1) Includes costs associated with acquisitions and manufacturing footprint actions. (2) Adjustments related to acquisitions and divestitures include fair value adjustments of acquired assets. Segment Results of Operations For additional information regarding our segment measures, see Note 4 to the Condensed Consolidated Financial Statements. Smart Infrastructure Solutions Three Months Ended % Change Nine Months Ended % Change September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Segment Revenues $ 319,647 $ 283,905 12.6 % $ 824,209 $ 871,777 (5.5) % Segment EBITDA 40,447 37,693 7.3 % 97,691 118,854 (17.8) % as a percent of segment revenues 12.7 % 13.3 % 11.9 % 13.6 % Smart Infrastructure Solutions revenues increased $35.7 million and decreased $47.6 millio n in the three and nine months ended September 29, 2024 from the comparable periods of 2023. The increase in revenues in the three months ended September 29, 2024 was primarily due to acquisitions, higher copper pass-through pricing, and favorable currency translation of $34.4 million, $4.4 million, and $0.3 million, respectively, partially offset by decreases in volume of $3.4 million. The decrease in revenues in the nine months ended September 29, 2024 was primarily due to decreases in volume and unfavorable currency translation of $95.4 million and $0.7 million, respectively, partially offset by acquisitions and higher copper pass-through pricing of $41.8 million and $6.7 million, respectively. Smart Infrastructure Solutions EBITDA increased $2.8 million in the three months ended September 29, 2024 from the comparable period of 2023 primarily due to the the increase in revenues discussed above, partially offset by an increase in incentive compensation. Smart Infrastructure Solutions EBITDA decreased $21.2 million in the nine months ended September 29, 2024 from the comparable period of 2023 primarily due to the decline in revenues discussed above, partially offset by benefits realized from our productivity improvement initiatives. -25- Automation Solutions Three Months Ended % Change Nine Months Ended % Change September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 (In thousands, except percentages) Segment Revenues $ 335,279 $ 342,902 (2.2) % $ 970,728 $ 1,089,064 (10.9) % Segment EBITDA 71,819 77,244 (7.0) % 198,301 229,662 (13.7) % as a percent of segment revenues 21.4 % 22.5 % 20.4 % 21.1 % Automation Solutions revenues decreased $7.6 million and $118.3 million in the three and nine months ended September 29, 2024 from the comparable periods of 2023 . The decrease in revenues in the three months ended September 29, 2024 was primarily due to decreases in volume and unfavorable currency translation of $11.8 million and $1.7 million, respectively, partially offset by higher copper pass-through pricing and acquisitions of $5.8 million and $0.1 million, respectively. The decrease in revenues in the nine months ended September 29, 2024 was primarily due to decreases in volume, unfavorable currency translation, and divestitures of $123.4 million, $5.1 million, and $0.4 million, respectively, partially offset by higher copper pass-through pricing and acquisitions of $10.4 million and $0.2 million, respectively. Automation Solutions EBITDA decreased $5.4 mil lion and $31.4 million in the three and nine months ended September 29, 2024 from the comparable periods of 2023 primarily as a result of the decrease in revenues discussed above, partially offset by benefits realized from our productivity improvement initiatives. 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 2024 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. The following table is derived from our Condensed Consolidated Cash Flow Statements: Nine Months Ended September 29, 2024 October 1, 2023 (In thousands) Net cash provided by (used for): Operating activities $ 177,357 $ 159,993 Investing activities (366,244) (145,497) Financing activities (84,815) (167,403) Effects of currency exchange rate changes on cash and cash equivalents (360) (3,798) Decrease in cash and cash equivalents (274,062) (156,705) Cash and cash equivalents, beginning of period 597,044 687,676 Cash and cash equivalents, end of period $ 322,982 $ 530,971 Net cash provided by operating activities totaled $177.4 million in the nine months ended September 29, 2024 compared to $160.0 million in the year ago period. Despite a decrease in net income, operating cash flows increased $17.4 million compared to the prior year due to a $52.0 million improvement in operating assets and liabilities that was primarily driven by favorable changes in receivables. During the first nine months of 2023, receivables were a use of cash of $48.9 million compared to a source of cash of $3.2 million in 2024. -26- Net cash used for invest ing activities totaled $366.2 million for the nine months ended September 29, 2024 compared to $145.5 million in the year ago period. Investing activities for the nine months ended September 29, 2024 included $295.6 million primarily for the acquisitions of Precision and Voleatech, capital expenditures of $70.8 million, and asset sales of $0.1 million. Investing activities for the nine months ended October 1, 2023 included $106.7 million primarily for the acquisitions of Sichert and Cloudrail, capital expenditures of $61.9 million, proceeds from asset sales of $13.8 million, and $9.3 million received from escrow for the disposal of a business. Net cash used for financing activities totaled $84.8 million for the nine months ended September 29, 2024 compared to $167.4 million in th e year ago period. Financing activities for the nine months ended September 29, 2024 included payments under our share repurchase program of $77.9 million, payments related to share based compensation activities of $8.9 million, cash dividend payments of $6.2 million, financing lease payments of $0.7 million, and proceeds from the issuance of common stock of $8.9 million. 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. Our cash and cash equivalents balance was $323.0 million as of September 29, 2024. Of the total cash balance, $200.5 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 strategic 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 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. Our outstanding debt obligations as of September 29, 2024 consisted of $1,228.0 million of senior subordinated notes. Additional discussion regarding our various borrowing arrangements is included in Note 10 to the Condensed Consolidated Financial Statements. 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.