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(Exact
name of registrant as specified in its charter)
_________________________________________________
iDelaware
i36-3601505
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1 North Brentwood Boulevard
i15th Floor
iSt. Louis, iMissourii63105
(Address of principal executive offices)
(i314) i854-8000
Registrant’s telephone number, including area code
_________________________________________________
Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐.
Indicate by check mark whether the Registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company i☐Emerging
growth company i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
-5-
BELDEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: iSummary
of Significant Accounting Policies
i
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include Belden Inc. and all of its subsidiaries (the Company, us, we, or our). We eliminate all significant affiliate accounts and transactions in consolidation.
The accompanying Condensed Consolidated Financial Statements presented
as of any date other than December 31, 2021:
•Are prepared from the books and records without audit, and
•Are prepared in accordance with the instructions for Form 10-Q and do not include all of the information required by accounting principles generally accepted in the United States for complete statements, but
•Include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial statements.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Supplementary Data contained in our 2021 Annual Report on Form 10-K.
iBusiness
Description
We are a global supplier of specialty networking solutions built around itwo global businesses - Enterprise Solutions and Industrial Automation Solutions. Our comprehensive portfolio of solutions enables customers to transmit and secure data, sound, and video for mission critical applications across complex enterprise and industrial environments.
iReporting
Periods
Our fiscal year and fiscal fourth quarter both end on December 31. Our fiscal first quarter ends on the Sunday falling closest to 91 days after December 31, which was April 3, 2022, the 93rd day of our fiscal year 2022. Our fiscal second and third quarters each have 91 days. The six months ended July 3, 2022 and July 4, 2021 included 184 days and 185 days, respectively.
i
Fair Value
Measurement
Accounting guidance for fair value measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
•Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant
inputs are observable, either directly or indirectly; and
•Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the three and six months ended July 3, 2022 and July 4, 2021, we utilized Level 1 inputs to determine the fair value of cash equivalents, and we utilized Level 2 and Level 3 inputs to determine the fair value of net assets acquired in business combinations (see Note 3) and for impairment testing (see Notes 4 and 11). We did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended July 3, 2022 and July 4, 2021.
iCash
and Cash Equivalents
We classify cash on hand and deposits in banks, including commercial paper, money market accounts, and other investments with an original maturity of three months or less, that we hold from time to time, as cash and cash equivalents. We periodically have cash equivalents consisting of short-term money market funds and other investments. As of July 3, 2022, we did not have any such cash equivalents on hand. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations. We do not enter into investments for trading or speculative purposes.
-6-
i
Contingent
Liabilities
We have established liabilities for environmental and legal contingencies that are probable of occurrence and reasonably estimable, the amounts of which are currently not material. We accrue environmental remediation costs based on estimates of known environmental remediation exposures developed in consultation with our environmental consultants and legal counsel. We are, from time to time, subject to routine litigation incidental to our business. Historically, these lawsuits have primarily involved claims for damages arising out of the use of our products, allegations of patent or trademark infringement, and litigation and administrative proceedings involving employment matters and commercial disputes. Based on facts currently available, we believe the disposition of the claims that are pending or asserted will not have a material adverse effect on our financial position, results of operations, or cash flow.
As
of July 3, 2022, we were party to standby letters of credit, bank guaranties, and surety bonds totaling $i7.1 million, $i5.2
million, and $i3.8 million, respectively.
/i
Revenue
Recognition
We recognize revenue consistent with the principles as outlined in the following five step model: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) each performance obligation is satisfied. See Note 2.
i
Subsequent
Events
We evaluated subsequent events after the balance sheet date through the financial statement issuance date for appropriate accounting and disclosure.
i
Equity Method Investment
During the second quarter of 2022, we invested $i20.0 million
in Litmus Automation, Inc. (Litmus) for a noncontrolling ownership interest. Litmus provides the critical data connectivity needed to monitor, visualize, analyze, and integrate industrial data. We account for this investment using the equity method of accounting. The carrying value of our investment is included in Other Long-Lived Assets in the Condensed Consolidated Balance Sheets. The results of our investment in Litmus were not material to our consolidated financial statements for the three months ended July 3, 2022.
Noncontrolling Interest
We have a i51%
ownership percentage in a joint venture with Shanghai Hi-Tech Control System Co, Ltd (Hite). The purpose of the joint venture is to develop and provide certain Industrial Automation Solutions products and integrated solutions to customers in China. Belden and Hite are committed to fund $i1.53 million and $i1.47 million,
respectively, to the joint venture in the future. The joint venture is determined to not have sufficient equity at risk; therefore, it is considered a variable interest entity. We have determined that Belden is the primary beneficiary of the joint venture, due to both our ownership percentage and our control over the activities of the joint venture that most significantly impact its economic performance based on the terms of the joint venture agreement with Hite. Because Belden is the primary beneficiary of the joint venture, we have consolidated the joint venture in our financial statements. The results of the joint venture attributable to Hite’s ownership are presented as net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations. The joint venture is not material to our consolidated financial statements as of or for the periods ended July 3, 2022 and July 4,
2021.
/
Certain Belden subsidiaries include a noncontrolling interest as of or for the periods ended July 3, 2022 and July 4, 2021. The results attributable to the noncontrolling interest holders are not material to our consolidated financial statements, and are presented as net income attributable to noncontrolling interests in the Condensed Consolidated Statements of Operations. During the fourth quarter of 2021, we purchased
a noncontrolling interest for a purchase price of $i2.3 million.
Note 2: iRevenues
Revenues
are recognized when control of the promised goods or services is transferred to our customers and in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Taxes collected from customers and remitted to governmental authorities are not included in our revenues.
-7-
i
The following tables present our revenues
disaggregated by major product category.
We
generate revenues primarily by selling products that provide secure and reliable transmission of data, sound, and video for mission critical applications. We also generate revenues from providing support and professional services. We sell our products to distributors, end-users, installers, and directly to original equipment manufacturers. At times, we enter into arrangements that involve the delivery of multiple performance obligations. For these arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price and recognized when or as each performance obligation is satisfied.
-8-
Generally, we determine relative standalone selling price using the prices charged separately to a customers on a standalone basis. Most of our
performance obligations related to the sale of products are satisfied at a point in time when control of the product is transferred based on the shipping terms of the arrangement. Typically, payments are due after control transfers, which is less than one year from satisfaction of the performance obligation.
The amount of consideration we receive and revenue we recognize varies due to rebates, returns, and price adjustments. We estimate the expected rebates, returns, and price adjustments based on an analysis of historical experience, anticipated sales demand, and trends in product pricing. We adjust our estimate of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed. Adjustments to revenue for performance obligations satisfied in prior periods were not significant during the three and six months ended July 3,
2022 and July 4, 2021.
i
The following table presents estimated and accrued variable consideration:
Price
adjustments recognized against gross accounts receivable
i26,205
i23,035
/
Depending
on the terms of an arrangement, we may defer the recognition of some or all of the consideration received because we have to satisfy a future obligation. Consideration allocated to support services under a support and maintenance contract is typically paid in advance and recognized ratably over the term of the service. Consideration allocated to professional services is typically recognized when or as the services are performed depending on the terms of the arrangement. As of July 3, 2022, total deferred revenue was $i26.8
million, and of this amount, $i19.8 million is expected to be recognized within the next twelve months, and the remaining $i7.0 million
is long-term and is expected to be recognized over a period greater than twelve months. The following table presents deferred revenue activity during the three and six months ended July 3, 2022 and July 4, 2021, respectively:
2022
2021
(In
thousands)
Beginning balance at January 1
$
i19,390
$
i11,130
New
deferrals
i8,857
i3,751
Acquisitions
i6,567
i5,997
Revenue
recognized
(i3,365)
(i1,272)
Balance
at the end of Q1
i31,449
i19,606
New
deferrals
i4,265
i4,127
Acquisitions
i—
(i2,740)
Revenue
recognized
(i8,880)
(i83)
Balance
at the end of Q2
$
i26,834
$
i20,910
Service-type
warranties represent $i8.2 million of the deferred revenue balance at July 3, 2022, and of this amount $i3.7
million is expected to be recognized in the next twelve months, and the remaining $i4.5 million is long-term and will be recognized over a period greater than twelve months.
As of July 3, 2022 and December 31, 2021, we did not have any material contract assets recorded in the Condensed Consolidated Balance Sheets.
We expense sales commissions as incurred when the duration of the related revenue arrangement is one year or less. We capitalize sales commissions when the original duration of the related revenue arrangement is longer than one year, and we amortize it over the related revenue arrangement period. We did not have any capitalized sales commissions on our balance sheet as of July 3, 2022 and December 31, 2021.
-9-
i
The
following table presents sales commissions that are recorded within selling, general and administrative expenses:
During the six months ended July 3, 2022, we completed ithree
acquisitions. On January 17, 2022, we acquired macmon secure GmbH (Macmon) for $i42.4 million, net of cash acquired. Macmon, based in Berlin, Germany, is a leading provider of products and services that secure network infrastructure in a variety of mission critical industries. On March 3, 2022, we acquired NetModule AG (NetModule) for $i23.5 million,
net of cash acquired. NetModule, based in Bern, Switzerland, is a leading provider of reliable, fast and secure wireless network infrastructures through advanced capabilities in 5G and WiFi6 technologies in a variety of mission critical industries with a strong focus on mass transit and intelligent traffic systems within the transportation vertical. On April 15, 2022, we acquired Communication Associates, Inc. (CAI) for $i18.7 million, net of cash acquired. CAI is headquartered
in Anniston, Alabama and designs, manufactures, and sells a range of plug-in radio frequency filters used in outside plant hybrid fiber-coax nodes. The results of operations of each acquisition have been included in our results of operations from their respective acquisition dates. The ithree acquisitions were not material to our consolidated results of operations. Macmon and NetModule are included in the Industrial Automation Solutions segment, and CAI is included in the Enterprise Solutions segment. All ithree
acquisitions were funded with cash on hand. iThe following table summarizes the estimated, preliminary fair values of the assets acquired and liabilities assumed for all ithree
acquisitions in total as of their respective acquisition dates (in thousands): /
Receivables
$
i6,527
Inventory
i8,278
Other
current assets
i369
Property, plant and equipment
i1,375
Intangible
assets
i38,709
Goodwill
i52,823
Operating
lease right-of-use assets
i6,167
Total assets acquired
$
i114,248
Accounts
payable
$
i2,497
Accrued liabilities
i6,716
Long-term
debt
i2,440
Deferred income taxes
i9,610
Long-term
operating lease liabilities
i2,926
Other long-term liabilities
i5,936
Total
liabilities assumed
$
i30,125
Net assets
$
i84,123
The
above purchase price allocation is preliminary and subject to revision as additional information about the fair value of individual assets and liabilities becomes available. The preliminary measurement of receivables, intangible assets, goodwill, deferred income taxes, and other assets and liabilities are subject to change. A change in the estimated fair value of the net assets acquired will change the amount of the purchase price allocable to goodwill.
The preliminary fair value of acquired receivables is $i6.5
million, which is equivalent to its gross contractual amount. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments we have used in estimating the preliminary fair values assigned to each class of acquired assets and assumed liabilities could materially affect the results of our operations.
-10-
For purposes of the above allocation, we based our preliminary estimate of the fair values for intangible assets on valuation studies performed by a third party valuation firm. We used various valuation methods including discounted cash flows, lost income, excess earnings, and relief from royalty to estimate the preliminary
fair value of the identifiable intangible assets (Level 3 valuation). Goodwill and other intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill is primarily attributable to the expansion of industrial automation and broadband & 5G product offerings in end-to-end solutions. iOur tax basis in the acquired goodwill is
izero. The intangible assets related to the ithree acquisitions consisted of the following:/
Fair
Value
Amortization Period
(In thousands)
(In years)
Intangible assets subject to amortization:
Developed technologies
$
i30,726
i4.2
Customer
relationships
i4,677
i15.0
Trademarks
i2,806
i2.0
Sales
backlog
i200
i0.9
Non-compete
agreements
i300
i4.0
Total
intangible assets subject to amortization
$
i38,709
Intangible
assets not subject to amortization:
Goodwill
$
i52,823
n/a
Total intangible assets not subject to amortization
$
i52,823
Total
intangible assets
$
i91,532
Weighted average amortization period
i5.3
The
amortizable intangible assets reflected in the table above were determined by us to have finite lives. The useful life for the developed technology intangible asset was based on the estimated time that the technology provides us with a competitive advantage and thus approximates the period and pattern of consumption of the intangible asset. The useful life for the customer relationship intangible asset was based on our forecasts of estimated sales from recurring customers. The useful life for the trademarks was based on the period of time we expect to continue to go to market using the trademarks.
Opterna International Corp.
Our acquisition of Opterna International Corp. (Opterna) in 2019 included potential earn-out consideration. As of the acquisition date, we estimated the fair value of the earn-out to be $i5.8 million.
The earn-out period ended in 2021, and the financial targets tied to the earn-out were not achieved. We reduced the earn-out liability to izero and recognized a $i5.8 million
benefit in Selling, General and Administrative Expenses in the six months ended July 4, 2021. This benefit was excluded from Segment EBITDA of our Enterprise Solutions segment.
Note 4: iDisposals
We classify assets and liabilities as held for sale (disposal
group) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When we classify a disposal group as held for sale, we test for impairment. An impairment charge is recognized when the carrying value of the disposal group exceeds the estimated fair value, less costs to sell. We also cease depreciation and amortization for assets classified as held for sale.
During the first quarter of 2021, we
committed to a plan to sell our oil and gas cable business in Brazil that met all of the criteria to classify the assets and liabilities of this business, formerly part of the Industrial Automation Solutions segment, as held for sale. At such time, the carrying value of the disposal group exceeded the fair value less costs to sell, which we determined based upon the expected sale price, by $i3.4 million. Therefore, we recognized an impairment charge equal to this
amount in the first quarter of 2021. The impairment charge was excluded from Segment EBITDA of our Industrial Automation Solutions segment. We completed the sale of our oil and gas cable business in Brazil during the second quarter of 2021 for $i10.9 million, net of cash delivered with the business.
-11-
Note
5: Discontinued Operations
On February 22, 2022, we sold Tripwire for gross cash consideration of $i350 million. The divestiture of Tripwire represents a strategic shift impacting our operations and financial results. As a result, the Tripwire disposal group, which was included in our Industrial Automation Solutions segment, is reported within discontinued operations. We recognized a loss on disposal of discontinued
operations, net of tax of $i4.6 million during the six months ended July 3, 2022. iThe
following table summarizes the operating results of the Tripwire disposal group up to the February 22, 2022 disposal date:
During
the six months ended July 3, 2022, the Tripwire disposal group had capital expenditures of approximately $i0.0 million and recognized share-based compensation expense of $i0.2 million.
During the three and six months ended July 4, 2021, the Tripwire disposal group had capital expenditures of approximately $i1.6 million and $i2.3 million,
respectively, and recognized share-based compensation expense of $i0.7 million and $i1.4 million,
respectively. The disposal group did not have any significant non-cash charges for investing activities during the three and six months ended July 3, 2022 and July 4, 2021. The following table provides the major classes of assets and liabilities of the disposal group as of December 31, 2021:
Property,
plant and equipment, less accumulated depreciation
i6,250
Operating lease right-of-use assets
i3,893
Goodwill
i331,024
Intangible
assets, less accumulated amortization
i63,541
Deferred income taxes
i834
Other
long-lived assets
i5,325
Total assets of Tripwire disposal group
$
i449,402
Liabilities:
Accounts
payable
$
i6,458
Accrued liabilities
i56,208
Deferred
income taxes
i10,964
Long-term operating lease liabilities
i5,257
Other
long-term liabilities
i20,192
Total liabilities of Tripwire disposal group
$
i99,079
-12-
The Tripwire disposal group also had $i3.4 million of accumulated other comprehensive income as of December 31, 2021.
Note
6: iReportable Segments
We are organized around itwo global businesses: Enterprise Solutions and Industrial Automation Solutions.
Each of the global businesses represents a reportable segment. In conjunction with the Tripwire divestiture during the first quarter of 2022, we changed the name of our former Industrial Solutions segment to Industrial Automation Solutions. The composition of the segment did not change as a result of this name change.
The key measures of segment profit or loss are Segment Revenues and Segment EBITDA. Segment Revenues represent non-affiliate revenues. Segment EBITDA excludes certain items, including depreciation expense; amortization of intangibles; asset impairment; severance, restructuring, and acquisition integration costs; purchase accounting effects related to acquisitions, such as the adjustment of acquired inventory to fair value; and other costs. We allocate corporate expenses to the segments for purposes of measuring Segment EBITDA. Corporate expenses are allocated on the basis
of each segment’s relative EBITDA prior to the allocation.
iOur measure of segment assets does not include cash, goodwill, intangible assets, deferred tax assets, or corporate assets. All goodwill is allocated to reporting units of our segments for purposes of impairment testing. Inter-company revenues between our segments is not material.
Amortization
of software development intangible assets
i52
i679
i731
Severance,
restructuring, and acquisition integration costs
i4,416
i3,795
i8,211
Adjustments
related to acquisitions and divestitures
(i6,339)
i1,877
(i4,462)
Asset
impairments
i—
i6,995
i6,995
Segment
assets
i522,635
i580,653
i1,103,288
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i
The following table is a reconciliation of the total of the reportable segments’ Revenues and EBITDA to consolidated revenues and consolidated income from continuing operations before taxes, respectively.
Amortization
of software development intangible assets
(i981)
(i322)
(i1,988)
(i731)
Severance,
restructuring, and acquisition integration costs (1)
(i5,857)
(i3,040)
(i9,580)
(i8,211)
Adjustments
related to acquisitions and divestitures (2)
(i576)
(i1,912)
(i576)
i4,462
Asset
impairments (3)
i—
i—
i—
(i6,995)
Eliminations
(i50)
(i12)
(i105)
(i45)
Consolidated
operating income
i81,936
i68,349
i155,457
i119,297
Interest
expense, net
(i11,276)
(i14,870)
(i25,687)
(i30,381)
Loss
on debt extinguishment
i—
i—
(i6,392)
i—
Total
non-operating pension benefit
i1,070
i1,445
i2,270
i2,129
Consolidated
income from continuing operations before taxes
$
i71,730
$
i54,924
$
i125,648
$
i91,045
(1)
Severance, restructuring, and acquisition integration costs for the three and six months ended July 3, 2022 primarily related to our Manufacturing Footprint and Acquisition Integration programs. Costs for the three and six months ended July 4, 2021 primarily related to our Acquisition Integration and completed Cost Reduction programs. See Note 12.
(2) During the three and six months ended July 3, 2022, we recognized cost of sales of $ii1.1/ million
related to purchase accounting adjustments of acquired inventory to fair value and collected $ii0.5/ million
of previously written off receivables associated with the sale of Grass Valley. During the three months ended July 4, 2021, we recognized cost of sales of $i1.2 million related to purchase accounting adjustments of acquired inventory to fair value, recognized $i0.8 million
for the purchase accounting effect of recording deferred revenue at fair value, and collected $i0.1 million of previously written off receivables associated with the sale of Grass Valley. During the six months ended July 4, 2021, we reduced the Opterna earn-out liability by $i5.8 million,
recognized cost of sales of $i2.0 million related to purchase accounting adjustments of acquired inventory to fair value, collected $i1.4 million
of previously written off receivables associated with the sale of Grass Valley, and recognized $i0.8 million for the purchase accounting effect of recording deferred revenue at fair value.
(3) During the six months ended July 4, 2021, we recognized a $i3.6 million
impairment on assets held and used and a $i3.4 million impairment on assets held for sale. See Note 11.
/
-15-
Note 7: iIncome (loss) per Share
i
The following
table presents the basis for the income (loss) per share computations:
Less: Net
income attributable to noncontrolling interest
i81
i208
i84
i283
Income
from continuing operations attributable to Belden stockholders
i58,561
i45,138
i102,654
i74,128
Add: Loss
from discontinued operations, net of tax
i—
(i1,374)
(i3,685)
(i1,698)
Add: Loss
on disposal of discontinued operations, net of tax
ii—/
i—
(i4,567)
i—
Net
income attributable to Belden stockholders
$
i58,561
$
i43,764
$
i94,402
$
i72,430
Denominator:
Weighted
average shares outstanding, basic
i44,252
i44,759
i44,535
i44,717
Effect
of dilutive common stock equivalents
i530
i503
i644
i445
Weighted
average shares outstanding, diluted
i44,782
i45,262
i45,179
i45,162
/
For
both the three and six months ended July 3, 2022, diluted weighted average shares outstanding exclude outstanding equity awards of ii1.1/
million as they are anti-dilutive. In addition, for the three and six months ended July 3, 2022, diluted weighted average shares outstanding do not include outstanding equity awards of i0.2 million and i0.3
million, respectively, because the related performance conditions have not been satisfied.
For both the three and six months ended July 4, 2021, diluted weighted average shares outstanding exclude outstanding equity awards of ii1.3/
million as they are anti-dilutive. In addition, for both the three and six months ended July 4, 2021, diluted weighted average shares outstanding do not include outstanding equity awards of ii0.4/
million because the related performance conditions have not been satisfied.
For purposes of calculating basic earnings per share, unvested restricted stock units are not included in the calculation of basic weighted average shares outstanding until all necessary conditions have been satisfied and issuance of the shares underlying the restricted stock units is no longer contingent. Necessary conditions are not satisfied until the vesting date, at which time holders of our restricted stock units receive shares of our common stock.
For purposes of calculating diluted earnings per share, unvested restricted stock units are included to the extent that they are dilutive. In determining whether unvested restricted stock units are dilutive, each issuance of restricted stock units is considered separately.
Once
a restricted stock unit has vested, it is included in the calculation of both basic and diluted weighted average shares outstanding.
Note 8: iCredit Losses
We are exposed to credit losses primarily through sales of products and services. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, current
and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
-16-
Estimates are used to determine the allowance,
which is based upon an assessment of anticipated payments as well as other information that is reasonably available. iThe following table presents the activity in the trade receivables allowance for doubtful accounts for our continuing operations for the three and six months ended July 3, 2022 and July 4, 2021, respectively:
2022
2021
(In
thousands)
Beginning balance at January 1
$
i4,864
$
i5,085
Current
period provision
i846
i52
Acquisitions
i319
i—
Write-offs
(i667)
(i47)
Recoveries
collected
(i50)
(i23)
Fx
impact
(i19)
(i17)
Q1
ending balance
$
i5,293
$
i5,050
Current
period provision
i656
i224
Acquisitions
i—
(i192)
Write-offs
(i64)
i—
Recoveries
collected
(i12)
(i36)
Fx
impact
(i81)
(i24)
Q2
ending balance
$
i5,792
$
i5,022
Note
9: iInventories
i
The following table presents the major classes of inventories as of July 3, 2022 and December
31, 2021, respectively:
We have operating
and finance leases for properties, including manufacturing facilities, warehouses, and office space; as well as vehicles and certain equipment. We make certain judgments in determining whether a contract contains a lease in accordance with ASU 2016-02. Our leases have remaining lease terms of less than i1 year to i17
years; some of which include extension and termination options for an additional i15 years or within 1 year, respectively. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably certain as of the commencement date of the lease. Our lease agreements do not contain any material residual value guarantees or material variable lease payments.
We have entered into various short-term operating leases with an initial term of twelve months or less. These leases are not recorded on
our balance sheet, and for the three and six months ended July 3, 2022 and July 4, 2021, the rent expense for short-term leases was not material.
We have certain property and equipment lease contracts that may contain lease and non-lease components, and we have elected to utilize the practical expedient to account for these components together as a single combined lease component.
As the rate implicit in most of our leases is not readily determinable, we use the incremental borrowing rate to determine the present value of the lease payments, which is unique to each leased asset, and is based upon the term of the
lease, commencement date of the lease, local currency of the leased asset, and the credit rating of the legal entity leasing the asset.
-17-
We are party to a lease guarantee, whereby Belden has covenanted the lease payments for one of Grass Valley's property leases through its 2035 expiration date. This lease guarantee was retained by Belden and not transferred to Black Dragon Capital as part of the sale of Grass Valley. Belden would be required to make lease payments only if the primary obligor, Black Dragon Capital, fails to make the payments. As of July 3, 2022, the lease had approximately
$i17.3 million of lease payments remaining. We have not recorded a liability associated with this guarantee.
We recognized depreciation expense in income from continuing operations of $i11.4
million and $i22.6 million in the three and six months ended July 3, 2022, respectively. We recognized depreciation expense in income from continuing operations of $i10.7 million and
$i21.4 million in the three and six months ended July 4, 2021, respectively.
We recognized amortization expense in income from continuing operations of $i10.2
million and $i20.0 million in the three and six months ended July 3, 2022, respectively. We recognized amortization expense in income from continuing operations of $i7.5
million and $i15.9 million in the three and six months ended July 4, 2021, respectively.
Asset Impairment
During the six months ended July 4, 2021, we sold our oil and gas cable business in Brazil and recognized an impairment charge of $i3.4 million.
See Note 4.
Also during the six months ended July 4, 2021, we performed a recoverability test over certain held and used long-lived assets in our Industrial Automation Solutions segment. We determined that the carrying values of the assets were not recoverable and recognized a $i3.6 million impairment charge to write them down to fair value. This impairment charge was excluded
from Segment EBITDA of our Industrial Automation Solutions segment.
Note 12: iSeverance, Restructuring, and Acquisition Integration Activities
Manufacturing Footprint Program
We are consolidating our manufacturing footprint in the Americas region. We recognized $i4.0 million
and $i5.9 million of severance and other restructuring costs for this program during the three and six months ended July 3, 2022, respectively. The costs were incurred by both the Enterprise Solutions and Industrial Automation Solutions segments. We expect to incur approximately $i5 million
of incremental costs for this program in 2022.
Acquisition Integration Program
We are integrating our recent acquisitions with our existing businesses to achieve desired cost savings, which are primarily focused on consolidating existing and acquired facilities as well as other support functions. The Enterprise Solutions segment incurred $ii1.0/ million
of restructuring and integration costs during the three and six months ended July 3, 2022 related to the CAI acquisition, and the Industrial Automation Solutions segment incurred $i0.1 million and $i3.1 million
of restructuring and integration costs during the three and six months ended July 3, 2022, respectively, related to the Macmon, NetModule and OTN Systems acquisitions. We expect to incur approximately $i5 million of incremental costs for this program in 2022. The Enterprise Solutions and Industrial Automation Solutions segments recognized $i0.6 million
and $i2.4 million of severance and other restructuring and integration costs during the three and six months ended July 4, 2021, respectively related to the OTN Systems and Opterna acquisitions.
-19-
The restructuring and integration costs incurred during 2022 and 2021 primarily
consisted of equipment transfer, costs to consolidate operating and support facilities, retention bonuses, relocation, travel, legal, and other costs. The majority of the restructuring and integration costs related to these actions were paid as incurred or are payable within the next i60 days. Furthermore, there were no significant severance accrual balances as of July 3, 2022 or December 31, 2021.
i
The
following table summarizes the severance and other restructuring and integration costs of the Acquisition Integration Program and Manufacturing Footprint Program described above by financial statement line item in the Condensed Consolidated Statement of Operations:
On June 2, 2021, we entered into an amended and restated Revolving Credit Agreement that provides a $i300.0 million multi-currency asset-based revolving credit facility (the Revolver). The maturity date of the Revolver is June 2, 2026. The borrowing base under the Revolver includes eligible accounts receivable; inventory; and property, plant and equipment of certain
of our subsidiaries in the United States, Canada, Germany, the United Kingdom and the Netherlands. Interest on outstanding borrowings is variable, based upon LIBOR or other similar indices in foreign jurisdictions, plus a spread that ranges from i1.25%-i1.75%,
depending upon our leverage position. Outstanding borrowings in the U.S. and Canada may also, at our election, be priced on a base rate plus a spread that ranges from i0.25% — i0.75%,
depending on our leverage position. We pay a commitment fee on the total commitments of i0.25%. In the event that we borrow more than i90%
of our combined borrowing base or our borrowing base availability is less than $i20.0 million, we are subject to a fixed charge coverage ratio covenant. We paid approximately $i2.3 million
of fees associated with the amended Revolver, which will be amortized over its term using the effective interest method. As of July 3, 2022, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $i292.8 million.
Senior Subordinated Notes
We had outstanding €i200.0
million aggregate principal amount of i4.125% senior subordinated notes due 2026 (the 2026 Notes). During the six months ended July 3, 2022, we repurchased the full €i200.0 million
2026 Notes outstanding for cash consideration of €i204.1 million ($i227.9 million), including a redemption premium, and recognized a $i6.4 million
loss on debt extinguishment including the write-off of unamortized debt issuance costs.
-20-
We have outstanding €i450.0 million aggregate principal amount of i3.375%
senior subordinated notes due 2027 (the 2027 Notes). The carrying value of the 2027 Notes as of July 3, 2022 is $i471.2 million. The 2027 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2027 Notes rank equal in right of payment with our senior subordinated notes due 2031 and 2028 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior
debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on January 15 and July 15 of each year.
We have outstanding €i350.0 million aggregate principal amount of i3.875%
senior subordinated notes due 2028 (the 2028 Notes). The carrying value of the 2028 Notes as of July 3, 2022 is $i366.5 million. The 2028 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2028 Notes rank equal in right of payment with our senior subordinated notes due 2031 and 2027 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior
debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on March 15 and September 15 of each year.
We have outstanding €i300.0 million aggregate principal amount of i3.375%
senior subordinated notes due 2031 (the 2031 Notes). The carrying value of the 2031 Notes as of July 3, 2022 is $i314.2 million. The 2031 Notes are guaranteed on a senior subordinated basis by our current and future domestic subsidiaries. The 2031 Notes rank equal in right of payment with our senior subordinated notes due 2028 and 2027 and with any future subordinated debt, and they are subordinated to all of our senior debt and the senior
debt of our subsidiary guarantors, including our Revolver. Interest is payable semiannually on January 15 and July 15 of each year.
Fair Value of Long-Term Debt
The fair value of our senior subordinated notes as of July 3, 2022 was approximately $i948.9 million based on quoted prices of the debt instruments in inactive markets (Level 2 valuation). This amount represents the fair value of our senior subordinated notes with
a carrying value of $i1,151.9 million as of July 3, 2022.
Note 14: iNet
Investment Hedge
All of our euro denominated notes were issued by Belden Inc., a USD functional currency entity. As of July 3, 2022, €i567.8 million of our outstanding foreign denominated debt is designated as a net investment hedge on the foreign currency risk of our net investment in our euro foreign operations. The objective of the hedge is to protect the net investment in the foreign operation against adverse
changes in the euro exchange rate. The transaction gain or loss is reported in the translation adjustment section of other comprehensive income. For the six months ended July 3, 2022 and July 4, 2021, the transaction gain associated with the net investment hedge reported in other comprehensive income was $i53.5
million and $i28.8 million, respectively. During the six months ended July 3, 2022, we de-designated €i200.0 million
of our outstanding debt that was previously designated as a net investment hedge. After the de-designation, transaction gains or losses associated with this €i200.0 million of debt are reported in income from continuing operations.
Note 15: iIncome
Taxes
For the three and six months ended July 3, 2022, we recognized income tax expense of $i13.1 million and $i22.9
million, respectively, representing an effective tax rate of i18.2% and i18.2%, respectively. The effective tax rates were primarily impacted by the effect of our
foreign operations, including statutory tax rates differences and foreign tax credits.
For the three and six months ended July 4, 2021, we recognized income tax expense of $i9.6 million and $i16.6
million, respectively, representing an effective tax rate of i17.4% and i18.3%, respectively. The effective tax rates were primarily impacted by the effect of our
foreign operations, including statutory tax rates differences and foreign tax credits.
Note 16: iPension and Other Postretirement Obligations
iThe
following table provides the components of net periodic benefit costs for our pension and other postretirement benefit plans:
The following table summarizes the effects of reclassifications from accumulated other comprehensive income (loss) for the six months ended July 3, 2022:
Amount Reclassified from
Accumulated Other Comprehensive Income (2)
Affected Line Item in the Consolidated Statements of Operations and Comprehensive Income
(In thousands)
Amortization of pension and other postretirement benefit plan items:
Actuarial losses
$
i420
(1)
Prior
service cost
i91
(1)
Total before tax
i511
Tax
benefit
(i137)
Total net of tax
$
i374
(1) The
amortization of these accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit costs (see Note 16).
(2) In addition, we reclassified $i3.0 million of accumulated foreign currency translation gains associated with the sale of Tripwire.
/
Note
18: iShare Repurchase
In 2018, our Board of Directors authorized a share repurchase program, which allows us to purchase up to $i300.0
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 three months ended July 3, 2022, we repurchased i0.3 million shares of our common stock for an aggregate cost of $i16.6
million at an average price per share of $i51.71. During the six months ended July 3, 2022, we repurchased i1.2
million shares of our common stock for an aggregate cost of $i66.6 million at an average price per share of $i55.23. Subsequent to July
3, 2022, we repurchased i0.6 million shares of our common stock for an aggregate cost of $i33.4 million at an average price
per share of $i55.74. As of the date of this filing, we had $i115.0 million of authorizations remaining
under the program. During the three and six months ended July 4, 2021, we did iino/t
repurchase any stock.
-23-
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 solutions built around two global businesses - Enterprise Solutions and Industrial Automation Solutions. Our
comprehensive portfolio of solutions enables customers to transmit and secure data, sound, and video for mission critical applications across complex enterprise and industrial environments.
We strive for operational excellence through the execution of our Belden Business System, which includes three areas of focus: Lean enterprise initiatives, our Market Delivery System, and our Talent Management System. Through operational excellence we generate free cash flow on an annual basis. We utilize the cash flow generated by our business to fuel our continued transformation and generate shareholder value. 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 margins present a unique value proposition for shareholders.
We use a set of tools and processes
that are designed to continuously improve business performance in the critical areas of quality, delivery, cost, and innovation. We consider revenue growth, Adjusted EBITDA margin, free cash flows, and return on invested capital to be our key operating performance indicators. We also seek to acquire businesses that we believe can help us achieve these objectives.
Trends and Events
The following trends and events during 2022 have had varying effects on our financial condition, results of operations, and cash flows.
Pandemic
On March 11, 2020, the World Health Organization (WHO) declared the outbreak of the novel coronavirus (COVID-19) a pandemic. Since the beginning of the pandemic, our foremost focus has
been on the health and safety of our employees and customers. In response to the outbreak, to protect the health and safety of our employees, we 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. In light of variant mutations of the virus, even as vaccinations become more prevalent and more employees return to our offices, many of these safeguards will continue.
Our suppliers, distributors, and other partners have similarly had their operations disrupted, and in regions of the world where infection rates have remained high, human suffering and market disruptions have persisted. We will continue to actively monitor the situation and
may take further actions that alter our business operations as may be required by local or foreign governmental authorities, or that we determine are in the best interests of our employees and customers.
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 44% of our consolidated
revenues during the quarter ended July 3, 2022 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.
-24-
Inflation
During 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 and other costs. We are mindful of ongoing inflationary pressures and as a result, proactively implement selling price increases and cost control measures.
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. 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.
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 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.
Tripwire Divestiture
On February 22, 2022, we sold Tripwire for gross cash consideration of $350 million and recognized a loss on disposal of discontinued operations, net of tax of $4.6 million during the six months ended July 3, 2022. See Note 5.
Debt Repurchase
During
the six months ended July 3, 2022, we repurchased all of the €200.0 million aggregate principal amount of 4.125% senior subordinated notes previously due 2026. We recognized a $6.4 million loss on debt extinguishment for the premiums paid to the bond holders to retire the 2026 Notes and for the unamortized debt issuance costs on the 2026 Notes that we were required to write-off. See Note 13.
Acquisitions
During the six months ended July 3, 2022, we completed three acquisitions. On January 17, 2022, we acquired Macmon for $42.4 million, net of cash acquired. Macmon, based in Berlin, Germany, is a leading provider of products and services that secure network infrastructure in a variety of mission critical industries. On March
3, 2022, we acquired NetModule for $23.5 million, net of cash acquired. NetModule, based in Bern, Switzerland, is a leading provider of reliable, fast and secure wireless network infrastructures through advanced capabilities in 5G and WiFi6 technologies in a variety of mission critical industries with a strong focus on mass transit and intelligent traffic systems within the transportation vertical. On April 15, 2022, we acquired CAI for $18.7 million, net of cash acquired. CAI is headquartered in Anniston, Alabama and designs, manufactures, and sells a range of plug-in radio frequency filters used in outside plant hybrid fiber-coax nodes. The results of operations of each acquisition have been included in our results of operations from their respective acquisition dates. The three acquisitions were not material to our results of operations. Macmon and NetModule are included in the Industrial Automation Solutions segment,
and CAI is included in the Enterprise Solutions segment. All three acquisitions were funded with cash on hand. See Note 3.
-25-
Share Repurchase Program
During the three months ended July 3, 2022, we repurchased 0.3 million shares of our common stock for an aggregate cost of $16.6 million at an average price per share of $51.71. During the six months ended July 3, 2022, we repurchased 1.2 million shares of our common stock for an aggregate cost of $66.6 million at an average price per share of $55.23. See Note 18.
Equity Method Investment
During
the second quarter of 2022, we invested $20.0 million in Litmus for a noncontrolling ownership interest. Litmus provides critical data connectivity needed to monitor, visualize, analyze, and integrate industrial data. We account for this investment using the equity method of accounting. 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.
•We did not change any of our existing critical accounting
policies from those listed in our 2021 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.
Revenues
increased $90.7 million and $192.4 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 due to the following factors:
•Higher sales volume and favorable pricing from industrial automation, smart buildings, and broadband & 5G products resulted in a $103.7 million and $201.1 million increase in revenues, respectively.
•Higher copper pass-through pricing had a $0.2 million and $14.1 million favorable impact on revenues, respectively.
•Acquisitions contributed an estimated $8.0 million and $11.2 million in revenues, respectively.
•The divestiture of our oil and gas cable business in 2021 had a $4.8
million and $10.3 million unfavorable impact on revenues.
•Currency translation had a $16.4 million and $23.7 million unfavorable impact on revenues.
-26-
Gross profit increased $31.0 million and $70.6 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 due to the increases in revenues discussed above.
Selling, general and administrative expenses increased $11.6 million and $34.1 million in the three and six months ended July 3, 2022,
respectively, from the comparable periods of 2021. 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 incentive compensation and acquisitions.
Research and development expenses increased $3.7 million and $4.6 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily due to increased investments in R&D projects as we continue our commitment to growth initiatives.
Amortization of intangibles increased $2.0 million and $2.8 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily due to acquisitions.
Asset
impairments decreased $7.0 million in the six months ended July 3, 2022 from the comparable period of 2021 as a result of the impairments on assets held and used and assets held for sale of $3.6 million and $3.4 million, respectively, during the six months ended July 4, 2021.
Operating income increased $13.6 million and $36.2 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily as a result of the increase in gross profit discussed above.
Net interest expense decreased $3.6 million and $4.7 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily due to the repurchase
of senior subordinated notes previously due 2026 and currency translation.
Loss on debt extinguishment increased $6.4 million in the six months ended July 3, 2022 from the comparable period of 2021 due to the redemption of the 2026 Notes during the first quarter of 2022. The $6.4 million loss on debt extinguishment represents the premium paid to the bond holders to retire the 2026 Notes and for the unamortized debt issuance costs on the 2026 Notes that we were required to write-off. See Note 13.
Income from continuing operations before taxes increased $16.8 million and $34.6 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily due to the increase in operating income discussed above.
For
the three and six months ended July 3, 2022, we recognized income tax expense of $13.1 million and $22.9 million, respectively, representing an effective tax rate of 18.2%. 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 15.
Adjusted
revenues increased $89.8 million and $191.5 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 due to the following factors:
•Higher sales volume and favorable pricing from industrial automation, smart buildings, and broadband & 5G products resulted in a $102.9 million and $200.3 million increase in revenues, respectively.
•Higher copper pass-through pricing had a $0.2 million and $14.1 million favorable impact on revenues, respectively.
•Acquisitions contributed an estimated $8.0 million and $11.2 million in revenues, respectively.
•The divestiture of our oil and gas cable business in 2021
had a $4.8 million and $10.3 million unfavorable impact on revenues.
•Currency translation had a $16.4 million and $23.7 million unfavorable impact on revenues.
Adjusted EBITDA increased $18.1 million and $41.0 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021 primarily due to leverage on higher sales volume, as discussed above. Accordingly, Adjusted EBITDA margins in the three and six months ended July 3, 2022 expanded to 16.6% from 16.1% and to 16.5% from 15.6%, respectively, in the comparable periods of 2021.
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 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 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 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 measures, accompanied by the disclosure of the costs of these programs, provides valuable insight.
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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:
Severance,
restructuring, and acquisition integration costs (1)
5,857
3,040
9,580
8,211
Amortization of software development intangible assets
981
322
1,988
731
Adjustments
related to acquisitions and divestitures (2)
576
1,912
576
(4,462)
Loss on debt extinguishment
—
—
6,392
—
Asset
impairments (3)
—
—
—
6,995
Adjusted EBITDA
$
110,967
$
92,898
$
210,461
$
169,451
GAAP
income from continuing operations margin
8.8
%
7.9
%
8.0
%
6.9
%
Adjusted EBITDA margin
16.6
%
16.1
%
16.5
%
15.6
%
(1)
Severance, restructuring, and acquisition integration costs for the three and six months ended July 3, 2022 primarily related to our Manufacturing Footprint and Acquisition Integration programs. Costs for the three and six months ended July 4, 2021 primarily related to our Acquisition Integration and completed Cost Reduction programs. See Note 12.
(2) During the three and six months ended July 3, 2022, we recognized cost of sales of $1.1 million related to purchase accounting adjustments of acquired inventory to fair value and collected $0.5 million of previously written off receivables associated with the sale of Grass Valley. During the three months ended July 4, 2021, we recognized cost of sales of $1.2 million related to purchase
accounting adjustments of acquired inventory to fair value, recognized $0.8 million for the purchase accounting effect of recording deferred revenue at fair value, and collected $0.1 million of previously written off receivables associated with the sale of Grass Valley. During the six months ended July 4, 2021, we reduced the Opterna earn-out liability by $5.8 million, recognized cost of sales of $2.0 million related to purchase accounting adjustments of acquired inventory to fair value, collected $1.4 million of previously written off receivables associated with the sale of Grass Valley, and recognized $0.8 million for the purchase accounting effect of recording deferred revenue at fair value.
(3) During the six months ended July 4, 2021, we recognized
a $3.6 million impairment on assets held and used and a $3.4 million impairment on assets held for sale. See Note 11.
Segment Results of Operations
For additional information regarding our segment measures, see Note 6 to the Condensed Consolidated Financial Statements.
Enterprise Solutions revenues increased $39.9 million and $82.0 million in the three and six months ended July 3, 2022 from the comparable periods of 2021. The increase in revenues in the three months ended July 3, 2022 was primarily due to increases in volume and favorable pricing, acquisitions, and higher copper pass-through pricing of $40.6 million, $1.4 million, and $1.0 million, respectively, partially offset by unfavorable currency translation of $3.1 million. The increase in revenues in the six months ended July 3, 2022 was primarily due to increases in volume and favorable pricing, higher copper pass-through pricing, and acquisitions of $78.1 million, $6.4 million, and $1.4 million, respectively,
partially offset by unfavorable currency translation of $3.9 million.
Enterprise Solutions EBITDA increased $5.9 million and $8.4 million in the three and six months ended July 3, 2022, respectively, compared to the year ago periods primarily as a result of the increase in revenues discussed above.
Industrial
Automation Solutions revenues increased $49.9 million and $109.5 million in the three and six months ended July 3, 2022, respectively, from the comparable periods of 2021. The increase in revenues in the three months ended July 3, 2022 was primarily due to increases in volume and favorable pricing of $62.2 million and acquisitions of $6.6 million, partially offset by unfavorable currency translation, a divestiture, and lower copper pass-through pricing of $13.3 million, $4.8 million, and $0.8 million, respectively. The increase in revenues in the six months ended July 3, 2022 was primarily due to increases in volume and favorable pricing, higher copper pass-through pricing, and acquisitions of $122.1 million, $7.7 million, and $9.8 million, respectively, partially offset by unfavorable currency translation and a divestiture
of $19.8 million and $10.3 million, respectively.
Industrial Automation Solutions EBITDA increased $12.6 million and $32.5 million in the three and six months ended July 3, 2022 from the comparable periods of 2021 primarily due to leverage on higher sales volume, as discussed above. Accordingly, for the three and six months ended July 3, 2022, Adjusted EBITDA margins expanded from 17.9% to 19.0% and from 17.4% to 19.3%, respectively, over the year ago periods.
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 2022 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 and includes the results and cash flow activity of discontinued operations up to the February 22, 2022 disposal date:
Effects of currency exchange rate changes on cash and cash equivalents
(9,220)
(993)
Decrease in cash and cash equivalents
(116,075)
(78,703)
Cash and cash equivalents, beginning of period
643,757
501,994
Cash
and cash equivalents, end of period
$
527,682
$
423,291
Operating cash flows were a use of cash of $8.6 million in the six months ended July 3, 2022 compared to a source of cash of $26.7 million in the prior year. Operating cash flows declined $35.2 million compared to the prior year primarily due to unfavorable changes in accounts payable and accrued liabilities partially offset by a favorable change in receivables. The use of cash for accounts payable was due to the timing of payments primarily for purchases of raw materials and the use of cash for accrued liabilities was primarily attributable
to higher incentive compensation payments and channel partner rebates, all of which were the direct result of improved company performance and increased demand.
Net cash from investing activities was a source of cash of $205.0 million in the six months ended July 3, 2022, compared to a use of cash of $94.2 million in the prior year. 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 the investment in Litmus as well as the acquisitions of Macmon, NetModule and CAI and capital expenditures of $31.0 million. Investing activities for the six months ended July 4, 2021 included cash payments of $73.7 million for the acquisition
of OTN Systems and capital expenditures of $30.9 million, partially offset by cash receipts of $10.8 million primarily for the sale of our oil and gas cable business in Brazil.
Net cash used for financing activities totaled $303.3 million for the six months ended July 3, 2022, compared to $10.1 million in the prior year. 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, net 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. Financing activities for the six months ended July 4, 2021 included cash dividend payments of $4.5
million, net payments related to share based compensation activities of $2.0 million, repayments of debt obligations of $1.8 million assumed as part of the OTN Systems acquisition, and debt issuance costs of $1.7 million.
Our cash and cash equivalents balance was $527.7 million as of July 3, 2022. Of this amount, $170.3 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 July 3, 2022 consisted of $1,151.9 million of senior subordinated notes. Additional discussion regarding our various borrowing arrangements is included in Note 13 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.
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Item 3: Quantitative and Qualitative Disclosures about Market Risks
The
following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal amounts by expected maturity dates and fair values as of July 3, 2022.
Principal Amount by Expected Maturity
Fair
2022
Thereafter
Total
Value
(In
thousands, except interest rates)
€450.0 million fixed-rate senior subordinated notes due 2027
$
—
$
471,240
$
471,240
$
404,927
Average interest rate
3.375
%
€350.0
million fixed-rate senior subordinated notes due 2028
$
—
$
366,520
$
366,520
$
313,719
Average interest rate
3.875
%
€300.0
million fixed-rate senior subordinated notes due 2031
$
—
314,160
$
314,160
$
230,301
Average interest rate
3.375
%
Total
$
1,151,920
$
948,947
Item
7A of our 2021 Annual Report on Form 10-K provides information as to the practices and instruments that we use to manage market risks. There were no material changes in our exposure to market risks since December 31, 2021.
Item 4: Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the principal executive officer and principal financial officer concluded
that our disclosure controls and procedures were effective as of the end of the period covered by this report.
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1: Legal Proceedings
On
November 24, 2020, the Company announced a data incident involving unauthorized access and copying of some current and former employee data, as well as limited company information regarding some business partners. In January 2021, Anand Edke filed a putative class action lawsuit against the Company in the Circuit Court of Cook County, Illinois, Case No. 2021 CH 47. In February 2021, Kia Mackey filed a separate putative class action lawsuit against the Company in the U.S District Court for the Eastern District of Missouri, Case No. 4:21-CV-00149. The Edke case was transferred to the U.S. District Court for the Eastern District of Missouri and subsequently stayed pursuant
to the joint request of the parties due to the similarity to the Mackey case. In the Mackey case, the plaintiff has asked for injunctive relief, unspecified damages, and unspecified legal fees. The Company believes that any potential exposure associated with the litigation will be covered by insurance. The Company continues to vigorously defend the lawsuit.
We are a party to various other legal proceedings and administrative actions that are incidental to our operations. In our opinion, the proceedings and actions in which we are involved should not, individually or in the aggregate, have a material adverse effect on our financial condition, operating results, or cash flows. However, since the trends and outcome of this litigation are inherently uncertain,
we cannot give absolute assurance regarding the future resolution of such litigation, or that such litigation may not become material in the future.
Item 1A: Risk Factors
There have been no material changes with respect to risk factors as previously disclosed in our Form 10-K filed on February 15, 2022. There may be additional risks that impact our business that we currently do not recognize as, or that are not currently, material to our business.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Set
forth below is information regarding our stock repurchases for the three months ended July 3, 2022 (in thousands, except per share amounts).
Period
Total Number of Shares Purchased
Average
Price Paid per Share
Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
(1)
In November 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 security laws and other regulations. This program is funded with cash on hand and cash flows from operating activities. The program does not have an expiration date and may be suspended at any time at the discretion of the Company. From inception of our program, we have repurchased 3.1 million shares of our common stock for an aggregate cost of $151.6 million and an average price of $49.34 as of July 3, 2022. During the three months ended July 3, 2022, we repurchased 0.3 million shares of our common stock for an
aggregate cost of $16.6 million and an average price per share of $51.71. Subsequent to July 3, 2022, we repurchased i0.6 million shares of our common stock for an aggregate cost of $i33.4 million
at an average price per share of $i55.74. As of the date of this filing, we had $115.0 million of authorizations remaining under the program.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.