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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.
-4-
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 three months ended April 3, 2022 and April 4, 2021 included 93 days and 94 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 months ended April 3, 2022 and April 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 three months ended April 3, 2022 and April 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 April 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.
-5-
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. These lawsuits primarily involve 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 April 3, 2022, we were party to standby letters of credit, bank guaranties, and surety bonds totaling $i7.4 million, $i6.2
million, and $i3.3 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
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 April 3, 2022 and April 4,
2021.
Certain subsidiaries of Opterna included noncontrolling interests, which generated an immaterial amount of Opterna's annual revenues. Because we had a controlling financial interest in these subsidiaries, they were consolidated into our financial statements, and the results that were attributable to the noncontrolling interest holders were presented as net income attributable to noncontrolling interests in the Condensed Consolidated Statements of Operations. During the fourth quarter of 2021, we purchased Opterna's noncontrolling interests for a purchase price of $i2.3 million.
A subsidiary of OTN Systems includes a noncontrolling interest. Because we have a controlling financial interest in the subsidiary, it is consolidated into our financial statements. This subsidiary that includes a noncontrolling interest is not material to our consolidated financial statements as of or for the periods ended April 3, 2022 and April 4, 2021.
/
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.
-6-
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 selling price and recognized when or as each performance obligation is satisfied. Generally, we determine relative selling price using the prices charged to 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 months ended April 3, 2022 and April 4, 2021.
i
The
following table presents estimated and accrued variable consideration:
Price
adjustments recognized against gross accounts receivable
i22,742
i23,035
/
-7-
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 April 3, 2022, total deferred revenue was $i31.4
million, and of this amount, $i23.9 million is expected to be recognized within the next twelve months, and the remaining $i7.5 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 months ended April 3, 2022 and April 4, 2021:
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
Service-type
warranties represent $i9.0 million of the deferred revenue balance at April 3, 2022, and of this amount $i4.2
million is expected to be recognized in the next twelve months, and the remaining $i4.8 million is long-term and will be recognized over a period greater than twelve months.
As of April 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 April 3, 2022 and December 31, 2021. iThe following table presents sales commissions that are recorded within
selling, general and administrative expenses:
We acquired NetModule AG (NetModule) on March 3, 2022 for a preliminary purchase price, net of cash acquired of $i23.5 million,
which was funded with cash on hand. 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. The results of NetModule have been included in our Condensed Consolidated Financial Statements from March 3, 2022, and are reported within the Industrial Automation Solutions segment. The NetModule acquisition was not material to our financial position or results of operations.
macmon secure GmbH
We acquired macmon secure GmbH (Macmon) on January
17, 2022, for a preliminary purchase price, net of cash acquired of $i42.4 million, which was funded with cash on hand. Macmon, based in Berlin, Germany, is a leading provider of products and services that secure network infrastructures in a variety of mission critical industries. The results of Macmon have been included in our Condensed Consolidated Financial Statements from January 17, 2022, and are reported within the Industrial
Automation Solutions segment. The Macmon acquisition was not material to our results of operations.
-8-
i
The following table summarizes the estimated, preliminary fair values of the assets acquired and the liabilities assumed as of January
17, 2022 (in thousands):
Receivables
$
i1,836
Other current
assets
i173
Property, plant and equipment
i160
Intangible
assets
i22,248
Goodwill
i31,258
Operating
lease right-of-use assets
i2,979
Total assets acquired
$
i58,654
Accounts
payable
$
i371
Accrued liabilities
i4,079
Deferred
income taxes
i5,828
Long-term operating lease liabilities
i2,534
Other
long-term liabilities
i3,401
Total liabilities assumed
$
i16,213
Net
assets
$
i42,441
/
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 $i1.8 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.
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 product offerings in complete end-to-end solutions. iOur tax basis in the acquired goodwill is izero.
The intangible assets related to the Macmon acquisition consisted of the following:/
Fair Value
Amortization Period
(In thousands)
(In
years)
Intangible assets subject to amortization:
Developed technologies
$
i18,825
i4.0
Customer
relationships
i2,282
i15.0
Trademarks
i1,141
i2.0
Total
intangible assets subject to amortization
$
i22,248
Intangible
assets not subject to amortization:
Goodwill
$
i31,258
n/a
Total intangible assets not subject to amortization
$
i31,258
Total
intangible assets
$
i53,506
Weighted average amortization period
i5.0
-9-
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 three months ended April 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 in Selling, General and Administrative Expenses 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.
Note
5: Discontinued Operations
On February 7, 2022, we signed a definitive agreement to divest Tripwire for $i350 million in cash, and completed the transaction on February 22, 2022. We recognized a loss on disposal of discontinued operations, net of tax of $i4.6 million
during the three months ended April 3, 2022. 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. iThe following
table summarizes the operating results of the Tripwire disposal group up to the February 22, 2022 disposal date during the first quarter of 2022 and 2021, respectively :
During
the three months ended April 3, 2022 and April 4, 2021, the Tripwire disposal group had capital expenditures of approximately $i0.0 million and $i0.7 million,
respectively, and recognized share-based compensation expense of $i0.2 million and $i0.7 million,
respectively. The disposal group did not have any significant non-cash charges for investing activities during the three months ended April 3, 2022 and April 4, 2021.
-10-
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
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
i32
i377
i409
Severance,
restructuring, and acquisition integration costs
i1,952
i3,219
i5,171
Adjustments
related to acquisitions and divestitures
(i6,307)
(i67)
(i6,374)
Asset
impairments
i—
i6,995
i6,995
Segment
assets
i476,217
i560,351
i1,036,568
iThe
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
(i1,007)
(i409)
Severance,
restructuring, and acquisition integration costs (1)
(i3,723)
(i5,171)
Asset
impairments (2)
i—
(i6,995)
Adjustments
related to acquisitions and divestitures (3)
i—
i6,374
Eliminations
(i55)
(i33)
Consolidated
operating income
i73,521
i50,948
Interest
expense, net
(i14,411)
(i15,511)
Loss
on debt extinguishment
(i6,392)
i—
Total
non-operating pension benefit
i1,200
i684
Consolidated
income from continuing operations before taxes
$
i53,918
$
i36,121
(1)
Severance, restructuring, and acquisition integration costs for the three months ended April 3, 2022 primarily relate to our Acquisition Integration Program. See Note 12. Costs for the three months ended April 4, 2021 primarily relate to our Acquisition Integration Program and completed Cost Reduction Program.
-12-
(2) During the three months ended April 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.
(3) During the three months ended April 4, 2021, we reduced the Opterna earn-out liability by $i5.8 million,
collected $i1.4 million of receivables associated with the sale of Grass Valley that were previously written off, and recognized cost of sales of $i0.8 million
related to purchase accounting adjustments of acquired inventory to fair value for the OTN Systems acquisition.
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
i3
i75
Income
from continuing operations attributable to Belden stockholders
i44,093
i28,990
Add: Loss
from discontinued operations, net of tax
(i3,685)
(i324)
Add: Loss
on disposal of discontinued operations, net of tax
(ii4,567/)
i—
Net
income attributable to Belden stockholders
$
i35,841
$
i28,666
Denominator:
Weighted
average shares outstanding, basic
ii44,811/
ii44,679/
Effect
of dilutive common stock equivalents
i756
i366
Weighted
average shares outstanding, diluted
ii45,567/
ii45,045/
/
For
the three months ended April 3, 2022 and April 4, 2021, diluted weighted average shares outstanding exclude outstanding equity awards of i1.1 million and i1.3
million, respectively, as they are anti-dilutive. In addition, for the three months ended April 3, 2022 and April 4, 2021, diluted weighted average shares outstanding do not include outstanding equity awards of i0.1 million and i0.4
million, respectively, 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.
-13-
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 months ended April 3, 2022 and April 4, 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 months ended April 3, 2022 and April 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.
We are party to a lease guarantee, whereby Belden has covenanted the lease payments for one of Snell Advanced Media's (SAM) property leases through its 2035 expiration date. The lease guarantee was executed in 2018 following the acquisition of SAM, which we subsequently sold on July 2, 2020 as part of the Grass Valley disposal group. 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 April
3, 2022, the SAM lease has approximately $i19.2 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 $i11.2
million and $i10.7 million in the three months ended April 3, 2022 and April 4, 2021, respectively.
We recognized amortization expense in income from continuing operations of $i9.8
million and $i8.4 million in the three months ended April 3, 2022 and April 4, 2021, respectively.
Asset Impairment
During the first quarter of 2021, we committed to a plan to sell our oil and gas cable business in Brazil, and recognized an impairment charge of $i3.4 million
during the three months ended April 4, 2021. During the second quarter of 2021, we completed the sale of this business. See Note 4.
Also in the first quarter of 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 during the three months ended April 4, 2021 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
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 Industrial Automation Solutions segment incurred $i3.0 million of restructuring and integration costs during the three months ended April 3, 2022 related to the Macmon, NetModule and OTN Systems acquisitions. We expect to incur approximately $i7 million
of incremental costs for this program in 2022. The Enterprise Solutions and Industrial Automation Solutions segments recognized $i1.8 million of severance and other restructuring and integration costs during the three months ended April 4, 2021 related to the OTN Systems and Opterna acquisitions.
The restructuring and integration costs incurred during the first quarter of 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 April 3, 2022 or December 31, 2021.
-16-
i
The following table summarizes the severance and other restructuring and integration costs of the Acquisition Integration 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 April 3, 2022, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $i292.5 million.
Senior Subordinated Notes
We had outstanding €i200.0
million aggregate principal amount of i4.125% senior subordinated notes due 2026 (the 2026 Notes). In March 2022, we repurchased the full €i200.0 million
2026 Notes outstanding for cash consideration of €i204.1 million ($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.
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 April 3, 2022 is $i502.5 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.
-17-
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 April 3, 2022 is $i390.8 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 April 3, 2022 is $i335.0 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 April 3, 2022 was approximately $i1,185.6 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 $i1,228.3 million as of April 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 April 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 three months ended April 3, 2022 and April 4, 2021, the transaction gain associated with the net investment hedge reported in other comprehensive income was $i13.7
million and $i38.5 million, respectively. During the three months ended April 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 months ended April 3, 2022, we recognized income tax expense of $i9.8 million representing an effective tax rate of i18.2%.
The effective tax rate was primarily impacted by the effect of our foreign operations, including statutory tax rates differences and foreign tax credits.
For the three months ended April 4, 2021, we recognized income tax expense of $i7.1 million representing an effective tax rate of i19.5%. The
effective tax rate was primarily impacted by the effect of our foreign operations, including statutory tax rates differences and foreign tax credits.
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Note 16: iPension
and Other Postretirement Obligations
i
The 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 three months ended April 3, 2022:
Amount Reclassified from
Accumulated Other Comprehensive Income (1) (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
$
i216
(1)
Prior
service cost
i47
(1)
Total before tax
i263
Tax
benefit
(i70)
Total net of tax
$
i193
(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 April 3, 2022, we repurchased i0.9 million shares of our common stock under the share repurchase program for an aggregate cost of $i50.0
million at an average price per share of $i56.51. During the three months ended April 4, 2021, we did inot
repurchase any stock.
Note 19: iSubsequent Event
On April 15, 2022, we acquired Communication Associates, Inc. (Communication Associates) for approximately $i19 million,
net of cash acquired. The acquisition was funded with cash on hand. Communication Associates is headquartered in Anniston, Alabama and designs, manufactures, and sells a range of plug-in RF filters used in outside plant HFC nodes. The results of Communication Associates will be reported within our Enterprise Solutions segment from the acquisition date.
-20-
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 global supplier of specialty networking 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 45% of our consolidated revenues during the quarter ended April 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.
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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. During periods of inflation, if we are unable to raise prices timely and sufficiently to recover our material costs, our earnings could decline. We are mindful of ongoing inflationary pressures and as a result, proactively implement selling
price increases and cost control measures. 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 7, 2022, we signed a definitive agreement to divest Tripwire for $350 million in cash, and completed the transaction on February 22, 2022. We recognized a loss on disposal of discontinued operations, net of tax of $4.6 million during the three months ended April 3, 2022. See Note 5.
Debt
Repurchase
During the three months ended April 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.
Macmon and NetModule Acquisitions
On January 17, 2022, we acquired Macmon, a leading provider of products and services that secure network infrastructures in a variety of mission critical industries, for approximately $42.4 million, net of cash acquired. Headquartered in Berlin, Germany,
Macmon brings proven products and technologies that protect network infrastructure and extend our offerings in the areas of segmentation, zoning and access control. The results of Macmon have been included in our Condensed Consolidated Financial Statements from January 17, 2022, and are reported within the Industrial Automation Solutions segment. See Note 3.
On March 3, 2022, we acquired NetModule, 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 for approximately $23.5 million, net of cash acquired. Headquartered in Bern, Switzerland, NetModule
contributes to Belden’s Industrial Automation strategic plan to accelerate our capabilities within wireless technology and to expand applications we serve to meet the growing solution requirements of our customers. The results of NetModule have been included in our Condensed Consolidated Financial Statements from March 3, 2022, and are reported within the Industrial Automation Solutions segment. See Note 3.
-22-
Share Repurchase Program
During the three months ended April 3, 2022, we repurchased 0.9 million shares of our common stock with cash on hand for an aggregate cost of $50.0
million at an average price per share of $56.51 as part of our share repurchase program approved in 2018 by our Board of Directors. See Note 18.
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 $101.7 million in the three months ended April 3, 2022 from the comparable period 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 $97.4 million increase in revenues.
•Higher copper pass-through pricing had a $13.9 million favorable impact on revenues.
•Acquisitions contributed an estimated $3.2 million in revenues.
•The divestiture of our oil and gas cable business in 2021 had a $5.5 million unfavorable impact on revenues.
•Currency translation had a $7.3 million unfavorable impact on revenues.
Gross profit increased $39.7 million in the three months ended April 3, 2022 from the comparable period of 2021 due to the increases in revenues discussed above.
Selling,
general and administrative expenses increased $22.4 million in the three months ended April 3, 2022 from the comparable period 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.
-23-
Research and development expenses increased $0.8 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due to increased investments in R&D projects as we continue our commitment to growth initiatives.
Amortization of intangibles
increased $0.8 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due to acquisitions.
Asset impairments decreased $7.0 million in the three months ended April 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 three months ended April 4, 2021.
Operating income increased $22.6 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily as a result of the increase in gross profit discussed above.
Net
interest expense decreased $1.1 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due to currency translation.
Loss on debt extinguishment increased $6.4 million in the three months ended April 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 $17.8 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due
to the increase in operating income discussed above.
For
the three months ended April 3, 2022, we recognized income tax expense of $9.8 million, 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.
Revenues increased $101.7 million in the three months ended April 3, 2022 from the comparable period 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 $97.4 million increase in revenues.
•Higher
copper pass-through pricing had a $13.9 million favorable impact on revenues.
•Acquisitions contributed an estimated $3.2 million in revenues.
•The divestiture of our oil and gas cable business in Brazil in 2021 had a $5.5 million unfavorable impact on revenues.
•Currency translation had a $7.3 million unfavorable impact on revenues.
-24-
Adjusted EBITDA increased $22.9 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due to leverage on higher sales volume, as discussed above.
Accordingly, Adjusted EBITDA margins in the three months ended April 3, 2022 expanded to 16.3% from 15.0% in the comparable period 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.
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)
3,723
5,171
Asset impairments (2)
—
6,995
Amortization of software development intangible assets
1,007
409
Adjustments
related to acquisitions and divestitures (3)
—
(6,374)
Adjusted EBITDA
$
99,494
$
76,553
GAAP
income from continuing operations margin
7.2
%
5.7
%
Adjusted EBITDA margin
16.3
%
15.0
%
(1) Severance, restructuring, and acquisition
integration costs for the three months ended April 3, 2022 primarily relate to our Acquisition Integration Program. See Note 12. Costs for the three months ended April 4, 2021 primarily relate to our Acquisition Integration Program and completed Cost Reduction Program.
(2) During the three months ended April 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.
-25-
(3) During the three months ended April
4, 2021, we reduced the Opterna earn-out liability by $5.8 million, collected $1.4 million of receivables associated with the sale of Grass Valley that were previously written off, and recognized cost of sales of $0.8 million related to purchase accounting adjustments of acquired inventory to fair value for the OTN Systems acquisition.
Segment Results of Operations
For additional information regarding our segment measures, see Note 6 to the Condensed Consolidated Financial Statements.
Enterprise Solutions revenues increased $42.1 million in the three months ended April 3, 2022 from the comparable period of 2021. The increase in revenues in the three months ended April 3, 2022 was primarily due to increases in volume and favorable pricing as well as higher copper pass-through pricing of $37.5 million
and $5.4 million, respectively, partially offset by unfavorable currency translation of $0.8 million.
Enterprise Solutions EBITDA increased $2.5 million in the three months ended April 3, 2022 compared to the year ago period primarily as a result of the increase in revenues discussed above.
Industrial Automation Solutions revenues increased $59.6 million in the three months ended April 3, 2022 from the comparable period of 2021. The increase in revenues in the three months ended April 3, 2022 was primarily due to increases in volume and favorable pricing, higher copper pass-through pricing, and acquisitions
of $59.9 million, $8.5 million, and $3.2 million, respectively, partially offset by unfavorable currency translation and a divestiture of $6.5 million and $5.5 million, respectively.
Industrial Automation Solutions EBITDA increased $19.9 million in the three months ended April 3, 2022 from the comparable period of 2021 primarily due to leverage on higher sales volume, as discussed above. Accordingly, Adjusted EBITDA margins expanded to 19.7% from 16.9% in the year ago period.
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.
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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
(1,349)
(2,277)
Decrease in cash and cash equivalents
(84,175)
(131,144)
Cash and cash equivalents, beginning of period
643,757
501,994
Cash
and cash equivalents, end of period
$
559,582
$
370,850
Operating cash flows were a use of cash of $58.0 million in the three months ended April 3, 2022 compared to $41.5 million in the three months ended April 4, 2021. Operating cash flows declined $16.5 million compared to the prior year primarily due to unfavorable changes in accrued liabilities, accounts payable and inventories, partially offset by favorable changes in receivables. The use of cash in accrued liabilities was primarily due to higher incentive compensation payments and channel
partner rebates, both of which were a direct result of improved company performance during 2021, and the use of cash in inventory was primarily driven by increased demand.
Net cash from investing activities was a source of cash of $261.8 million in the three months ended April 3, 2022, compared to a use of cash of $82.3 million in the prior year. Investing activities for the three months ended April 3, 2022 included cash receipts of $338.7 million for the Tripwire disposal, partially offset by payments of $65.9 million for the acquisitions of Macmon and NetModule and capital expenditures of $11.0 million. Investing activities for the three months ended April 4, 2021 included cash payments of $72.2 million for the acquisition of OTN Systems
and capital expenditures of $11.2 million, partially offset by cash receipts of $1.1 million associated with the sale of Grass Valley.
Net cash used for financing activities totaled $286.7 million for the three months ended April 3, 2022, compared to $5.0 million in the prior year. Financing activities for the three months ended April 3, 2022 included payments under borrowing arrangements of $230.6 million, payments under our share repurchase program of $50.0 million, net payments related to share based compensation activities of $3.7 million, and cash dividend payments of $2.3 million. Financing activities for the three months ended April 4, 2021 included cash dividend payments of $2.2 million, repayments of debt obligations of $1.8 million assumed as part of the OTN Systems
acquisition, and net payments related to share based compensation activities of $0.9 million.
Our cash and cash equivalents balance was $559.6 million as of April 3, 2022. Of this amount, $176.4 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 April 3, 2022 consisted of $1,228.3 million of senior subordinated notes. Additional discussion regarding our various borrowing arrangements is included in Note 13 to the Condensed Consolidated Financial Statements.
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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.
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 April 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
$
—
$
502,470
$
502,470
$
488,933
Average interest rate
3.375
%
€350.0
million fixed-rate senior subordinated notes due 2028
$
—
$
390,810
$
390,810
$
384,072
Average interest rate
3.875
%
€300.0
million fixed-rate senior subordinated notes due 2031
$
—
334,980
$
334,980
$
312,573
Average interest rate
3.375
%
Total
$
1,228,260
$
1,185,578
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. It is premature to estimate the potential exposure to the Company associated with the litigation. The Company intends 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 April 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 2.8 million shares of our common stock under the program for an aggregate cost of $135.0 million and an average price of $49.07. During the three months ended April 3, 2022, we repurchased 0.9 million shares of our common stock under the share repurchase program
for an aggregate cost of $50.0 million and an average price per share of $56.51.
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.
