BELDEN INC. (BDC) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Belden is a leading global supplier of network infrastructure and digitization solutions that makes the digital journey simpler, smarter and secure. We’re moving beyond connectivity, from what we make to what we make possible through a performance-driven portfolio, forward-thinking expertise and purpose-built solutions. We are aligned with attractive secular growth markets, positioned to provide comprehensive solutions that drive customer outcomes, focused on new product innovation and technology leadership, and committed to sustainable ESG practices.
Our current business goals are to:
•Drive organic revenue growth in excess of GDP;
•Deliver incremental Adjusted EBITDA margins of approximately 30%;
•Generate free cash flows of approximately $1 billion cumulatively from 2022 through 2025;
•Execute a disciplined capital allocation strategy while maintaining net leverage of approximately 1.5x; and
•Drive Adjusted EPS to at least $8.00 by 2025.
Significant Trends and Events in 2023
The following trends and events during 2023 had varying effects on our financial condition, results of operations, and cash flows.
Foreign currency
Our exposure to currency rate fluctuations primarily relates to exchange rate movements between the U.S. dollar and the euro, Canadian dollar, Hong Kong dollar, Chinese yuan, Mexican peso, Australian dollar, British pound, Indian rupee, and Swiss franc. Generally, as the U.S. dollar strengthens against these foreign currencies, our revenues and earnings are negatively impacted as our foreign denominated revenues and earnings are translated into U.S. dollars at a lower rate. Conversely, as the U.S. dollar weakens against foreign currencies, our revenues and earnings are positively impacted. Because all of our senior subordinated notes are denominated in euros, interest expense on the notes is affected by exchange rate movements between the U.S. dollar and the euro.
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.
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. Importantly, however, 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 our products 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 Belden products owned and held 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 are dependent upon our channel partners to provide us with information regarding the amount of our products that they own and hold in their inventory. As such, all references to the effect of channel inventory changes are estimates.
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Market Growth and Market Share
The markets in which we operate can generally be characterized as highly competitive and highly fragmented, with many players. Based on available data for our served markets, we estimate that our market share across our segments is significant, ranging from approximately 5% – 15%. A substantial acquisition in one of our served markets would be necessary to meaningfully change our estimated market share percentage. We monitor available data regarding market growth, including independent market research reports, publicly available indices, and the financial results of our direct and indirect peer companies, in order to estimate the extent to which our served markets grew or contracted during a particular period. We generally expect that our unit sales volume will increase or decrease consistently with the market growth rate. Our strategic goal is to transition to a solutions provider and target faster growing geographies, applications, and trends within our end markets, in order to achieve growth that is higher than the general market growth rate. To the extent that we exceed the market growth rates, we consider it to be the result of capturing market share.
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, energy, and other costs. We monitor inflation pressures and proactively implement selling price increases and cost control measures as appropriate.
Share Repurchase Program
During 2023, we repurchased 2.3 million shares of our common stock for an aggregate cost of $192.1 million at an average price per share of $85.27. See Note 22.
Sichert Acquisition
During 2023, we acquired Sichert with cash on hand for $97.5 million, net of cash acquired. Sichert, based in Berlin Germany, designs and manufactures a portfolio of polycarbonate street cabinets utilized in outside plant passive optical networks (“PON”) and 5G networks. Sichert is reported within the Enterprise Solutions segment. See Note 4.
CloudRail Acquisition
During 2023, we acquired CloudRail with cash on hand for $9.2 million, net of cash acquired. CloudRail, based in Mannheim, Germany, specializes in sensor to cloud data solutions allowing end users to quickly connect sensors on their machinery to cloud providers to drive business insights and improve outcomes. CloudRail is reported within the Industrial Automation Solutions segment. See Note 4.
Gain on Sale of Assets
During 2023, we sold our property in Ontario, Canada as part of a sale and leaseback transaction for $13.8 million and recognized a $12.1 million pre-tax gain on sale. This gain on sale was excluded from Segment EBITDA. See Note 11.
Sale and Deconsolidation of Hite
During 2023, we sold our 51% ownership interest in Shanghai Hi-Tech Control System Co, Ltd to (Hite) for $0.9 million and recognized a $0.4 million pretax gain on sale. The sale also includes $0.6 million of potential earnout payments. The joint venture developed and provided certain Industrial Automation Solutions products and integrated solutions to customers in China. As Belden was the primary beneficiary of the joint venture, due to both our ownership percentage and control over the activities of the joint venture, we consolidated the joint venture in our financial statements and presented the results of the joint venture attributable to Hite’s ownership as net income attributable to noncontrolling interest in the Consolidated Statements of Operations up to the disposal date when we sold and deconsolidated the entity. See Note 2.
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Results of Operations
Consolidated Income from Continuing Operations before Taxes
| Years Ended December 31, | Percentage Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||
| (In thousands, except percentages) | |||||||||||||||||
| Revenues | $ | 2,512,084 | $ | 2,606,485 | $ | 2,301,260 | (3.6) | % | 13.3 | % | |||||||
| Gross profit | 954,966 | 916,289 | 771,843 | 4.2 | % | 18.7 | % | ||||||||||
| Selling, general and administrative expenses | 492,702 | 448,636 | 378,027 | 9.8 | % | 18.7 | % | ||||||||||
| Research and development expenses | 116,427 | 104,350 | 90,227 | 11.6 | % | 15.7 | % | ||||||||||
| Amortization of intangibles | 40,375 | 37,860 | 30,630 | 6.6 | % | 23.6 | % | ||||||||||
| Asset impairments | — | — | 9,283 | n/a | (100.0) | % | |||||||||||
| Gain on sale of assets | 12,056 | 37,891 | — | (68.2) | % | n/a | |||||||||||
| Operating income | 317,518 | 363,334 | 263,676 | (12.6) | % | 37.8 | % | ||||||||||
| Interest expense, net | 33,625 | 43,554 | 62,693 | (22.8) | % | (30.5) | % | ||||||||||
| Non-operating pension benefit | 1,863 | 4,005 | 4,476 | 53.5 | % | (10.5) | % | ||||||||||
| Gain on sale of note receivable | — | — | 27,036 | n/a | (100.0) | % | |||||||||||
| Loss on debt extinguishment | — | 6,392 | 5,715 | 100.0 | % | 11.8 | % | ||||||||||
| Income from continuing operations before taxes | 285,756 | 317,393 | 226,780 | (10.0) | % | 40.0 | % |
2023 Compared to 2022
Revenues decreased $94.4 million from 2022 to 2023 due to the following factors:
•Lower sales volume resulted in a $108.4 million decrease in revenues.
•Copper prices had a $19.9 million unfavorable impact on revenues.
•Divestitures had a $1.4 million unfavorable impact on revenues.
•Currency translation had a $0.4 million unfavorable impact on revenues.
•Acquisitions contributed $35.7 million in revenues.
Gross profit increased $38.7 million from 2022 to 2023 primarily due to favorable product mix and pricing. Gross profit margins were robust, expanding 280 basis points from 35.2% to 38.0%.
Selling, general and administrative expenses increased $44.1 million from 2022 to 2023. Strategic investments to enhance our solution selling capabilities, acquisitions, and severance actions contributed to the increase in selling, general and administrative expenses; partially offset by a decrease in incentive compensation.
Research and development expenses increased $12.1 million from 2022 to 2023 primarily due to increased investments in R&D projects as we continue our commitment to growth initiatives.
Amortization of intangibles increased $2.5 million from 2022 to 2023 primarily due to acquisitions.
Gain on sale of assets decreased $25.8 million from 2022 to 2023. During 2022 and 2023, we sold certain real estate in the United States and Canada and recognized a $37.9 million and $12.1 million pre-tax gain on sale, respectively. See Note 11.
Operating income decreased $45.8 million from 2022 to 2023 primarily due to the increase in expenses and decrease in the gain on sale of assets discussed above.
Net interest expense decreased $9.9 million from 2022 to 2023 primarily due to the retirement of the 2026 Notes during 2022 and an increase in interest income.
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Loss on debt extinguishment decreased $6.4 million from 2022 to 2023 due to the debt refinancing that took place during 2022. The loss on debt extinguishment in 2022 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 16.
Income from continuing operations before taxes decreased $31.6 million from 2022 to 2023 primarily due to the decrease in operating income discussed above.
2022 Compared to 2021
Revenues increased $305.2 million from 2021 to 2022 due to the following factors:
•Higher sales volume and favorable pricing from industrial automation, smart buildings, and broadband products resulted in a $365.0 million increase in revenues.
•Acquisitions, net of disposals contributed $19.3 million in revenues.
•Currency translation had a $65.3 million unfavorable impact on revenues.
•Copper prices had a $13.8 million unfavorable impact on revenues.
Gross profit increased $144.4 million from 2021 to 2022 due to the increases in revenues discussed above. Accordingly, gross profit margins expanded nearly 200 basis points year over year.
Selling, general and administrative expenses increased $70.6 million from 2021 to 2022. The increase in selling, general and administrative expenses is primarily attributable to strategic investments to enhance our solution selling capabilities, expenses from our acquired businesses and costs associated with lease guarantees as discussed in Note 12.
Research and development expenses increased $14.1 million from 2021 to 2022 primarily due to increased investments as we further strengthen our product offering and continue our commitment to growth initiatives.
Amortization of intangibles increased $7.2 million from 2021 to 2022 primarily due to acquisitions.
Asset impairments decreased $9.3 million from 2021 to 2022 as a result of the following impairment charges during 2021: $3.6 million to write down certain held and used long-lived assets in our Industrial Automation Solutions segment to fair value, $3.4 million for our former oil and gas business in Brazil sold during 2021, and a $2.3 million charge to write down certain real estate in Germany to its fair value and sold as part of a sale and leaseback transaction during 2021. See Notes 5, 11 and 12.
Gain on sale of assets increased $37.9 million from 2021 to 2022. During 2022, we sold certain real estate in the United States and recognized a $37.9 million pre-tax gain on sale. See Note 11.
Operating income increased $99.7 million from 2021 to 2022 primarily as a result of the increase in gross profit, the gain on sale of assets in 2022, and lack of asset impairment charges as compared to 2021, partially offset by the increase in selling, general and administrative expenses; research and development expenses; and amortization of intangibles expense discussed above.
Net interest expense decreased $19.1 million from 2021 to 2022 primarily due to the repurchase of senior subordinated notes previously due 2026 and currency translation.
Gain on sale of note receivable decreased $27.0 million from 2021 to 2022 as a result of the sale of the Seller’s Note in 2021 related to the 2020 divestiture of Grass Valley. See Note 5.
Loss on debt extinguishment increased $0.7 million from 2021 to 2022. The loss on debt extinguishment in 2022 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. The loss on debt extinguishment in 2021 represents the premium paid to the bond holders to retire the 2025 Notes and for the unamortized debt issuance costs on the 2025 Notes that we were required to write-off.
Income from continuing operations before taxes increased $90.6 million from 2021 to 2022 primarily due to the increase in operating income discussed above.
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Income Taxes
| Years Ended December 31, | Percentage Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||
| (In thousands, except percentages) | |||||||||||||||||
| Income from continuing operations before taxes | $ | 285,756 | $ | 317,393 | $ | 226,780 | (10.0) | % | 40.0 | % | |||||||
| Income tax expense | (43,200) | (49,645) | (27,939) | (13.0) | % | 77.7 | % | ||||||||||
| Effective tax rate | 15.1 | % | 15.6 | % | 12.3 | % |
2023
We recognized income tax expense of $43.2 million in 2023, representing an effective tax rate of 15.1%. 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 18.
2022
We recognized income tax expense of $49.6 million in 2022, representing an effective tax rate of 15.6%. The effective tax rate was primarily impacted by foreign tax rate differences, domestic permanent differences, and tax credits primarily associated with our foreign income inclusions.
2021
We recognized income tax expense of $27.9 million in 2021, representing an effective tax rate of 12.3%. The effective tax rate was primarily impacted by a change in the deferred tax asset valuation allowance due to the release of a valuation allowance against the foreign tax credits in the U.S. and a pension deferred tax asset in a foreign jurisdiction.
Our income tax expense and effective tax rate in future periods may be impacted by many factors, including our geographic mix of income and changes in tax laws.
Consolidated Adjusted EBITDA
| Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||
| (In thousands, except percentages) | ||||||||||
| GAAP and Adjusted Revenues | $ | 2,512,084 | $ | 2,606,485 | $ | 2,301,260 | ||||
| GAAP income from continuing operations | $ | 242,556 | $ | 267,748 | $ | 198,841 | ||||
| Depreciation expense | 51,379 | 46,669 | 43,073 | |||||||
| Income tax expense | 43,200 | 49,645 | 27,939 | |||||||
| Amortization of intangibles | 40,375 | 37,860 | 30,630 | |||||||
| Interest expense, net | 33,625 | 43,554 | 62,693 | |||||||
| Severance, restructuring, and acquisition integration costs (1) | 25,152 | 16,685 | 23,867 | |||||||
| Amortization of software development intangible assets | 7,692 | 3,875 | 1,579 | |||||||
| Adjustments related to acquisitions and divestitures (2) | 6,177 | 7,833 | (5,035) | |||||||
| Loss on debt extinguishment | — | 6,392 | 5,715 | |||||||
| Non-operating pension settlement loss | — | 1,189 | — | |||||||
| Asset impairments(3) | — | — | 9,283 | |||||||
| Gain on sale of assets(4) | (12,056) | (37,891) | — | |||||||
| Gain on sale of note receivable(5) | — | — | (27,036) | |||||||
| Adjusted EBITDA | $ | 438,100 | $ | 443,559 | $ | 371,549 | ||||
| GAAP income from continuing operations margin | 9.7 | % | 10.3 | % | 8.6 | % | ||||
| Adjusted EBITDA margin | 17.4 | % | 17.0 | % | 16.1 | % |
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(1)Includes costs from programs described in Note 15, Restructuring Activities as well as other immaterial programs.
(2)In 2023, we incurred $4.1 million for lease guarantees associated with the Grass Valley disposal (see Note 12), $1.5 million related to fair value adjustments of acquired inventory and other assets, and $0.6 million of net losses associated with the sales of businesses. In 2022, we incurred $10.1 million for lease guarantees associated with the Grass Valley disposal, $2.2 million related to fair value adjustments of acquired inventory and other assets, and gains of $4.5 million on collections from previously written off receivables associated with the sale of Grass Valley. In 2021, we collected $2.2 million of receivables associated with the sale of Grass Valley and acquisition of SPC that were previously written off, reduced the Opterna earn-out liability by $5.8 million, recognized cost of sales of $2.3 million related to adjustments of acquired inventory to fair value, and recognized a $0.6 million loss on the sale of tangible assets.
(3)In 2021, we recognized a $3.6 million impairment on assets held and used and a $5.7 million impairment on assets held for sale. See Note 11, Property, Plant, and Equipment, for details.
(4)In 2023, we sold certain real estate in Canada for $13.8 million, net of transaction costs and recognized a $12.1 million pre-tax gain on sale. In 2022, we sold certain real estate in the United States for $42.2 million, net of transaction costs and recognized a $37.9 million pre-tax gain on sale. See Note 11, Property, Plant, and Equipment, for details.
(5)In 2021, we sold the seller's note associated with the Grass Valley disposal to a third party for $62.0 million and recognized a pre-tax gain on sale of $27.0 million. See Note 5, Disposals.
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; fair value adjustments and transaction costs related to acquisitions; 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 revenues and 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 businesses' 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.
| Year Ended December 31, | Percentage Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||
| (In thousands, except percentages) | |||||||||||||||||
| GAAP and Adjusted Revenues | $ | 2,512,084 | $ | 2,606,485 | $ | 2,301,260 | (3.6) | % | 13.3 | % | |||||||
| Adjusted EBITDA | 438,100 | 443,559 | 371,549 | (1.2) | % | 19.4 | % | ||||||||||
| as a percent of adjusted revenues | 17.4 | % | 17.0 | % | 16.1 | % |
2023 Compared to 2022
Revenues decreased $94.4 million from 2022 to 2023 due to the following factors:
•Lower sales volume resulted in a $108.4 million decrease in revenues.
•Copper prices had a $19.9 million unfavorable impact on revenues.
•Divestitures had a $1.4 million unfavorable impact on revenues.
•Currency translation had a $0.4 million unfavorable impact on revenues.
•Acquisitions contributed $35.7 million in revenues.
Adjusted EBITDA decreased $5.5 million in 2023 from 2022 primarily due to the decrease in revenues discussed above, partially offset by favorable mix. Adjusted EBITDA margins expanded to 17.4% from 17.0% in the year ago period.
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2022 Compared to 2021
Revenues increased $305.2 million from 2021 to 2022 due to the following factors:
•Higher sales volume and favorable pricing from industrial automation, smart buildings, and broadband products resulted in a $365.0 million increase in revenues.
•Acquisitions, net of disposals contributed $19.3 million in revenues.
•Currency translation had a $65.3 million unfavorable impact on revenues.
•Copper prices had a $13.8 million unfavorable impact on revenues.
Adjusted EBITDA increased $72.0 million in 2022 from 2021 primarily due to the leverage on higher sales volume, as discussed above. Accordingly, adjusted EBITDA margins expanded to 17.0% from 16.1% in the year ago period.
Segment Results of Operations
For additional information regarding our segment measures, see Note 6 to the Consolidated Financial Statements.
Enterprise Solutions
| Years Ended December 31, | Percentage Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||
| (In thousands, except percentages) | |||||||||||||||||
| Segment Revenues | $ | 1,122,831 | $ | 1,198,478 | $ | 1,074,426 | (6.3) | % | 11.5 | % | |||||||
| Segment EBITDA | 149,107 | 161,517 | 144,509 | (7.7) | % | 11.8 | % | ||||||||||
| as a percent of segment revenues | 13.3 | % | 13.5 | % | 13.4 | % |
2023 Compared to 2022
Enterprise revenues decreased $75.6 million in 2023 as compared to 2022. Decreases in volume, lower copper prices, and unfavorable currency translation contributed $92.5 million, $10.2 million, and $4.6 million, respectively, to the decrease in revenues, partially offset by revenues of $31.7 million from acquisitions.
Enterprise EBITDA decreased $12.4 million in 2023 as compared to 2022 primarily due to the decreases in revenues discussed above.
2022 Compared to 2021
Enterprise revenues increased $124.1 million in 2022 as compared to 2021. The increase in revenues was primarily due to increases in volume and favorable pricing of $135.0 million and acquisitions of $5.4 million, partially offset by unfavorable currency translation and lower copper pass-through pricing of $13.3 million and $3.0 million, respectively.
Enterprise EBITDA increased $17.0 million in 2022 as compared to 2021 primarily due to the increase in revenues discussed above. Accordingly, Adjusted EBITDA margins expanded to 13.5% from 13.4% in the year ago period.
Industrial Automation Solutions
| Years Ended December 31, | Percentage Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||
| (In thousands, except percentages) | |||||||||||||||||
| Segment Revenues | $ | 1,389,253 | $ | 1,408,007 | $ | 1,226,834 | (1.3) | % | 14.8 | % | |||||||
| Segment EBITDA | 287,328 | 277,079 | 222,684 | 3.7 | % | 24.4 | % | ||||||||||
| as a percent of segment revenues | 20.7 | % | 19.7 | % | 18.2 | % |
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2023 Compared to 2022
Industrial Automation revenues decreased $18.8 million in 2023 as compared to 2022 primarily due to decreases in volume and lower copper prices of $15.9 million and $9.7 million, respectively, partially offset by favorable currency translation and acquisitions, net of disposals of $4.2 million and $2.6 million, respectively.
Industrial Automation EBITDA increased $10.2 million in 2023 as compared to 2022 primarily as a result of favorable mix and manufacturing productivity. Accordingly, Adjusted EBITDA margins expanded to 20.7% from 19.7% in the year ago period.
2022 Compared to 2021
Industrial Automation revenues increased $181.2 million in 2022 as compared to 2021 primarily due to increases in volume and favorable pricing of $230.1 million and acquisitions, net of disposals of $13.9 million, partially offset by unfavorable currency translation and lower copper pass-through pricing of $52.0 million and $10.8 million, respectively.
Industrial Automation EBITDA increased $54.4 million in 2022 as compared to 2021 primarily as a result of the increase in revenues discussed above. Accordingly, Adjusted EBITDA margins expanded to 19.7% from 18.2% in the year ago period.
Liquidity and Capital Resources
Significant factors affecting our cash liquidity include (1) cash provided by operating activities, (2) disposals of businesses and tangible assets, (3) cash used for acquisitions, restructuring actions, capital expenditures, share repurchases, dividends, and senior subordinated note repurchases, and (4) our available credit facilities and other borrowing arrangements. We expect our operating activities to generate cash in 2024 and believe our sources of liquidity are sufficient to fund current working capital requirements, capital expenditures, contributions to our retirement plans, share repurchases, senior subordinated note repurchases, quarterly dividend payments, and our short-term operating strategies. However, we may require external financing were we to 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 offerings, and commodities pricing.
The following table is derived from our Consolidated Cash Flow Statements and includes the results and cash flow activity of discontinued operations up to the February 22, 2022 disposal date:
| Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| (In thousands) | ||||||
| Net cash provided by (used for): | ||||||
| Operating activities | $ | 319,638 | $ | 281,296 | ||
| Investing activities | (200,358) | 168,411 | ||||
| Financing activities | (211,932) | (393,214) | ||||
| Effects of currency exchange rate changes on cash and cash equivalents | 2,020 | (12,574) | ||||
| Increase (decrease) in cash and cash equivalents | (90,632) | 43,919 | ||||
| Cash and cash equivalents, beginning of year | 687,676 | 643,757 | ||||
| Cash and cash equivalents, end of year | $ | 597,044 | $ | 687,676 |
Net cash provided by operating activities totaled $319.6 million for 2023 compared to $281.3 million for 2022. The increase is primarily due to a $35.4 million improvement in operating assets and liabilities as we successfully managed working capital to mitigate the impact of lower revenues in 2023.
Net cash from investing activities was a use of cash of $200.4 million for 2023 compared to a source of cash of $168.4 million for 2022. Investing activities for 2023 included $116.7 million for capital expenditures and $106.7 million primarily for the acquisitions of Sichert and Cloudrail, partially offset by $13.7 million for asset sales and $9.3 million received from the disposals of businesses. Investing activities for 2022 included proceeds of $334.6 million and $43.5 million from the sale of the Tripwire disposal group and tangible property, respectively, partially offset by $105.1 million for capital expenditures and $104.6 million primarily for the acquisitions of Macmon, NetModule and CAI.
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Net cash flows used for financing activities totaled $211.9 million for 2023 compared to $393.2 million for 2022. Financing activities for 2023 included payments under our share repurchase program of $192.1 million, payments related to share based compensation activities of $17.4 million, cash dividend payments of $8.5 million, financing lease payments of $0.4 million, and proceeds from the issuance of common stock of $6.5 million. Financing activities for 2022 included repayments of debt obligations of $230.6 million, payments under our share repurchase program of $150.0 million, cash dividend payments of $8.9 million, net payments related to share based compensation activities of $7.2 million, financing lease payments of $0.2 million, and proceeds from the issuance of common stock of $3.7 million.
Our cash and cash equivalents balance was $597.0 million as of December 31, 2023. Of this amount, $303.2 million was held outside of the U.S. in our foreign operations. Substantially all of the foreign cash and cash equivalents are readily convertible into U.S. dollars or other foreign currencies. Our strategic plan does not require the repatriation of foreign cash in order to fund our operations in the U.S., and it is our current intention to permanently reinvest the foreign cash and cash equivalents outside of the U.S. If we were to repatriate the foreign cash to the U.S., we may be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. See Note 18, Income Taxes in the accompanying notes to our consolidated financial statements.
Our outstanding debt obligations as of December 31, 2023 consisted of $1.2 billion of senior subordinated notes. As of December 31, 2023, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $289.1 million. Additional discussion regarding our various borrowing arrangements is included in Note 16 to the Consolidated Financial Statements.
At December 31, 2023, the following contractual obligations and commercial commitments were outstanding:
a.Principal payments on long-term debt totaled $1.2 billion, none of which is due in 2024 (see Note 16). Depending on the conditions in the credit markets, we may refinance this debt, or we may use cash from operations, including temporarily accessing our Revolving Credit Agreement, to repay this debt.
b.Interest payments on long-term debt of $216.0 million, of which $44.2 million is due in 2024.
c.Operating lease obligations of $91.5 million, of which $18.0 million is due in 2024 (see Note 12).
d.Pension and other postemployment obligations of $106.6 million, of which $12.3 million is due in 2024 (see Note 19).
e.Obligations to purchase goods or services that are enforceable and legally binding of $43.7 million. All of these obligations are due in 2024.
f.Standby financial letters of credit, bank guarantees, and surety bonds totaled $19.9 million, of which $13.5 million will expire or mature in 2024. These commitments are generally issued to secure obligations we have for a variety of commercial reasons such as workers compensation self-insurance programs in several states and the importation and exportation of product. We expect to replace most of these when they expire or mature.
g.Obligations for uncertain tax positions of $7.1 million, none of which is due in 2024 (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.
Current-Year Adoption of Recent Accounting Pronouncements
Discussion regarding our adoption of accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S. (GAAP). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
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Our significant accounting policies are discussed in Note 2 of our Consolidated Financial Statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
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 3.
At the time of sale, we establish an estimated reserve for trade, promotion, and other special price reductions such as contract pricing, discounts to meet competitor pricing, and on-time payment discounts. We also reserve for, among other things, correction of billing errors, incorrect shipments, and settlement of customer disputes. Customers are allowed to return inventory if and when certain conditions regarding the functionality of the inventory and our approval of the return are met. Certain distribution customers are allowed to return inventory at original cost, in an amount not to exceed three percent of the prior year’s purchases, in exchange for an order of equal or greater value. Until we can process these reductions, corrections, and returns (together, the Changes) through individual customer records, we estimate the amount of outstanding Changes and recognize them by reducing revenues. We determine our estimate based on our historical Changes as a percentage of revenues and the average time period between the original sale and the issuance of the Changes. We adjust other current assets and cost of sales for the estimated level of returns.
We base these estimates on historical and anticipated sales demand, trends in product pricing, and historical and anticipated Changes patterns. We make revisions to these estimates in the period in which the facts that give rise to each revision become known. Future market conditions and product transitions might require us to take actions to further reduce prices and increase customer return authorizations. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to measure the Changes. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our sales reserve for such Changes as of December 31, 2023 would have affected net income by approximately $2.5 million in 2023.
Income Taxes
We recognize deferred tax assets resulting from tax credit carryforwards, net operating loss carryforwards, and deductible temporary differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred tax assets generally represent future tax benefits to be received when these carryforwards can be applied against future taxable income or when expenses previously reported in our Consolidated Financial Statements become deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or all of the deferred tax assets may not be realized. We are required to estimate taxable income in future years or develop tax strategies that would enable tax asset realization in each taxing jurisdiction and use judgment to determine whether to record a deferred tax asset valuation allowance for part or all of a deferred tax asset.
We consider the weight of all available evidence, both positive and negative, in assessing the realizability of the deferred tax assets associated with net operating losses. We consider the reversals of existing taxable temporary differences as well as projections of future taxable income. We consider the future reversals of existing taxable temporary differences to the extent they were of the same character as the temporary differences giving rise to the deferred tax assets. We also consider whether the future reversals of existing taxable temporary differences will occur in the same period and jurisdiction as the temporary differences giving rise to the deferred tax assets. The assumptions utilized to estimate our future taxable income are consistent with those assumptions utilized for purposes of testing goodwill for impairment, as well as with our budgeting and strategic planning processes.
Significant judgment is required in evaluating our uncertain tax positions. We establish accruals for uncertain tax positions when we believe that the full amount of the associated tax benefit may not be realized. In the future, if we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves, there could be a material effect on our income tax provisions in the period in which such determination is made.
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In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures (ASU 2023-09) enhancing the transparency and decision usefulness of income tax disclosures. ASU 2023-09 addresses investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments in ASU 2023-09 are applied on a prospective basis, though retrospective application is permitted. We did not early adopt this pronouncement and are in the process of evaluating its impact on our consolidated financial statements and related disclosures.
See Note 18, Income Taxes, to the consolidated financial statements for further information regarding income taxes.
Goodwill and Indefinite-Lived Intangible Assets
We test our goodwill and other indefinite-lived intangible assets not subject to amortization for impairment on an annual basis during the fourth quarter or when indicators of impairment exist. We base our estimates on assumptions we believe to be reasonable, but which are not predictable with precision and therefore are inherently uncertain. Actual future results could differ from these estimates.
We test goodwill annually for impairment at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. We determined that each of our reportable segments (Enterprise Solutions and Industrial Automation Solutions) represents an operating segment. Within those operating segments, we have identified reporting units based on whether there is discrete financial information prepared that is regularly reviewed by segment management. As a result of this evaluation, we have identified three reporting units within Enterprise Solutions and three reporting units within Industrial Automation Solutions for purposes of goodwill impairment testing.
The accounting guidance related to goodwill impairment testing allows for the performance of an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Such an evaluation is made based on the weight of all available evidence and the significance of all identified events and circumstances that may influence the fair value of a reporting unit. If it is more likely than not that the fair value is less than the carrying value, then a quantitative assessment is required for the reporting unit, as described in the paragraph below. In 2023, we performed a qualitative assessment over three of our reporting units.
When we evaluate goodwill for impairment using a quantitative assessment, we compare the fair value of each reporting unit to its carrying value. We determine the fair value using an income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows using growth rates and discount rates that are consistent with current market conditions in our industry. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. In addition to the income approach, we calculate the fair value of our reporting units under a market approach. The market approach measures the fair value of a reporting unit through analysis of financial multiples of comparable businesses. Consideration is given to the financial conditions and operating performance of the reporting unit being valued relative to those publicly-traded companies operating in the same or similar lines of business.
For our annual impairment test in 2023, we performed a quantitative assessment over three of our reporting units. The excess of the fair value over the carrying value under the income approach ranged from 30% to 106%. The assumptions used to estimate fair values were based on the past performance of the reporting unit as well as the projections incorporated in our strategic plan. Significant assumptions included sales growth, profitability, and related cash flows, along with cash flows associated with taxes and capital spending. The discount rate used to estimate fair value was risk adjusted in consideration of the economic conditions in effect at the time of the impairment test. We also considered assumptions that market participants may use. In our quantitative assessment, the discount rate ranged from 11.9% to 13.8%, the 2024 to 2033 compounded annual revenue growth rate ranged from 4.2% to 6.3%, and the revenue growth rate beyond 2033 ranged from 2.0% to 3.0%. By their nature, these assumptions involve risks and uncertainties. There is inherent risk associated with using an income approach to estimate fair values. If actual results are significantly different from our estimates or assumptions, we may have to recognize impairment charges that could be material.
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We also test our indefinite-lived intangible asset, a trademark, for impairment on an annual basis during the fourth quarter. The accounting guidance allows for the performance of an optional qualitative assessment, similar to that described above for goodwill, but we did not perform a qualitative assessment as part of our indefinite-lived intangible asset impairment testing for 2023. Rather, we performed a quantitative assessment for our indefinite-lived trademark in 2023. Under the quantitative assessment, we determined the fair value of the trademark using a relief from royalty methodology and compared the fair value to the carrying value. We determined that our trademark was not impaired during 2023. Significant assumptions to determine fair value included sales growth, a royalty rate, and a discount rate.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit costs and obligations are dependent on the various actuarial assumptions used in calculating such amounts. These assumptions relate to discount rates, salary growth, long-term return on plan assets, health care cost trend rates, mortality tables, and other factors. We base the discount rate assumptions on current investment yields on high-quality corporate long-term bonds. The salary growth assumptions reflect our long-term actual experience and future or near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management’s expectation of the future economic environment. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Our key assumptions are described in further detail in Note 19 to the Consolidated Financial Statements. Actual results that differ from our assumptions are accumulated and, if in excess of the lesser of 10% of the projected benefit obligation or the fair market value of plan assets, amortized over the estimated future working life of the plan participants.
As a sensitivity measure, the effect of a 50 basis point decline in the assumed discount rate would have resulted in a decrease in the 2023 net periodic benefit cost of approximately $0.1 million and an increase in the projected benefit obligations of approximately $19.8 million as of December 31, 2023. A 50 basis point decline in the expected return on plan assets would have resulted in an increase in the 2023 net periodic benefit cost of approximately $1.5 million.
Conversely, the effect of a 50 basis point increase in the assumed discount rate would have resulted in a decrease in the 2023 net periodic benefit cost of less than $0.1 million and a decrease in the projected benefit obligation of approximately $18.3 million as of December 31, 2023. A 50 basis point increase in the expected return on plan assets would have resulted in a decrease in the 2023 net periodic benefit cost of approximately $1.5 million.
Acquisition Accounting
We allocate the consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the consideration over the amount allocated to the assets and liabilities, if any, is recorded to goodwill. We use all available information to estimate fair values. We typically engage third party valuation specialists to assist in the fair value determination of inventories, tangible long-lived assets, and intangible assets other than goodwill. The carrying values of acquired receivables and accounts payable have historically approximated their fair values as of the acquisition date. As necessary, we may engage third party specialists to assist in the estimation of fair value for certain liabilities. We adjust the preliminary acquisition accounting, as necessary, typically up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our acquisition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
If actual results are materially different than the assumptions we used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on our net earnings. See Note 4.
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