BELDEN INC. (BDC) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Belden is a leading global supplier of network infrastructure 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 $8.00 by 2025.

Significant Trends and Events in 2022

The following trends and events during 2022 had varying effects on our financial condition, results of operations, and cash flows.

Pandemic

In 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. 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.

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 are mindful of ongoing inflationary pressures and as a result, proactively implement selling price increases and cost control measures.

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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. 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.

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 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

During 2022, we sold Tripwire for gross cash consideration of $350 million and recognized a loss on disposal of discontinued operations, net of tax of $9.2 million. See Note 5.

Debt Repurchase

During 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 16.

Acquisitions

During 2022, we completed three acquisitions. On January 17, 2022, we acquired Macmon for $41.9 million, net of cash acquired. Macmon, based in Berlin, Germany, is a leading provider of products and services that secure network infrastructure in a variety of mission critical industries. On March 3, 2022, we acquired NetModule for $23.5 million, net of cash acquired. NetModule, based in Bern, Switzerland, is a leading provider of reliable, fast and secure wireless network infrastructures through advanced capabilities in 5G and WiFi6 technologies in a variety of mission critical industries with a strong focus on mass transit and intelligent traffic systems within the transportation vertical. On April 15, 2022, we acquired CAI for $19.0 million, net of cash acquired. CAI is headquartered in Anniston, Alabama and designs, manufactures, and sells a range of plug-in radio frequency filters used in outside plant hybrid fiber-coax nodes. The results of operations of each acquisition have been included in our results of operations from their respective acquisition dates. The three acquisitions were not material to our results of operations. Macmon and NetModule are included in the Industrial Automation Solutions segment, and CAI is included in the Enterprise Solutions segment. All three acquisitions were funded with cash on hand. See Note 4.

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Share Repurchase Program

During 2022, we repurchased 2.6 million shares of our common stock under the share repurchase program for an aggregate cost of $150.0 million at an average price per share of $57.95. See Note 22.

Gain on Sale of Asset

During 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. This gain on sale was excluded from Segment EBITDA of our Industrial Automation Solutions segment. See Note 11.

Equity Method Investment

During 2022, we invested $20.0 million in Litmus for a noncontrolling ownership interest. Litmus provides critical data connectivity needed to monitor, visualize, analyze, and integrate industrial data. We account for this investment using the equity method of accounting. See Note 2.

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Results of Operations

Consolidated Income from Continuing Operations before Taxes

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 & 5G products resulted in a $365.0 million increase in revenues.

•Acquisitions, net of disposals contributed an estimated $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. See Note 4.

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 asset 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 asset 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.

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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. See Note 16.

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. See Note 16.

Income from continuing operations before taxes increased $90.6 million from 2021 to 2022 primarily due to the increase in operating income discussed above.

2021 Compared to 2020

Revenues increased $549.1 million from 2020 to 2021 due to the following factors:

•Higher sales volume from industrial automation, smart buildings, and broadband & 5G products resulted in a $376.8 million increase in revenues.

•Copper prices had a $117.2 million favorable impact on revenues.

•Currency translation had a $26.7 million favorable impact on revenues.

•Acquisitions contributed an estimated $37.7 million in revenues.

•Divestitures had a $9.3 million unfavorable impact on revenues.

Gross profit increased $196.2 million from 2020 to 2021 due to the increases in revenues discussed above while gross profit margins expanded 70 basis points. Excluding the impact of higher copper pass through pricing and changes in foreign currency rates, gross profit margins increased more than 200 basis points.

Selling, general and administrative expenses increased $54.6 million from 2020 to 2021. Strategic investments to enhance our solution selling capabilities (e.g., customer innovation centers), higher incentive compensation, and acquisitions contributed to the increase in selling, general and administrative expenses.

Research and development expenses increased $17.2 million from 2020 to 2021 primarily due to increased investments in R&D projects as we continue our commitment to growth initiatives.

Amortization of intangibles increased $1.6 million from 2020 to 2021 primarily due to currency translation.

Asset impairments increased $9.3 million from 2020 to 2021 as a result of impairment charges of $3.6 million to write down certain held and used long-lived assets in our Industrial Automation Solutions segment to fair value, impairment charges of $3.4 million for our former oil and gas business in Brazil sold during 2021, and impairment charges of $2.3 million to write down certain real estate in Neckartenzlingen, Germany sold as part of a sale and leaseback transaction during 2021 to its fair value. See Notes 5, 11 and 12.

Operating income increase $113.6 million from 2020 to 2021 primarily due to the increase in gross profit discussed above, partially offset by the increase in selling, general and administrative expenses; research and development expenses; amortization of intangibles expense; and asset impairments.

Net interest expense increased $3.8 million from 2020 to 2021 primarily due to currency translation.

Gain on sale of note receivable increased $27.0 million from 2020 to 2021 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 $5.7 million from 2020 to 2021 due to the debt refinancing that took place during 2021. The $5.7 million loss on debt extinguishment 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. See Note 16.

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Income from continuing operations before taxes increased $136.0 million from 2020 to 2021 primarily due to the increase in operating income discussed above.

Income Taxes

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, and domestic permanent differences and tax credits primarily associated with our foreign income inclusions. See Note 18.

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.

2020

We recognized income tax expense of $20.1 million in 2020, representing an effective tax rate of 22.1%. The effective tax rate was impacted by foreign tax rate differences, and domestic permanent differences and tax credits primarily associated with our foreign income inclusions.

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

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(1)See Note 15, Severance, Restructuring, and Acquisition Integration Activities, for details.

(2)In 2022, we incurred $10.1 million for lease guarantees associated with the Grass Valley disposal (see Note 12), $2.2 million related to fair value adjustments of acquired inventory and investments, 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. In 2020, we recognized $0.1 million of cost of sales related to adjustments of acquired inventory to fair value.

(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 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 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.

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 & 5G products resulted in a $365.0 million increase in revenues.

•Acquisitions, net of disposals contributed an estimated $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.

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2021 Compared to 2020

Revenues increased $549.1 million from 2020 to 2021 due to the following factors:

•Higher sales volume from industrial automation, smart buildings, and broadband & 5G products resulted in a $376.8 million increase in revenues.

•Copper prices had a $117.2 million favorable impact on revenues.

•Currency translation had a $26.7 million favorable impact on revenues.

•Acquisitions contributed an estimated $37.7 million in revenues.

•Divestitures had a $9.3 million unfavorable impact on revenues.

Adjusted EBITDA increased $137.7 million in 2021 from 2020 primarily due to the leverage on higher sales volume, as discussed above. Accordingly, Adjusted EBITDA margins expanded to 16.1% from 13.3% 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

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.

2021 Compared to 2020

Enterprise revenues increased $202.0 million in 2021 as compared to 2020. Increases in volume, higher copper prices, and favorable currency translation contributed $143.6 million, $50.4 million, and $8.0 million, respectively, to the increase in revenues year over year.

Enterprise EBITDA increased $45.2 million in 2021 as compared to 2020 primarily due to the leverage on higher sales volume, as discussed above. Accordingly, Adjusted EBITDA margins expanded to 13.4% from 11.4% in the year ago period.

Industrial Automation Solutions

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.

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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.

2021 Compared to 2020

Industrial Automation revenues increased $347.1 million in 2021 as compared to 2020 primarily due to increases in volume; higher copper prices; acquisitions, net of disposals; and favorable currency translation of $233.2 million, $66.8 million, $28.4 million, and $18.7 million, respectively.

Industrial Automation EBITDA increased $90.4 million in 2021 as compared to 2020 primarily as a result of the increase in revenues discussed above. Accordingly, Adjusted EBITDA margins expanded to 18.2% from 15.0% 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 2023 and believe our sources of liquidity are sufficient to fund current working capital requirements, capital expenditures, contributions to our retirement plans, share repurchases, senior subordinated note repurchases, quarterly dividend payments, and our short-term operating strategies. However, we may require external financing 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 consistent with the Consolidated Cash Flow Statements:

Net cash provided by operating activities totaled $281.3 million for 2022 compared to $272.1 million for 2021. The increase is primarily due to higher net income and favorable changes in inventory. Inventory was a source of cash of $5.6 million compared to a use of cash of $93.0 million in the prior year. The use of cash for inventory in the prior year was due to investments in inventory to satisfy the increasing demand.

Net cash provided by investing activities totaled $168.4 million for 2022 compared to a use of cash of $92.0 million for 2021. 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, as well as $105.1 million for capital expenditures and $104.6 million for the investment in Litmus and acquisitions of Macmon, NetModule and CAI. Investing activities for 2021 included capital expenditures of $91.0 million, payments primarily for the acquisition of OTN Systems of $73.3 million, purchases of intangible assets of $3.6 million, cash receipts for the carrying value of the seller's note and sale of the oil and gas cable business in Brazil of $45.7 million, and cash receipts for the sale of real estate in Germany of $30.2 million.

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Net cash flows used for financing activities totaled $393.2 million for 2022 compared to $32.9 million for 2021. 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. Financing activities for 2021 included repayments of debt obligations of $360.3 million, cash dividend payments of $9.0 million, debt issuance costs of $8.2 million, net payments related to share based compensation activities of $5.6 million, financing lease payments of $3.1 million, payments to noncontrolling interests of $2.7 million, and borrowings under credit arrangements of $356.0 million. During 2021, we completed an offering for €300.0 million aggregate principal amount of 3.375% senior subordinated notes due 2031, repurchased the €300.0 million 2025 Notes, and refinanced the Revolver - see Note 16.

Our cash and cash equivalents balance was $687.7 million as of December 31, 2022. Of this amount, $198.9 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, 2022 consisted of $1.2 billion of senior subordinated notes. As of December 31, 2022, we had no borrowings outstanding on the Revolver, and our available borrowing capacity was $291.1 million. Additional discussion regarding our various borrowing arrangements is included in Note 16 to the Consolidated Financial Statements.

At December 31, 2022, the following contractual obligations and commercial commitments were outstanding:

a.Principal payments on long-term debt of $1.2 billion, none of which is due in 2023 (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 $309.1 million, of which $44.2 million is due in 2023.

c.Operating lease obligations of $77.2 million, of which $15.5 million is due in 2023 (see Note 12).

d.Pension and other postemployment obligations of $84.3 million, of which $9.6 million is due in 2023 (see Note 19).

e.Obligations to purchase goods or services that are enforceable and legally binding of $26.7 million. All of these obligations are due in 2023.

f.Standby financial letters of credit, bank guarantees, and surety bonds totaling $17.3 million, of which $15.3 million are scheduled to expire or mature in 2023. 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 $6.2 million, none of which is due in 2023 (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.

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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.

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, 2022 would have affected net income by approximately $2.0 million in 2022.

At times, we enter into arrangements that involve the delivery of multiple promised goods or services. For these arrangements, when the promised goods or services can be separated, the revenue is allocated to each distinct good or service based on that performance obligation’s relative standalone selling price and recognized based upon transfer of control for each performance obligation. Generally, we determine standalone selling price using the adjusted market assessment approach.

Revenue allocated to support services under our support contracts is typically recognized ratably over the term of the service. Revenue allocated to distinct professional services is recognized when (or as) the performance obligation is satisfied depending on the terms of the arrangement. When professional services are not distinct from goods, the professional services and goods are combined into one performance obligation, and revenue allocated to that performance obligation is recognized when (or as) the performance obligation is satisfied.

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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.

On August 16, 2022, the Inflation Reduction Act of 2022 (the Act) was signed into law. We are evaluating the effect that the Act will have on our consolidated financial statements and related disclosures. None of the tax provisions of the Act are expected to have a material impact to 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 2022, we performed a qualitative assessment over five of our reporting units.

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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 2022, we performed a quantitative assessment over one of our reporting units. The excess of the fair value over the carrying value under the income approach was 48%. 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 was 13.1%, the 2023 to 2032 compounded annual revenue growth rate was 4.9%, and the revenue growth rate beyond 2032 was 2.5%. 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.

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 2022. Rather, we performed a quantitative assessment for our indefinite-lived trademark in 2022. 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 2022. Significant assumptions to determine fair value included sales growth, royalty rates, and discount rates.

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 18 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 2022 net periodic benefit cost of less than $0.1 million and an increase in the projected benefit obligations of approximately $17.8 million as of December 31, 2022. A 50 basis point decline in the expected return on plan assets would have resulted in an increase in the 2022 net periodic benefit cost of approximately $1.8 million.

Conversely, the effect of a 50 basis point increase in the assumed discount rate would have resulted in an increase in the 2022 net periodic benefit cost of approximately $0.6 million and a decrease in the projected benefit obligation of approximately $16.3 million as of December 31, 2022. A 50 basis point increase in the expected return on plan assets would have resulted in a decrease in the 2022 net periodic benefit cost of approximately $1.8 million.

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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.