Belden Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020 (89 days), compared with the three months ended March 31, 2019 (90 days). Belden supplies specialty networking solutions through Enterprise Solutions and Industrial Solutions. Grass Valley is reported as discontinued operations following the company’s decision to sell it.
Financial performance
- Revenue: $463.5 million, down 7.3% from $500.1 million. Management attributed the decline mainly to lower sales volume, including channel inventory changes; copper prices and currency translation also reduced revenue. Acquisitions contributed an estimated $17.0 million.
- Profit and margins: Gross profit was $170.5 million, down 8.8%; gross margin was 36.8%, versus 37.4%. Operating income fell 37.4% to $29.7 million; operating margin was 6.4%, versus 9.5%. Continuing-operations income was $14.9 million, compared with $27.9 million.
- Net income and EPS: Net loss was $11.2 million, or $0.25 per diluted share, versus net income of $25.2 million, or $0.42 per diluted share. The 2020 result included a $26.1 million after-tax loss from discontinued operations.
- Adjusted EBITDA: $60.8 million, down 20.4%; adjusted EBITDA margin declined to 13.1% from 15.3%. These are non-GAAP measures.
- Segments: Enterprise Solutions revenue rose 2.5% to $212.2 million and segment EBITDA rose 14.2% to $24.7 million. Industrial Solutions revenue fell 14.2% to $251.3 million and segment EBITDA fell 35.0% to $35.5 million.
- Cash flow: Operating cash use was $52.1 million, versus $46.1 million used a year earlier. Investing activities used $18.3 million, including $20.9 million of capital expenditures; financing activities used $53.9 million. Cash and cash equivalents at period-end were $293.7 million including discontinued operations; the balance sheet separately reports $251.0 million of continuing-operations cash and $42.7 million in the Grass Valley disposal group.
- Debt and liquidity: Long-term debt carrying value was $1.385 billion, comprising senior subordinated notes due 2025–2028; the notes’ stated principal/carrying amount before issuance costs was $1.405 billion. The notes are fixed-rate, with a stated average rate of 3.5% and no maturities until 2025. At quarter-end, the $400 million revolver had no borrowings and $303.4 million available. At the start of Q2, Belden drew $190 million, citing COVID-19 uncertainty.
- Other: The company paid $31.4 million in full earnout consideration for Snell Advanced Media and repurchased 0.6 million shares for $21.2 million. The quarterly common dividend was $0.05 per share.
Material changes and unusual items
- Belden recorded a $23.2 million impairment charge on the Grass Valley disposal group. Its Q1 revenue fell to $51.0 million from $87.0 million, and its pretax loss was $33.7 million, including the impairment.
- COVID-19-related economic disruption, customer demand reductions, supplier constraints, and facility shutdowns affected operations. Management said it expected the impacts to become more significant in Q2 and anticipated Q2 revenue below Q1 levels, potentially with continued demand effects beyond Q2.
- Belden adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $2.9 million cumulative-effect adjustment to retained earnings, including $1.0 million for continuing operations and $1.9 million for discontinued operations.
- Foreign-currency translation contributed to comprehensive income; Belden reported a $54.7 million transaction gain on its net investment hedge in other comprehensive income and de-designated €532.2 million of previously designated debt.
- The 2019 cost-reduction program is expected to reduce annual SG&A by $60 million, with $40 million expected in 2020 and the full benefit in 2021; approximately $20 million of incremental program costs were expected in 2020. Integration activities for SPC, Opterna, and FutureLink are expected to incur about $2.5 million of additional costs in 2020.
Outlook, risks, and contingencies
Management said it expected operating activities to generate cash in 2020 and believed available liquidity was sufficient for current needs. That assessment is subject to substantial uncertainty: the duration and severity of COVID-19, demand, supplier and customer operations, channel inventory, foreign exchange, commodity prices, and economic conditions could affect results and cash flows. Management’s interim goodwill testing found fair value above carrying value, but reporting-unit headroom ranged from 2% to 269%; the filing warns that prolonged weak conditions or results below assumptions could require a potentially material impairment. Belden reported no material off-balance-sheet arrangements and said pending routine litigation and environmental/legal contingencies were not expected to have a material adverse effect based on information available. It is cooperating with an SEC investigation related to a previously disclosed internal-control material weakness and said it did not expect a material adverse outcome.
Important facts for investors to verify
- How COVID-19 affected Q2 and subsequent revenue, margins, operations, and working capital relative to management’s stated expectations.
- The progress, timing, and final sale terms for Grass Valley, including any further impairment or retained obligations.
- Revolver borrowings, remaining availability, cash balances, and cash generation after the $190 million Q2 draw and continued share repurchases.
- Whether Industrial Solutions’ revenue and EBITDA decline persists, and whether the planned cost reductions deliver the stated savings.
- Goodwill valuation assumptions and headroom, particularly for reporting units with only 2% excess fair value over carrying value.