Belden Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Belden supplies specialty networking products and services through Enterprise Solutions and Industrial Solutions. The quarter ended September 29, 2019; year-to-date figures cover nine months. Amounts below are in U.S. dollars unless noted.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $620.3m | $655.8m | $1,845.0m | $1,930.0m |
| Gross profit / margin | $235.4m / 38.0% | $260.9m / 39.8% | $701.2m / 38.0% | $749.0m / 38.8% |
| Operating income (loss) | ($280.5m) | $131.3m | ($174.9m) | $232.0m |
| Net income (loss) | ($297.0m) | $85.9m | ($229.5m) | $117.2m |
| Loss per common share, diluted | ($6.70) | $1.80 | ($6.04) | $2.21 |
| Adjusted EBITDA (non-GAAP) / margin | $101.6m / 16.4% | $126.7m / 19.2% | $289.8m / 15.7% | $352.6m / 18.2% |
Operating cash flow was $89.5m for the nine months, versus $100.9m a year earlier; capital expenditures were $74.1m. Cash declined $123.9m from year-end 2018 to $296.7m. Long-term debt was $1,403.7m carrying value; the notes’ carrying value before unamortized issuance costs was $1,424.3m. The company had no revolver borrowings and $287.0m available under its $400m facility. Current assets were $1,122.7m and current liabilities $577.5m. Common dividends declared were $0.05 per share in Q3.
Material changes versus prior periods
- Revenue fell 5.4% in Q3 and 4.4% year to date. Management attributed the declines mainly to lower volume, unfavorable currency translation and lower copper prices; acquisitions partly offset the declines.
- Adjusted EBITDA fell 19.8% in Q3 and 17.8% year to date, with lower revenue and unfavorable mix cited as drivers. Enterprise Solutions revenue declined 6.1% in Q3 and 6.9% year to date; Industrial Solutions declined 5.5% and 1.8%, respectively.
- Q3 and year-to-date GAAP results include a $342.1m impairment charge for the Grass Valley reporting unit: $326.1m goodwill, $14.4m customer relationships and $1.6m trademarks.
- The prior-year comparison included a $62.1m patent-litigation gain received from Corning in July 2018. Nine-month 2018 results also included a $23.0m debt-extinguishment loss.
- All mandatory convertible preferred stock converted on July 15, 2019 into approximately 6.9m common shares, eliminating preferred stock and its dividend obligation.
Outlook, commentary, risks and unusual items
- Management expected operating activities to generate cash in 2019 and considered liquidity sufficient for current working capital, capital expenditure, retirement-plan contributions, repurchases, dividends and near-term strategies; significant acquisitions could require external financing. No specific revenue or earnings guidance is provided in the filing text.
- After quarter-end, Belden committed to sell Grass Valley, expects to complete the sale within 12 months, and will report it as discontinued operations beginning in Q4 2019. Grass Valley had $491.8m of assets and $194.0m of liabilities at quarter-end.
- Also after quarter-end, the company announced a cost-reduction program targeting $40m of annualized SG&A savings, with some benefit expected in 2020 and the full benefit in 2021. Associated costs and timing were not yet known.
- Management cited foreign-exchange exposure, copper and compound prices, channel inventory, market demand and competition as factors affecting results. About 48% of revenue was from customers outside the U.S.
- The company continued cooperating with an SEC investigation related to a previously disclosed 2017 internal-control material weakness; it believed the outcome would not materially adversely affect the company. It reported disclosure controls effective and no material change in internal control during the quarter. Routine legal and environmental contingencies were described as not material; standby letters of credit, bank guarantees and surety bonds totaled $16.9m.
- Belden adopted lease accounting in 2019, recording operating-lease right-of-use assets of about $90.5m and lease liabilities of about $103.4m at adoption, with no material income-statement or cash-flow impact.
Important facts for investors to verify
- Whether the Grass Valley sale proceeds, timing and final disposal accounting differ materially from management’s plan, and how discontinued operations affect future comparisons.
- Whether revenue, segment performance and adjusted EBITDA stabilize after the reported volume and mix declines; assess non-GAAP measures alongside GAAP results.
- The assumptions supporting the $342.1m impairment and the remaining carrying values of goodwill and intangible assets.
- Cash generation, working-capital needs, capital spending and debt-service capacity, including use of the $287m revolver availability.
- Delivery and execution costs for the announced $40m annualized savings program, and developments in the SEC investigation.