Belden Inc. — Q3 2018 Form 10-Q
Business context and period. Belden provides signal-transmission products and services through Enterprise Solutions and Industrial Solutions. This report covers the three and nine months ended September 30, 2018; comparatives ended October 1, 2017. Amounts below are in U.S. dollars unless noted.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $655.8m | $621.7m | $1,930.0m | $1,783.8m |
| Gross profit / margin | $260.9m / 39.8% | $239.8m / 38.6% | $749.0m / 38.8% | $705.3m / 39.5% |
| Operating income / margin | $131.3m / 20.0% | $61.1m / 9.8% | $232.0m / 12.0% | $175.5m / 9.8% |
| Net income attributable to Belden common stockholders | $77.1m | $(7.7)m | $91.2m | $36.5m |
| Basic / diluted EPS | $1.90 / $1.80 | $(0.18) / $(0.18) | $2.23 / $2.21 | $0.86 / $0.86 |
| Adjusted EBITDA / margin | $126.7m / 19.2% | $119.2m / 19.2% | $352.6m / 18.2% | $324.1m / 18.2% |
Q3 revenue grew 5.5% on a GAAP basis; adjusted revenue grew 6.0%. Nine-month GAAP and adjusted revenue increased 8.2% and 8.6%, respectively. Management attributed growth to acquisitions, higher volume and pricing, and, for the nine-month period, favorable currency and copper-price effects; the MCS divestiture partly offset growth. The $62.1m Corning patent-litigation gain materially boosted GAAP operating income and earnings. Adjusted EBITDA excludes that gain and related litigation costs.
Segments. Q3 Enterprise Solutions revenue was $392.1m and EBITDA $72.2m (18.4% margin), versus $360.8m and $62.1m (17.2%). Industrial Solutions revenue was $266.9m and EBITDA $53.8m (20.1%), versus $260.9m and $55.7m (21.4%). Enterprise benefited from acquisition growth and restructuring; Industrial EBITDA was pressured by product mix and temporary supply-chain inefficiencies and extended lead times.
Cash, debt and liquidity
- Nine-month operating cash flow was $100.9m, down from $103.6m. Investing used $106.3m and financing used $220.9m; cash declined $232.1m to $329.0m.
- Capital expenditures were $63.5m, including $13.8m of incremental software-development costs. Business acquisitions used $84.6m; proceeds from the MCS and Hirschmann JV sale were $40.2m.
- At September 30, cash was $329.0m, current assets $1,176.5m and current liabilities $619.6m. Long-term debt carrying value was $1,503.6m; senior subordinated notes had $1,527.0m carrying value before issuance costs. No revolver borrowings were outstanding; available capacity was $359.8m under the $400m facility.
- Cash and debt decreased from $561.1m and $1,560.7m at year-end 2017. Belden issued €350m of 3.875% notes due 2028 and used proceeds plus cash to retire its 2023 and 2024 notes, recording a $23.0m nine-month extinguishment loss. Q3 common dividends declared were $0.05 per share; $125.0m was spent on share repurchases year to date.
Outlook, commentary and notable matters
- Management said 2018 operating activities were expected to generate cash and that available liquidity was sufficient for working capital, capital spending, retirement contributions, repurchases, dividends and near-term strategies. Significant acquisitions could require external financing. The filing provides no specific quarterly or full-year 2018 earnings guidance; it identifies a strategic goal of 5–7% annual revenue growth in constant currency.
- The Grass Valley/SAM integration program generated $36.6m of severance and restructuring costs in the first nine months. Belden expects about $12m more in Q4 2018 and Q1 2019 and approximately $44m of annualized savings; savings began in Q3. The manufacturing-footprint program was expected to finish by year-end and is expected to generate about $13m of annualized savings.
- Belden received $62.1m from Corning in July and recognized the amount as a pre-tax gain. Corning petitioned the U.S. Supreme Court for review of the enhanced-damages ruling; management believed the petition would not be granted. The outcome remained pending at filing.
- The effective tax rate was 27.3% for Q3 and 28.2% year to date. Tax accounting related to the Tax Cuts and Jobs Act remained provisional; Belden expected to finalize the transition-tax calculation in Q4 2018. Foreign-currency movements, copper and other material costs, channel inventory, competition, economic conditions, and project-order timing were identified as business risks.
- Disclosure controls were deemed ineffective as of September 30, 2018 because of an ongoing material weakness in controls ensuring revenue-recognition criteria are met. Remediation controls had been designed and implemented, but effectiveness had not yet been demonstrated for a sufficient period.
- Belden disclosed that certain 2017 interim revenue and net income were overstated due to revenue-recognition errors: $11.8m and $2.6m, respectively, for the comparative quarter, and $28.3m and $6.9m for the comparative nine months. Management concluded the errors were not material to those prior interim statements; they were corrected by year-end 2017, and those periods were not restated.
Investor verification priorities
- Assess underlying earnings and margin trends excluding the one-time patent gain, restructuring, acquisition-related items and debt-refinancing costs; reconcile non-GAAP measures to GAAP.
- Track remediation and testing of revenue-recognition controls, given the continuing material weakness and previously identified interim-period errors.
- Monitor cash conversion and working-capital movements, particularly the substantial accounts-payable cash outflow, inventory growth, and elevated capital spending.
- Review debt service, euro-denominated debt and net-investment hedge exposure, as well as the cash required for preferred-stock dividends and its scheduled mandatory conversion around July 2019.
- Verify Corning appeal developments, provisional tax adjustments, SAM integration costs and realized savings, and the final purchase-price allocation and potential earnout for SAM.