Belden Inc. — 2016 Third-Quarter Form 10-Q
Business context and reporting period. Belden provides signal-transmission products and services across five segments: Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The third quarter ended October 2, 2016; comparisons are with the quarter ended September 27, 2015. The nine-month periods were 276 days in 2016 and 270 days in 2015, which affects year-to-date comparability.
Financial performance
| Metric | Three months ended Oct. 2, 2016 | Prior-year quarter | Nine months ended Oct. 2, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $601.1 million | $579.3 million | $1,744.2 million | $1,712.0 million |
| Gross profit / margin | $246.0 million / 40.9% | $226.1 million / 39.0% | $719.2 million / 41.2% | $668.1 million / 39.0% |
| Operating income | $62.0 million | $34.5 million | $165.2 million | $83.5 million |
| Net income attributable to Belden common stockholders | $29.0 million | $14.6 million | $87.3 million | $16.5 million |
| Diluted EPS | $0.68 | $0.34 | $2.05 | $0.38 |
| Adjusted EBITDA margin (non-GAAP) | 18.5% | 16.5% | 17.6% | 16.3% |
Quarterly revenue grew 3.8%; operating income increased 79.6%. Nine-month revenue rose 1.9%, while operating income nearly doubled. Management attributed improved gross profit and EBITDA primarily to higher volume and restructuring-related productivity. GAAP results also reflect restructuring costs, acquisition accounting and other items; adjusted EBITDA is a non-GAAP measure.
Cash flow and liquidity. Nine-month operating cash flow was $146.8 million, versus $92.0 million. Capital expenditures were $36.1 million, implying cash flow after capital expenditures of approximately $110.7 million. Cash and equivalents were $748.3 million at October 2, 2016, including $144.5 million held outside the U.S. Carrying-value debt was approximately $1.693 billion, or about $945 million net of cash. The $400 million revolving facility had no borrowings and $275.1 million of available capacity. Management said operating cash generation and available liquidity were expected to cover current needs; significant acquisitions could require external financing.
Material changes and segment trends
- Broadcast revenue rose 5.1% and segment EBITDA rose 33.5% in the quarter, supported by volume, M2FX, and productivity. Management cited stronger broadcast and broadband demand.
- Enterprise Connectivity revenue increased 1.0% in the quarter but declined 1.3% year to date; segment EBITDA increased in both periods.
- Industrial Connectivity and Industrial IT revenue declined year to date, which management linked to lower energy prices, reduced industrial capital spending, and currency effects. Quarterly revenue improved modestly in both segments, and margins benefited from productivity actions.
- Network Security quarterly revenue fell 4.2%, while nine-month revenue increased 2.0%; EBITDA margins improved in both periods.
- Quarterly revenue growth reflected higher unit volume and M2FX, partly offset by lower copper costs and unfavorable currency translation. Year-to-date adjusted revenue declined 0.5% on a non-GAAP basis.
Outlook, risks, contingencies and unusual items
- No specific consolidated revenue or earnings guidance is provided in the filing. Management expects industrial market conditions to continue weighing on industrial sales volume.
- Restructuring plans are expected to yield annualized savings of approximately $18 million for the industrial restructuring program, $10 million from manufacturing-footprint consolidation beginning in the second half of 2017, and $30 million from the Grass Valley program. Further costs were expected for the footprint and Grass Valley programs.
- Belden issued $501.5 million net proceeds from 6.75% mandatory convertible preferred stock in July, for general corporate purposes. Preferred dividends of $6.7 million reduced income attributable to common shareholders. Conversion around July 2019 could issue approximately 6.2 million to 6.9 million common shares.
- After quarter-end, Belden issued €200 million ($222.2 million) of 4.125% subordinated notes due 2026 and used the proceeds to repay its variable-rate term loan. It expected a $2.2 million debt-extinguishment loss in Q4 2016.
- The nine-month effective tax rate was negative 0.6%, reflecting tax benefits tied to international tax planning, an acquisition-related deferred-tax adjustment, and foreign net operating losses, partly offset by a $2.7 million uncertain-tax-position expense. These items make reported earnings and tax rates less indicative of a normalized rate.
- A $7.4 million pension settlement loss was recognized in the nine months. Restructuring and acquisition integration costs totaled $27.1 million in that period.
- A court ruling dated November 3, 2016 granted Belden subsidiary PPC $47.7 million in enhanced damages, plus undetermined prejudgment interest, in its patent case against Corning. Belden had not recorded an amount because Corning may appeal.
- Risks identified include global and served-market weakness, currency volatility and the U.K. exit from the EU, commodity costs, channel inventory, competition, execution of restructuring and acquisitions, cybersecurity, intellectual property, taxes, and impairment of goodwill or intangibles. Management stated routine pending legal matters were not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether volume growth and productivity gains persist, especially in Broadcast and Enterprise, and whether industrial demand stabilizes.
- Actual restructuring charges, completion timing, and realized savings compared with management’s targets.
- The dilution and dividend cost of the mandatory convertible preferred stock, and the effects of the subsequent debt refinancing.
- How much of the unusually low year-to-date tax expense is sustainable versus one-time tax benefits.
- The outcome and timing of the Corning appeal, and whether any damages or interest are ultimately recognized.
- Cash generation, net debt, and liquidity after the term-loan repayment and subsequent note issuance.