Belden Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2017. Belden supplies signal-transmission solutions through Broadcast, Enterprise, Industrial, and Network Solutions. The six-month 2017 period had 183 days versus 185 days in the prior-year period.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $610.6 million | $601.6 million | $1,162.0 million | $1,143.1 million |
| Gross profit | $242.5 million | $248.2 million | $464.6 million | $473.2 million |
| Gross margin | 39.7% | 41.3% | 40.0% | 41.4% |
| Operating income | $62.5 million | $62.2 million | $113.8 million | $103.2 million |
| Net income attributable to Belden common stockholders | $27.2 million | $42.0 million | $44.2 million | $58.5 million |
| Diluted EPS attributable to common stockholders | $0.64 | $0.99 | $1.03 | $1.38 |
| Adjusted EBITDA margin (non-GAAP) | 18.3% | 17.9% | 17.6% | 17.2% |
| Operating cash flow | Six months: $34.8 million, versus $60.6 million | Capital expenditures were $22.2 million, versus $25.1 million |
- Q2 revenue grew 1.5%; six-month revenue grew 1.7%. Acquisitions and higher copper costs lifted reported revenue, partly offset by unfavorable currency translation. Q2 sales volume slightly reduced revenue; six-month volume was modestly positive.
- Gross profit and gross margin declined, reflecting restructuring and integration costs, unfavorable currency translation, and product mix. Higher copper costs increased revenue but had little effect on gross profit dollars, weakening gross margin.
- Operating income was nearly flat in Q2 and increased 10.3% for the first half, as lower SG&A and R&D costs offset gross-profit pressure. Adjusted EBITDA margin improved 40 basis points in both reported periods, which management attributed mainly to restructuring productivity and its Lean system.
- Common-stockholder earnings fell in part because the 2017 results include preferred dividends: $8.7 million in Q2 and $17.5 million for the first half. The comparison is also affected by unusually favorable tax benefits in 2016.
Liquidity, debt, and capital allocation
- At July 2, cash and cash equivalents were $670.4 million, down from $848.1 million at year-end 2016. Current assets were $1,416.9 million and current liabilities were $537.7 million.
- Long-term debt carrying value was $1,679.4 million. Belden had no revolver borrowings and reported $288.7 million of available capacity under its amended $400 million asset-based revolver, which matures in 2022.
- Six-month operating cash flow fell $25.8 million year over year, primarily due to working-capital outflows, including inventory increases made in preparation for anticipated stronger second-half demand and higher receivables. Operating cash flow less capital expenditures was approximately $12.6 million, compared with $35.4 million in the prior period; this is a simple calculation, not the company’s stated free-cash-flow measure.
- Investing cash use was $189.1 million, including the Thinklogical acquisition. Financing cash use was $33.7 million, including $21.7 million of dividends. The company paid off $5.2 million of 9.25% notes due 2019 during the quarter.
- After quarter-end, Belden issued €450 million of 3.375% notes due 2027 and used proceeds plus cash to repurchase $581.3 million of its 5.5% notes due 2022. It announced plans to repurchase the remaining $118.7 million and expected a debt-extinguishment loss exceeding $25 million.
Developments, outlook, and risks
- Belden acquired Thinklogical for $171.3 million in cash on May 31, 2017. It contributed $10.2 million of revenue and $1.1 million of pretax income in the reported period. The preliminary purchase allocation includes $57.5 million of goodwill and $86.3 million of amortizable intangible assets.
- The manufacturing-footprint consolidation is expected to finish in 2018. Belden expects about $11 million of additional restructuring costs in 2017 and 2018 and approximately $13 million of annualized savings beginning in the second half of 2017. Earlier restructuring programs are substantially delivering expected savings.
- Management expects operating activities to generate cash in 2017 and believes liquidity is sufficient for working capital, capital spending, retirement contributions, dividends, share repurchases, note repurchases, and short-term plans. A significant acquisition could require external financing. No specific revenue or earnings guidance is provided in the filing.
- Key exposures include foreign-exchange movements, copper and other input costs, market demand and channel inventories, competition, acquisition integration, execution of productivity initiatives, cybersecurity and information-system disruptions, and goodwill or intangible-asset impairment. About 47% of revenue is international.
- The $61.3 million patent-infringement judgment against Corning remained under appeal; Belden had not recognized a gain. Other routine legal and environmental contingencies were described as not currently material. The planned sale of the MCS business and Hirschmann JV was expected to close in 2017; the disposal group had previously incurred a $23.9 million impairment charge.
- Belden plans to adopt the new revenue-recognition standard in 2018 and initially expects no material financial-statement impact, with disclosure changes expected to be the most significant effect. The company also changed the Tripwire trademark from an indefinite to a 10-year useful life and began amortizing it in 2017.
Most important facts for investors to verify
- Whether anticipated second-half demand materializes, given the inventory build and the reduction in operating cash flow.
- Whether copper-cost pass-through and product mix improve, particularly in Enterprise Solutions, where EBITDA declined despite slightly higher Q2 revenue.
- Progress and realized savings from the manufacturing-footprint program, alongside remaining costs and execution risks.
- The final cost and debt impact of the post-quarter 2022-note repurchases, including the expected loss exceeding $25 million and resulting leverage and interest burden.
- Thinklogical’s subsequent contribution, integration, and final purchase accounting, including the estimates underlying goodwill and acquired intangibles.
- Outcomes of the Corning appeal and the planned disposal of the MCS business and Hirschmann JV; neither the contingent patent gain nor disposal proceeds should be assumed realized based on this filing.