Belden Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 28, 2015; comparative quarter ended June 29, 2014. Six-month comparisons are for the periods ended on those dates. Amounts below are in millions of dollars, except per-share data.
Business context and reporting period
Belden provides signal transmission solutions across Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The Network Security segment was added following the January 2015 acquisition of Tripwire. The unaudited interim statements include normal recurring adjustments and should be read with the 2014 Form 10-K.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $585.8 | $600.9 | $1,132.7 | $1,088.6 |
| Gross profit | $234.3 | $204.4 | $441.9 | $380.1 |
| Gross margin | 40.0% | 34.0% | 39.0% | 34.9% |
| Operating income | $44.1 | $12.3 | $49.0 | $61.8 |
| Income from continuing operations | $21.7 | $0.0 | $2.0 | $25.2 |
| Net income | $21.6 | $0.0 | $2.0 | $24.6 |
| Diluted EPS | $0.50 | $0.00 | $0.05 | $0.56 |
| Adjusted EBITDA | $100.1 | $89.8 | $188.6 | $163.3 |
| Adjusted EBITDA margin | 16.7% | 14.8% | 16.1% | 14.9% |
Q2 GAAP revenue declined 2.5%, while first-half revenue rose 4.1%. Q2 operating margin increased to 7.5% from 2.1%; first-half operating margin declined to 4.3% from 5.7%. Q2 results benefited from higher gross profit and lower SG&A, while first-half operating income was lower due to higher SG&A, R&D, and intangible amortization. Interest expense increased 36.9% in Q2 and 32.2% in the first half, primarily reflecting higher debt.
- Cash flow: First-half operating cash flow was $5.0, versus $10.6 in 2014. Investing used $722.5, including $695.3 for acquisitions and $27.2 for capital expenditures. Financing provided $188.3, including $200.0 of borrowings. Cash fell $532.7 to $208.4.
- Liquidity: Current assets were $947.3 and current liabilities $496.3 at June 28. Cash included $127.6 held outside the U.S.; the company stated it intended to permanently reinvest foreign cash abroad. Revolver availability was $110.0 under a $400.0 facility.
- Debt: Total debt and borrowing arrangements were $1,921.2, including $200.0 drawn on the revolver, a $245.8 term loan, and $1,475.4 of senior subordinated notes. Long-term debt was $1,918.7 after current maturities.
- Dividends: $0.05 per share was declared in Q2; $0.10 per share for the first half.
Material changes and segment trends
- Tripwire was acquired for $703.2, funded with cash and $200.0 of revolver borrowings. Its preliminary allocation included $477.6 of goodwill and $306.0 of identifiable intangible assets. Tripwire contributed $25.3 of Q2 revenue and a $16.2 pretax loss; first-half contribution was $44.0 of revenue and a $44.8 pretax loss.
- Tripwire purchase accounting reduced reported revenue by $14.4 in Q2 and $32.7 in the first half through acquired deferred-revenue fair-value adjustments. The acquired business also added significant amortization and $9.2 of accelerated stock-award compensation in the first half.
- Q2 segment revenue was down 13.0% in Broadcast, 3.2% in Enterprise Connectivity, and 9.7% in Industrial Connectivity; Industrial IT increased 15.0%. Network Security reported $39.6 of revenue and $8.8 of EBITDA. Broadcast weakness reflected deferred customer spending, foreign exchange, and government austerity; Industrial Connectivity was affected by China and lower energy-related investment.
- First-half adjusted EBITDA rose 15.5%, supported by acquisitions and productivity improvements, partly offset by lower unit volumes and unfavorable currency translation. Acquisitions contributed $29.2 of first-half adjusted EBITDA, according to management.
- Cash used for acquisitions was $695.3 in the first half, versus $311.5 in the comparable 2014 period. Goodwill increased to $1,418.0 from $943.4 at year-end 2014, and intangible assets increased to $713.5 from $461.3.
Outlook, commentary, and risks
- Management expected operating activities to generate cash in 2015 and believed available liquidity was sufficient for current working capital, capital expenditures, retirement contributions, dividends, and other stated needs. A significant future acquisition could require external financing.
- Belden planned a Broadcast restructuring beginning in Q3 2015, expecting approximately $30 of severance and other charges, about $27 in the second half, and approximately $30 of annualized savings beginning in Q4. The company said it did not expect significant additional 2015 costs from the previously discussed productivity and integration programs, but other future restructuring actions remained possible.
- Management expected ongoing Broadcast pressure from deferred infrastructure spending, industry transitions, lower advertising spending, and “over-the-top” distribution models. It also cited currency movements, commodity prices, channel inventory, market demand, and acquisition integration as factors affecting results.
- First-half tax benefit included a $1.5 benefit from releasing a valuation allowance; management also forecast a negative effective tax rate for the full year due to foreign tax credits and tax-planning strategies. Actual future tax rates may vary with geographic income mix and tax-law changes.
- Environmental and legal contingency liabilities were described as not material; management said pending litigation was not expected to materially affect financial position, results, or cash flow, while noting outcomes are uncertain. Standby letters of credit, bank guaranties, and surety bonds totaled $7.9, $3.5, and $3.3, respectively.
- Principal disclosed risks include challenging economies and served markets, materials costs and availability, competition and distribution-channel changes, foreign exchange and credit-market volatility, acquisition integration, execution of productivity initiatives, product development, intellectual-property claims, taxes, goodwill impairment, regulatory compliance, cyberattacks, product failures, and labor matters.
Important facts for investors to verify
- Whether the planned Broadcast restructuring delivers the stated savings and how much of the expected charges is recognized.
- Tripwire’s operating trajectory and the effect of purchase accounting, amortization, and integration costs on reported versus adjusted results.
- Cash conversion and working-capital trends, including the decline in cash and inventory turns to 6.0 from 6.9 a year earlier.
- Debt, interest expense, revolver availability, and the company’s capacity to fund acquisitions and other commitments.
- Whether Broadcast and Industrial Connectivity market weakness, foreign-exchange effects, and customer spending deferrals persist.
- Full-year tax assumptions and realizability of foreign tax credits; the filing provides no specific revenue or earnings guidance.