Belden Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparative periods ended July 1, 2012. Belden designs, manufactures, and markets signal-transmission solutions for broadcast, enterprise, and industrial markets. In 2013 it reorganized reporting into four global platforms: Broadcast, Enterprise Connectivity, Industrial Connectivity, and Industrial IT. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $529.5 | $458.2 | $1,037.0 | $897.8 |
| Gross profit | $179.2 | $144.6 | $346.5 | $277.4 |
| Operating income | $53.9 | $53.0 | $98.2 | $90.2 |
| Continuing-operations income | $29.5 | $39.7 | $51.7 | $59.4 |
| Net income | $29.5 | $42.4 | $51.7 | $66.7 |
| Diluted EPS, continuing operations | $0.66 | $0.86 | $1.15 | $1.28 |
- Revenue grew 15.6% in Q2 and 15.5% in the first half. Acquisitions contributed $100.5 million and $197.3 million, respectively, to the increases. Reported gross margin was approximately 33.8% in Q2 versus 31.6%, and 33.4% for the first half versus 30.9%.
- Reported operating income rose 1.7% in Q2 and 8.9% in the first half, but operating margin was about 10.2% and 9.5%, respectively, versus 11.6% and 10.0%. Management said operating margin excluding specified acquisition-related and restructuring costs, accelerated depreciation, and intangible amortization improved to 14.1% in Q2 and 13.4% in the first half, from 12.1% and 10.7%.
- Net income fell 30.4% in Q2 and 22.4% in the first half. Higher interest expense, increased amortization, and higher effective taxes weighed on earnings. Prior-year net income included discontinued operations income of $2.7 million in Q2 and $7.2 million in the first half.
- Cash from operations was negative $16.5 million for the first half, compared with positive $30.6 million in the prior-year period. The company attributed the decline principally to working-capital and tax-related cash uses, including $85.8 million of accrued-tax payments; these included $41.8 million related to the 2012 Thermax/Raydex sale and a $30.0 million Cooper Industries tax-sharing settlement.
- Capital expenditures were $20.3 million in the first half. Cash and equivalents were $476.2 million at June 30, up from $395.1 million at year-end 2012; $295.8 million was held outside the United States.
- Total debt carrying value was $1,330.9 million, versus $1,151.2 million at December 31, 2012. Debt comprised $232.1 million of term loans and subordinated notes with carrying value of $1,098.8 million. The company issued €300 million of 5.5% notes due 2023 and used proceeds in part to repay revolver borrowings. No revolver balance was outstanding; $386.6 million of capacity remained available. The company reported compliance with facility covenants.
- Current assets were $1,077.2 million and current liabilities $376.6 million at June 30. Shareholders’ equity was $795.3 million. The company repurchased $62.5 million of shares in the first half and declared dividends of $0.10 per share.
Material changes and operating drivers
- Acquisitions of Miranda and PPC, both completed in 2012, and Softel, acquired in January 2013, expanded the Broadcast segment and materially contributed to reported growth. PPC acquisition-related inventory fair-value charges were $6.6 million in the first half.
- Broadcast revenue more than doubled, largely due to acquisitions, but operating income for the first half declined 7.6% to $3.4 million. The segment incurred substantial acquisition amortization, inventory fair-value, restructuring, and accelerated-depreciation costs.
- Industrial Connectivity revenue increased 1.6% for the first half and operating income rose 6.8%; Enterprise Connectivity revenue and operating income declined 1.7% and 2.2%. Industrial IT revenue increased 8.9% and operating income rose 21.0% for the first half.
- Management cited weak economic conditions, particularly in Europe, and weak non-residential construction spending. It also noted market-share gains in industrial markets, productivity benefits from Lean Enterprise initiatives, and changing channel inventories. Lower copper costs reduced selling prices and reported revenue.
Outlook, risks, contingencies, and unusual items
- Management expected operating activities to generate cash in 2013 and said available liquidity was sufficient for working capital, capital spending, retirement-plan contributions, repurchases, dividends, and near-term operating plans. A significant acquisition would require external financing. No specific revenue or earnings guidance was provided.
- Belden expected approximately $11 million of additional severance, other restructuring costs, and accelerated depreciation in 2013 related principally to Broadcast facility consolidation and acquisition integration. It said further restructuring actions could result in additional future costs.
- Key disclosed risks include economic and customer-demand conditions, commodity and material prices, channel inventories, competition, foreign exchange and political uncertainty, acquisition integration and performance, execution of productivity initiatives, manufacturing realignment, and potential impairment of goodwill or intangible assets.
- The company reported routine litigation, including 98 asbestos-related personal-injury cases pending as of July 25, 2013, and an environmental matter involving a former Kingston, Canada property. Management did not expect these matters to have a material adverse effect based on information then available, but noted outcomes were uncertain. Environmental and legal contingency liabilities recorded were described as not material.
- A $3.8 million receivable remained from escrow relating to the 2010 Trapeze Networks sale, with negotiations continuing over the escrow and buyer claims. The company also recorded $3.7 million of first-half tax expense for an uncertain foreign tax position, plus $1.5 million of related interest expense. First-half tax expense included a $5.2 million benefit from U.S. tax-law changes.
- Foreign-currency translation reduced first-half comprehensive income; the company reported no outstanding derivatives at June 30 and no material change in market-risk exposure since year-end 2012.
Important facts for investors to verify
- Whether revenue and margin growth persists after separating acquired-company contributions, purchase-accounting effects, and restructuring or integration costs.
- Whether operating cash flow recovers after the unusually large tax and working-capital outflows, and how much foreign-held cash could be available domestically without tax costs.
- Debt levels, interest expense, leverage-covenant headroom, and the effect of variable-rate term-loan exposure and future maturities.
- Actual 2013 integration and restructuring costs versus management’s approximately $11 million additional-cost estimate, including any further actions.
- Resolution of the Trapeze escrow claims, foreign tax audit, asbestos litigation, and Kingston environmental assessment.