Belden Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 30, 2012; nine-month results compared with the period ended October 2, 2011. Financial statements are unaudited. Belden designs, manufactures, and markets cable, connectivity, and networking products for industrial, enterprise, and broadcast markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $490.4 million | $519.7 million | $1,438.7 million | $1,517.6 million |
| Gross profit | $146.8 million | $152.8 million | $440.4 million | $439.8 million |
| Operating income (loss) | $(7.6) million | $51.9 million | $94.7 million | $152.1 million |
| Continuing-operations income (loss) | $(51.1) million | $31.4 million | $15.5 million | $88.3 million |
| Net income (loss) | $(38.8) million | $31.2 million | $27.9 million | $87.8 million |
- Q3 revenue fell 5.6%; nine-month revenue fell 5.2%. Q3 reported gross margin was approximately 29.9% versus 29.4% a year earlier. Excluding restructuring costs and Miranda inventory fair-value charges, management reported gross margins of 32.7% for Q3 and 31.6% for the first nine months, compared with 29.4% and 29.0%, respectively.
- Q3 included $30.0 million of asset impairment and a $50.6 million loss on debt extinguishment. Nine-month operating income declined 37.8%; continuing-operations income declined 82.4%.
- Nine-month operating cash flow was $93.3 million, versus $99.5 million. Investing cash outflow was $372.5 million, including $341.9 million for acquisitions and $31.8 million of capital expenditures. Financing cash inflow was $282.7 million. Cash increased $2.9 million to $385.6 million.
- At September 30, cash was $385.6 million; total debt carrying value was $972.5 million, including $12.8 million current maturities. The resulting cash-less-debt amount was approximately $586.9 million. Revolver borrowings were zero, with $386.8 million available; Belden reported compliance with facility covenants. Current assets of $1,003.0 million exceeded current liabilities of $409.5 million.
- Reported nine-month diluted EPS was $0.60; Q3 diluted EPS was $(0.87). Nine-month dividends declared were $0.15 per share.
Material changes and business drivers
- Belden acquired Miranda Technologies for approximately $374.7 million in July. Miranda contributed $29.3 million of Q3 revenue and was included in the Americas segment. The purchase price allocation remained provisional.
- Revenue declines reflected lower sales volumes, channel inventory changes, lower selling prices tied to copper and other commodity costs, and unfavorable foreign currency translation. Acquisitions partly offset those declines. Networking revenue rose 26.5% in Q3, largely due to Miranda; cable revenue fell 10.0% and connectivity revenue fell 18.8%.
- EMEA revenue fell 13.8% in Q3, with management citing currency effects and softer European demand. Asia Pacific revenue fell 7.9%; the segment reported a Q3 operating loss of $16.6 million, including impairment of assets held for sale.
- Belden issued $700 million of 5.5% subordinated notes due 2022 and borrowed a CAD$250 million variable-rate term loan to help fund Miranda and refinance debt. It repurchased most of its 2017 and 2019 notes, recording the $50.6 million extinguishment loss. At quarter-end, $700 million of the 2022 notes, $17.0 million of 2019 notes, and $255.4 million of term-loan principal remained outstanding.
Outlook, risks, and unusual items
- Management expected operating activities to generate cash in 2012 and considered liquidity adequate for working capital, capital expenditures, retirement-plan contributions, share repurchases, debt repurchases, dividends, and near-term operating strategies. No specific revenue or earnings guidance was provided.
- Belden agreed to sell certain Chinese cable assets serving the consumer-electronics market; the sale was expected to close in Q4 2012, subject to closing conditions and regulatory review. The company recorded a $26.0 million impairment, and the assets were classified as held for sale.
- Q3 restructuring costs totaled approximately $18.9 million across the segments. Management expected no further significant costs from those actions and expected most costs to be paid in 2012, while noting that additional actions under review could result in future costs.
- Discontinued-operations items included a $14.1 million gain from reversal of an uncertain-tax-position liability and a $4.0 million gain from reversal of related interest and penalties. Belden also reduced its Trapeze Networks escrow receivable by $7.0 million; $8.0 million remained as its estimated collection value, amid unresolved buyer claims and negotiations.
- Risks cited include global economic conditions and demand, commodity prices, currency movements, channel inventory, distributor reliance, acquisition integration and performance, competition, and potential impairment of goodwill or intangible assets. Management described routine litigation as not expected to be materially adverse, but disclosed 99 pending asbestos-related cases and an unresolved environmental matter involving a former Kingston, Canada property.
Important facts for investors to verify
- Whether Miranda integration, provisional purchase accounting, and expected acquisition benefits support future growth and returns.
- Whether revenue and margins stabilize amid weaker demand, channel inventory changes, currency effects, and commodity-linked pricing.
- Debt service capacity and covenant headroom after the refinancing and acquisition, including exposure to variable interest rates.
- Completion and final proceeds of the Chinese asset sale, and the eventual recovery of the Trapeze escrow receivable.
- Whether tax benefits and discontinued-operations gains are nonrecurring, and whether litigation or environmental matters develop materially.