Belden Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Belden supplies signal-transmission products and services through Enterprise Solutions and Industrial Solutions. The quarter ended April 1, 2018, and comprised 91 days; the comparable 2017 quarter comprised 92 days. Belden reorganized its reporting segments in 2018 and recast prior-period segment data.
Financial performance and liquidity
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Revenue | $605.6 million | $551.4 million; up 9.8% |
| Gross profit / margin | $230.6 million / 38.1% | $222.4 million / 40.3% |
| Operating income / margin | $44.2 million / 7.3% | $51.6 million / 9.4% |
| Net income attributable to Belden | $2.6 million; common-stockholder loss was $6.1 million, or $0.15 per share | $25.7 million; common-stockholder income was $17.0 million, or $0.40 per share |
| Adjusted EBITDA / margin | $103.3 million / 17.0% | $93.0 million / 16.9%; up 11.1% |
| Operating cash flow | Use of $83.9 million | Use of $12.3 million |
| Cash and cash equivalents | $362.9 million | $561.1 million at December 31, 2017 |
| Long-term debt, carrying value | $1,662.7 million | $1,560.7 million at December 31, 2017 |
Revenue growth reflected acquisitions, favorable currency translation, higher copper costs and sales volume; these factors were partly offset by the MCS divestiture. Adjusted EBITDA and margins are non-GAAP measures. The company reported $1,687.9 million of senior subordinated notes and $333.4 million of available revolving-credit capacity, with no revolver borrowings outstanding. Current assets were $1,183.5 million and current liabilities were $589.1 million.
Material changes and unusual items
- SAM was acquired on February 8 for $92.9 million net of cash acquired. It contributed $20.8 million in revenue and a $2.8 million pretax loss during the quarter. The preliminary purchase-price allocation includes $92.3 million of goodwill and remains subject to revision.
- Belden issued €350 million of 3.875% notes due 2028 and used proceeds and cash on hand to repurchase portions of its 2023 and 2024 notes. The refinancing resulted in a $20.0 million debt-extinguishment loss. The remaining 2023 and 2024 notes were repurchased on April 5; the company expected an additional approximately $3.0 million loss in Q2.
- Restructuring, severance and acquisition-integration costs were $20.4 million, versus $6.6 million a year earlier. Operating income fell 14.3%, while net interest expense decreased by $6.5 million.
- Income-tax expense was $4.4 million, an effective rate of 63.2%, including valuation-allowance adjustments related to foreign tax credits and the Tax Cuts and Jobs Act. Tax accounting under the Act remained provisional.
- Foreign-currency translation reduced comprehensive income by $31.8 million. The company repurchased 1.1 million shares for $75.3 million and paid $10.8 million in dividends.
Outlook, risks and contingencies
Belden gave no specific revenue or earnings guidance in this filing. Management expects operating activities to generate cash in 2018 and considers available liquidity sufficient for current needs, while noting a significant acquisition could require external financing. For the SAM/Grass Valley integration, management expects approximately $41 million of additional restructuring costs, mostly by year-end 2018, and approximately $44 million of annualized savings beginning in the second half. The manufacturing-footprint program is expected to generate approximately $13 million of annualized savings.
Risks cited include economic and market conditions, competition, foreign-exchange and commodity-price movements, channel inventory, acquisition integration, product development, cybersecurity and information-system disruptions, tax-law changes, and raw-material availability. Routine litigation and environmental contingencies were described as not material. PPC’s patent judgment against Corning was affirmed at approximately $61.8 million, but Corning sought rehearing; Belden has not recorded a gain.
A previously disclosed material weakness in revenue-recognition controls remained unresolved, and management concluded disclosure controls were not effective as of April 1. Remediation controls had been designed and implementation had begun, but effectiveness had not yet been demonstrated. The filing also notes that Q1 2017 revenue and net income had been overstated by $6.1 million and $3.0 million, respectively, due to errors deemed immaterial and corrected by year-end 2017.
Important facts for investors to verify
- Whether SAM integration delivers the projected savings and whether additional costs or purchase-accounting adjustments arise.
- Cash-flow normalization: Q1 operating cash use was $83.9 million, largely associated with working-capital movements and prior-period payables.
- Debt balances, interest costs and the effect of the April 5 note repurchases on subsequent-period results and liquidity.
- Completion and testing of remediation for the revenue-recognition material weakness.
- Final tax accounting under the Tax Cuts and Jobs Act and the outcome of Corning’s rehearing petition; no related gain is recorded.