Belden Inc. — Q1 2017 Form 10-Q
Business context and period. Belden provides signal transmission products and solutions through Broadcast, Enterprise, Industrial, and Network Solutions. The quarter ended April 2, 2017; the comparable 2016 quarter ended April 3 and included 94 days, versus 92 days in 2017.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $551.4 million | $541.5 million |
| Gross profit / margin | $222.1 million / 40.3% | $225.0 million / 41.6% |
| Operating income / margin | $51.3 million / 9.3% | $41.0 million / 7.6% |
| Net income attributable to Belden | $25.7 million | $16.5 million |
| Net income attributable to common stockholders / diluted EPS | $17.0 million / $0.40 | $16.5 million / $0.39 |
| Adjusted EBITDA / margin (non-GAAP) | $93.0 million / 16.9% | $89.1 million / 16.4% |
| Cash from operating activities | $(12.3) million | $12.6 million |
| Capital expenditures | $10.4 million | $13.4 million |
Gross margin contracted despite higher revenue; operating income rose 25.3%, principally reflecting lower SG&A, R&D, and amortization expenses. Net income attributable to common stockholders includes $8.7 million of preferred dividends in 2017; no preferred dividends were reported in the comparator. The filing describes adjusted EBITDA and adjusted margin as non-GAAP measures.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $815.9 million at April 2, 2017, down $32.2 million from year-end 2016; $225.3 million was held outside the U.S.
- Long-term debt carrying value was $1.642 billion, consisting primarily of senior subordinated notes; no revolver borrowings were outstanding. Available revolver capacity was $269.4 million, with the facility maturing in 2018.
- Operating cash use reflected a $76.8 million use from changes in operating assets and liabilities. Days sales outstanding increased from 60 to 64 days. Operating cash flow less capital expenditures was approximately negative $22.7 million.
- Financing cash use was $15.2 million, including $10.8 million of dividends and $4.4 million of net share-based compensation payments. Investing cash use was $10.4 million, all capital expenditures.
Material changes and segment results
- Revenue increased 1.8% year over year. Management attributed the increase to $9.3 million from higher copper costs and $4.4 million from unit volume, partly offset by $3.8 million of unfavorable currency translation. Higher copper costs boost reported revenue but can pressure gross margin.
- Adjusted EBITDA increased 4.4%, with margin expanding to 16.9% from 16.4%, mainly due to restructuring-related productivity and higher volume; unfavorable currency translation reduced adjusted EBITDA by $0.8 million.
- Enterprise Solutions revenue rose 7.2% and Industrial Solutions rose 3.6%. Broadcast Solutions revenue declined 1.6%, although segment EBITDA margin improved to 15.1% from 13.6%. Network Solutions revenue fell 4.8% and EBITDA fell 11.0%, with weaker volume, currency effects, and product mix cited.
- Effective January 1, 2017, Belden combined its former Industrial IT and Network Security businesses into Network Solutions. It also began amortizing the Tripwire trademark over an estimated 10-year life, recording $0.8 million of quarterly amortization.
Outlook, risks, and unusual items
- Management expects operating activities to generate cash in 2017 and believes current liquidity can fund working capital, capital expenditures, retirement contributions, dividends, and other stated needs. No specific revenue or earnings guidance is provided in the filing.
- The manufacturing-footprint program is expected to finish by year-end 2017. Belden recorded $5.7 million of related costs in the quarter, expects about $9 million more in the remainder of 2017, and anticipates approximately $10 million of annualized savings beginning in the second half of 2017.
- A definitive agreement to sell the MCS business and Hirschmann JV for $39 million was signed in Q1; closing was expected in Q2 or Q3 2017. A $23.9 million impairment had been recorded in Q4 2016.
- On May 3, 2017, Belden agreed to acquire Thinklogical for $160 million, funded with cash on hand, subject to approvals and other closing conditions. The expected closing was Q2 2017.
- A patent judgment of approximately $61.3 million in Belden’s favor against Corning remained on appeal; no gain was recorded. Routine environmental and legal contingency accruals were described as not material. Standby letters of credit, surety bonds, and bank guarantees totaled $8.1 million, $2.4 million, and $1.7 million, respectively.
- Key disclosed risks include economic and served-market weakness, competition, foreign exchange, copper and other input costs, distribution-channel changes, acquisition integration, execution of productivity initiatives, cybersecurity and information-system disruptions, and tax-rate variability. Management reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends, particularly receivables and DSO, improve in subsequent quarters.
- Whether restructuring savings materialize as expected and whether additional costs remain within the stated estimate.
- Completion and proceeds of the MCS/Hirschmann disposal, and closing, funding, and integration of the Thinklogical acquisition.
- Debt repayment capacity, revolver availability and 2018 maturity, and the effect of the mandatory convertible preferred stock, which is expected to convert in July 2019 into approximately 6.2–6.9 million common shares if not converted earlier.
- Outcome of the Corning appeal; the potential judgment remains unrecognized and is not included in reported results.