Belden Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Belden supplies specialty networking solutions through its Enterprise Solutions and Industrial Solutions businesses. This unaudited filing covers the quarter ended October 3, 2021 and the first nine months of fiscal 2021. The quarter comprised 91 days; the nine-month period had 276 days, compared with 271 days in the prior-year period.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $630.8m | $475.8m | $1,769.2m | $1,364.2m |
| Gross profit | $223.3m | $167.6m | $626.2m | $488.0m |
| Operating income | $71.2m | $36.1m | $188.6m | $83.0m |
| Income from continuing operations | $41.3m | $20.6m | $114.0m | $38.6m |
| Diluted EPS, continuing operations | $0.91 | $0.46 | $2.51 | $0.86 |
| Adjusted EBITDA margin | 16.0% | 13.7% | 15.5% | 12.8% |
- Q3 revenue rose 32.6%; nine-month revenue rose 29.7%. Management attributed growth principally to higher sales volume, with additional revenue from higher copper prices, favorable currency translation, and acquisitions.
- Q3 gross margin was approximately 35.4%, versus 35.2%; operating margin was approximately 11.3%, versus 7.6%. Nine-month gross margin was approximately 35.4%, versus 35.8%; operating margin was approximately 10.7%, versus 6.1%.
- Operating cash flow for the nine months was $101.9m, compared with $38.7m. Capital expenditures were $55.6m. Receivables used $129.0m of cash, partly offset by a $73.7m source from accounts payable.
- Cash and cash equivalents were $457.8m at October 3, down from $502.0m at December 31, 2020. Current assets were $1,268.0m and current liabilities $622.4m. The company reported no Revolver borrowings and $293.9m of available capacity under its $300m facility, maturing in 2026.
- Long-term debt carrying value was $1,492.6m. The notes’ aggregate carrying value before unamortized issuance costs was $1,510.1m. The company issued €300m of 3.375% notes due 2031 and used proceeds plus cash to repurchase all €300m of 2.875% notes due 2025; the refinancing resulted in a $5.7m extinguishment loss.
Material changes and unusual items
- Both segments expanded: Q3 Enterprise Solutions revenue increased 24.9% and Industrial Solutions revenue increased 39.9%. Their EBITDA margins were 14.0% and 17.3%, respectively, compared with 11.5% and 15.6% a year earlier.
- Belden acquired OTN Systems in January 2021 for $73.3m net of cash acquired. It contributed $7.6m of Q3 revenue and a $2.9m pretax loss, including acquisition-related costs and purchase-accounting effects.
- Nine-month 2021 results included a $5.8m benefit from releasing the Opterna earn-out liability, impairment charges of $3.4m on the Brazil oil-and-gas cable business, $3.6m on held-and-used assets, and $2.3m on German real estate held for sale, as well as the $5.7m debt-extinguishment loss. The Brazil business was sold in Q2; the German real-estate sale-leaseback was expected to close in Q4.
- Prior-year nine-month net loss included discontinued-operations losses and a $113.0m impairment associated with Grass Valley, sold in July 2020. Nine-month 2021 net income therefore is not directly comparable to the prior-year consolidated net loss; continuing-operations income increased in both the quarter and nine-month period.
Outlook, management commentary and risks
- Management expected operating activities to generate cash in 2021 and considered liquidity sufficient for current working capital, capital expenditures, retirement-plan contributions, dividends, and operating plans. A significant acquisition could require external financing. No specific revenue or earnings guidance was provided in the filing text.
- The cost-reduction program was described as substantially complete and delivering approximately $60m of annual SG&A savings; about $5m of additional program costs were expected in Q4 2021. Management did not expect significant incremental 2021 acquisition-integration costs.
- Management cited ongoing pandemic disruption, inflation and commodity-price exposure, foreign exchange, and channel inventory as factors that can affect results. It said price increases and cost controls were being used to address inflation, but warned that delayed or insufficient price recovery could pressure earnings.
- Belden disclosed putative class actions arising from a 2020 data incident; potential exposure could not yet be estimated. It also retained a guarantee for a former subsidiary’s lease, with approximately $20.2m of payments remaining if the primary obligor defaults; management did not consider a liability probable. Routine litigation and environmental contingencies were described as not material based on current information.
- The company held a $34.9m estimated fair-value seller’s note from the Grass Valley sale, due in 2025; accrued PIK interest was reserved under its expected-loss methodology. The filing also states there were no material changes in market-risk exposure and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether volume growth and margin improvement continue, and how much reported growth reflects copper prices, currency, acquisitions, or underlying demand.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside the company’s cash and available Revolver capacity.
- Debt refinancing terms, future interest costs, and the value and recoverability of the Grass Valley seller’s note.
- Realization of the stated annual cost savings, remaining restructuring costs, and completion and economics of the German sale-leaseback.
- Developments in the data-incident litigation and any change in the estimated exposure or lease-guarantee assessment.