Belden Inc. — Q3 2017 Form 10-Q
Business context and period: Belden provides signal-transmission solutions through Broadcast, Enterprise, Industrial, and Network Solutions. The quarter ended October 1, 2017; comparisons are with the quarter ended October 2, 2016. The nine-month period ended October 1, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $621.7 million | $601.1 million | $1,783.8 million | $1,744.2 million |
| Gross profit | $239.8 million | $246.0 million | $704.4 million | $719.2 million |
| Operating income | $60.8 million | $62.0 million | $174.6 million | $165.2 million |
| Net income attributable to Belden | $1.0 million | $36.2 million | $62.7 million | $94.6 million |
| Net income (loss) attributable to common stockholders | $(7.7) million | $29.5 million | $36.5 million | $88.0 million |
| Basic and diluted EPS attributable to common stockholders | $(0.18) | $0.70 basic; $0.69 diluted | $0.86 | $2.09 basic; $2.07 diluted |
Q3 gross margin was approximately 38.6% versus 40.9%; operating margin was approximately 9.8% versus 10.3%. Management’s non-GAAP adjusted EBITDA was $119.2 million in Q3 (19.2% margin), up 6.9%; for nine months it was $324.1 million (18.2% margin), up 5.0%. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Cash flow and liquidity: Nine-month operating cash flow was $103.6 million versus $147.4 million; capital expenditures were $33.4 million. Investing cash outflow was $200.3 million, including $165.9 million net cash paid for Thinklogical. Financing cash outflow was $305.2 million. Cash at October 1 was $461.4 million, including $141.1 million held outside the U.S. Long-term debt carrying value was $1.530 billion. The $400 million asset-based revolver had no borrowings and $314.1 million available capacity.
Changes and key developments
- Revenue rose 3.4% in Q3 and 2.3% for nine months. Growth reflected acquisition contribution, higher copper-related selling prices, and currency effects, partly offset by lower sales volume. Management said higher copper costs lifted revenue but had little effect on gross-profit dollars and pressured gross margin.
- Q3 operating income declined 1.9%; nine-month operating income increased 5.7%. Lower SG&A helped, while gross-profit declines, restructuring costs, and higher amortization weighed on results.
- Q3 included a $51.6 million loss on debt extinguishment, contributing to a pretax loss of $10.2 million. Belden issued euro-denominated 2027 and 2025 notes and used proceeds and cash to retire or repurchase higher-coupon debt. Net interest expense declined year over year.
- Thinklogical was acquired on May 31 for $171.3 million cash. It contributed $11.6 million of Q3 revenue and a $2.7 million pretax loss from the acquisition date through quarter-end; purchase accounting and integration effects are relevant to reported results.
- Segment results were mixed: Industrial Solutions revenue increased 7.1% and EBITDA 29.2% in Q3; Enterprise revenue increased 6.7% while EBITDA fell 3.2%; Broadcast revenue declined 1.2%; Network revenue increased 0.6%.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expected operating activities to generate cash in 2017 and believed liquidity would cover working capital, capital spending, retirement contributions, repurchases, dividends, and near-term operating plans. Significant acquisitions could require external financing.
- The manufacturing-footprint consolidation is expected to finish in 2018. Belden reported $25.3 million of related restructuring costs in the first nine months of 2017, expects about $7 million additional costs through 2018, and projects approximately $13 million annualized savings; savings began in Q3.
- Management cited exposure to foreign exchange, copper and other input costs, demand and channel inventories, competition, acquisition integration, cybersecurity, intellectual property, and execution of productivity initiatives. It reported no material change to previously disclosed risk factors.
- A $61.3 million patent-infringement judgment in Belden’s favor against Corning remained under appeal; no gain was recorded. The planned sale of the MCS business and Hirschmann JV for $39 million was expected to close in Q4 2017; the assets remained classified as held for sale.
- Q3 tax benefit was $11.1 million despite a pretax loss, affected by foreign tax-credit planning, lower foreign tax rates, and non-taxable currency translation gains. The nine-month effective tax rate was negative 12.0%, making reported earnings and tax rates unusually sensitive to discrete items.
Investor verification priorities
- Reconcile GAAP common-stockholder losses and EPS to net income attributable to Belden, preferred dividends, and the debt-extinguishment charge.
- Assess the sustainability of adjusted EBITDA growth and margin gains relative to GAAP gross-margin pressure, restructuring exclusions, and copper-cost pass-through.
- Review working-capital needs and cash conversion: operating cash flow fell, with inventory investment a major factor.
- Confirm the effects of the 2017 refinancing, euro-denominated debt and currency exposure, and remaining revolver availability on future interest expense and liquidity.
- Track Thinklogical integration and returns, the planned asset sale, restructuring savings and remaining costs, and the appeal outcome of the Corning judgment.