Belden Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 3, 2016. Belden provides signal-transmission products and solutions across five platforms: Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The 2016 quarter had 94 days, compared with 88 days in the prior-year quarter.
Financial performance
Amounts are in U.S. dollars; financial-statement figures are in millions except per-share data.
| Metric | Q1 2016 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $541.5 | $547.0 | Down 1.0%; adjusted revenue was $543.8, down 4.5% |
| Gross profit / margin | $225.0 / 41.6% | $207.6 / 38.0% | Gross profit up 8.4% |
| Operating income / margin | $41.0 / 7.6% | $4.9 / 0.9% | Improved substantially |
| Net income (loss) | $16.4 | $(19.6) | Belden-attributable income was $16.5 |
| Diluted EPS | $0.39 | $(0.46) | — |
| Adjusted EBITDA / margin | $89.1 / 16.4% | $88.5 / 15.5% | EBITDA up 0.6%; non-GAAP measure |
| Operating cash flow | $12.7 | $(48.2) | Improved year over year |
| Capital expenditures | $13.4 | $15.5 | — |
Liquidity and debt
- Cash and equivalents were $146.3 at quarter-end, down from $216.8 at December 31, 2015; $86.0 was held outside the U.S. and management intended to keep foreign cash permanently reinvested abroad.
- Long-term debt was $1,689.7, with $2.5 of current maturities. Total net debt and other borrowing arrangements were $1,692.2, versus $1,727.8 at year-end.
- The company repaid $50.0 of revolving borrowings and had no revolver balance at quarter-end, with $296.0 of available capacity under its $400 million facility. Term-loan interest was 3.25%.
- Management said it expected operating activities to generate cash in 2016 and believed liquidity was sufficient for current needs. A significant acquisition could require external financing.
Material changes and operating trends
- Revenue was affected by unfavorable currency translation (down $10.9) and lower copper costs (down $10.4); higher unit volume and M2FX contributed $14.5 and $1.5, respectively. The longer reporting quarter also contributed to reported volume comparisons.
- Segment results were mixed: Network Security revenue rose 12.2% and EBITDA rose 15.8%; Enterprise Connectivity revenue fell 4.2% while EBITDA rose 18.6%. Industrial Connectivity revenue fell 7.8%, and Industrial IT revenue fell 11.8% with EBITDA down 22.4%. Broadcast revenue declined 3.0% while EBITDA was broadly flat.
- Management attributed industrial weakness to lower energy prices, reduced customer capital spending, and a stronger U.S. dollar. It reported lower global demand and deferred customer spending in broadcast infrastructure markets.
- Productivity improvements and lower restructuring/integration costs supported margins. The prior-year quarter included $9.2 million of accelerated-vesting compensation expense related to the Tripwire acquisition and higher deferred-revenue purchase-accounting adjustments.
- The January 2016 M2FX acquisition cost $23.2 million preliminarily, including $7.6 million of estimated earn-out consideration; the filing said it was not material to results or financial position.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected industrial market conditions to continue weighing on industrial sales volume.
- Management expected approximately $18 million of annualized savings from the industrial restructuring program and approximately $30 million from the Grass Valley restructuring program. It expected additional restructuring costs of about $5 million and $2 million, respectively, largely in Q2 and Q2–Q3 2016.
- Key stated risks include economic and served-market downturns, currency and commodity-price movements, competition, channel disruption, execution of productivity initiatives and acquisitions, product development, cybersecurity, intellectual property disputes, and goodwill or intangible-asset impairment.
- A jury found that Corning willfully infringed two PPC patents; the court had not entered judgment and was considering post-trial motions. Belden recorded no amount for the matter. The company stated routine litigation and currently accrued environmental and legal contingencies were not expected to have a material adverse effect.
- Standby letters of credit, bank guaranties, and surety bonds totaled $9.1 million, $3.0 million, and $2.4 million, respectively. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether industrial and broadcast demand stabilizes, and whether Network Security growth continues.
- Whether restructuring savings are realized as planned and at what cost; management noted it continued to evaluate potential additional restructuring actions.
- Cash generation, working-capital movements, and available borrowing capacity relative to the substantial debt burden.
- The outcome and potential financial impact of the Corning patent litigation and any other material legal developments.
- How currency, commodity prices, acquisition integration, and revenue-recognition changes affect reported and adjusted results.