Belden Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014 (89 days), compared with the three months ended March 31, 2013 (90 days). Belden provides signal-transmission products and solutions through Broadcast, Enterprise Connectivity, Industrial Connectivity, and Industrial IT segments. Financial amounts below are in U.S. dollars; unless noted, millions.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $487.7 | $507.5 | Down 3.9% |
| Gross profit / gross margin | $175.7 / 36.0% | $167.4 / 33.0% | Gross profit up 5.0% |
| Operating income / operating margin | $49.5 / 10.2% | $44.2 / 8.7% | Operating income up 11.9% |
| Income from continuing operations | $25.2 | $22.2 | Up 13.1% |
| Net income | $24.6 | $22.2 | Up 10.6% |
| Diluted EPS | $0.56 | $0.49 | Up $0.07 |
| Operating cash flow | $(20.4) | $(71.7) | Lower cash use |
Gross margin improved partly because Q1 2013 included a $6.6 million acquisition-related inventory fair-value charge. Excluding that charge, management said gross profit in Q1 2014 increased by $1.8 million. Operating income also benefited from lower amortization expense, while higher SG&A and lower equity-method investment income were offsets. The 2014 quarter included a $0.6 million after-tax loss related to the disposal of discontinued operations.
Segments and material period changes
- Broadcast: Revenue $165.9 million, up 6.6%; operating income $10.6 million versus a $0.1 million loss. Improvement reflected higher volume, productivity, product mix, and input costs; the prior-year segment included the $6.6 million inventory charge.
- Enterprise Connectivity: Revenue $108.4 million, down 7.1%; operating income $10.2 million, up 15.1%. Productivity, product mix, and input costs supported profit despite lower volume.
- Industrial Connectivity: Revenue $159.3 million, down 9.8%; operating income $20.8 million, down 15.1%, mainly with lower revenue. The prior-year period benefited from non-recurring projects.
- Industrial IT: Revenue $54.1 million, down 7.6%; operating income $8.1 million, down 14.4%, primarily reflecting lower revenue.
Consolidated revenue fell mainly because of lower unit volume and channel inventory, including shorter lead times associated with Lean initiatives and prior-year non-recurring industrial projects. Lower copper costs reduced reported revenue by an estimated $5.7 million; currency translation reduced it by about $0.4 million.
Cash, debt, and liquidity
- At March 30, 2014, cash and cash equivalents were $569.6 million, down $43.7 million from year-end. Total debt and borrowing arrangements were $1.369 billion, including $2.5 million current maturities; approximate net debt was $799 million.
- There were no revolver borrowings; available borrowing capacity was $325 million. The $400 million asset-based facility matures in 2018. The term loan carried a 3.25% rate at quarter-end and matures in 2020.
- Operating activities used $20.4 million; investing activities used $16.0 million, including $10.4 million of capital expenditures; financing activities used $6.1 million. Operating cash use improved from the prior-year quarter largely because Q1 2013 included significant tax payments.
- Management expected operating activities to generate cash in 2014 and believed liquidity sufficient for expected operating needs, capital expenditures, retirement contributions, dividends, and planned repurchases. A significant acquisition could require external financing.
Outlook, commentary, and risks
- Belden acquired Grass Valley on March 31, 2014, after quarter-end, for $220 million cash, subject to a working-capital adjustment. The acquisition expands Broadcast; the quarter-end balance sheet does not reflect the completed cash purchase. A $4.4 million advance was paid before quarter-end.
- Management expected approximately $25 million of severance and other restructuring costs in 2014 to integrate Grass Valley and pursue synergies.
- A separate productivity program was expected to incur approximately $18 million of costs in the remainder of 2014 and reduce annualized operating expenses by approximately $18 million, with benefits expected from the second half of 2014.
- Q1 income tax expense was $5.7 million and the effective tax rate was 18.4%, including a $2.2 million benefit from reducing an uncertain tax position after favorable foreign-audit developments. Management noted that future tax rates may vary with geographic income mix and tax-law changes.
- Risks cited include economic and customer-demand conditions, competition, distributor and channel-inventory changes, commodity costs, foreign exchange, execution and integration of acquisitions, productivity initiatives, and possible impairment of goodwill or intangible assets. Management reported no material change in market-risk exposure or previously disclosed risk factors.
- Environmental proceedings concerning a former property in Kingston, Canada remain uncertain; the company said it did not currently expect a material adverse effect but could not assure the eventual outcome. Belden also continued negotiations concerning a Trapeze Networks escrow receivable, recorded at $3.8 million.
Important facts for investors to verify
- Post-acquisition cash, debt, and liquidity following the $220 million Grass Valley purchase, and the final working-capital adjustment.
- Whether the expected Grass Valley synergies and productivity savings are realized, and whether integration costs exceed management’s estimates.
- Whether revenue and volume stabilize, particularly in Industrial Connectivity and Industrial IT, and how channel inventory and copper prices affect reported sales and margins.
- Cash generation, debt-service costs, and available revolver capacity as the year progresses.
- Developments in the Kingston environmental matter, Trapeze escrow negotiations, and foreign tax positions.