Belden Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 2, 2011; comparative periods ended October 3, 2010. Belden designs, manufactures, and markets cable, connectivity, and networking products. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $519.7 | $396.9 | $1,517.6 | $1,191.9 |
| Gross profit / margin | $152.8 / 29.4% | $118.2 / 29.8% | $439.8 / 29.0% | $345.9 / 29.0% |
| Operating income / margin | $51.9 / 10.0% | $41.6 / 10.5% | $152.1 / 10.0% | $112.5 / 9.4% |
| Income from continuing operations | $31.4 | $22.6 | $88.3 | $58.6 |
| Net income | $31.2 | $20.6 | $87.8 | $52.0 |
| Diluted EPS, net income | $0.65 | $0.43 | $1.82 | $1.09 |
- Revenue rose 30.9% in Q3 and 27.3% year to date. Management attributed the growth to acquisitions, higher copper-related selling prices, favorable currency translation, and higher unit volumes.
- Networking and connectivity products improved product mix, while completion of restructuring reduced related costs. Q3 gross margin nevertheless declined year over year; SG&A and R&D costs increased, partly due to strategic initiatives and acquisitions.
- Operating cash flow was $99.5 million for the nine months, versus $55.4 million a year earlier. Capital expenditures were $21.8 million; acquisitions used $59.7 million. Cash declined $10.5 million to $348.2 million.
- At October 2, cash was $348.2 million, current assets $926.0 million, and current liabilities $400.5 million (current ratio approximately 2.3). Long-term debt carrying value was $551.0 million; cash exceeded debt by approximately $202.8 million.
- Belden had no borrowings under its $400 million senior secured facility and reported $381.8 million available capacity. The facility matures in 2016; the company reported covenant compliance. Notes outstanding include $350 million of 7.0% notes due 2017 and $200 million of 9.25% notes due 2019.
Material changes and business developments
- Belden acquired ICM, Poliron, and Byres during 2011 for cash consideration of $21.9 million, $29.2 million, and $7.2 million, respectively. The company said each acquisition was not material individually to reported results. Acquisitions contributed $104.0 million to nine-month revenue growth.
- Revenue increased across all segments year to date. Americas operating income rose 37.2%; EMEA rose 53.9%; Asia Pacific rose 1.8%. Asia Pacific Q3 operating income declined 19.1%, and its operating margin fell to 7.7% from 11.6%, amid consumer-electronics pricing pressure and strategic investment.
- Shareholders’ equity increased to $709.7 million from $638.5 million at year-end 2010. The company repurchased 866,930 shares for $25.0 million at an average $28.84 and declared dividends of $0.15 per share year to date.
- Q3 discontinued-operations loss was $0.2 million, compared with $2.0 million in the 2010 quarter; the prior-year comparative included losses from Trapeze, sold in December 2010.
Outlook, risks, and unusual items
- Management expected full-year operating activities to generate cash and stated liquidity was sufficient for working capital, capital spending, retirement contributions, repurchases, dividends, and operating plans. The filing provides no specific earnings or revenue guidance.
- The debt indentures require an offer to repurchase notes at par using qualifying asset-disposition proceeds not reinvested. Belden expected to make an offer in Q4 2011 based on estimated excess Trapeze proceeds of $40–$50 million; the notes were trading above par.
- After quarter-end, on October 31, Belden agreed to a further $25 million share repurchase, funded with available cash and scheduled for completion by December 30, 2011.
- Key stated risks include global economic conditions and demand, competition, copper and other material costs, currency movements, execution and integration of acquisitions and strategic initiatives, emerging-market operating risks, and potential impairment of goodwill or intangibles. Management noted no material change in market-risk exposure since year-end 2010.
- The company reported 87 pending asbestos-related personal-injury cases as of October 31, 2011. It believed pending legal matters were not expected to have a material adverse effect, while acknowledging litigation outcomes are uncertain. Standby letters of credit, bank guarantees, and surety bonds totaled $10.4 million, $6.0 million, and $1.7 million, respectively.
- Nine-month tax expense included a net $4.7 million benefit from reduced deferred-tax-asset valuation allowances and a $1.9 million benefit from reducing uncertain-tax-position reserves. Q3 foreign-currency translation loss was $27.1 million, reducing quarterly comprehensive income to $4.1 million despite net income of $31.2 million.
Investor verification priorities
- Confirm how much revenue and profit growth reflects organic volume and pricing versus acquisitions, copper pass-through, and foreign exchange.
- Monitor the Q3 gross-margin decline and Asia Pacific margin compression, along with returns on strategic and acquisition investments.
- Assess working-capital demands: receivables and inventory used cash, despite improved reported DSO and inventory turns.
- Verify the timing, amount, and funding of the expected $40–$50 million note repurchase offer and the additional $25 million stock repurchase.
- Review covenant headroom, debt-service costs, emerging-market exposure, asbestos litigation developments, and future tax benefits or charges.