Belden Inc. — Q2 2010 Form 10-Q
Business and period: Belden designs, manufactures and markets cable, connectivity and networking products. The quarter ended July 4, 2010; the six-month period included 185 days, compared with 179 days in the prior-year period ended June 28, 2009. Financial statements are unaudited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $426.1m | $343.8m | $826.5m | $672.3m |
| Gross profit / margin | $125.8m / 29.5% | $108.5m / 31.6% | $244.2m / 29.5% | $192.7m / 28.7% |
| Operating income (loss) / margin | $36.9m / 8.7% | $5.0m / 1.4% | $65.1m / 7.9% | ($31.4m) / (4.7%) |
| Net income (loss) | $19.7m | ($4.9m) | $31.4m | ($37.3m) |
| Diluted EPS | $0.41 | ($0.10) | $0.66 | ($0.80) |
Q2 revenue rose 23.9%; six-month revenue rose 22.9%. Management attributed growth principally to higher unit volumes and copper-related selling prices, with acquisitions and Wireless revenue recognition also contributing. Q2 operating income improved substantially, but gross margin contracted year over year. For the first half, operating results benefited from the absence of prior-year impairment and asset-sale losses and lower restructuring costs.
Six-month operating cash flow was $5.5m, down from $69.3m; capital expenditures were $12.7m, making operating cash flow less capital expenditures negative $7.2m. Cash fell $63.3m to $245.6m, including an $8.0m unfavorable currency effect. Receivables used $61.4m of cash, partly reflecting higher sales. Management reported improved days sales outstanding (62 days versus 65) and inventory turns (7.8 versus 6.1).
At July 4, cash was $245.6m and current assets were $742.8m against current liabilities of $319.3m. Long-term debt carrying value was $548.8m; principal debt comprised $350m of 7.0% notes due 2017 and $200m of 9.25% notes due 2019. No borrowings were outstanding under the senior secured facility; available capacity was $171.9m, and the company was in covenant compliance. The company repaid $46.3m of revolving borrowings during the first half. Dividends declared were $0.10 per share for the six months.
Changes, outlook and risks
- Segment trends: Americas revenue increased 26.0% in Q2, but operating margin fell to 13.7% from 17.0%, with competitive pricing and increased spending cited. EMEA returned to operating income of $19.3m from a $12.7m loss, partly reflecting the absence of prior-year impairment and sale losses. Asia Pacific revenue rose 41.5%, while operating margin declined to 12.2% from 14.3%. Wireless reduced its operating loss to $2.7m from $8.0m.
- Accounting and unusual items: New multiple-deliverable revenue guidance adopted January 1, 2010 accelerated Wireless revenue recognition and improved reported Wireless operating results; management said the positive effect should continue through the remainder of 2010, at a similar level in Q3 and Q4, but would not be significant beyond 2010. The filing estimates the guidance contributed $1.7m and $3.8m to Wireless operating-loss improvement in Q2 and the first half, respectively. Q2 and first-half results also included a $1.5m escrow-settlement gain and $2.7m net derivative losses in interest expense. No consolidated numerical earnings or revenue guidance was provided.
- Restructuring and liquidity commentary: The company continued global cost reductions, including a planned closure of one of two Leominster, Massachusetts plants. It reported $55.8m of cumulative severance costs and no expected further severance charges for the existing actions, while noting that additional restructuring could be considered. Management expected operating activities to generate cash during 2010 and believed liquidity adequate for working capital, capital spending, retirement contributions, dividends and restructuring payments.
- Risks and contingencies: Risks include economic conditions and demand, competition and pricing, copper and other input costs, foreign exchange, execution of restructuring and acquisitions, product development, and interest-rate and counterparty exposure. The company had 86 pending asbestos-related personal-injury cases as of July 26, 2010; management did not expect current proceedings to have a material adverse effect but cautioned outcomes are uncertain. Bank guaranties, standby letters of credit and surety bonds totaled $10.1m, $9.2m and $1.6m, respectively. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether the sharp decline in operating cash flow and working-capital use are temporary, particularly the increase in receivables.
- Separate underlying Wireless performance from the temporary revenue-recognition benefit, and confirm the expected Q3/Q4 impact.
- Review debt terms, covenant headroom, facility availability and the economic effects of the 2010 interest-rate swaps and cap.
- Track gross-margin pressure, competitive pricing, copper costs and segment-level margin trends.
- Monitor restructuring execution, potential additional actions, and the asbestos litigation and other contingencies.