Belden Inc. — Q3 2020 Form 10-Q
Business context and period: Belden supplies specialty networking solutions through Enterprise Solutions and Industrial Solutions. The quarter ended September 27, 2020; comparisons are with the quarter ended September 29, 2019. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $475.8 | $533.1 | -10.7% |
| Gross profit / margin | $167.6 / 35.2% | $198.8 / 37.3% | Margin -2.1 pts |
| Operating income | $36.1 | $57.5 | -37.2% |
| Continuing-operations income | $20.6 | $38.0 | -45.9% |
| Net income (loss) | $17.1 | $(297.0) | Prior period included large impairment |
| Diluted EPS | $0.38 | $(6.70) | Continuing-operations EPS: $0.46 vs. $0.83 |
| Adjusted EBITDA / margin | $65.3 / 13.7% | $90.0 / 16.9% | EBITDA -27.5%; margin -3.2 pts |
For the first nine months, revenue was $1,364.2 million, down 13.7%; operating income was $83.0 million, down 49.4%; and adjusted EBITDA was $175.2 million, down 32.1%, with margin of 12.8% versus 16.3%. Continuing-operations income was $38.6 million; net loss was $62.0 million, including a $103.4 million loss from discontinued operations. Diluted EPS was $(1.39), including continuing-operations EPS of $0.86.
Cash flow and balance sheet: Nine-month operating cash flow was $38.7 million, versus $89.5 million a year earlier; capital expenditures were $56.8 million. The filing does not provide a directly stated free-cash-flow figure. At September 27, cash was $391.5 million, long-term debt carrying value was $1,500.7 million, and available revolver capacity was $265.2 million. The company had repaid the $190.0 million borrowed on its revolver earlier in the year. Current assets were $1,006.8 million and current liabilities $457.8 million.
Material changes and unusual items
- Lower sales volume was the primary revenue headwind, reducing Q3 revenue by an estimated $67.4 million. Acquisitions contributed $4.9 million; copper prices and currency were modestly favorable in the quarter.
- Industrial Solutions Q3 revenue fell 13.7% and segment EBITDA fell 30.0%; Enterprise Solutions revenue fell 7.3% and segment EBITDA fell 26.8%. Lower revenue drove the declines, with increased R&D investment also weighing on Industrial Solutions results.
- Belden completed the sale of Grass Valley on July 2, 2020. It recorded a $2.7 million after-tax gain in Q3 and a $113.0 million impairment charge in the first nine months. Consideration included approximately $59.5 million net cash, a $175 million seller note due 2025, and potential earnouts of up to $178 million. The note’s recorded fair value was $34.9 million; Q3 accrued PIK interest of $3.6 million was reserved under the expected-loss methodology.
- Belden adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $2.9 million cumulative retained-earnings adjustment. Its interim goodwill test found fair value only about 2% above carrying value for one reporting unit; no impairment was recorded. Management cautioned that continued weak conditions or results below assumptions could lead to a material impairment.
- The effective tax rate was 3.0% in Q3 and 7.7% for the first nine months, partly reflecting foreign tax credits. The company was still assessing the CARES Act’s effect on its annual tax provision.
Outlook, risks, and contingencies
Management expects COVID-19-related economic disruption to continue, including reduced demand in several end markets, supplier and facility operating constraints, and uncertainty affecting customers. It did not provide numerical revenue or earnings guidance. Management said it expects operating activities to generate cash in 2020 and believes available liquidity is sufficient for current needs, while noting that a significant acquisition could require external financing.
A cost-reduction program is expected to reduce annual SG&A by an estimated $60 million, with $40 million expected in 2020 and the full benefit in 2021; approximately $9.6 million of incremental costs remained expected. Management reported no material change in previously disclosed risk factors. An SEC investigation concerning a previously disclosed material weakness in internal controls remained ongoing; Belden said it was cooperating and did not expect a material adverse effect. Routine legal matters and environmental contingencies were described as not currently material.
Debt consists primarily of fixed-rate subordinated notes with maturities from 2025 to 2028 and an average stated rate of about 3.5%; the company reported no debt maturities before 2025 and no maintenance covenants on the notes. Its revolver matures in 2022, and borrowing availability depends on the borrowing base and facility terms.
Important facts for investors to verify
- Whether COVID-19 demand conditions and customer activity improve or weaken, and how that affects revenue, margins, and operating cash flow.
- Whether the Grass Valley seller note and potential earnouts ultimately yield the amounts and timing assumed; review the note’s credit-loss reserve and the planned return of Belden’s 9% equity interest.
- Whether the cost-reduction savings are realized as scheduled and whether restructuring and integration costs remain within estimates.
- Whether the reporting unit with only about 2% impairment-test headroom avoids a future goodwill impairment if actual performance or market assumptions deteriorate.
- How liquidity, debt covenants, working capital, and cash generation evolve; reconcile reported cash and borrowing-base availability with future capital returns and investment needs.