Business context and reporting period
Belden Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. It supplies specialty networking products and solutions through Enterprise Solutions and Industrial Solutions. The company classified its Grass Valley live media business as discontinued operations in the fourth quarter after committing to sell it; prior-period results were recast accordingly, except cash-flow statements.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2,131.3 million | $2,165.7 million |
| Gross profit / margin | $793.5 million / 37.2% | $829.9 million / 38.3% |
| Operating income / margin | $207.2 million / 9.7% | $314.0 million / 14.5% |
| Income from continuing operations | $109.9 million | $167.1 million |
| Net income (loss) | $(376.8) million | $160.7 million |
| Diluted EPS from continuing operations | $2.15 | $3.23 |
| Adjusted EBITDA / margin | $350.9 million / 16.5% | $393.7 million / 18.2% |
| Operating cash flow | $276.9 million | $289.2 million |
| Free cash flow | $166.9 million | $193.0 million |
Revenue fell 1.6%; adjusted EBITDA declined 10.9%. Management attributed revenue pressure to unfavorable currency translation ($28.0 million), lower sales volume (including channel inventory and weaker industrial markets; $21.6 million), and lower copper costs ($17.2 million), partly offset by $32.4 million from acquisitions. Lower production volumes and unfavorable product mix also weighed on profitability. 2018 operating income included a $62.1 million patent-litigation gain, which did not recur.
Segment revenue and EBITDA both declined year over year. Enterprise revenue was $1,081.2 million and EBITDA $162.3 million, with an EBITDA margin of 15.0% (17.4% in 2018). Industrial revenue was $1,050.0 million and EBITDA $188.9 million, with a margin of 18.0% (19.0% in 2018).
Cash, debt and liquidity
Cash and cash equivalents were $425.9 million at year-end including discontinued operations; $407.5 million was reported in continuing-operations cash on the balance sheet, with a further $18.4 million included in Grass Valley assets. Long-term debt carrying value was $1,439.5 million, consisting of senior subordinated notes; reported face-value payment obligations were $1,459.4 million, all due after 2024. The company had no Revolver borrowings and reported $310.6 million of available borrowing capacity, including Grass Valley assets. Operating cash flow less capital expenditures was $166.9 million. Capital expenditures were $110.0 million, and the company paid $50.0 million for share repurchases and $34.4 million in common dividends.
Material changes, outlook and risks
- Grass Valley: Belden recorded a $521.4 million impairment in 2019, driving most of the reported net loss. On February 4, 2020, it agreed to sell the business for $140 million cash, a subordinated note with an initial face amount of $213 million (subject to pension-liability adjustments), and potential earn-out consideration of up to $150 million. Closing was expected in the first half of 2020, subject to conditions. The note bears 10% interest in kind and is contemplated to mature in five years.
- Restructuring: A cost-reduction program incurred $19.6 million of severance costs in 2019 and is expected to reduce annual SG&A by about $40 million, with some benefit in 2020 and full benefit in 2021; about $10 million of further costs were expected in 2020. Acquisition integration incurred $6.1 million in 2019, with about $5 million additional costs expected in 2020.
- Management goals, not formal near-term guidance: Belden cited targets of 5–7% annual adjusted revenue growth in constant currency, 20–22% adjusted EBITDA margin, 13–15% free-cash-flow growth, and 13–15% return on invested capital. 2019 adjusted EBITDA margin was 16.5%.
- Other notable changes: The mandatory convertible preferred stock converted in July 2019 into about 6.9 million common shares. The company acquired Opterna, FutureLink and SPC in 2019. Anixter represented approximately 13% of 2019 revenue; Anixter and WESCO combined represented about 15%, and their proposed combination could affect distribution and channel inventory.
- Risks and contingencies: Key exposures include economic and industrial-market weakness, channel inventory shifts, foreign exchange and commodity-price volatility, competition and technology substitution (including fiber for copper), distributor concentration, and supply constraints. The company disclosed an ongoing SEC investigation related to a previously reported 2017 internal-control material weakness; it stated the investigation was not expected to have a material adverse effect. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2019, although the acquired 2019 businesses were excluded from the evaluation.
Important facts for investors to verify
- Progress and final proceeds from the Grass Valley sale, including note collectability, contingent earn-out, pension transfers and closing conditions.
- Whether the restructuring savings materialize on schedule and whether further costs exceed estimates.
- Underlying revenue, volume and margin trends, especially industrial demand, channel inventory and currency effects.
- Debt repayment capacity and liquidity after the Grass Valley disposition; distinguish reported cash from cash held in discontinued operations and overseas.
- Potential effects of Anixter/WESCO consolidation and any changes in customer or distributor purchasing.
- Assumptions behind the $521.4 million impairment and remaining goodwill valuations; the audit identified Grass Valley valuation, goodwill and revenue estimates as critical audit matters.