Belden Inc. — Q1 2013 Form 10-Q
Business context and period: Belden designs, manufactures, and markets signal-transmission products for broadcast, enterprise, and industrial markets. The quarter ended March 31, 2013; the comparable quarter ended April 1, 2012 and included two more days. The company reorganized its reporting into four global platforms: Broadcast, Enterprise Connectivity, Industrial Connectivity, and Industrial IT. Results include Miranda and PPC, acquired in 2012, and Softel, acquired in January 2013; the prior period includes the now-divested cable business.
Key financial results
| Metric | Q1 2013 | Comparable period |
|---|---|---|
| Revenue | $507.5 million | $439.6 million; up 15.4% |
| Gross profit / margin | $167.4 million / 33.0% | $132.8 million / 30.2% |
| Operating income / margin | $44.2 million / 8.7% | $37.1 million / 8.4% |
| Continuing-operations income | $22.2 million; $0.49 diluted EPS | $19.7 million; $0.42 diluted EPS |
| Net income | $22.2 million; $0.49 diluted EPS | $24.3 million; $0.52 diluted EPS |
| Operating cash flow | $(71.7) million | $12.7 million |
| Cash and cash equivalents | $469.4 million at March 31 | $395.1 million at December 31, 2012 |
| Total debt | $1.333 billion | $1.151 billion at December 31, 2012 |
Gross margin excluding the $6.6 million acquired-inventory fair-value charge was 34.3%, versus 30.2%. Operating margin excluding that charge and intangible amortization was 12.6%, versus 9.1%, as calculated by the company. Interest expense rose to $15.9 million from $11.9 million, largely reflecting acquisition-related debt.
Operating cash use primarily reflected a $70.0 million use from accrued taxes, including $38.5 million paid on the 2012 Thermax and Raydex sale and $30.0 million to settle a tax-sharing dispute with Cooper Industries. Investing cash use was $11.1 million, including $9.5 million for acquisitions and $6.4 million of capital expenditures. Financing provided $161.8 million, including proceeds from new notes, partly offset by debt repayment and $31.3 million of share repurchases.
Changes and segment performance
- Revenue growth was primarily acquisition-driven: acquisitions contributed $96.8 million. The divested cable business reduced the comparison by $24.7 million; lower volumes, including channel-inventory effects, reduced revenue by about $3.5 million, and currency reduced it by about $0.9 million.
- Broadcast revenue rose 122.1% to $155.6 million, but reported an operating loss of $0.1 million, including purchase-accounting and amortization costs. Excluding those charges, the company reported $18.2 million of operating income.
- Enterprise Connectivity revenue declined 6.2% to $116.6 million amid weaker volume, Europe, and non-residential construction.
- Industrial Connectivity revenue increased 4.2% to $176.7 million; operating income rose 28.9% to $24.4 million.
- Industrial IT revenue increased 15.0% to $58.5 million; operating income rose 66.6% to $9.5 million.
- Net income declined year over year because the prior period included $4.5 million of after-tax discontinued-operations income; continuing-operations income increased 12.7%.
Liquidity, outlook, risks, and unusual items
- At quarter-end, Belden had $469.4 million cash, including $281.3 million held outside the United States, and $386.8 million of available revolver capacity. There were no revolver borrowings, and the company reported compliance with credit-facility covenants. Debt included $242.2 million of term loans and $1.091 billion of senior subordinated notes.
- Management expects operating activities to generate cash in 2013 and considers liquidity sufficient for working capital, capital spending, retirement contributions, buybacks, dividends, and near-term plans. A significant acquisition would require external financing. The filing gives no earnings or revenue guidance.
- Belden expects approximately $8 million of 2013 severance and other restructuring costs from consolidating New York facilities following acquisitions; further restructuring actions remain possible.
- Q1 included a $5.2 million tax benefit from U.S. tax-law changes and $3.7 million of tax expense for a foreign uncertain tax position. Interest expense included $1.5 million relating to that position. The effective tax rate was 21.8%.
- Risks cited include economic weakness and demand, channel inventories, commodity prices, competition, currency and political uncertainty, acquisition integration and performance, product development, and operational or cybersecurity disruptions. The company also reported 100 pending asbestos-related cases as of May 3, 2013 and an unresolved environmental matter at a former Kingston, Canada property; management did not expect either to be materially adverse but noted outcomes are uncertain.
- Belden continues negotiations over the Trapeze sale escrow and buyer claims; it recorded a $3.8 million receivable as its best estimate of the amount remaining to collect. Environmental and legal contingency accruals were described as not material.
Investor verification priorities
- Assess how much reported growth and margin improvement is sustainable apart from acquisitions and purchase-accounting effects.
- Review the drivers and timing of operating cash flow recovery after the substantial tax-related cash outflow.
- Evaluate leverage, interest costs, refinancing needs, and the implications of variable-rate term debt and subordinated notes.
- Track integration, restructuring costs, and performance of the acquired Broadcast businesses, particularly given the segment’s reported operating loss.
- Monitor demand and channel-inventory trends in Europe and non-residential construction, as well as the unresolved legal, environmental, tax, and Trapeze escrow matters.