Belden Inc. — Q1 2019 Form 10-Q
Business and period: Belden provides signal-transmission products and services through Enterprise Solutions and Industrial Solutions. The filing covers the three months ended March 31, 2019; the comparison period ended April 1, 2018.
Financial results
- Revenue: $587.2 million, down 3.0% year over year. Gross profit was $224.7 million; gross margin was 38.3%, versus 38.1%.
- Operating results: Operating income was $44.4 million, up 0.5%; operating margin was 7.6%, versus 7.3%. Net income was $25.2 million. After $8.7 million of preferred dividends, income attributable to common stockholders was $16.5 million, or $0.42 per diluted share, versus a $6.1 million loss, or $(0.15) per share.
- Adjusted measures: Adjusted EBITDA was $87.1 million, down 15.7%; adjusted EBITDA margin was 14.8%, versus 17.0%. These are non-GAAP measures.
- Segments: Enterprise Solutions revenue was $326.5 million (down 7.0%) and EBITDA was $39.6 million (down 31.1%); Industrial Solutions revenue was $260.6 million (up 1.6%) and EBITDA was $47.5 million (up 2.2%).
- Cash flow: Operating cash use was $46.1 million, compared with $83.9 million in the prior-year quarter. Capital expenditures were $23.6 million. Cash decreased $81.6 million to $339.0 million.
- Liquidity and debt: Current assets were $1.13 billion and current liabilities $572.1 million. Long-term debt carrying value was $1.44 billion; cash less carrying-value debt was approximately $1.10 billion net debt. The $400 million revolving facility had no borrowings and $345.5 million available.
Changes and management commentary
- Revenue fell mainly due to lower volume ($20.9 million adverse), currency translation ($13.7 million adverse), and copper prices ($5.1 million adverse), partly offset by favorable pricing ($10.6 million) and acquisitions. Volume weakness was concentrated in Enterprise Solutions; Industrial Solutions grew across regions.
- Enterprise Solutions faced softer demand in final-mile broadband and live media production, partly offset by smart-building growth. Industrial Solutions benefited from broad-based volume and pricing gains.
- Income before taxes rose to $30.8 million from $7.0 million, principally because the prior-year period included a $20.0 million debt-extinguishment loss and current-period net interest expense was lower. The effective tax rate was 18.3%, versus 63.2%; the comparison was affected by tax valuation-allowance items.
- Operating cash use improved year over year, primarily from increased collections on receivables; days sales outstanding declined to 62 from 66. Cash use nevertheless reflected substantial payments in accounts payable and accrued liabilities.
- Management expects operating activities to generate cash in 2019 and believes available liquidity can fund working capital, capital expenditures, retirement-plan contributions, dividends, and stated operating plans. It noted that significant acquisitions may require external financing. No specific revenue or earnings guidance was provided.
Outlook, risks, and unusual items
- Key sensitivities include foreign-exchange movements, copper and other commodity prices, customer and channel inventory levels, demand, competition, and broader economic conditions. About half of quarterly revenue was to customers outside the U.S.
- Belden adopted lease accounting on January 1, 2019, recording approximately $90.5 million of right-of-use assets and $103.4 million of operating-lease liabilities; management reported no material impact on earnings or cash flow from adoption.
- The SAM/Grass Valley integration program incurred $3.0 million of restructuring costs in the quarter; management expected no further costs. A SAM earnout settlement made up to $31.4 million payable in Q1 2020, unless earlier payment is required; Belden also recorded $1.3 million of related SG&A expense.
- After quarter-end, Belden acquired Opterna for approximately $45 million net of cash, with potential earnout consideration up to $25 million.
- Mandatory convertible preferred stock is scheduled to convert around July 15, 2019 into approximately 6.2 million to 6.9 million common shares, subject to the stated conversion terms. Quarterly preferred dividends were $8.7 million.
- Belden disclosed ongoing cooperation with an SEC investigation concerning a previously reported material weakness in internal controls. The company said it did not expect a material adverse outcome. It reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Facts investors should verify
- Whether Enterprise Solutions demand and segment profitability stabilize, and whether Industrial Solutions growth continues.
- Whether operating cash flow improves beyond the quarter’s working-capital-driven cash use.
- Debt maturities, euro-denominated debt and currency exposure, and available revolver capacity.
- The final preferred-stock conversion ratio, resulting dilution, and related dividend implications.
- Opterna’s purchase accounting and earnout exposure, and the timing and payment of the SAM earnout.
- Developments in the SEC investigation and any implications for internal controls or financial reporting.