Belden Inc. — Q2 2018 Form 10-Q
Business context and period. Belden provides signal-transmission products and services through Enterprise Solutions and Industrial Solutions. This unaudited report covers the three and six months ended July 1, 2018; comparisons are to periods ended July 2, 2017. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $668.6 | $610.6 | $1,274.2 | $1,162.0 |
| Gross profit | $257.6 | $243.1 | $488.2 | $465.5 |
| Operating income | $56.5 | $62.8 | $100.7 | $114.4 |
| Net income attributable to Belden common stockholders | $20.1 | $27.2 | $14.0 | $44.2 |
| Diluted EPS attributable to common stockholders | $0.49 | $0.64 | $0.34 | $1.03 |
| Adjusted EBITDA / margin | $122.6 / 18.3% | $111.8 / 18.3% | $225.9 / 17.7% | $204.8 / 17.6% |
Q2 gross margin was approximately 38.5%, versus 39.8% a year earlier; operating margin was 8.5%, versus 10.3%. Revenue grew 9.5% reported (10.0% on the company’s adjusted-revenue measure). Growth reflected acquisitions, favorable currency translation, higher copper prices and higher sales volume, partly offset by the MCS divestiture. Q2 GAAP net income attributable to Belden was $28.9 million; common-stockholder income is lower after preferred dividends.
- Segments: Enterprise Solutions revenue was $399.7 million and EBITDA $70.3 million (17.6% margin), up from $348.8 million and $56.4 million (16.2%). Industrial Solutions revenue was $271.7 million and EBITDA $53.2 million (19.6% margin), versus $261.8 million and $54.1 million (20.7%). Industrial margin faced unfavorable product mix.
- Cash flow: First-half operating cash flow was negative $29.4 million, compared with positive $34.8 million. The filing attributes the deterioration mainly to accounts payable, a cash use of $84.7 million versus a $14.7 million source in the prior-year period. Investing cash use was $82.4 million; financing cash use was $185.0 million.
- Cash, debt and liquidity: Cash was $261.4 million at July 1, down from $561.1 million at year-end; $155.2 million was held outside the U.S. Long-term debt carrying value was $1,482.9 million; senior subordinated note principal was $1,507.0 million. The $400 million revolver had no borrowings and $348.0 million available.
- Capital spending was $39.5 million in the first half. Belden spent $100.0 million on share repurchases and paid $22.0 million in cash dividends during the period.
Material changes and unusual items
- Belden acquired Snell Advanced Media (SAM) in February and Net-Tech Technology (NT2) in April; both are reported in Enterprise Solutions. SAM contributed $51.9 million of first-half revenue and a $9.4 million pretax loss, including substantial restructuring and integration costs.
- Belden issued €350 million of 3.875% notes due 2028 and used proceeds and cash to retire its 2023 and 2024 notes. Debt-extinguishment losses were $3.0 million in Q2 and $23.0 million in the first half. Net interest expense declined year over year.
- First-half net income and common EPS were pressured by the debt-extinguishment loss, lower operating income and higher taxes. The effective tax rate was 24.5% for Q2 and 30.5% for the first half, versus 5.8% and 6.8% in the comparable 2017 periods; 2017 tax benefits and foreign tax-credit items affected that comparison.
- 2017 interim results were not restated after Belden identified nonmaterial revenue-recognition errors. Those errors overstated 2017 revenue by $10.4 million for Q2 and $16.5 million for the first half, and net income by $1.3 million and $4.3 million, respectively. This affects comparability.
- Adoption of the revenue-recognition standard increased opening retained earnings by $2.6 million; it reduced first-half 2018 revenue by $0.1 million and had no Q2 revenue impact. Other accounting-standard adoptions also reduced opening retained earnings, including a $31.7 million reduction from the intra-entity tax-transfer standard.
Outlook, risks and contingencies
- Management expects operating activities to generate cash in 2018 and considers available liquidity sufficient for working capital, capital expenditures, retirement-plan contributions, repurchases and dividends; a significant acquisition could require external financing. The filing does not provide formal quarterly or annual earnings guidance. Belden states a strategic goal of 5–7% annual revenue growth in constant currency.
- For the SAM/Grass Valley integration, management expects about $22 million of additional restructuring costs, mostly by year-end 2018, and approximately $44 million of annualized savings, with savings expected to begin in the second half of 2018. The manufacturing-footprint program is expected to finish by year-end and is expected to generate about $13 million in annualized savings.
- On July 19, after quarter-end, Belden received approximately $62.1 million pre-tax from Corning following a patent judgment. No gain was recorded in Q2; Belden expects to record it in Q3.
- Disclosure controls were deemed ineffective at July 1 because a previously reported material weakness in controls over revenue recognition remained unresolved. Remediation procedures had begun, but effectiveness had not yet been demonstrated for a sufficient period.
- Key disclosed risks include economic and end-market weakness, foreign exchange and commodity-price movements, competition, distributor and channel-inventory changes, technology substitution, acquisition integration and financing, tax-law uncertainty, tariffs and trade changes, and cybersecurity/privacy exposure. Management said routine litigation and recorded environmental and legal contingencies were not expected to have a material adverse effect; standby letters of credit, bank guarantees and surety bonds totaled $7.2 million, $2.4 million and $2.3 million, respectively.
Important facts for investors to verify
- Whether operating cash flow recovers from the first-half outflow and inventory/payables working-capital pressure.
- Progress against SAM integration costs and the timing and realization of the projected $44 million annualized savings.
- Remediation and testing of the revenue-recognition control weakness, and the implications of the 2017 interim revenue errors for comparisons.
- Q3 recognition and tax treatment of the Corning proceeds, and whether the expected cash strengthens liquidity as anticipated.
- Debt levels, refinancing economics and potential dilution: mandatory conversion of the 6.75% preferred stock is scheduled around July 15, 2019, into a stated range of 6.2–6.9 million common shares, subject to adjustment.