Belden Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. Belden supplies signal transmission, connectivity, broadcast and network security solutions through Broadcast, Enterprise, Industrial and Network Solutions segments. Approximately 47% of 2017 sales were outside the U.S.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $2.389 billion | $2.357 billion | +1.4% |
| Gross profit / margin | $934.0 million / 39.1% | $981.0 million / 41.6% | Profit down 4.8%; margin down 250 bps |
| Operating income / margin | $234.7 million / 9.8% | $223.9 million / 9.5% | +4.8% |
| Net income | $92.9 million | $127.6 million | Down 27.3% |
| Diluted EPS attributable to common stockholders | $1.37 | $2.65 | Down 48.3% |
| Adjusted EBITDA and margin (non-GAAP) | $434.3 million / 18.2% | $431.2 million / 18.3% | +0.7%; margin down 10 bps |
| Cash from operations | $255.3 million | $314.8 million | Down 18.9% |
| Free cash flow (non-GAAP) | $192.1 million | $261.2 million | Down 26.5% |
Common-stockholder earnings were also reduced by $34.9 million of preferred dividends, versus $15.4 million in 2016. Revenue growth reflected Thinklogical acquisition contributions ($30.8 million), higher copper costs ($13.0 million) and favorable currency translation ($12.2 million), partly offset by lower volume. Higher copper costs lifted reported revenue but pressured gross margin; lower volume and restructuring costs also contributed to the gross-profit decline.
Cash and equivalents were $561.1 million at year-end, down from $848.1 million. Inventory rose to $297.2 million from $190.4 million; management attributed the operating-cash-flow decline primarily to an unfavorable inventory change, including higher copper costs and temporary safety stock. Capital expenditures were $64.3 million. Long-term debt carrying value was $1.561 billion; the company had no revolver borrowings and $348.6 million of available capacity on its $400 million asset-based facility.
Segments and material changes
- Broadcast: Revenue $725.1 million, down 5.8%; Segment EBITDA $112.8 million, down 18.1%. Lower volume, particularly at Grass Valley, outweighed Thinklogical sales and productivity improvements.
- Enterprise: Revenue $631.2 million, up 4.6%; Segment EBITDA $103.7 million, up 2.3%. Margin declined as copper-cost increases were not fully and promptly passed through.
- Industrial: Revenue $628.5 million, up 7.3%; Segment EBITDA $119.6 million, up 18.2%, supported by volume growth, especially in discrete manufacturing, and productivity gains.
- Network: Revenue $403.9 million, up 1.1%; Segment EBITDA $93.9 million, up 1.2%. The segment combined former Industrial IT and Network Security operations effective January 1, 2017; prior periods were revised.
Thinklogical was acquired in May 2017 for $171.3 million in cash and contributed $30.8 million of revenue and a pretax loss of $8.9 million for the period included. Belden sold its MCS business and Hirschmann JV on December 31, 2017 for $40.2 million, recording a $1.0 million loss. A further acquisition closed February 8, 2018 for $75.8 million plus $18.4 million of assumed debt.
Debt refinancing replaced higher-coupon notes with euro-denominated notes due 2025 and 2027. Interest expense fell to $82.9 million from $95.1 million, but Belden recorded a $52.4 million debt-extinguishment loss. The company also repurchased $25.0 million of shares and paid $0.20 per common share in annual dividends.
Outlook, risks and unusual items
- Management’s stated strategic goals—not formal guidance—are annual constant-currency adjusted revenue growth of 5–7%, adjusted EBITDA margin of 20–22%, free-cash-flow growth of 13–15%, and return on invested capital of 13–15%. Management expects operating activities to generate cash in 2018 and considers current liquidity sufficient for expected needs; a significant acquisition could require external financing.
- The 2016–2018 manufacturing-footprint program incurred $48.4 million through 2017, with about $6 million of additional costs expected in 2018. Management expects approximately $13 million of annualized savings; savings began in the third quarter of 2017.
- The Tax Cuts and Jobs Act produced a provisional $28.4 million net tax expense in 2017, including a $29.1 million transition-tax expense and a $35.3 million valuation allowance on foreign tax credits, partly offset by deferred-tax remeasurement benefits. Belden said further analysis could change these estimates in 2018. The reported effective tax rate was 6.5% and included other significant tax benefits.
- Key risks include economic and end-market weakness, competitive pricing, foreign exchange, copper and other raw-material volatility, distributor concentration (Anixter represented 12% of revenue), acquisition integration, and substitution of fiber for copper. Backlog was $259.2 million at year-end, mostly scheduled to ship in 2018; orders are generally cancellable or reschedulable.
- A jury judgment of approximately $61.3 million in Belden’s favor in its Corning patent case remained on appeal; no gain was recorded. Management said other ordinary-course legal and environmental matters were not expected to have a material adverse effect.
- Ernst & Young issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness at Grass Valley involved revenue being recognized before all delivery criteria were met, including shipments to third-party logistics providers rather than final customer destinations. Quarterly 2017 revenue errors were corrected in the year-end statements; the filing says they were not material to previously issued interim statements. Remediation had begun but was not yet established as effective.
Most important facts for investors to verify
- Progress and testing of controls remediation at Grass Valley, and whether revenue recognition controls operate effectively under the adopted ASC 606 standard.
- Underlying volume, pricing and margin trends after separating copper-cost pass-through, foreign exchange, acquisitions and restructuring effects.
- Inventory normalization and the resulting sustainability of operating cash flow and free cash flow.
- Execution and realized savings from the manufacturing consolidation, alongside its remaining costs.
- Final accounting for the Tax Act and the usability of deferred tax assets and tax-credit carryforwards.
- Post-acquisition performance and integration of Thinklogical and the February 2018 acquisition, as well as debt, liquidity and any dilution implications of preferred-stock conversion.