Belden Inc. — Q2 2016 Form 10-Q
Business context and period. Belden supplies signal-transmission products and solutions across Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The quarter ended July 3, 2016; the six-month period included 185 days, compared with 179 days in the prior-year period. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $601.6 | $585.8 | $1,143.1 | $1,132.7 |
| Gross profit | $248.2 | $234.3 | $473.2 | $441.9 |
| Operating income | $62.2 | $44.1 | $103.2 | $49.0 |
| Net income attributable to Belden | $41.8 | $21.6 | $58.4 | $2.0 |
| Diluted EPS | $0.98 | $0.50 | $1.37 | $0.05 |
| Adjusted EBITDA (non-GAAP) | $108.1 | $100.1 | $197.2 | $188.6 |
| Adjusted EBITDA margin | 17.9% | 16.7% | 17.2% | 16.1% |
| Operating cash flow | — | — | $60.5 | $5.0 |
Q2 revenue increased 2.7% and adjusted EBITDA increased 8.0%; six-month revenue rose 0.9% and adjusted EBITDA rose 4.5%. Gross margin was approximately 41.3% in Q2 versus 40.0% a year earlier. Operating margin was approximately 10.3% versus 7.5%. The six-month comparison is affected by different period lengths and prior-year acquisition-related charges.
Six-month capital expenditures were $25.1 million, implying operating cash flow less capital expenditures of approximately $35.3 million. Cash declined $41.0 million from year-end to $175.8 million. Current assets were $819.2 million and current liabilities $498.7 million (working capital $320.5 million; current ratio approximately 1.64).
At July 3, gross debt was $1.708 billion and net debt carrying value was $1.684 billion, excluding cash. Long-term debt was $1.682 billion, with $2.5 million of current maturities. Cash of $175.8 million plus $293.7 million of available Revolver capacity provided reported liquidity; no Revolver borrowings were outstanding. The term loan carried a 3.41% variable rate.
Changes and drivers
- Q2 GAAP revenue growth reflected higher unit volumes, partly offset by lower copper-related selling prices and unfavorable currency translation. Management cited broadcast and enterprise as the strongest volume-growth markets; industrial volumes remained weak.
- For the six months, Broadcast revenue rose 3.8% and Network Security revenue rose 5.3%; Industrial Connectivity fell 7.9%, Enterprise Connectivity fell 2.4%, and Industrial IT fell 4.9%. Segment results reflect the 2016 transfer of audio-video cable and connectors from Broadcast to Enterprise; prior periods were recast.
- Profitability improved with higher volume and restructuring-related productivity. SG&A declined year over year, including the absence of $9.2 million of prior-year accelerated Tripwire acquisition-award compensation in the six-month comparison.
- Q2 net income included significant tax benefits. The company reported $8.1 million related to a foreign-currency-loss tax deduction and $7.0 million from reversal of deferred tax liabilities following an IRS Private Letter Ruling. The six-month period also included a $3.8 million valuation-allowance benefit; a $2.7 million uncertain-tax-position expense partially offset benefits. These items make reported earnings and effective tax rates less indicative of recurring performance.
Outlook, risks, and unusual items
- No specific revenue, EPS, or margin guidance is stated in the supplied filing text. Management expected industrial-market conditions to continue pressuring industrial sales volumes and said operating activities were expected to generate cash in 2016; it considered liquidity sufficient for current needs, while noting a significant acquisition could require external financing.
- Restructuring plans target annualized savings of approximately $18 million for the industrial program, $10 million from manufacturing-footprint consolidation beginning in the second half of 2017, and $30 million for the Grass Valley program. Additional costs were expected: about $2 million, $16 million in 2016 plus $15 million in 2017, and $1 million, respectively.
- Management identified currency movements, lower energy prices and industrial customer spending, copper and other input costs, channel inventory, competitive markets, and execution of restructuring and acquisitions as risks. The UK’s EU-exit vote had weakened sterling; longer-term effects depended on negotiations. Routine litigation was not expected to be materially adverse, but a patent case remained unresolved: a jury found willful infringement, while post-trial motions and entry of judgment were pending. No amount was recorded.
- Standby letters of credit, bank guarantees, and surety bonds totaled $8.9 million, $2.9 million, and $2.4 million, respectively. The company reported no material off-balance-sheet arrangements.
- Subsequent event: On July 26, 2016, Belden issued mandatory convertible preferred depositary shares for approximately $502 million net proceeds, intended for general corporate purposes. Conversion around July 15, 2019 could result in 6.2–6.9 million common shares.
Most important facts for investors to verify
- Underlying demand and volume trends by segment, particularly continued weakness in industrial markets and broadcast customer spending.
- How much of earnings improvement is sustainable after separating tax benefits, restructuring costs, purchase-accounting effects, and other non-GAAP adjustments.
- Delivery of stated restructuring savings against remaining costs and implementation timelines.
- Debt repayment capacity, variable-rate exposure, and use of the preferred-offering proceeds; assess potential conversion dilution.
- Resolution and possible financial impact of the patent litigation, and effects of currency, Brexit-related uncertainty, and commodity prices.
- Cash-flow conversion: operating cash flow improved substantially, but working-capital movements included significant cash uses for accrued liabilities, payables, and taxes.