Belden Inc. — Q3 2015 Form 10-Q
Reporting period: Third quarter and nine months ended September 27, 2015; comparisons are to the periods ended September 28, 2014. Belden provides signal-transmission products and services across Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. Unless noted, amounts below are in millions.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $579.3 | $610.8 | $1,712.0 | $1,699.4 |
| Gross profit / margin | $226.1 / 39.0% | $221.7 / 36.3% | $668.1 / 39.0% | $601.8 / 35.4% |
| Operating income / margin | $34.5 / 6.0% | $58.0 / 9.5% | $83.5 / 4.9% | $119.8 / 7.1% |
| Income from continuing operations | $14.8 | $33.8 | $16.9 | $59.0 |
| Net income | $14.6 | $33.8 | $16.5 | $58.5 |
| Diluted EPS | $0.34 | $0.77 | $0.38 | $1.32 |
- Cash flow: Nine-month operating cash flow was $92.0, versus $64.8 in 2014. Capital expenditures were $39.1; operating cash flow less capital expenditures was approximately $52.9. Investing cash outflow was $730.8, including $695.3 for acquisitions.
- Cash and liquidity: Cash was $241.9 at September 27, down from $741.2 at year-end 2014. Current assets were $953.4 and current liabilities $510.2. The company reported $111.2 of available borrowing capacity under its revolving facility.
- Debt: Total debt and borrowing arrangements were $1,916.6, versus $1,767.9 at year-end 2014; long-term debt was $1,914.1. Debt comprised $1,471.4 of senior subordinated notes, a $245.2 term loan, and $200.0 drawn on the revolver. Cash less total debt implies net debt of approximately $1,674.7.
- Non-GAAP measures: Adjusted revenue was $590.1 in Q3, down 3.8%, and $1,758.1 for nine months, up 3.0%. Adjusted EBITDA was $97.5 in Q3, up 1.2%, and $286.1 for nine months, up 10.2%; adjusted EBITDA margins were 16.5% and 16.3%, respectively. These measures exclude specified items and are not GAAP results.
Material changes and business drivers
- Q3 GAAP revenue fell 5.2%, while nine-month revenue rose 0.7%. Acquisitions added $34.9 in Q3 and $159.8 for nine months; unfavorable currency translation reduced revenue by $36.5 and $103.2, respectively. Lower unit volumes and copper costs also reduced revenue.
- Gross profit increased despite lower Q3 revenue, but operating income and earnings declined as selling, general and administrative costs, R&D, amortization, and interest expense rose. Q3 interest expense was $25.4 versus $21.5; nine-month expense was $74.0 versus $58.3.
- Tripwire, acquired in January 2015 for $703.2, contributed $30.5 of Q3 revenue and $74.5 for nine months, but recorded pre-tax losses of $10.6 and $46.3, respectively. Purchase-accounting reductions to acquired deferred revenue reduced reported revenue by $10.9 in Q3 and $43.6 for nine months. The purchase-price allocation remained preliminary.
- Broadcast was pressured by lower Grass Valley infrastructure demand: Q3 segment revenue fell 11.1% and segment EBITDA fell 9.3%. Industrial Connectivity revenue fell 13.7% in Q3 amid currency effects and weak industrial demand. Enterprise Connectivity EBITDA improved, while Network Security reported a 27.2% Q3 segment EBITDA margin.
- Foreign currency translation was a significant headwind. Management cited soft broadcast and industrial demand, with strength in enterprise and broadband connectivity partly offsetting weakness in China, Europe, and Latin America.
Outlook, risks, contingencies and unusual items
- Management expected operating activities to generate cash in 2015 and considered liquidity sufficient for working capital, capital expenditures, retirement contributions, dividends, and near-term plans. A significant acquisition could require external financing.
- Belden began a further Grass Valley restructuring in Q3, recording approximately $14.0 of costs. It expected about $16 of additional costs, mostly in Q4 2015, and approximately $30 of annualized savings beginning in Q4. The earlier productivity program was substantially completed, with expected annualized operating-expense reductions of approximately $18 substantially being realized.
- The nine-month 2015 tax benefit was $7.3, including recognition of foreign tax credits and a $1.5 benefit from reducing a valuation allowance. Management forecast a negative full-year effective tax rate on forecast pre-tax income; tax outcomes may vary with income mix and tax-law changes.
- Risks highlighted include economic and end-market weakness, currency and commodity-price movements, competition, channel inventory, acquisition integration, execution of productivity initiatives, goodwill and intangible impairment, cybersecurity, product failures, intellectual property claims, and variable tax rates. Management reported no material changes to previously disclosed risk factors.
- A jury found in July 2015 that Corning willfully infringed two PPC patents. Judgment had not been entered and post-trial motions remained pending; Belden had recorded no amount for the matter. Management said routine legal proceedings were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- Standby letters of credit, bank guaranties, and surety bonds totaled $7.8, $3.1, and $1.8, respectively. The filing states that recorded environmental and legal contingency liabilities were not material and reports no material off-balance-sheet arrangements.
- The $39.1 share repurchase in Q3 used all remaining authorization under the repurchase program. Quarterly dividends declared were $0.05 per share.
Important facts for investors to verify
- Whether the new Grass Valley restructuring achieves the stated $30 annualized savings and how much of the remaining approximately $16 cost is incurred.
- Tripwire’s operating performance, integration progress, preliminary purchase accounting, and deferred-revenue effects on reported results.
- Whether broadcast and industrial demand stabilizes, and the extent to which currency movements and lower copper costs continue to affect sales and margins.
- Cash generation, revolver availability, debt levels, and financing needs after the Tripwire acquisition and substantial acquisition spending.
- Developments in the Corning patent litigation and the potential financial outcome, which was not quantified in the filing.
- The sustainability of the unusually large tax benefit and the assumptions underlying management’s negative full-year effective tax-rate forecast.