Belden Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Belden designs, manufactures, and markets cable, connectivity, and networking products for industrial, enterprise, broadcast, and consumer electronics markets. This filing covers the 13 weeks ended July 1, 2012, and the six months ended that date; comparisons are with the periods ended July 3, 2011.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First six months 2012 | First six months 2011 |
|---|---|---|---|---|
| Revenue | $484.0 million | $536.3 million | $948.3 million | $997.9 million |
| Gross profit | $151.9 million | $156.6 million | $293.6 million | $287.1 million |
| Operating income | $58.4 million | $58.2 million | $102.3 million | $100.3 million |
| Income from continuing operations | $42.4 million | $34.9 million | $66.7 million | $56.9 million |
| Diluted EPS from continuing operations | $0.92 | $0.72 | $1.43 | $1.18 |
- Gross margin improved to 31.4% from 29.2% in Q2 and to 31.0% from 28.8% for the six-month period. Operating margin rose to 12.1% from 10.8% in Q2 and to 10.8% from 10.0% for six months.
- Operating cash flow was $30.6 million for the first six months, versus $31.2 million a year earlier. Capital expenditures were $21.8 million.
- Cash and cash equivalents were $337.3 million at July 1, 2012, down from $382.7 million at year-end 2011. Current assets were $884.9 million and current liabilities $339.0 million.
- Debt at July 1 consisted of $349.4 million principal of 7.0% senior subordinated notes due 2017 and $200.0 million principal of 9.25% notes due 2019. No borrowings were outstanding under the senior secured facility; $387.2 million of capacity was available, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue fell 9.7% in Q2 and 5.0% for six months. Management attributed the declines to lower unit volumes and channel inventory, lower selling prices as copper costs declined, and unfavorable currency translation. Lower copper prices reduced estimated revenue by approximately $14 million in Q2 and $24 million for six months.
- Despite lower revenue, gross and operating margins improved, reflecting better product mix, lower manufacturing input costs, productivity gains from Lean initiatives, and cost management. Q2 operating income was nearly flat year over year; six-month operating income increased 2.0%.
- Regional performance was mixed. EMEA revenue declined 13.7% in Q2 and 9.0% for six months, while operating income increased in both periods. Asia Pacific revenue fell 12.7% and 12.5%, respectively; six-month operating income declined 8.7%. Americas revenue fell 5.5% in Q2 but increased 0.3% for six months, with operating income higher in both periods.
- The effective tax rate was 8.0% in Q2 and 15.0% for six months, compared with 23.5% and 25.2% in the prior-year periods. Reduced valuation allowances on certain deferred tax assets generated tax benefits of $10.7 million in Q2 and $10.4 million for six months, substantially supporting the increase in net income.
- Cash used in financing increased to $46.5 million, primarily due to $50.0 million of share repurchases. Belden repurchased 1.4 million shares in the six-month period at an average $35.28 per share; $50.0 million remained under the $150.0 million authorization at July 1.
Outlook, commentary, risks, and unusual items
- Management expected operating activities to generate cash in 2012 and believed available liquidity was sufficient for working capital, capital expenditures, retirement-plan contributions, repurchases, dividends, and near-term operating strategies. No quantified earnings or revenue guidance was provided in the filing.
- Belden expected to undertake restructuring activities in 2012 in response to economic uncertainty and to manage costs and competitiveness. Management cited softening European conditions, weaker Chinese demand and channel inventory, and an underperforming consumer electronics business in Asia Pacific; strategic alternatives for that business were being evaluated.
- After quarter-end, Belden acquired Miranda Technologies for $374.7 million in cash to expand broadcast infrastructure offerings. It subsequently borrowed CAN$250.0 million under a new term loan due 2017 and funded the remainder with cash. Purchase accounting was incomplete; post-acquisition debt and liquidity amounts were not stated clearly in this filing.
- Of July 1 cash, $306.2 million was held outside the United States. Belden said its plans did not require repatriation and that it intended to permanently reinvest foreign cash; repatriation could trigger taxes.
- Potential risks include economic and customer-demand changes, channel inventory, commodity prices, foreign exchange, competition, execution and integration of acquisitions, and restructuring outcomes. The company also described routine litigation, including asbestos-related claims and a Canadian contaminated-property matter; it did not expect these matters to have a material adverse effect based on information then available, but noted outcomes were uncertain.
- A $15.2 million receivable remained in escrow from the 2010 Trapeze Networks sale. Belden had not collected it and was negotiating with the buyer over the escrow and related claims.
Important facts for investors to verify
- Whether improved margins and operating income can persist while revenue and end-market volumes are under pressure.
- How much of the earnings increase came from the one-time deferred-tax valuation-allowance benefit, and the future realization of deferred tax assets.
- Miranda’s acquired assets, liabilities, operating contribution, integration costs, and the resulting debt and liquidity position once purchase accounting is finalized.
- Whether foreign cash can practically support U.S. needs without tax costs, and the implications of the term-loan financing and variable interest rates.
- The recoverability of the $15.2 million Trapeze escrow receivable and developments in the asbestos and Canadian environmental proceedings.