Belden Inc. — Q2 2011 Form 10-Q
Business context and period. Belden designs, manufactures and markets cable, connectivity and networking products serving industrial, enterprise, broadcast and consumer electronics markets. This unaudited report covers the quarter and six months ended July 3, 2011; comparisons are with the periods ended July 4, 2010.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $536.3 million | $410.6 million | $997.9 million | $795.0 million |
| Gross profit | $156.6 million | $117.3 million | $287.1 million | $227.7 million |
| Operating income | $58.2 million | $39.6 million | $100.3 million | $70.9 million |
| Income from continuing operations | $34.9 million | $21.6 million | $56.9 million | $35.9 million |
| Net income | $34.7 million | $19.7 million | $56.6 million | $31.4 million |
| Diluted EPS | $0.72 | $0.41 | $1.17 | $0.66 |
- Q2 revenue rose 30.6%; operating income rose 47.0%. Six-month revenue grew 25.5% and operating income 41.4%.
- Approximate gross margin was 29.2% in Q2 2011 versus 28.6% in Q2 2010; approximate operating margin was 10.9% versus 9.6%. Six-month gross margin was 28.8% versus 28.6%, and operating margin was 10.0% versus 8.9%.
- Q2 revenue growth reflected higher selling prices, acquisitions, higher unit sales and favorable currency translation. For the six months, management attributed $64.7 million of revenue increase to pricing, $65.9 million to acquisitions, $50.8 million to unit volume and $21.5 million to currency.
- Cash from operations was $31.2 million for the six months, versus $5.5 million a year earlier. Investing used $66.1 million, including $52.4 million for acquisitions and $14.9 million in capital expenditures. Financing used $1.7 million. Cash declined $29.3 million to $329.3 million.
- At July 3, cash was $329.3 million and current assets were $922.3 million against current liabilities of $384.0 million. Receivables were $363.4 million and inventories $201.9 million.
- Long-term debt was $551.0 million carrying value, comprising $350 million of 7.0% subordinated notes due 2017 and $200 million of 9.25% notes due 2019. The new $400 million secured revolving facility, maturing in 2016, had no borrowings and $380.4 million of available capacity; the company reported covenant compliance.
Material changes and management commentary
- Operating results benefited from higher revenue, completed restructuring actions, manufacturing and Lean Enterprise initiatives, acquisitions, and higher equity-method investment income. Prior-year cost of sales included $4.8 million of restructuring costs in Q2 and $9.8 million in the first half; 2011 had no significant such costs.
- SG&A and R&D increased, reflecting strategic initiatives, acquisitions and product development; their growth was below revenue growth for SG&A.
- Both ICM, acquired for $21.9 million in January, and Brazilian industrial cable maker Poliron, acquired for $29.2 million in April, were included in the Americas segment. Each acquisition was described as individually not material to reported results.
- Management said it expected operating activities to generate cash for the full year and considered liquidity sufficient for working capital, capital spending, retirement contributions, dividends, share repurchases and near-term strategies. No specific revenue or earnings guidance was provided in the supplied filing text.
- In July, the board authorized up to $150 million in share repurchases. In August, Belden entered a $25 million prepaid variable share repurchase agreement funded from cash; no shares had been repurchased under the program as of August 10.
Risks, contingencies and unusual items
- Management cited exposure to economic conditions and demand, competition, commodity and energy costs, currencies, acquisitions and integration, execution of strategic initiatives, product development, manufacturing realignment, tax-rate variability, and political, regulatory and repatriation risks in emerging markets.
- Commodity price movements, particularly copper, can affect selling prices, revenue and gross margin; management noted that their effects are estimates and vary across transactions.
- Belden reported 81 pending asbestos-related personal injury cases as of July 22, 2011, among many defendants. It stated that it had been dismissed or agreed to dismissal in more than 400 similar cases and did not expect pending proceedings to have a material adverse effect, while acknowledging litigation outcomes are uncertain.
- Routine legal and environmental contingencies were accrued when probable and reasonably estimable. Standby letters of credit, bank guaranties and surety bonds totaled $10.7 million, $7.1 million and $1.7 million, respectively.
- Q2 and first-half 2011 tax expense included a $2.4 million benefit from final settlement of a foreign tax audit. 2010 comparisons included a $1.5 million escrow settlement gain and a $2.7 million derivative loss in interest expense; neither item recurred in 2011.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in market-risk exposure since year-end 2010.
Important facts for investors to verify
- How much reported revenue and margin expansion came from organic volume and operating improvements versus acquisitions, pricing and foreign exchange.
- Whether receivables and inventory growth convert to cash; first-half working-capital changes used $49.8 million, and inventory turns declined to 7.5 from 7.8 a year earlier.
- The terms, covenant headroom and potential borrowing costs of the new credit facility, and the cash and leverage effects of the announced repurchases.
- Acquisition integration and performance, particularly Poliron’s emerging-market exposure, and the durability of segment growth and margins.
- Developments in asbestos litigation and uncertain tax matters, alongside commodity-price, currency and geopolitical risks.