Belden Inc. — Q3 2014 Form 10-Q
Business context and period. Belden supplies signal-transmission products through Broadcast, Enterprise Connectivity, Industrial Connectivity, and Industrial IT platforms. The third quarter ended September 28, 2014; the filing also reports the nine months ended that date. Comparisons are with the quarter and nine months ended September 29, 2013.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $610.8 | $522.5 | $1,699.4 | $1,559.4 |
| Gross profit / margin | $221.7 / 36.3% | $182.8 / 35.0% | $601.8 / 35.4% | $529.4 / 34.0% |
| Operating income / margin | $58.0 / 9.5% | $53.9 / 10.3% | $119.8 / 7.1% | $152.1 / 9.8% |
| Income from continuing operations | $33.8 | $29.1 | $59.0 | $80.8 |
| Net income | $33.8 | $29.1 | $58.5 | $80.8 |
| Diluted EPS | $0.77 | $0.65 | $1.32 | $1.80 |
| Operating cash flow | Not stated separately | Not stated separately | $64.8 | $50.8 |
| Capital expenditures | Not stated separately | Not stated separately | $31.1 | $31.4 |
- Q3 revenue increased 16.9%, while operating income rose 7.6%; nine-month revenue grew 9.0%, but operating income fell 21.2%. Acquisitions contributed $80.6 million to Q3 and $150.1 million to nine-month revenue growth.
- Q3 gross margin improved year over year, but operating margin contracted. Nine-month operating results included substantial restructuring, integration, acquisition-related amortization, and inventory fair-value charges.
- Nine-month net cash used in investing was $343.3 million, primarily reflecting $313.1 million of net acquisition spending. Financing provided $120.4 million. Cash declined by $164.2 million from year-end 2013 to $449.1 million.
- At September 28, cash was $449.1 million; current assets were $1,168.9 million and current liabilities $470.1 million. Debt totaled $1,538.7 million, including $2.5 million current maturities. The revolver had no borrowings and $330.2 million of available borrowing capacity.
- Q3 and nine-month effective tax rates were unusually low at 7.3% and 4.2%, respectively, reflecting tax benefits from uncertain-tax-position reductions, return-to-provision adjustments, and foreign tax-rate differences.
Material changes and segment trends
- Grass Valley, acquired in March 2014, and ProSoft, acquired in June 2014, expanded Broadcast and Industrial IT revenue. Their preliminary purchase-price allocations include significant goodwill and intangible assets; Grass Valley reported a $30.5 million pretax loss for the nine months since acquisition, including acquisition-related items.
- Broadcast revenue rose 44.4% in Q3 and 34.1% for the nine-month period, largely due to Grass Valley. Broadcast reported a nine-month operating loss of $2.3 million, burdened by restructuring, amortization, and purchase-accounting costs.
- Enterprise Connectivity revenue declined 6.5% in Q3 and 7.5% for nine months, as Belden shifted toward higher-value products and away from lower-margin cable. Operating income edged higher in both periods.
- Industrial Connectivity Q3 revenue rose 2.5%, but nine-month revenue fell 1.3%; operating income declined 8.6% and 16.3%, respectively. Industrial IT revenue increased 25.2% in Q3 and 2.8% for nine months, while nine-month operating income fell 15.8%.
- Long-term debt increased from $1,364.5 million at year-end 2013 to $1,536.2 million. Belden issued $200 million of 5.25% subordinated notes due 2024 in June 2014; interest expense also increased year over year.
Outlook, commentary, risks, and unusual items
- Management expected 2014 operating activities to generate cash and stated that liquidity was sufficient for working capital, capital expenditures, retirement-plan contributions, repurchases, dividends, and short-term strategies. A significant acquisition could require external financing.
- The productivity program is expected to reduce operating expenses by approximately $18 million annually; management said initial benefits began in Q3. Belden expected approximately $23 million of additional restructuring and integration costs in Q4 2014, with most program liabilities expected to be paid in the remainder of 2014 and first half of 2015.
- Key sensitivities identified include demand and economic conditions, channel inventory, competition, copper and other input costs, currency movements, acquisition integration and performance, execution of productivity initiatives, and tax rates. Falling copper costs reduced reported revenue through lower selling prices; channel inventory declines also weighed on some sales.
- Management cited routine litigation and environmental matters as not currently expected to have a material adverse effect. A Kingston, Ontario contamination matter remained uncertain; the company was assessing potential liability and remediation costs. Standby letters of credit, bank guarantees, and surety bonds totaled $11.1 million.
- The nine-month period included a $0.6 million after-tax loss related to settlement of a working-capital adjustment for a previously sold business. Belden also continued negotiations over a $3.8 million escrow receivable related to the sale of Trapeze Networks.
- Management reported no material change in market-risk exposure, no material change in risk factors from the 2013 Form 10-K, and effective disclosure controls. The filing provides no specific consolidated earnings or revenue guidance.
Investor verification priorities
- Assess how much reported growth and future performance depend on Grass Valley and ProSoft, including Grass Valley’s losses and the still-preliminary acquisition valuations.
- Reconcile reported results with the $48.8 million of nine-month restructuring and integration costs and other purchase-accounting charges; verify the timing and realization of projected savings and remaining costs.
- Monitor operating cash conversion, working-capital movements, acquisition spending, and cash levels alongside debt and available revolver capacity.
- Evaluate whether Enterprise revenue declines, channel inventory changes, and lower copper-related pricing persist, and whether segment margins recover.
- Confirm the durability of the low effective tax rate and track resolution of the Kingston environmental matter and Trapeze escrow negotiations.