Belden Inc. — 2016 Form 10-K Summary
Business context and reporting period
Belden designs and sells signal-transmission products and solutions across five reportable segments: Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The fiscal year and fourth quarter ended December 31, 2016. Approximately 45% of annual sales were outside the United States; Anixter represented 12% of revenue.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $2.357 billion (+2.1%) | $2.309 billion |
| Gross profit / margin | $981.0 million / 41.6% | $918.2 million / 39.8% |
| Operating income / margin | $223.9 million / 9.5% | $140.6 million / 6.1% |
| Income from continuing operations | $127.6 million | $66.5 million |
| Net income attributable to Belden common stockholders | $112.6 million; diluted EPS $2.65 | $66.2 million; diluted EPS $1.54 |
| Adjusted EBITDA / margin (non-GAAP) | $431.2 million / 18.3% | $400.7 million / 17.0% |
| Operating cash flow | $314.8 million | $241.5 million |
| Free cash flow (non-GAAP) | $261.2 million | $187.0 million |
Fourth-quarter revenue was $612.4 million versus $597.2 million in Q4 2015; operating income was $58.7 million versus $57.0 million. Q4 2016 net income attributable to Belden common stockholders was $24.6 million, including $8.7 million of preferred dividends, versus $49.7 million in Q4 2015. Q4 2016 included $10.3 million of patent-settlement royalty revenue.
At year-end, cash and cash equivalents were $848.1 million, current assets $1.479 billion, and current liabilities $570.3 million. Long-term debt, net of unamortized issuance costs, was $1.620 billion; gross debt principal was approximately $1.643 billion. The Revolver had no borrowings and $276.4 million of available capacity. Cash included $249.4 million held outside the U.S.; management said repatriation could incur U.S. tax. Operating cash flow less capital expenditures was approximately $260.8 million before the company’s stated non-GAAP free-cash-flow adjustments.
Material changes versus prior year
- GAAP revenue rose 2.1%, but adjusted revenue (non-GAAP) declined 0.1%. Volume growth in Broadcast and Enterprise and acquisition contributions were offset by lower copper costs and unfavorable currency translation. Revenue also reflected deferred-revenue purchase-accounting effects and patent royalties.
- Adjusted EBITDA increased 7.6%, with margin expanding from 17.0% to 18.3%, principally due to productivity initiatives. GAAP operating income improved substantially, though 2016 included a $23.9 million impairment charge on businesses classified as held for sale.
- Broadcast revenue grew 4.0% and segment EBITDA margin rose to 17.9%. Enterprise revenue was nearly flat; Industrial Connectivity revenue fell 3.0%; Industrial IT revenue fell 3.6%; and Network Security revenue fell 1.9%. Segment EBITDA increased in each segment year over year.
- Operating cash flow increased by $73.3 million. Investing cash outflow fell sharply from 2015, when $695.3 million was spent on acquisitions, to $73.3 million in 2016.
Outlook, management commentary, risks, and unusual items
- Management’s stated goals are 5–7% annual adjusted revenue growth in constant currency, 18–20% adjusted EBITDA margins, free cash flow exceeding adjusted net income, and 13–15% return on invested capital. These are targets, not a specific 2017 forecast. Management expected operating activities to generate cash in 2017 and considered liquidity sufficient for anticipated needs; a significant acquisition could require external financing.
- Management cited continued weakness in industrial markets tied to lower energy prices, a stronger U.S. dollar, and reduced customer capital spending. Broadcast customers had deferred some infrastructure spending amid industry transitions. Currency, commodity prices, channel inventories, competition, acquisition execution, and customer demand are material risks.
- Restructuring costs were $38.8 million in 2016. A manufacturing-footprint program is expected to incur a further approximately $15 million in 2017 and generate about $10 million of annualized savings beginning in the second half of 2017. Other programs were expected to provide annualized savings of approximately $18 million and $30 million, respectively.
- Belden issued $501.5 million net proceeds from 6.75% mandatory convertible preferred stock; absent earlier conversion, it is scheduled to convert in 2019 into approximately 6.2–6.9 million common shares. It also issued euro-denominated 4.125% notes due 2026 and used proceeds to repay its variable-rate term loan. The resulting preferred dividends reduced 2016 earnings attributable to common stockholders.
- The effective tax rate was negative 0.9%, reflecting tax-planning benefits, deferred-tax valuation-allowance changes, and other discrete items. The company retained a $104.8 million valuation allowance on deferred tax assets.
- A court entered a $61.3 million judgment for Belden subsidiary PPC in a patent case against Corning; Corning appealed, and Belden recorded no gain while the appeal remained pending. Separately, Belden agreed in principle to sell its MCS business and Hirschmann joint venture for $39 million and recognized a $23.9 million impairment.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s control assessment excluded acquired M2FX operations, which represented $18.4 million of year-end assets and $6.6 million of 2016 revenue.
Important facts for investors to verify
- Track organic and constant-currency performance separately from acquisition, deferred-revenue purchase-accounting, copper-price, and patent-settlement effects; adjusted measures are non-GAAP.
- Assess whether restructuring savings materialize as scheduled and whether industrial and broadcast demand recovers.
- Review debt maturities, interest costs, the preferred stock’s dividend and 2019 conversion terms, and the potential common-share dilution.
- Follow the Corning appeal and the proposed $39 million divestiture, including final proceeds and any further adjustments.
- Evaluate the sustainability of the unusually low 2016 tax rate and the realizability of deferred tax assets and carryforwards.