Belden Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Belden supplies signal-transmission products and software through five segments: Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.309 billion | $2.308 billion |
| Gross profit / gross margin | $918.2 million / 39.8% | $819.4 million / 35.5% |
| Operating income / margin | $140.6 million / 6.1% | $163.1 million / 7.1% |
| Net income attributable to Belden stockholders | $66.2 million | $74.4 million |
| Diluted EPS | $1.54 | $1.69 |
| Operating cash flow | $236.4 million | $194.0 million |
| Capital expenditures | $55.0 million | $45.5 million |
| Cash and cash equivalents at year-end | $216.8 million | $741.2 million |
| Total debt at year-end | $1.753 billion | $1.768 billion |
Simple operating cash flow less capital expenditures was approximately $181.4 million in 2015. The year-end current ratio was approximately 1.53, calculated from current assets of $843.2 million and current liabilities of $549.3 million. Debt less cash was approximately $1.536 billion.
Adjusted revenue, a non-GAAP measure, increased 1.7% to $2.361 billion. Adjusted EBITDA rose 11.5% to $400.7 million, and adjusted EBITDA margin improved to 17.0% from 15.5%. These measures exclude specified items and should be read alongside GAAP results.
Fourth-quarter revenue was $597.2 million versus $608.9 million in Q4 2014. Q4 operating income was $57.0 million versus $43.3 million; income from continuing operations was $49.7 million versus $15.4 million.
Material changes and segment trends
- Reported full-year revenue was essentially flat. Acquisitions added revenue, offset by $132.1 million of unfavorable currency translation, lower copper-related revenue of $40.6 million, and lower unit volumes.
- Operating income fell 13.8% and income from continuing operations before taxes fell 51.0%. Higher SG&A, R&D, amortization and net interest expense outweighed higher gross profit. Net interest expense increased 23.3% to $100.6 million.
- Broadcast revenue declined 3.0% to $900.6 million, with weakness in broadcast infrastructure partly offset by broadband connectivity. Industrial Connectivity revenue declined 11.6% to $603.4 million amid weaker industrial demand, lower energy prices and currency effects. Industrial IT revenue declined 3.6% to $244.3 million.
- Enterprise Connectivity revenue fell 2.3% to $445.2 million, while segment EBITDA rose 8.3% to $71.5 million, reflecting improved mix, volume and productivity.
- Network Security, established following the Tripwire acquisition, reported 2015 segment revenue of $167.1 million and segment EBITDA of $44.6 million. The segment was absent in the prior-year comparison.
Outlook, risks and unusual items
- Management’s stated goals are annual adjusted revenue growth of 5–7% on a constant-currency basis, adjusted EBITDA margin of 18–20%, return on invested capital of 13–15%, and free cash flow exceeding adjusted net income. These are strategic goals, not a specific 2016 earnings forecast.
- Management expects continued pressure on industrial segments from a strong U.S. dollar and lower energy prices. Broadcast infrastructure demand was also affected by deferred customer capital spending and industry transitions.
- Restructuring programs are expected to produce approximately $18 million of annualized savings in industrial operations and $30 million in Broadcast. Additional expected 2016 restructuring costs were approximately $9 million and $4 million, respectively.
- Tripwire was acquired for $703.2 million in January 2015. It contributed $116.6 million in reported revenue, but a $47.8 million loss from continuing operations before taxes; reported revenue was reduced by about $50.4 million due to acquired deferred-revenue fair-value accounting. Belden acquired M2FX in January 2016 for approximately $16 million initially, with up to $9 million of additional consideration.
- 2015 included $47.2 million of severance, restructuring and acquisition-integration costs and a $9.2 million Tripwire-related accelerated-vesting compensation charge. The effective tax rate was negative 66.5%, reflecting a $26.6 million tax benefit, including tax-planning benefits and a valuation-allowance reduction; this materially supported net income.
- Key exposures include foreign exchange, copper and other input costs, economic and end-market weakness, acquisition integration, competition, distributor concentration and cybersecurity. Anixter accounted for 12% of 2015 revenue.
- A jury found that Corning willfully infringed two PPC patents; post-trial motions remained pending and Belden had recorded no amount for the matter. Belden said other pending legal matters were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s control assessment and the auditor’s control audit excluded Tripwire, which represented $790.1 million of year-end assets and $116.6 million of 2015 revenue.
Important facts for investors to verify
- Whether planned restructuring savings materialize and whether the disclosed industrial and Broadcast demand weakness persists.
- Tripwire’s post-acquisition profitability, revenue recognition effects, integration progress and the realized return on the $703.2 million purchase price.
- Debt repayment capacity, interest burden, available revolver capacity ($242.5 million at year-end), and the effect of foreign cash that management intended to keep invested overseas.
- The sustainability of the unusually favorable 2015 tax benefit and the realizability of deferred tax assets and tax-credit carryforwards.
- The status and financial consequences, if any, of the Corning patent litigation and the completion of internal-control integration for Tripwire.