Belden Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Fiscal quarter ended June 28, 2020; comparisons are with the quarter ended June 30, 2019. Belden supplies specialty networking solutions through Enterprise Solutions and Industrial Solutions. Grass Valley is classified as discontinued operations.
Financial results
Amounts are in millions of dollars unless noted otherwise. “Q2” refers to the three months ended June 28, 2020; “first half” refers to the six months ended that date.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $424.8 | $548.4 | $888.3 | $1,048.5 |
| Gross profit | $149.9 | $205.1 | $320.4 | $391.9 |
| Gross margin | 35.3% | 37.4% | 36.1% | 37.4% |
| Operating income | $17.1 | $58.8 | $46.8 | $106.3 |
| Continuing-operations income | $3.2 | $41.4 | $18.1 | $69.3 |
| Net income (loss) | $(67.9) | $42.3 | $(79.1) | $67.5 |
| Adjusted EBITDA and margin | $49.1; 11.6% | $91.6; 16.7% | $110.0; 12.4% | $168.0; 16.0% |
- Q2 revenue declined 22.5%; first-half revenue declined 15.3%. Management attributed the decreases mainly to lower sales volume, including channel-inventory changes, with additional unfavorable effects from copper prices and currency translation. Acquisitions partly offset the declines.
- Q2 operating income fell 70.9%. Lower gross profit was the principal factor; SG&A savings partly offset the revenue and margin pressure.
- Net losses primarily reflect Grass Valley impairment charges: $89.8 million in Q2 and $113.0 million in the first half. Continuing operations remained profitable, but at substantially lower levels than in 2019.
- First-half operating cash flow was a use of $12.1 million, compared with a source of $21.6 million in 2019. Capital expenditures were $41.7 million. Investing cash use was $38.1 million; financing provided $20.0 million.
- Cash and cash equivalents, including discontinued operations, totaled $393.0 million at June 28, 2020; $195.0 million was held outside the U.S. Long-term debt carrying value was $1,537.4 million, including $90.0 million drawn on the revolver. Revolver availability was $177.8 million.
- At June 28, total assets were $3,177.0 million and stockholders’ equity was $829.9 million. Balance-sheet cash excluding discontinued operations was $359.7 million.
Material changes and business developments
- Both segments reported lower revenue and EBITDA. Q2 Enterprise Solutions revenue was down 17.1% and segment EBITDA down 37.5%; Industrial Solutions revenue was down 26.9% and EBITDA down 52.6% year over year.
- Belden drew $190.0 million on its revolving credit facility during Q2 as a precaution amid COVID-19 uncertainty, then repaid $100.0 million. The facility matures in 2022; its borrowing rate is variable.
- Belden paid $31.4 million in cash for the final Snell Advanced Media earnout during the first half and repurchased $35.0 million of common stock. The quarterly common dividend remained $0.05 per share.
- After quarter-end, on July 2, 2020, Belden completed the sale of Grass Valley. Consideration included $120.0 million gross cash (approximately $67.0 million net of cash delivered), a five-year $175.0 million seller’s note, up to $88.0 million of payment-in-kind interest, and potential earnouts of up to $178.0 million. Belden also invested $3.0 million for a 9% equity interest, with a put right through October 31, 2020. Cash proceeds are subject to working-capital adjustments.
- Effective January 1, 2020, certain product lines were transferred from Enterprise Solutions to Industrial Solutions; prior segment data was recast.
Outlook, risks, and unusual items
- Management said COVID-19 had reduced demand in several end markets and expected continued adverse effects from uncertainty, customer demand, social-distancing measures, and supplier or facility disruptions. Q2 revenue was down sequentially from Q1, unlike typical seasonal patterns.
- No specific revenue or earnings guidance was provided. Management expected operating activities to generate cash in 2020 and said available liquidity was sufficient for current working capital, capital spending, retirement contributions, repurchases, dividends, and short-term operating strategies; a significant acquisition could require external financing.
- The 2019 cost-reduction program is expected to lower annual SG&A by approximately $60.0 million, with $40.0 million expected in 2020 and the full benefit in 2021; Belden expected approximately $22.0 million of additional program costs. The acquisition integration program was expected to incur approximately $1.5 million of additional costs.
- Interim goodwill testing found fair values above carrying values, but the excess ranged from only 2% to 206% across reporting units. Belden warned that prolonged weak conditions or results below assumptions could lead to a potentially material impairment.
- Other exposures include foreign-exchange movements, copper and other commodity prices, channel inventory, and COVID-related demand uncertainty. The filing reported no material change in previously disclosed risk factors. Belden continued to cooperate with an SEC investigation related to a previously disclosed internal-control material weakness; management did not expect a material adverse outcome.
- Belden adopted the expected-credit-loss accounting standard in 2020, recording a $2.9 million cumulative-effect reduction to retained earnings. The filing also reported environmental and legal contingency accruals as not material and stated that pending litigation was not expected to have a material adverse effect based on currently available facts.
Important facts for investors to verify
- How the Grass Valley seller’s note, PIK interest, potential earnouts, working-capital adjustment, and 9% equity interest affect ultimate proceeds and cash realization.
- Whether demand, channel inventories, and segment margins stabilize after the sharp Q2 and first-half declines, particularly in Industrial Solutions.
- Cash generation and liquidity after the first-half operating cash outflow, including revolver availability, debt service, and the use of cash held in foreign subsidiaries.
- Whether cost-reduction savings are achieved on schedule and offset ongoing restructuring costs and lower sales.
- Goodwill valuation assumptions and impairment headroom, especially for reporting units with limited fair-value excess.
- Further developments in the SEC investigation and any material changes to litigation, COVID-19 effects, or the company’s outlook.