Belden Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 30, 2019; six-month results are compared with the six months ended July 1, 2018. Belden provides signal-transmission solutions through its Enterprise Solutions and Industrial Solutions segments.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $637.5 million | $668.6 million | -4.7% |
| Gross profit / margin | $241.0 million / 37.8% | $257.6 million / 38.5% | Profit -6.4% |
| Operating income / margin | $61.1 million / 9.6% | $56.5 million / 8.5% | +8.2% |
| Net income attributable to Belden common stockholders | $33.5 million; diluted EPS $0.84 | $20.1 million; diluted EPS $0.49 | |
| Adjusted EBITDA / margin | $101.2 million / 15.9% | $122.6 million / 18.3% | -17.5% |
For the first six months, revenue was $1,224.7 million (-3.9%), operating income $105.6 million (+4.8%), net income attributable to common stockholders $49.9 million, and diluted EPS $1.26 versus $0.34. Adjusted EBITDA was $188.2 million (-16.7%) and its margin was 15.4% versus 17.7%.
Cash flow and balance sheet: Six-month operating cash flow was $21.6 million, compared with cash used of $29.4 million in the prior-year period. Capital expenditures were $50.8 million; acquisition spending, net of acquired cash, was $50.5 million. Cash declined $125.4 million from year-end to $295.2 million. At June 30, current assets were $1,116.5 million and current liabilities $590.0 million. Long-term debt carrying value was $1,457.6 million (approximately $1,162.3 million net of cash); the company had no revolver borrowings and $320.9 million of available capacity. Operating lease liabilities totaled $95.8 million.
Material changes and segment results
- Revenue declines reflected lower volume, unfavorable foreign-currency translation, and lower copper prices, partly offset by acquisitions. Management attributed most of the volume weakness to Enterprise Solutions; Industrial Solutions volume improved.
- Enterprise Solutions Q2 revenue fell 7.5% to $369.9 million and segment EBITDA fell 23.9% to $53.5 million. Management cited softer demand in final-mile broadband and live media production.
- Industrial Solutions Q2 revenue declined 1.5% to $267.7 million; segment EBITDA fell 10.8% to $47.5 million, partly reflecting lower revenue and product-development investment.
- Operating income increased despite lower sales, mainly because restructuring and integration costs were substantially lower than in Q2 2018. Prior-year results also included a $3.0 million debt-extinguishment loss in Q2 and $23.0 million for the first half.
Outlook, management commentary, risks and unusual items
- Management expects operating activities to generate cash in 2019 and believes available liquidity is sufficient for working capital, capital expenditures, retirement contributions, repurchases, dividends, and near-term operating plans. No numerical revenue or earnings guidance is provided.
- Belden acquired Opterna for a preliminary net purchase price of $61.5 million and acquired the FutureLink product line for $5 million. Opterna contributed $8.8 million of Q2 revenue; its preliminary purchase-price allocation includes $45.0 million of goodwill. The company expects about $3.0 million of additional Opterna/FutureLink integration costs, mostly by year-end 2019.
- A $6.4 million tax benefit associated with changes to the valuation allowance for foreign tax credits and foreign restructuring contributed to lower effective tax rates: 10.9% in Q2 and 13.8% for the first half, versus 24.5% and 30.5%, respectively, a year earlier.
- Foreign exchange, copper and other commodity prices, channel inventory, economic conditions, customer demand, and competition may affect results. About 50% of first-half revenue was from customers outside the U.S.
- The company is cooperating with an SEC investigation concerning a material weakness in internal controls reported as of December 31, 2017; management believes it will not have a material adverse effect. Belden reported no material change in previously disclosed risk factors and considers other pending routine litigation not expected to be materially adverse, while noting outcomes remain uncertain.
- On July 15, 2019, mandatory convertible preferred stock converted into approximately 6.9 million common shares. Belden also repurchased 0.5 million shares in July for $27.2 million. These subsequent events affect capital structure and share count.
Important facts for investors to verify
- Whether Enterprise Solutions demand stabilizes, particularly in final-mile broadband and live media production, and whether Industrial Solutions growth can offset weakness.
- Drivers of the adjusted EBITDA and margin decline, including unfavorable mix, and the extent to which reported improvement in GAAP operating income reflects lower prior-year restructuring costs.
- Cash conversion and funding needs given first-half operating cash flow of $21.6 million versus $50.8 million of capital expenditures and $50.5 million of acquisition spending.
- Opterna’s final purchase accounting, earnout exposure (maximum $25.0 million), integration costs, and expected operating contribution.
- Effects of the preferred-stock conversion and ongoing repurchases on diluted share count, liquidity, and per-share results; and developments in the SEC investigation.