Belden Inc. — Q1 2015 Form 10-Q
Business context and period. Belden provides signal-transmission products and solutions through five segments: Broadcast, Enterprise Connectivity, Industrial Connectivity, Industrial IT, and Network Security. The fiscal quarter ended March 29, 2015 and included 88 days; the comparable quarter ended March 30, 2014 and included 89 days. Amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| GAAP revenue | $547.0 | $487.7 |
| Gross profit / margin | $207.6 / 38.0% | $175.7 / 36.0% |
| Operating income / margin | $4.9 / 0.9% | $49.5 / 10.2% |
| Income (loss) from continuing operations | $(19.6) | $25.2 |
| Net income (loss) per diluted share | $(0.46) | $0.56 |
| Adjusted revenue | $569.5 | $488.3 |
| Adjusted EBITDA / margin | $88.5 / 15.5% | $73.5 / 15.1% |
| Operating cash flow | $(48.2) | $(20.4) |
| Capital expenditures | $15.5 | $10.4 |
Adjusted revenue and Adjusted EBITDA are non-GAAP measures; the filing reconciles them to GAAP results. GAAP revenue rose 12.2% year over year, while adjusted revenue rose 16.6%. Gross profit increased, but operating income and earnings fell sharply as higher selling, R&D, amortization, restructuring and acquisition-related costs more than offset revenue growth. The filing reports a $0.7 million income tax expense despite the pretax loss, reflecting the forecasted annual tax rate and tax-planning effects.
At March 29, cash and equivalents were $166.7 million, down from $741.2 million at year-end. Current assets were $877.3 million and current liabilities $484.0 million. Total debt and other borrowings were $1,906.9 million, including $200.0 million drawn on the $400 million revolving facility; available revolver capacity was $114.0 million. Cash less reported debt was approximately $1.74 billion net debt. The company declared a $0.05 per-share dividend.
Material changes and drivers
- Tripwire was acquired on January 2, 2015 for $703.2 million, funded with cash and $200 million of revolver borrowings. Its results are included from the acquisition date; Network Security is now a reportable segment.
- Acquisitions of Tripwire, Grass Valley, ProSoft and Coast contributed $86.0 million to the increase in GAAP revenue. Higher unit volumes added $10.6 million; lower copper costs reduced revenue by $8.8 million and unfavorable currency translation reduced it by $28.5 million.
- Operating income included $14.5 million of severance, restructuring and acquisition-integration costs, $26.5 million of intangible amortization, and $9.4 million of acquisition purchase-accounting effects. Tripwire-related accelerated vesting compensation was $9.2 million. Acquired deferred-revenue fair-value adjustments reduced reported revenue by $22.5 million in total, including approximately $18.4 million related to Tripwire.
- Segment revenue and EBITDA were mixed: Broadcast revenue rose 28.3% and EBITDA 11.7%, with margin declining to 13.7%; Enterprise revenue fell 3.4%; Industrial Connectivity revenue fell 4.0% while EBITDA rose 2.1%; Industrial IT revenue rose 12.9% and EBITDA 15.6%. Network Security reported $37.1 million revenue and $9.9 million EBITDA for the post-acquisition quarter.
- Operating cash use increased to $48.2 million. Investing cash use of $710.8 million was primarily the $695.3 million net cash payment for Tripwire. Financing provided $190.1 million, principally from the $200 million revolver borrowing. Working-capital changes were a significant cash use.
Outlook, commentary and risks
- Management expected operating activities to generate cash in 2015 and considered liquidity sufficient for current working capital, capital expenditures, retirement-plan contributions, dividends and stated operating strategies. A significant future acquisition could require external financing.
- Management expected approximately $12 million of additional severance, restructuring and integration costs during the remainder of 2015, and stated that the productivity program was substantially realizing expected annualized operating-expense savings of approximately $18 million. Further restructuring actions and costs remain possible.
- Key stated risks include global economic and end-market weakness, foreign exchange and commodity-price volatility, channel inventory and distribution changes, competitive pressures, product and cyber risks, acquisition integration and synergy execution, tax-rate variability, and possible goodwill or intangible-asset impairment.
- Tripwire’s purchase-price allocation was preliminary. It included $477.6 million of goodwill, which the company stated was not tax-deductible, and $306.0 million of acquired intangible assets. Estimates and valuations may change as acquisition information is finalized.
- The company reported routine legal matters and environmental proceedings concerning a former Kingston, Ontario property. It did not expect a material adverse effect based on current information, but noted the outcome was uncertain. Standby letters of credit, surety bonds and bank guarantees totaled $7.5 million, $1.8 million and $1.6 million, respectively.
Important facts for investors to verify
- How much of reported revenue and EBITDA growth reflects acquired businesses versus organic growth, and how purchase-accounting adjustments affect comparability.
- Tripwire’s finalized purchase-price allocation, ongoing integration costs, and realization of expected synergies.
- Cash generation and working-capital trends, particularly whether operating cash flow improves after the seasonally cash-consuming first quarter.
- Debt levels, borrowing-base availability and covenant headroom under the revolving facility, as well as the cost of financing.
- Whether the approximately $18 million annualized productivity savings persist and whether additional restructuring charges arise.
- The eventual resolution and potential exposure, if any, related to the Kingston environmental matter and other contingencies.