Belden Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Belden supplies signal-transmission products through Broadcast, Enterprise Connectivity, Industrial Connectivity and Industrial IT platforms. This unaudited quarter ended June 29, 2014; comparisons are with the quarter ended June 30, 2013. Results include Grass Valley from March 31 and ProSoft from June 11, 2014.
Financial performance
Amounts below are in millions, except per-share data. Cash flow figures are for the six months ended June 29, 2014.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $600.9 | $529.5 | $1,088.6 | $1,037.0 |
| Gross profit | $204.4 | $179.2 | $380.1 | $346.5 |
| Gross margin | 34.0% | 33.8% | 34.9% | 33.4% |
| Operating income | $12.3 | $53.9 | $61.8 | $98.2 |
| Income from continuing operations | $0.015 | $29.5 | $25.2 | $51.7 |
| Net income | $0.015 | $29.5 | $24.6 | $51.7 |
| Diluted EPS | $0.00 | $0.66 | $0.56 | $1.15 |
- Q2 revenue grew 13.5%; six-month revenue rose 5.0%. Acquisitions contributed $69.5 million of revenue in each reported period. Lower selling prices, primarily from lower copper costs, reduced revenue; volume and channel-inventory movements varied by period.
- Q2 operating margin was approximately 2.1%, versus 10.2% a year earlier. Reported operating income included $38.2 million of severance, restructuring and integration costs, $7.4 million of acquired-inventory fair-value charges, and $15.8 million of intangible amortization. Q2 pretax loss was $5.8 million; a $5.8 million tax benefit brought net income to approximately break-even.
- For the first half, operating cash flow was $10.6 million, compared with a $16.5 million use in 2013. Capital expenditures were $21.0 million. Investing cash outflow was $333.4 million, including $311.5 million net cash used for acquisitions. Financing provided $155.3 million.
- At June 29, cash and equivalents were $445.0 million, total debt was $1,561.6 million and long-term debt was $1,559.1 million. The company had no revolver borrowings and reported $335.0 million of available borrowing capacity. Current assets were $1,178.7 million and current liabilities $475.0 million.
Material changes and segment trends
- Grass Valley was acquired for $218.0 million and ProSoft for $105.0 million. Their purchase-price allocations remained preliminary. Goodwill and intangible assets increased substantially following the acquisitions.
- Broadcast revenue rose 49.0% in Q2 to $248.1 million, largely due to Grass Valley; the segment reported a $26.3 million operating loss, including significant restructuring, amortization and inventory fair-value costs.
- Enterprise Connectivity revenue fell 8.8% to $121.3 million; operating income was $13.7 million. Industrial Connectivity revenue increased 3.7% to $178.2 million, while operating income declined 24.7% to $18.3 million. Industrial IT revenue fell 8.4% to $53.3 million and operating income fell 34.9% to $6.0 million.
- Long-term debt increased from $1,364.5 million at year-end 2013 to $1,559.1 million, including issuance of $200 million of 5.25% senior subordinated notes due 2024. The company repurchased $31.2 million of shares in the first half and paid $4.4 million in dividends.
Outlook, risks and contingencies
- Management expected to incur approximately $32 million of additional severance, restructuring and integration costs in the second half of 2014, including ProSoft integration. The productivity program was expected to reduce annual operating expenses by approximately $18 million, with benefits beginning in the second half of 2014. Management said it expected operating activities to generate cash in 2014 and considered liquidity adequate for current needs; a significant acquisition could require external financing. No specific revenue or EPS guidance was provided in the filing text.
- Management cited risks including economic conditions, demand and competition, channel inventory, copper and other input costs, currency movements, execution and integration of acquisitions, productivity initiatives, tax-rate variability, and potential impairment of goodwill or intangible assets.
- The company reported routine litigation and environmental contingencies; accrued environmental and legal liabilities were described as not material. It disclosed a disputed remediation matter involving a former property in Kingston, Canada, which management did not believe would have a material adverse effect based on current information, while noting the outcome was uncertain. Standby letters of credit, bank guaranties and surety bonds totaled $11.5 million.
- A $3.8 million escrow receivable from the 2010 Trapeze sale remained subject to negotiations with the buyer. The company also recorded a $0.6 million after-tax loss in the first half related to settling a working-capital adjustment on the Thermax and Raydex sale.
Investor verification points
- Review the composition and cash-payment timing of the $38.2 million Q2 restructuring and integration charge, and whether the projected $18 million annual savings are achieved.
- Track acquired-business revenue, profitability, integration progress and final purchase-price allocations, particularly goodwill and acquired intangible valuations.
- Assess underlying segment performance apart from acquisition effects, purchase-accounting charges, restructuring costs and channel-inventory changes.
- Monitor cash conversion, working-capital requirements, acquisition spending, debt levels and availability under the asset-based revolver.
- Follow the Kingston environmental matter, Trapeze escrow negotiations and other legal or tax contingencies for changes in estimates or materiality.