Black Box Corporation F3Q 2009 (Qtr End 12/27/08) Earnings Call Transcript

Jan.27.09 | About: Black Box (BBOX)

Black Box Corporation (NASDAQ:BBOX)

F3Q 2009 (Qtr End 12/27/08) Earnings Call Transcript

January 27, 2009 5:00 pm ET

Executives

Gary Doyle – Director, IR

Terry Blakemore – President and CEO

Mike McAndrew – VP, CFO, Secretary and Treasurer

Analysts

Joe Gagan – Atlantic Equity Research

Jeff Beach – Stifel Nicolaus

Nat Kellogg – Next Generation Equity Research

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Black Box Corporation Third Quarter Fiscal 2009 Earnings Call. At this time, all lines are in a listen-only mode; later there will be an opportunity for questions, and instructions will be given at that time. (Operator instructions) And as a reminder, this conference is being recorded.

I’ll now turn the conference over to Gary Doyle, Director of Investor Relations. Please go ahead, sir.

Gary Doyle

Thank you. Good evening, and welcome to Black Box Corporation’s third quarter fiscal 2009 earnings conference call.

My name is Gary Doyle and I am the Director of Investor Relations for Black Box. With us today are Terry Blakemore, President and CEO of Black Box Corporation, and Mike McAndrew, our Vice President and Chief Financial Officer.

Earlier today, we announced our third quarter fiscal 2009 results by issuing a press release and furnishing it to the Securities and Exchange Commission on Form 8-K. We also posted this press release to our website at blackbox.com. We will start today’s call with an overview of our results from Terry Blakemore, followed by a more detailed discussion from Mike and Terry. Following this, we will field questions as time allows.

Before we begin, and as a reminder, matters discussed in this call may contain forward-looking statements that involve risks and uncertainties concerning Black Box’s expected financial performance. Actual results may differ materially from expected results and reported results should not be considered as an indication of future performance. Potential factors that could affect our business and financial results include changes in economic conditions in our end market and in the general market at large. Additional factors are included in our most recent Form 10-K and today’s press release, including the ongoing SEC investigation and shareholder derivative lawsuits.

On this call and as presented in today’s press release, we will discuss some financial information that includes non-GAAP financial measures, including operating net income, operating earnings per share, free cash flow, EBITDA, adjusted EBITDA, and organic or same-office revenue comparisons. We will limit any non-GAAP financial discussions today to the specific measures in our press release. As I said earlier, our press release was filed with the SEC and posted to our website prior to this call. Please refer to the schedule that accompanies the press release for a reconciliation of non-GAAP financial measurements to the most directly comparable GAAP financial measurement and other supplemental information.

On the IR calendar, I would like to let everyone know Mike McAndrew will be attending the Next Generation Equity Research Third Annual Industrial Conference on March 3 in Chicago. Please check our website as that date approaches for a press release with more specific information on the conference.

Now, I would like to turn the call over to Mr. Terry Blakemore.

Terry Blakemore

Thanks, Gary.

I am pleased to report that our results for the third quarter demonstrates that in a challenging economic environment, the Black Box was able to generate diversified revenues and deliver double-digit margins and positive cash flow. Revenues for our third quarter were $262 million, a 1% increase from last year’s $258 million, and a 3% increase over last quarter’s $254 million. Year-to-date revenues were $758 million, a 2% decrease from last year’s $771 million.

Our third quarter operating earnings per share were $.88, up $0.03 from last year’s $0.85, and down $0.06 from last quarter’s record $0.94. Year-to-date operating earnings per share were $2.55 versus $2.45 for the same period last year. Our third-quarter free cash flow was $11 million compared to $23 million last year. On a sequential basis, comparison basis, our second-quarter free cash flow was $26 million. The year-to-date free cash flow stands at $49 million versus $38 million for the same period last year.

I will turn it over to Mike now for a more detailed discussion on our financial results.

Mike McAndrew

Thanks Terry.

As Terry just mentioned, we posted quarterly revenues of $262 million versus $258 million for the same period last year. Excluding the $32 million of revenue contribution in the third quarter related acquisitions and the negative $6 million impact from foreign currency, same office revenues for the third quarter are down $19 million or 8% over the third quarter of the prior year. This $90 million revenue decrease is partly driven by $6 million decrease in revenues resulting from the loss of Avaya distribution agreement we announced in August of 2007.

In the past, we have also adjusted for the impact of customer attrition related to the NextiraOne acquisition. Last quarter, 2Q09 was the final adjustment for that item. In addition, at a more macro level, we believe the remainder of the decrease in same office revenues is attributable to continued signs of caution from certain of our clients related to capital investments. In particular, we continue to see reduced capital spending in the retail and banking verticals.

Looking more deeply at our third-quarter revenues by the two segments that we report, the highlights are as follows. Initially from the service type segment perspective, our third-quarter revenues were comprised of $158 million or 60% of voice services revenue, $52 million or 20% of hotline products, and $52 million or 20% of data services.

Secondly, from a geographic segment perspective, our third-quarter revenues were comprised of $224 million or 85% from North America, $29 million or 11% from Europe, and $9 million or 4% from what we call all other, which is primarily the PacRim and the Latin America. On a year-to-date basis, total revenues $758 million versus prior year of $771 million.

Moving on to EPS, our third-quarter operating earnings per share were $0.88. This is up $0.03 from last year’s $0.85, and down $0.06 from last quarter’s record $0.94. This brings year-to-date operating EPS to $2.55 versus $2.45 for the same period last year. In the third quarter just ended, we took action is to right size our workforce relative to revenue decreases in certain markets. In total, we reduced our staff by approximately 100 team members during the third quarter. Accordingly, we have excluded approximately $1.7 million of employee severance costs from our operating expenses in the quarter.

We believe that the exclusion of these costs and the related tax impact provides a more accurate reflection of the company’s ongoing financial performance. Going forward, these actions will decrease our operating expenses by approximately $7 million annually. About half of the increase is related to cost of goods sold and the remainder relates to operating expense.

As of the noted in our press release, operating earnings per share excludes the following items

employees severance costs that I just discussed; acquisition integration costs; amortization of intangible assets on acquisitions; stock-based compensation expense; asset write off depreciation expense on acquisitions; historical stock option granting practice investigation costs; the change in fair market value of our interest rate swap and 409A expenses. Further details of these expenses can be found within today’s press release. In total, these excluded items represented $0.32 and $0.21 per share for the third quarter of fiscal 2009 and fiscal 2008 respectively. And these excluded items represented $0.44 and $0.71 per share for the year-to-date fiscal 2009 and year-to-date fiscal 2008 respectively.

GAAP diluted earnings per share for the third quarter were $0.56, an $0.08 decrease from last year’s $0.64, and a $0.26 decrease over last year’s quarters $0.82. Year to date GAAP diluted EPS was $2.11 versus $1.74 for the same period last year. GAAP cash provided by operating activities for the quarter was $30 million compared to $25 million for the same period last year. And on a sequential comparison basis, second quarter cash provided by operating activities was $26 million. GAAP cash provided by operating activities for year-to-date fiscal 2009 was $52 million, which compares to $37 million for the same period last year.

Third-quarter free cash flow was $11 million compared to $22 million last year. And on a sequential comparison basis, free cash flow was $26 million in the second quarter. Free cash flow for the year-to-date fiscal 2009 was $49 million compared to $38 million for the same period last year. Of our $11 million in free cash flow in the quarter, $10 million was used to fund acquisition activities, and an additional $1 million was used to pay dividends. We believe that free cash flow defined by the company as cash provided by operating activities, less net capital expenditures, less proceeds from option exercises, plus or minus foreign currency translation adjustments, is an important measurement of liquidity as it represents total cash available to the company.

Looking at EBITDA for the third quarter, it was $27 million, which compares to $28 million for the same period last year. And on a sequential quarter comparison basis, second quarter EBITDA was $30 million. EBITDA for year-to-date fiscal 2009 is $81 million compared to $78 million for the same period last year. Adjusted EBITDA for the quarter was $28 million compared to $28 million in the same period last year. And combining that to our second quarter of 2009, it was $30 million. Adjusted EBITDA for year-to-date fiscal 2009 stands at $83 million compared to $81 million for the same period last year.

We believe that EBITDA defined as income before income taxes plus interest, depreciation and amortization is a widely accepted measure of profitability that we believe will be used to measure the company’s inability to service its debt. Adjusted EBITDA defined as EBITDA plus noncash stock compensation expense may also be used to measure the company’s ability to service its debt.

Looking at some of our other key metrics at the end of the third quarter, we had cash and cash equivalents of $23 million, and total debt of $246 million, or a net debt position of $223 million. This is a $38 million increase from the net debt position of $185 million at the end of the second quarter. The increase in debt is attributable to the two acquisitions which we completed during the quarter. Currently our borrowing rate is 3.6%. Total availability under our line of credit is $350 million and as of December 31, we had approximately $100 million available for future borrowings. Our facility expires in January 2013.

Companywide DSOs were 54 days. This is an increase from the second quarter’s 50 days, and we look to make improvements in this area in the coming quarters to return to our target DSOs of 50 days. Accounts receivables reserves was $11 million or 6.4% of the gross AR balance. This compares to the second quarter’s AR reserve of $11.1 million or 6.6% of the gross AR balance.

Turning to inventory, our net inventory was $61.8 million with inventory turns of 8.6 times or 42 days. This compares to the second quarter net inventory of 62.7 million and 8.0 terms. Having reached our established goal of 8 turns in the second quarter, we will continue to stay focused on maintaining our turns throughout the balance of the fiscal year. Inventory reserves were $20.7 million or 25.1% of gross inventory, and this compares to the second quarter inventory reserves of $20.7 million or 24.8% of gross inventory.

For the quarter, new capital expenditures were $329, 000, bringing year-to-date CapEx to $1.9 million. Capital expenditures for FY09 is now targeted at approximately $2.5 million. Excluding the noncash impact of the interest rate swap discussed in today’s press release, interest expense for the third quarter was $3.3 million or 1.3% of revenues. This compares to second quarter interest expense of $2.8 million or 1.1% of revenues. And as I mentioned earlier, our current borrowing rate in history 3.6%. Our current tax rate stands at 36.5%.

Looking at backlog, our six-month order backlog now stands at $195 million compared to $196 million at the end of the second quarter, and $165 million at the end of the third quarter fiscal 2008. Approximately $12 million of the $195 million for this quarter is associated with acquisitions completed within the quarter. As a reminder, backlog represents expected revenue related to executed customer purchase orders or contracts that we estimate to be complete within 180 days of quarter end.

Relative to team member staffing, it stands at approximately 4,750. And although our team moves between data, voice and hotline groups, for perspective, our Black Box team breakdown approximately as follows

2,700 are mostly voice; 1,300 are mostly data, and 750 are mostly hotline. And as mentioned, the team does more around a bit, particularly from a DVH marketing perspective.

As of the end of the third quarter, the weighted average common and common equivalents shares stood at 17,533,000. And for the beginning of the fourth quarter, this number is an equivalent 17.5 million shares. There were no stock repurchases during the third quarter of fiscal 2009.

Looking at fiscal 2009, we are currently targeting reported revenues of between $990 million and $1.0 billion. We are adjusting our previously reported operating EPS range to $3.25 to $3.30 for the fiscal year. We continue to expect cash provided by operating activities in the range of 90% to 100% of operating net income. And as a reminder, this guidance is inclusive of our fiscal year to date acquisitions.

I would like to now turn the call back to Terry.

Terry Blakemore

Thanks, Mike.

Black Box’s results for the third quarter demonstrates the strength of our business model. Our well diversified customer base, and solutions offering has minimized the impact of a slowing global economy on our revenues. Our ability to effectively manage costs continues to provide double-digit operating margins and our consistent positive cash flow has allowed us to continue our stated goal of making selective strategic acquisitions. With that said, we recognized that we are not immune to the decrease in corporate capital expenditure and IT spending, which is occurring throughout the worldwide economy. Our customers in the banking and retail sectors have delayed or postponed large several projects.

As Mike mentioned earlier, the weakness in those sectors has negatively affected our organic growth. In addition, in those areas where revenue opportunities have held firm, we are experiencing some pricing pressures as other product and service providers vie to capture these opportunities.

Recently, one of our strategic partners, Nortel Networks Corporation announced that they were filing for creditor protection in Canada, the United States and Europe. During direct discussions with the leadership of Nortel, we were told that these actions were the fastest way to put Nortel on sound financial footing. We were also told that Nortel has sufficient liquidity to run their operations and restructure, while continuing to deliver innovation to their customers.

As many of you know, Black Box is one of Nortel’s elite North American channel partners. We do not anticipate any issues in securing the necessary products to service and provide maintenance to our Nortel client base. For many of those clients with whom we have installation in progress or a bid that’s yet to be awarded, we’re in active discussions with the client and Nortel to ensure that all concerned are satisfactorily at rest. Today our communications have been fulfilled.

It is important to note that we remain optimistic as certain sectors of our customer portfolio continue to show opportunity. Specifically, we see stability in the government, healthcare and education sectors. We’re also making investments in our business to ensure that we are providing our clients with full access to our full suite of offerings.

I am pleased to announce that we will be mailing the 2009 edition of our award-winning Black Box catalogue this week. This year’s catalog features more than 500 brand new products which complements the existing 118,000 products available in the catalog and on our website. In addition to the latest products, our catalog continues to offer our client tutorials, buying guides and multiple ways to access our unparalleled free technical support.

We also recently announced the launch of our completely redesigned website. The new site fully incorporates information from the voice communications, data infrastructure and product divisions into a comprehensive and easy to navigate site. New functions include enhanced research, streamlined navigation and a recommendation engine that automatically suggests alternate products and accessories. The new site also provides access to Black Box’s deep technical resources. The site is accessible at blackbox.com.

As we enter the fourth quarter, our strong business model has positioned Black Box to meet the challenges of the expected downward pressure on revenues. In spite of the economic uncertainties that lay ahead, our fundamental operating objectives remain unchanged. And we will continue to provide our clients with the highest levels of technical service throughout the world. We remain committed to evaluating potential acquisition opportunities. We believe firmly that expansion of our capabilities through M&A will benefit our customers and shareholders while solidifying our position as a market leader.

We are pleased with our operating earnings per share, revenues and cash flow results, given the constraints on the current economic environment. With respect to achieving our financial objectives for the year, we remain committed to maximize our profitability, through effective management of our cost structure, consistent with expected revenue levels over the coming quarters.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Joe Gagan with Atlantic Equity Research. Go ahead please.

Joe Gagan – Atlantic Equity Research

Hi, guys. How are you doing?

Terry Blakemore

Fine, Joe.

Mike McAndrew

Hey, Joe. We haven't heard from you in a while, how are you doing?

Joe Gagan – Atlantic Equity Research

Good. How have you been?

Mike McAndrew

Good.

Joe Gagan – Atlantic Equity Research

Yes, just a couple of questions. So far from like January 1 through January 27, have you done any acquisitions in that timeframe?

Mike McAndrew

No, we haven't completed any acquisitions. We generally put a press release out. It is our practice to put a press release out once that occurs and notify the investment community and our shareholders what we have done.

Joe Gagan – Atlantic Equity Research

Okay. And then if you were to look at your voice business, can you give me the rough approximate breakdown for which vendors’ products you carry, like say for example the top three or four?

Terry Blakemore

Yes, Joe. I can do that. We have actually our top five platform partners are Nortel, NEC, Siemens, Cisco and ShoreTel.

Joe Gagan – Atlantic Equity Research

Okay. Do you know what the percentages are roughly approximately?

Mike McAndrew

Yes, I think Nortel is running approximately 30% to 35%, and Cisco Siemens, NEC, probably 12% to 15% each. And then ShoreTel and there’s might count some other smaller groups below that, Joe.

Joe Gagan – Atlantic Equity Research

Okay. Now as far as the Siemens, I know that when you bought Norstan, they were a big -- they sold mostly Siemens, right? And they were a pretty big acquisition of yours, is there reason why Siemens is only 12.5% now, 12% to 15% now?

Terry Blakemore

We still have the – they have a very large base as you’ve said, and we still maintain that base today, Joe.

Joe Gagan – Atlantic Equity Research

Okay. So I guess it’s not the reason why it’s found that level or may be did I -- do you think that I overemphasized that do you think, as far as what it represented initially?

Mike McAndrew

Yes, I think that they were primarily Siemens, but they also did Cisco and Nortel. We actually also exited some other business lines that were less profitable after the transaction. So we are comfortable with the run rate of that business as what we bought and what we are running today is part of a billion dollar enterprise.

Joe Gagan – Atlantic Equity Research

Okay. And then now, the businesses you bought this October, those -- it was two companies, correct?

Terry Blakemore

Correct.

Joe Gagan – Atlantic Equity Research

Now those two companies did approximately $60 million in annualized revenues before you bought them?

Terry Blakemore

Roughly, that's about it.

Mike McAndrew

Yes, it’s like $50 million, but yes, they are about $50 million, $60 million, yes sir.

Joe Gagan – Atlantic Equity Research

Okay. $50 million, $60 million. And you paid like $47.9 million, is that – that's what I see on the cash flow?

Mike McAndrew

Yes. About 40 – I think it was $48 million thereabouts, yes.

Joe Gagan – Atlantic Equity Research

Okay. And then you bought, I guess it was Mutual Telecom in your – in the third calendar quarter?

Mike McAndrew

In the third calendar quarter, that is correct.

Joe Gagan – Atlantic Equity Research

And you paid $48.6 million I guess for that?

Mike McAndrew

It was more like 44, something like – somewhere in that range, yes sir.

Joe Gagan – Atlantic Equity Research

Okay. Now previous to these acquisitions over the last two quarters, you're -- you paid about 50% of revenues, and now on these last two, you paid like – well, you almost paid one times revenue on the Mutual Telecom. And on this one, you probably paid 70%, 80% of revenues. Is there a reason why you are paying more now on these last acquisitions?

Terry Blakemore

Joe, there is several different reasons, but primarily they have a very good customer base with long-term backlogs.

Joe Gagan – Atlantic Equity Research

So, were these companies more profitable than the ones previous, do you think?

Mike McAndrew

No, I wouldn't say so. But they just had more strategic partners, more steady clients than the normal acquisition that we would look at. They were aligned to support some of the large Fortune 500 type organizations or either the federal government being the Department of Defense.

Joe Gagan – Atlantic Equity Research

Okay. And so your acquisitions this year were these two in October, the Mutual Telecom in July or August, and then was there any – what was the one small one besides that?

Mike McAndrew

In the fiscal year, we had a small acquisition, I believe in April. I think it was about $10 million in revenue thereabouts.

Joe Gagan – Atlantic Equity Research

Okay. Do you know why if I look at the property, plant and equipment going from March, from the – if you look at the balance, sheet, the property, plant and equipment in March, it is like $32 million, and now it is $30.3 million. So you bought like -- say like a $110 million worth of annualized revenues, yet your property, plant and equipment is down, how does that work?

Mike McAndrew

That is obviously a net number and we are amortizing off, depreciating off some of that. We do evaluation on acquisitions and do fair market value on the assets of those enterprises which are booked in. That’s really the net effect of the book up in depreciation rates that we run with.

Joe Gagan – Atlantic Equity Research

Okay. And then as far as the severance, so I guess -- it is $1.7 million that you accrued for, and it’s 00 employees, so – how does -- what do you pay for severance? Do you pay like – I mean how much do you pay? Do you pay one month per year, or how does that work?

Mike McAndrew

We generally pay -- there's different rules internationally than there are domestically. But generally we pay certain number of weeks per year service up to a cap.

Joe Gagan – Atlantic Equity Research

Okay. So you are going to pay like an average of $17,000 to all these employees that are laid off?

Mike McAndrew

In this particular group, that would be – I'd say there was a 100 folk reduction, more like 80% were part of a action we took, 20 or so were treaded out in natural – leaving the company, so on. So, you divide that by 80 and that would give you the average.

Joe Gagan – Atlantic Equity Research

Okay. And then if you look at as far as what you're trying to accomplish as far as acquisitions, I mean how does that look like right now? I mean so – I mean you’ve bought those companies, not just traditional phone system companies, you bought a telecom, a carrier equipment company in the summer, and you bought it looks like a data the company in October, is it getting – I mean is that strategy changed as far as which type of companies you're looking to buy?

Terry Blakemore

No, not at all, Joe. We are continuing to stay on the data, voice or hotline area to complement our existing business in the long term.

Gary Doyle

Hey, Joe. This is Gary. How about one more question, then we have to move on to some other folks in the queue?

Joe Gagan – Atlantic Equity Research

That's it. Thanks.

Gary Doyle

Okay, great.

Terry Blakemore

Thank you.

Operator

Thank you. We will go next to Jeff Beach with Stifel Nicolaus. Go ahead please.

Jeff Beach – Stifel Nicolaus

Yes, good afternoon, and nice quarter.

Terry Blakemore

Thanks, Jeff.

Jeff Beach – Stifel Nicolaus

A couple of questions. First you lowered your guidance modestly, maybe slightly in the revenues, moderately in the earnings. Can you talk about – I assume in listening to everything, this is primarily increased price competition, but can you talk about the lower earnings guidance and these are more than price competition, and then where you are seeing the most price competition within the segments?

Mike McAndrew

I will tackle that. When I’d say -- yes, really the guidance that we put out there relative to what we had out before, Jeff, is really revenue driven relative to our expectations from three to six months ago. I think as you model that out, you’d see that, take the mid range there. We still expect to deliver double digit margins for the quarter, and that's really driving it. We – that's real time stuff. I think when you do the math there, you will find that year over year, organic down somewhere in the mid teens year to year when you do the math and take out, estimate the contribution of the acquired revenues. So that's really what's driving that. Relative to pricing pressures, we are definitely seeing it in our international markets, which are really data and hotline centric. And then domestically, we are seeing it in our data services business, and selectively on the voice side, and not quite as profound, but it is still there.

Jeff Beach – Stifel Nicolaus

All right, good. A second, you commented a little bit then on the international sales. But the trends in Europe, sales are tailing off, are you looking ahead through calendar 2009 at a much tougher environment in Europe than in North America?

Mike McAndrew

I would say we have experienced that today. If you kind of work through the math, that our data and hotline businesses are certainly being more affected, and I think part of that has to do with businesses that are in the competitive landscape, and there is a fairly higher concentration in some of these tougher verticals we're dealing with. In particular, we talked about retail and banking. The voice side, if you normalize the wire [ph] piece and some of the Nextira stuff, you know we are actually, for the first three quarters of this year, we are doing fairly well, only down about 1%. So I think it's really a service line orientation, and I would say that where we are at today, Jeff, we're really kind of focusing in on finishing FY09. I’ve given as much clarity and visibility for that as we can, and then we'll take logically from there.

Jeff Beach – Stifel Nicolaus

All right. Last thing, can you make a comment about the news today on the Wells Notice, can you just expand a little bit on that?

Terry Blakemore

Yes, Jeff. I will give you some information on that. We filed a Form 8-K on this earlier today. We just received a notice from the SEC that they intend to seek authority to bring a civil action against the company. We have the opportunity to present our views as to why the SEC should not bring the action against the company. And we are working with our advisers on the next steps. So that's really all I can comment on that today, Jeff.

Jeff Beach – Stifel Nicolaus

All right, thank you.

Terry Blakemore

You're welcome.

Operator

Thank you. Your next question is from Nat Kellogg with Next Generation Equity Research. Go ahead please.

Nat Kellogg – Next Generation Equity Research

Hi guys. How are you doing?

Mike McAndrew

Hi, Matt.

Terry Blakemore

How are you?

Nat Kellogg – Next Generation Equity Research

Good. Thanks for taking my call. Just a couple of quick things, I just want to make sure, did you guys say that -- I know the $195 million backlog, about $12 million was from the acquisitions?

Mike McAndrew

That's correct.

Nat Kellogg – Next Generation Equity Research

Okay, that’s helpful. And then just on employee severance and then the savings, you guys -- is that savings (inaudible) evenly spaced out over the next four quarters, or you guys expect that to take a little while before it will fully kick in?

Mike McAndrew

You know, I would say that that savings, we have got a piece of that benefit in the quarter. There was timing when in the quarter, you executed them, right? And so I would say that we probably got about 25% of that benefit in the current quarter, and then there will be a run rate off from there.

Nat Kellogg – Next Generation Equity Research

Okay. That's helpful. And then I just wonder if you guys mention quickly, I wonder if you guys could just give a little bit more color on the verticals that are doing pretty well, any sort of areas (inaudible) anything you guys can give a little bit more color on when you say government, health and communications, is that anything specific that – you know, they are the same customer, but just a little bit more in depth would be helpful?

Terry Blakemore

Yes. Well the medical vertical is doing pretty good, Nat. There is fairly -- I mean it is flat, but there is consistent opportunity there. There is a lot of upgrades or either replacements of equipment going on there. The educational is flat as well, but we do see large maintenance contracts upgrade potential there. And then the government, primarily the Department of Defense, the Army and the Air Force is up about 15%. A lot of opportunity there, not only in the US, but internationally that we are involved in as well.

Nat Kellogg – Next Generation Equity Research

And some of your recent acquisitions have sort of helped you guys sort of penetrate that a little more deeply, correct?

Terry Blakemore

That is correct. We had several large contracts vehicles for the government, that not only are US, but international contracts that will allow us to sell and service and maintain these systems outside of the US.

Nat Kellogg – Next Generation Equity Research

Okay, that's helpful. I guess – listen, it’s all I get for now, and I will hop back in queue. Thanks for taking my questions.

Operator

(Operator instructions) We have no one else in queue.

Terry Blakemore

We thank you for your time today. And as a reminder, our press release has been filed on Form 8-K and on blackbox.com. In addition, we are planning on filing our quarterly report on Form 10-Q with the SEC on Thursday, February 5. Also as Gary mentioned earlier, we will be available at the Next Generation Equity Research Conference on March 3 in Chicago. If you have any questions, please don't hesitate to give our Investor Relations line a call. The number is 724-873-6788. Again, thanks for joining us, and this concludes our conference call.

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 7 PM today through midnight, February 10. You may access the AT&T Executive playback service at any time by dialing 320-365-3844 and entering the access code 978968.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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