Black Box Corporation (NASDAQ:BBOX)
F1Q14 Earnings Conference Call
July 30, 2013 5:00 p.m. ET
Gary Doyle - Director, IR
Mike McAndrew - President and CEO
Tim Huffmyer - VP and CFO
Ken Davis - EVP of North American Commercial Services
Greg Burns – Sidoti and Company
Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter Fiscal 2014 Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.
I would now like to turn the conference over to Gary Doyle, Vice President of Investor relations. Please go ahead sir.
Thank you. Good evening and welcome to Black Box Corporation's first quarter of fiscal 2014 earnings conference call. With us today are Mike McAndrew, President and CEO of Black Box Corporation, Tim Huffmyer, our Vice President and Chief Financial Officer, and Ken Davis, our Executive Vice President of North American Commercial Services.
Earlier today, we announced our first quarter of fiscal 2014 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 on our website at blackbox.com. In addition to commentary from our executive team, we have a brief slide presentation supplementing the call. The slides are available for download on the new IR section of our website at blackbox.com. For those of you who are accessing the website, the slides are present on your screen.
We will begin today's call with comments from Mike, followed by a summary of our financial results from Tim. Mike will then provide an overview of our strategy and the markets that we serve. Our team will then take your questions.
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 markets and the general market at large. Additional factors are included in our most recent Form 10-K and today's press release.
On this call, and as presented in today's press release, we will discuss some financial information that includes non-GAAP financial measures, including adjusted operating income percentage or adjusted operating margin, 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 schedules that accompany the press release for a reconciliation of non-GAAP financial measurements to the most directly comparable GAAP financial measurement and other supplemental information.
Now I’d like to turn the call over to Mr. Mike McAndrew.
Thanks Gary. Welcome and thank you for joining us today to discuss the first quarter of fiscal 2014 results for Black Box Corporation. As discussed on last quarter’s call, our team is focused and we continue to invest in programs that will leverage our product and service platforms to drive organic growth within our business.
I would like to begin today’s call with a review of our first quarter fiscal 2014 results. For the quarter ended June 30, our revenue was $247 million. Our operating earnings per share was $0.54 and we generated $21 million in cash flow from operations. For the quarter, we outperformed our revenue guidance and hit our operating EPS guidance. This is our third consecutive quarter of [meet or hit] above the top and bottom line guidance. I am pleased with our solid results for the quarter. In particular, our business model continues to generate positive cash flow from operations, which enables us to repurchase stock, pay dividends and reduce our net debt position.
Strong balance sheet that we’ve built is an important foundation for our future growth. In addition, I am encouraged by our progress on the organizational changes and growth programs that we initiated over the last six months. These changes are in response to the challenges presented by the rapid changes in the communication technology market. I expect financial impact from these initiatives in the second half of this fiscal year. I will discuss these changes in more detail after a review of our financials from Tim.
Thanks Mike. Before I discuss our financial performance in the first quarter, I would like to review the recent changes we’ve made to our financial disclosures and presentation of our results. As Gary mentioned, we are including a slide presentation with our discussion today. We introduced the slide in a revised earnings discussion during our last quarter’s call. The feedback from our participants was very positive and we will continue with this practice.
Also on our last call, Mike described the new operating segments for our business: North America Products, International Products, North America Services and International Services. We recently filed an 8-K with historical quarter and annual financial information along those segments. Today’s earnings release reflects those segments and has been reformatted in a more simplified bullet type presentation. The content is the same that we have delivered in the past. However, we believe this format presents a more concise summary of our performance. Each of these changes is designed to provide our stakeholders with a transparent and thoughtful view from management’s perspective.
Now on to our results. In the first quarter, we posted revenue of 247 million, consistent with 248 million reported for the same period last year, both on an as reported and same-store basis. Revenue outperformance relative to guidance was driven by earlier than expected completion of certain projects with federal clients. Maintenance revenue, which is derived primarily from long-term agreements with our service clients was 50 million or 20% of our revenue for the first quarter.
Our six month order backlog now stands at 185 million compared to 201 million at the end of the fourth quarter. The decrease in the backlog is attributable to the large order within International Products and Federal projects that I just mentioned.
Last quarter, we described new growth programs which we believe will increase revenue from current clients and help to expand our market share. As we stated on our last call, revenue in the first half of fiscal 2014 will be – will not be significantly impacted by those programs. We expect those programs to generate revenue in the second half of the year. I will address our second half in the guidance discussion and Mike will discuss program progress later in the call.
Gross margins for the quarter was 31.2%. This is lower than the 32% to 32.5% guidance we provided last quarter. The reduction in the current quarter is primarily related to the large international products order mentioned earlier and a Federal project with a lower than normal margin. Excluding those items our gross margin for Q1 would have fallen within our guidance range. Although gross margin may continue to shift on a quarterly basis, we still believe that for modeling purposes, 32% to 32.5% is appropriate.
In the first quarter, SG&A was 61.3 million which included 139,000 of restructuring expenses. Last year, our restructuring expense reduced our projected SG&A by an annual run rate of approximately 12 million. As noted last quarter, much of the savings generated from our restructuring activity is being invested in new growth programs.
Last quarter, we also indicated that we do not anticipate any significant cost alignments in fiscal 2014. However, as we committed, we continue to analyze our business processes and work to make our product and service platforms more efficient. As a result, we have identified additional opportunity to align our costs with higher growth segments of the market. We now anticipate additional restructuring costs of approximately 2 to 3 million over the remainder of fiscal 2014.
Our adjusted operating margin for the first quarter was 6.4%. We attribute the decrease from last quarter’s 8% to the previously mentioned decreasing gross margins. We believe that as revenues grow, our efficient financial model has the power to deliver strong adjusted operating margins. This continues to be a primary metric upon which we measure our business.
First quarter operating earnings per share was $0.54, consistent with the guidance we provided last quarter. First quarter cash flow provided by operations was 21 million. Strong cash flow is another primary focus of management, and we will continue to deploy our free cash flows to balance long-term growth of the business with tangible returns to our shareholders.
Aggregate DSOs for the first quarter, inclusive of cost in excess of billings and billings in excess of cost were 80 days, down from fourth quarter aggregate DSOs of 90 days, and under our fiscal 2014 goal of 85days. As discussed last quarter, the decrease in aggregate DSOs is primarily driven by the expected processing of invoices on milestone based federal projects.
At the end of the first quarter we had cash and cash equivalents of $32 million and total debt of $178 million, resulting in a net debt position of 147 million. This is a 10 million decrease from a net debt position of $157 million at the end of the fourth quarter and the lowest our net debt position has been in two years. Currently, our incremental borrowing rate is 1.7% and our leverage ratio is 2.2 times. I'm comfortable with this debt level based on our ability to generate free cash flow. Our historical range for our leverage ratio is 1.5 to 2.6 times.
Total availability under our line of credit, which expires in March of 2017 is $400 million. At the end of the first quarter the unused portion of the line was approximately 222 million. During the first quarter we repurchased approximately 204,000 shares for just over 1% of our shares outstanding for approximately 5 million. We currently have authorization to purchase approximately 635,000 additional shares.
Over the last two years we have invested over $55 million to repurchase 2.3 million shares or approximately 14% of our shares outstanding. Repurchases may continue to occur from time to time depending on factors, such as cash flow, share price, other potential usage of cash and general market conditions. While we may continue to repurchase shares for the foreseeable future, there can be no assurance as to the timing or amount of such purchases.
Now I would like to provide guidance for the second quarter and the full year of fiscal 2014. For the second quarter, we are targeting reported revenues of $244 million to $249 million and an operating EPS range of $0.60 to $0.65. This operating EPS range includes stock-based compensation expense of $1.6 million, interest expense of $1.4 million and an expected income tax rate of 39.5%. We expect capital expenditures of $1 million and our expected weighted average shares outstanding is 16.2 million. Our second-quarter guidance includes an approximate 5% to 6% decrease in organic revenue from the same period last year.
For the full year of fiscal 2014, our guidance remains unchanged. We are targeting reported revenues of $1 billion to $1.020 billion and an operating EPS range of $2.70 to $2.90. This operating EPS range includes stock based compensation expense of $7.3 million, interest expense of $5.5 million and an expected income tax rate of 39.5%. We expect capital expenditures of $6 million and our expected weighted average shares outstanding is 16.2 million for the full year.
Our annual guidance projects an approximate 1% to 3% increase in our organic revenue from fiscal 2013. This guidance excludes restructuring charges, intangible amortization and the impact of changes in the fair market value of our interest rate swap. It is also before any new merger and acquisition activity that has not been announced. As you work through your models, you will note that our guidance for annual growth implies expanding growth rates in the back half of our fiscal year. We are comfortable with these growth rates, based on the early feedback from the growth programs that we described in last quarter’s call.
Now I’d like to turn the call over to Mike for a discussion of these initiatives.
Thanks Tim. Last quarter, as I discussed my vision for Black Box I laid out the four pillars of our strategy, the assets of our business and our new operating reporting segments. I also discussed the new programs that we have initiated to take advantage of the capabilities that we have built within our product and service platforms. We have made significant progress with those programs and as Tim indicated, we are confident that they will generate growth in the second half of our fiscal year.
In our products segments, we indicated that the primary generator of incremental revenue will be the addition of new direct sales positions worldwide. Direct sales has not historically been the primary go to market approach for our products business but testing over the 18 months has demonstrated that it is effective in increasing average order size and identifying new clients and opportunities. During the first quarter, we identified and hired approximately 40 new product sales people worldwide. Our expanded sales team is currently in various stages of training and will be actively involved in generating opportunities by the end of the current quarter.
In our services segment, we know that we cannot build out the required resources to execute on our full portfolio of offerings at each of our branches. But we want to ensure that our branches have access to centralized expertise to fulfill our clients’ needs. We believe a strong, centralized solution practices will better leverage the skills and relationships that we have in the field. In order to optimize this model, we need to ensure that the field and solution practices can effectively work together to identify opportunities, qualify them and engage in the bidding and sales process.
Over the first three months of our fiscal year, we have generated a significant number of opportunities for each of our Cisco and wireless solution practices. The majority of these leads have been qualified and are in various stages of the sale process. We believe that a number of these field driven opportunities will flow into revenue in the second half of the year.
The most encouraging aspect of our organizational transition over the past six months has been the rate of adoption of our new consistent go to market approach. Adoption in the field gives us confidence to continue to introduce new programs which expand our portfolio of high value communication offerings.
As an example, yesterday we announced the expansion of our relationship with GENBAND. GENBAND’s carrier class cloud services enable Black Box to offer a comprehensive unified communications as a service or UCaaS solution to our clients. We are hearing more frequently from our clients that they want to evaluate the cloud based solution and GENBAND’s NUViA offering is an important addition to our portfolio. UCaaS now joins our Cisco and wireless solution practices as key drivers of revenue growth and we’re working with other partners to add additional cloud based solutions to our offerings.
Over the last year, we have undertaken significant change to adapt to the rapid changes in the enterprise communications market. We initially discussed our product and service platforms which have enabled us to grow our offerings and take advantage of our capabilities. Recently we initiated programs to generate organic growth. Now we can speak confidently about the progress that we’re making. There is still much to do and I’m confident in our team and the commitment that we have made to profitably grow our company.
Now I’d like to open up the call for questions.
(Operator Instructions) And our first question will come from the line of Greg Burns with Black Box. Please go ahead sir.
Greg Burns – Sidoti and Company
Good afternoon. Thanks for taking the questions.
Good. A couple around the solution practices. I think last quarter you had kind of put a dollar value around I think the leads you were seeing through that pipeline. Can you give us any update on maybe some of the quantitative numbers in terms of the volume of business that you’re seeing come through the solutions practice pipeline?
Yeah, I will turn that one over to Ken, that’s really a services program.
Hi Greg, to answer your question, our combined pipeline, when we’re speaking about our wireless or Cisco, solution practice has more than doubled over the last three months to about $50 million in total and maybe a little more detail would help you on that. We've been excited about the programs. Almost all of our offices across North America are already participating in those programs. In other words, putting leads through those solution practices, about 75% of our field sales reps have submitted leads through those programs in various verticals as well. So we are seeing a lot of opportunities across the spectrum of verticals which is exciting to us.
Talking to our solution practice leaders we seem to be getting more of that per se on opportunities. So we’re reviewing and looking at any and all opportunities and try to let them out to see what we can to service them. So we’re very excited about how those programs are going. It’s still early on, we just started last quarter, but all indicating -- all the indicating points are leading towards obviously success as we move through the fiscal year.
Greg Burns – Sidoti and Company
And in terms of the GENBAND's NUViA solutions practice, can you just give us a little more color on the structure of that? Are you just wholesaling it? Did you the retain the customer or are you housing a solution in a Black Box Data Center, any kind of color on how that works would be helpful?
Yeah, absolutely. So the infrastructure around the solution – solution itself is not housed by Black Box, we are actually again acting as a system integrator here. So we’re engaging with the client if they’re looking for a cloud-based offering, we now have GENBAND as a alternative where we would wholesale. In fact, we would be the point of contact for that solution. So we would do the network assessment, any that changes or changes in the topology that needs to be supported, the billing would all come from us. So we would be the point of contact from the clients who would be looking to use that solution.
This is our first wholesale agreement. I mean we’ve had some success in the agency program that in particular Mitel over the last year or so. And so a lot of the demand we’ve seen is more at the SMB level, (inaudible) and had some success there. We are working with Mitel to advance a wholesale arrangement with them as well which we think is more attractive for traditional channel partners like ourselves and it allows us to actually provide more than just the UC solution with all the peripherals around it et cetera.
Greg Burns – Sidoti and Company
And in terms of the restructuring cost that you discussed in fiscal ’14, is there any cost savings associated with that or are you just kind of moving around expenses between the areas in the business?
I would say it’s going to be balanced. Most of the restructuring will fall into cost of sales. As we are kind of moving from some older technologies to newer technologies and changing our resource pools, I think the savings that you would see in SG&A would be marginal but you’d see us continue to use that to invest in these higher growth areas that we’ve identified.
(Operator Instructions) And we’ll go to the follow-up question from Greg Burns with Black Box.
Greg Burns – Sidoti and Company
So in terms of the guidance being back end loaded, obviously I guess it hinges on the growth on the solutions practices but I think also last quarter you discussed the September and the year with the Federal government. So is there any update you can give us in terms of the Fed, your visibility there in kind of replenishing the pipeline of project work that you discussed last quarter?
Yeah, I would say that you saw our headcount increase here in the last quarter and over half of that is really tied to billable resources on some federal awards we have won and are supporting. So those are mostly cost of sales resources. The project opportunities are less than they were last year. There is still couple of months to go, so it’s still out there. It is still an important element to us, working our way through the back half of the year, although I would say that as we continue to attack (inaudible) the profile of the business and get less project work necessary to grow our business and have more stabilization as a baseline, we continue to focus on that as well. So no clear view on that, any clearer view than we had last quarter, Greg. This next couple of months will be critical to that and we’ll be able to provide some more color as we move there, although as we get through the year and we put more in the done column, the risk there, at least in the current fiscal year, is, continues to minimize.
Greg Burns – Sidoti and Company
Okay. And then in terms of the gross margin, you provided some color around that, the Fed project and the large order on the product side of the business. Now was that stuff you were expecting to hit over the course of the year and this all fell into the first quarter and that’s why you saw such a significant decline in margins?
Greg Burns – Sidoti and Company
And kind of what confidence do you have that you get back to a normalized margin profile?
Yeah, well we look at some discrete items, so that kind of gets us into the range that we’ve guided to. No different, we did 33.2% in the fourth quarter last year when we had some higher margin stuff fall through ironically on the Fed side. So based on what we have going on right now, we do not have any order of the magnitude that we talked about here on TPS, it’s quite sizeable for that business. We are ramping up – we did have some ramp up costs in Fed. I just talked about some of the team member headcounts there that had a modest impact on the quarter. So the 32 to 32.5 is still something we’re comfortable with based on what we see today. And again we’ll see it bounce around but I think that is a good modeling range to use.
Greg Burns – Sidoti and Company
Okay, thank you.
And speakers we have no additional questions in queue.
Okay, well thank you and thank you all for your time today. As a reminder, our press release has been filed on Form 8-K and is available on blackbox.com. We have a very busy IR calendar coming up this quarter. Next week, we will host our Annual Shareholders Meeting here at our headquarters in Pittsburg on Tuesday, August 6th. In addition, Mike and Tim will present at the upcoming Oppenheimer Technology Conference in Boston on August 13th and the Three Part Advisors IDEAS Conference in Chicago on August 27th. All of those items will be posted on the calendar on our IR website and we will have press releases describing the events in more detail and those will be out shortly. Thank you again and this concludes today’s conference call.
Ladies and gentlemen, this conference will be available for replay after 7 PM today until August 13th at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-320-365-3844 and entering the access code 297222. That number again is 320-365-3844 with the access code 297222. That does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
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