Black Box Corporation F2Q10 (Qtr End 10/27/09) Earnings Call Transcript

Oct.27.09 | About: Black Box (BBOX)

Black Box Corporation (NASDAQ:BBOX)

F2Q10 Earnings Call Transcript

October 27, 2009 at 5:00 pm ET


Gary Doyle - Director, Investor Relations

Terry Blakemore - President and CEO

Mike McAndrew - VP, CFO, Secretary and Treasurer


Joe Gagan - Atlantic Equity Research

Jeff Beach - Stifel Nicolaus

Nat Kellogg - Next Generation Equity Research


Ladies and gentlemen, thank you for standing by, and welcome to the Black Box Corporation Second Quarter Fiscal 2010 Earnings Call. At this time, all lines are in a listen-only mode; later we will conduct the questions and answer session, 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 your host, Director of Investor Relations Mr. Gary Doyle, Please go ahead, sir.

Gary Doyle

Thank you. Good evening, and welcome to Black Box Corporation’s second quarter fiscal 2010 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 second quarter fiscal 2010 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 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 and related matters.

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 that Terry Blakemore our upcoming Investor and Financial Analysts Day in New York City next Thursday November Fifth. For more information on this event please contact our investor relation department.

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

Terry Blakemore

Thanks, Gary.

I am pleased to report another quarter of solid financial performance and strong operational results in the second quarter of our fiscal 2010. Revenues from the second quarter were $232 million a 9% percent decrease from last year $254 million and 1% decrease over last quarter’s $235 million. Year-to-date revenues were $467 million a 6% percent decrease from last year $496 million.

Our second quarter operating earnings per share were $0.72 down $0.19 from last year $0.91 and off $0.01 from last quarter $0.71. Year-to-date operating earnings per share or $1.43 compared $1.62 for the same period last year.

Second quarter pre-cash flow was $14 million compared $26 million last year. Pre-cash flow for the year stands at $31 million versus to $38 million for the same period last year. We used our cash primarily to decrease our outstanding debt. We believe that these sequential results demonstrate signs of stabilization in our markets. We will continue to watch for indications that our clients and prospects are ready to invest more aggressively in their communication infrastructures. In the meantime, we are delivering realms in the government and public sectors introducing innovative solutions to the market and securing key partnership commitments. I will speak more on these areas later in the call.

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

Mike McAndrew

Thanks Terry.

As Terry just mentioned, we posted quarterly revenues of $232 million versus $254 million for the same period last year. Excluding the $35 million of incremental of revenue contribution in the second quarter related to acquisitions over the last two years and the negative $2 million impact from foreign currency, same office revenues for the second quarter is down $44 million or 18% over the second quarter of the prior year.

On sequential basis revenue is down to $3 million from $235 million in the first quarter fiscal 2010 and excluding a positive $3 million impact from foreign currencies, same office revenues are down 3% percent sequentially. On the year-to-date basis total revenues are $467 million down $29 million from last year $496 million excluding the $76 million of revenue contribution in fiscal 2010 related to acquisitions and a negative $8 million impact from foreign currency same office revenues for fiscal 2010 are down $81 million or 17% from the prior fiscal year.

We continue to believe the decrease in same office revenues both on the year-over-year and in a sequential basis is attributable to continued signs of caution from certain of our clients related to both capital investment and IT spending.

Looking more deeply at our revenue by the segments that we report in the highlights are as follows, initially from the service type segment perspective our second quarter revenues were comprised of 61% of Voice Services, 19% of Data Services and 20% of Hotline Products.

Secondly from the geographic segments perspective our second quarter revenues were made up as follows, 86% from North America, 11% from Europe and 3% from what we call all other which is primarily the PacRim and Latin America.

Our gross margin for the quarter was 35.5% up from the last quarter’s 35.0%. Before we discuss EPS, I would like to remind that we have and we will to continue to discuss from financial information that include Non-GAAP financial measures. Please refer to today’s press release for a reconciliation of any GAAP to non-GAAP financial measures.

Our second quarter earnings-per-share was $0.72 down $0.19 from last year $0.91 and up $0.01 from last quarter $0.71. This brings year-to-date operating UPS to a $1.43 versus $1.62 for the same period last year. In the second quarter just ended we took an additional action to right size our workforce relative to the revenue decreases in certain of our markets. In total we have reduced our staff by approximately 100 team members during the second quarter. Accordingly, we have excluded approximately 650,000 of employees’ severance costs from our operating expenses in this quarter. For the year-to-date we have excluded 1.8 million of employees’ severance costs from our operating expenses and these items are included in a company’s pre-tax reconciling items for the quarter.

We believe that the exclusion of this costs and the related tax impact provides more accurate reflection of the Company’s ongoing financial performance. Looking forward the action in this quarter will decrease our ongoing operating expenses by approximately 2.7 million annually, approximately 1.6 million of the projected annual decrease is related to cost to goods sold with the remainder related to operating expense.

The benefits of these reductions are included in the guidance that I will provide shortly. Also, included in the Company’s pre-tax reconciling items for the second quarter is a pre-tax charge of $4 million recorded in connection with an agreement in principle pre-settlement of the previously disclosed pending shareholding derivative lawsuit and related matters arising out of the Company’s review which historical stock option practices is. This settlement is subject to execution of documentation regarding the settlement as well as court approval.

Total reconciling items excluded from our operating earnings per share represented $0.25 per share for the second quarter fiscal 2010 compared to $0.09 per share for the same period last year. Reconciling items represented $0.52 and $0.07 per share for the first six months of fiscal 2010 and fiscal 2009 respectively.

GAAP diluted earnings per share from the second were $0.47 at $0.35 decrease from last years $0.82 and $0.03 increased from last quarter $0.44. GAAP diluted EPS for the first six months of fiscal 2010 were $0.91 a 41% decreased from $1.55 for the same period last year. GAAP cash provided by operating activities for the quarter was $14 million was compare to $26 million for the same period last year and on a sequential comparison basis first quarter cash provided by operating activities was $16 million.

For the fiscal year-to-date GAAP cash provided by operating activities was $31 million versus $38 million for the same period last year. Second quarter free-cash flow was $14 million compared to $26 million last year and looking at that sequentially we had $16 million of pre cash flow in the first quarter 2010.

Free cash flow for the fiscal year to date is $30 million compared to $38 million for the same period last year. Of our $40 million in free-cash flow in the quarter $30 million was used to pay down debt and $1 million was used to pay dividends.

EBITDA for the second quarter was $20 million compared to 30 million for the same period last year. On a sequential quarter comparison basis. first quarter EBITDA was $21 million. EBITDA for the fiscal year-to-date is $40 million compared to $54 million for the same period last year.

Adjusted EBITDA for the second for the second was $21 million compared to $30 million for the same period last year and sequentially first quarter adjusted EBITDA was $22 million. Adjusted EBITDA for the fiscal year-to-date is $44 million compared to $55 million for the same period last year.

Looking at some of our other key metrics at the end of the second quarter we had cash and cash equivalent of $24 million and total debt of $224 million for a net debt position of $200 million. This is $30 million decrease from the net debt position of $230 million at the end of the first quarter. Apparently, our incremental borrowing rate is 1.3%. Total availability under our line of credit is $350 million. Throughout September 30th we had approximately $124 million available for future borrowing. Our credit facility expires in January 2013.

Company wide DSOs were 51 days, this is a one day improvement from the first quarter’s 52 days and we looked to make continued progress in this area to return to our target DSO of 50 days.

Accounts receivables reserves was $9.9 million or 6.6% of the gross AR balance, this compares to the first quarter’s AR reserve of $10 million or 6.2% of the gross AR balance.

During the inventory, our net inventory was $53.3 million with the inventory turns of 8.4 times for 43 days, this compares to first quarter net inventory of $54 million and an equivalent 8.5 turns. When we reach our established goal of 8 turns we will continue to stay focused on maintaining our turns throughout the balance of this fiscal year.

Inventory reserves were $19.8 million or 27.1% of gross inventory, this compares to first quarter inventory reserves of $19.9 million or 26.9% of gross inventory. For the quarter, new capital expenditures were approximately $500,000 bringing our year-to-date CapEx to approximately $1 million.

Interest expense for the second quarter was $2.2 million or 1.0% of revenues, this amount exclude a negative non-cash impact of $380,000 attributable to the interest rate swaps discussed in today’s press release. This compares to first quarter interest expense of $2.4 million or 1.1% of revenues excluding a positive non-cash impact or approximately $200,000 related to the interest rate swaps.

Our 6-month order backlog now stands at $207 million compared to $210 million at the end of the first quarter. That is reminder that the backlog represents expected revenue related to executed client purchase orders or contracts that are estimated to be complete within a 108 days quarter end.

As we look at maintenance revenue which is revenue derived primarily from long-term agreements with our voice clients it stands at 23% of our revenue for the second quarter. Revenue under this agreement is recognized rapidly over the term of agreement which is typically 1 to 3 years for our commercial clients and 3 to 5 years for our government clients. Also, I would like to point out in regards with recurring maintenance revenue amount is a subset of the backlog number that we just discussed.

Our team member staffing stands at 4,335 and while our team moves around a bit between data voice and hotline, for perspective our team breaks down approximately as follows: 2,500 are mostly Voice; 1,200 are mostly Data; and 600 are mostly Hotline.

As of the end of the second quarter, the weighted average in common equivalent shares is $17,548,000 and there were no stock repurchases during the second quarter of fiscal 2010.

Now, I would like to provide guidance for the upcoming quarter. So, for our third quarter fiscal 2010 we are targeting reported revenues of $230 million to $240 million with operating EPS range between $0.70 and $0.75. These thus assume an expected tax rate of 37.5% and from the capital expenditures stand point we are estimating that to be about a million dollars. As reminder this guidance includes the expected results from all acquisitions to-date including our recently announced that position of Quanta Systems and CBS Technologies.

As we discussed in the last couple of quarters, beginning with fiscal 2010 we have made a change to our computation and operating net income. In the past, we have excluded non-cash stock base compensations expense with this computation. Beginning with the first quarter of fiscal 2010, we have included non-cash stock base comp as a component of our operating expenses.

We do expect to have an approximately of $1.7 million of non-cash stock base comp in the third quarter of fiscal 2010 and this change is reflected in our target operating EPS range.

I would like turn the call back to Terry.

R. Terry Blakemore

Thanks Mike. As I mentioned earlier, we are seeing signs of stabilization in our client market. As Mike reported, our revenue and backlog numbers are consistent with the prior quarter. We are also seeing an improvement in bid solicitation activity primarily in our government, educational and healthcare verticals.

In addition, we are delivering key wins in the government and public sectors. Earlier this quarter, we announced the award of the Fourth Bragg Army Airfield Contract. This complex engagement will provide a state-of-the-art IT-based solution for a nation’s largest military installation.

We also announced the $38 million win or award to perform telecommunications and network management services and Miami International Airport and Dade County General Aviation Airports.

This is a comprehensive solution including traditional telephony, messaging, mobility, network infrastructure, data networking, wireless connectivity, digital signage, and network maintenance. I am proud to say that Black Box also achieved ISO certifications for IT management at this site.

Since our last call, Black Box has acquired 2 companies that add to our portfolio of solutions and expertise. Quanta Systems joined us earlier this month, and offers new capabilities in the physical and data security market. Markets customers base includes various agencies within the Department of Defense and other government accounts.

We announced the acquisition of CBS Technologies Group, or CBS Technologies Corporation earlier today. CBS brings deep expertise in voice communications and an active customer base which includes commercial, educational, and various government agency accounts.

We would like to welcome the teams and clients of Quanta and CBS to the Black Box family. We look forward to working with all of you. We also extended our portfolio of offerings this quarter through our new partnerships.

Our strategic business relationship with Core Dial will allow us to offer hosted Voice Over IP solutions to our customers who are interested in reducing their overall cost of communications. We also announced the strategic relationship with PEP Solutions which allows Black Box to market their industry leading portfolio of network performance monitoring solutions.

I have seen this economic downturn as an opportunity for Black Box to grow the capabilities of our business and improve our operating efficiency. We have very strong core business and a sound business model. We have proactively kept our cost structure aligned with our revenue opportunities, and continue to operate properly with significant positive cash flow.

Through this period, our team has identified key initiatives to provide for long-term growth, including advanced product and service solutions, strategic partner relationships, and complimentary business acquisitions. Over the last 18 months, we are posed on the number of these opportunities and brought them into our offerings.

So, while many of our competitors have been holding steady or moving backward in this difficult environment. We have been strategically laying the foundation for long-term growth. I am very proud with our results and looked forward to improvements in the general business environment.

We will now open up the call for your questions.

Question and Answer


Thank you. (Operator instructions)

Our first question will come from the line of Greg Burns of Sidoti & Company

Gregory Burns - Sidoti & Company

Looking at the backlog, I guess down the quarter over quarter. I guess those are just bumps from [Inaudible] government, contracts both at the end of the quarter, can you just give a little color there?

R. Terry Blakemore

Yes, I think what we saw there Greg, is we did book some but we also consumes along the way. I think if we go back to that quarter we had booked at a particular job and took us from the 195 range up to 210, so while we had some coming in and we also had some going out and in particular that job [Inaudible] in backlog, we did get a little bit of that benefit within the quarter. So, that will move around the bid for sure, we have seen, as Terry mentioned earlier, some activity on the government side as we have expected not just on onsite businesses but, we also saw a little bit traditional lift on hotline side from the seasonality stand point within the quarter which showed up in the September quarter.

Gregory Burns - Sidoti & Company

Okay and I guess I am just looking at the quarter. I guess the weak segment was at the services particular going on there, do you expect that to come back at the end of the year anytime?

R. Terry Blakemore

That is the one truly bounced around quite a bit, in fact we had a fairly significant job last quarter at lower margins that actually the gross margins down and we will work our way through that. So, sequentially that one is down 15% and that is primarily in the US.

That particular service is the choppiest of all three, CapEx to expand depending and also because of that, it is a quarter by quarter thing relative to winning opportunities and executing the work. It is moving to the next quarter, I think sequentially if you lay out the numbers of our guidance you will see that you back out, we reported what the historical revenues are for our acquisitions that we have just announced and essentially what you will you get this out is a flat quarter from the revenue stand point if you will take the mid-range.

One last day this quarter than the last we are actually hoping to show a little sequential increase, but I think we are still going to have mid-double digit teen down on a year-to-year basis and not probably the cross all three of our services. So, hopefully we will see stabilization there but that one will actually jump up and down more than the other two.

Michael McAndrew

Greg, we are seeing some uptick in the project bid solicitations for data more so than we have from last quarter I would say.

Gregory Burns - Sidoti & Company

Okay, thanks and finally any update you can give us on any goings on as far as Avaya?

Michael McAndrew

Yes, we are not currently an Avaya authorized reseller as you may be aware of. But at Avaya they have a new management and they have indicated that they are embracing all resellers as key distributions strategy and we are all involved in discussions with Avaya at the highest levels within the Company and there appears a willingness on both sides to come to a mutually acceptable business relationship in the near future.


Our next question comes from Nat Kellogg with Next Generation Equity Research. Please, go ahead.

Nat Kellogg - Next Generation Equity Research

On the $4 million charge, I guess that is a cash charge but has not shown up yet as a cash charge, Right? You will not estimate that payment until it gets approved by the court?

R. Terry Blakemore

That is correct. Its book is in accrual right now and once the settlement occurs the fund will distributed and would show up in cash from operation.

Nat Kellogg - Next Generation Equity Research

Can you just tell me, is this also related to the stock option expense issue or is this different?

R. Terry Blakemore

This has to do with; you know we have an SEC investigation going on. This is separate from that. This is a separate action, a derivative lawsuit made on behalf of the Company against a number of defendants and to separate from the SEC investigation and stands on its own terms with all the interested parties.

Nat Kellogg - Next Generation Equity Research

Okay, if I strip these out we are looking at above $60 million a quarter on the SG&A run rate and obviously we will get an uptick from that with the acquisitions vaulted on. Is that about right?

R. Terry Blakemore

Yes, that sounds about right, Nat. We have reduced a little bit this quarter from an annual basis, but most of those companies $12 million of historical revenues, you can model out the incremental SG&A to the comment with this guys along with the revenues and gross profit.

Nat Kellogg - Next Generation Equity Research

Right, maybe you can just get a little clearer, I know that you have done in the last couple of quarters just maybe sort of the end of the market breakdown where you are seeing particular strength or weakness either on an absolute or relative basis.

Michael McAndrew

True. We are actually seeing some delays in decision making on the commercial side related to the Nortel product, but overall we have seen some uptick in the federal government. We had quite a bit of activity on the federal government side and just recently the state government side. In addition to the healthcare verticals which seems to be going pretty well at this time.

Nat Kellogg - Next Generation Equity Research

Okay and weakness, I guess you have mentioned in the past week on financial, any change there or that continues to [pretty slow].

R. Terry Blakemore

No, that is continuous, we still have our customer base on the net and we continue to provide services on a daily basis and made some changes. Some upgrade activity going on there, but no large new capital expenditures to speak of but the retail and banking is something we hope will rebound in the near future.

Nat Kellogg - Next Generation Equity Research

Okay. And then, on the acquisition front, you guys have been quiet for a while and it seems like you will pick-up a piece again. Just curious, is that related to…, you guys obviously are trying to be a little conservative giving sort of the what the world has been through over the last couple of quarter, is the opportunity in the market for acquisitions a little bit more favorable today than it has been recently?

Michael McAndrew

We are always looking for good quality acquisitions to add to the Black Box family. We have been very careful but we also found some companies with two examples today with Quanta and CBS, we think they add a lot of value to our Company and they have a really good customer base and they have a great team of employees, and we will continue to search for those type of quality companies that might have interest in joining in our family.


Thank you. Gentlemen, no further questions in queue, please continue.

Michael McAndrew

Okay. We thank you for your time today as a reminder our press release has been filed on form 8K and proceeds on our website. As Gary mentioned earlier, I will be hosting our Investor and Financial Analysts Day, next Thursday, November 5 in New York City. If you have any questions about the event, please call our investor relations line at 724-873-6788. Again, our number is 724-873-6788.

We thank you for joining us this afternoon and this thus included our conference call.


Thank you. Ladies and gentlemen this conference is available from replay after 7pm Eastern time today, and on November 10 at midnight.

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