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Black Box Corporation (NASDAQ:BBOX)

F4Q10 Earnings Call

May 131, 2010 5:00 pm ET

Executives

Gary Doyle – Director Investor Relations

R. Terry Blakemore – President, Chief Executive Officer & Director

Michael McAndrew – Chief Financial Officer, Vice President, Principal Accounting Officer, Treasurer & Secretary

Analysts

Jeffery Beach – Stifel Nicolaus & Company, Inc.

Gregory Burns – Sidoti & Company, Inc.

Nat Kellogg – Hudson Securities

Operator

Welcome to the fourth quarter fiscal 2010 earnings conference call. At this time all participants are in a listen only mode. Later we will be conducting a question and answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would like to now turn the conference over to our host, Director of Investor Relations Mr. Gary Doyle.

Gary Doyle

Welcome to Black Box Corporation’s fourth quarter of 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 fourth quarter fiscal 2010 results by issuing a press release furnishing it to the Securities & Exchange Commission on Form 8K. We also posted this press release on our website at www.BlackBox.com.

We will start today’s call with an overview of our results from Terry Blakemore followed by a more detailed discussion by 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 markets and the general market at large. Additional factors are included in our most recent Form 10K, Form 10Q 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 operating net income, operating earnings per share, free cash flow, EBTIDA, 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 measurements and other supplemental information. Coming up on the IR calendar we will present at the UBS Global Technology and Services Conference in New York City on June 10th.

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

R. Terry Blakemore

I am pleased to report that our results for the fourth quarter and fiscal year 2010 show that despite a challenging economy and changes in our industry, the Black Box team delivered solid financial results and continue to provide the highest level of technical service and support to our clients worldwide. Revenues for the fourth quarter were $241 million equivalent with last year’s $241 million and a 5% decrease over last quarter’s $253 million. Fiscal 2010 revenues were $961 million, 4% decrease from last year’s $1 billion.

Our fourth quarter operating earnings per share were $0.78 down $0.14 from last year’s $0.92 and up $0.01 from last quarter’s $0.77. Fiscal 2010 operating earnings per share were $2.99 compared to $3.39 for the same period last year. Included in our fourth quarter and fiscal 2010 results is a $0.04 benefit from a reduction in our effective tax rate. Mike will discuss this in more detail later in the call.

Fourth quarter free cash flow was $18 million compared to $19 million last year. Free cash flow for fiscal 2010 was $59 million compared to $58 million for the same period last year. Free cash flow for the quarter was used to fund debt reduction and to pay dividends. I’ll turn it over to Mike now for a more detailed discussion on our financial results.

Michael McAndrew

As Terry just mentioned we posted quarterly revenues of $241 million, equivalent to $241 million for the same period last year. Excluding $42 million of incremental revenue contribution in the fourth quarter related to acquisitions over the last two years and a $3 million positive impact of foreign currency, same office revenues for the fourth quarter were down $15 million or 7% in the same quarter last year.

On a sequential basis, revenue was down $13 million from $253 million in the third quarter of fiscal ’10. Excluding $7 million related to acquisitions last quarter and a $1 million negative impact from foreign currency, same office revenues are down 6% sequentially. You’ll recall that last quarter’s revenue included approximately $11 million in revenue along with the related costs for a current project with the federal government client. Normalizing for the effect of this $11 million in revenue last quarter, sequential revenues are down slightly.

Fiscal 2010 total revenues are $961 million which is down $39 million from last year’s $1 billion. Excluding $162 million of revenue contribution in fiscal ’10 related to acquisitions and a $1 million negative impact from foreign currency, same office revenues for fiscal ’10 are down $123 million or 13% from the prior year. We believe the decrease in same office revenues on a year-to-year basis is attributable to caution from our commercial clients related to both capital investments and IT spending. We also believe that the results in the current quarter reflect stabilization in our end markets.

Looking more deeply at our revenue by the two segments that we report the highlights are as follows. Initially from a service type segment perspective, our fourth quarter revenues were made up of 62% of voice revenues, 19% of data revenues and 19% of hotline product revenues. Secondly, from a geographic segment perspective our fourth quarter revenues were comprised of 86% from North America, 10% from Europe and 4% from what we call all other which is primarily [inaudible] and Latin America.

Our gross margin for the quarter was up to 34.8%which is up from last quarter’s 34.3%. It should be noted that the gross margin percentage increase in all three of our service segments from last quarter. As I noted last quarter, the acceleration of revenue from our federal government project had a negative impact on our gross margin percentage in the third quarter. Our gross margin although improved over last quarter continues to run lower than historical rates. We attribute the decrease to continued pressure from competitive pricing factors primarily in our data services segment.

Before we discuss EPS I’d like to remind you that we have and will continue to discuss some financial information that includes non-GAAP financial measures. Please refer to today’s press release for a reconciliation of any GAAP to non-GAAP financial measures. Our fourth quarter operating earnings per share were $0.78 down $0.14 from last year’s $0.92 and up $0.01 from last quarter’s $0.77. This brings fiscal 2010 operating EPS to $2.99 versus $3.39 for the same period last year.

Our fourth quarter and fiscal 2010 results include the impact of a decrease in our annual effective tax rate from the previous estimate of 37.5% to the actual effective tax rate of 36.5%. This resulted in a fourth quarter effective tax rate of 33.5%. This reduction is primarily the result of a reduction in valuation allowances against certain net operating losses. The effective tax rate reduction increased fourth quarter and fiscal 2010 operating earnings per share by $0.04.

In the fourth quarter just ended we took additional action to right size our work force relative to the revenue decreases in certain of our markets. In total, we reduced our staff by approximately 80 team members during the fourth quarter. Accordingly, we’ve excluded $1.9 million of employee severance costs from our operating expenses in this quarter. For fiscal 2010 we’ve excluded approximately $4.6 million of employee severance costs from our operating expenses. These items are included in the pre-tax reconciling items presented in today’s press release.

Going forward, the right sizing actions in the fourth quarter will decrease our ongoing operating expenses by approximately $5.5 million annually. Approximately $2.3 million of the projected annual decrease is related to cost of goods sold and the remainder is related to operating expense. The operating cost impact of these reductions is included in the guidance that I will provide shortly.

We believe that the exclusion of these costs and the related tax impact provides a more accurate reflection off the company’s ongoing financial performance. I’ll speak more about our forward guidance in a moment but at this point we believe that there will be no further employee severance and facility consolidation costs related to the current economic downturn. The total reconciling items excluded from our operating earnings per share represented $0.35 for the fourth quarter of fiscal 2010 compared to $0.44 for the same period last year. Reconciling items presented $1.02 and $0.80 per share for fiscal 2010 and fiscal 2009 respectively.

GAAP diluted earnings per share for the fourth quarter were $0.43. This is a $0.05 decrease from last year’s $0.48 and a $0.20 decrease from last quarter’s $0.63. GAAP diluted EPS for fiscal 2010 were $1.97 which is a $0.62 decrease compared to $2.59 for the same period last year. GAAP cash provided by operating activities for the quarter was $20 million, equivalent to $20 million for the same period last year and on a sequential comparison basis third quarter cash provided by operating activities was $12 million.

For the full fiscal 2010 cash provided by operating activities was $62 million compared to $72 million for fiscal 2009. Fourth quarter free cash flow was $18 million compared to $19 million last year and on a sequential comparison basis free cash flow was $11 million in our third quarter of fiscal ’10. Free cash flow for fiscal 2010 was $59 million compared to $68 million for the same period last year. Of this $18 million of free cash flow in the quarter $17 million was used to fund debt reduction and $1 million was used to pay dividends.

EBITDA for the fourth quarter was $21 million. This compares to $19 million for the same period last year and sequentially in the third quarter we did $24 million. EBITDA for fiscal 2010 was $86 million which compares to $100 million for fiscal 2009. Adjusted EBITDA for the fourth quarter was $23 million compared to $20 million for the same period last year and on a sequential comparison basis third quarter adjusted EBITDA was $26 million. Adjusted EBITDA for the fiscal year to date was $93 million which compares to $103 million for fiscal 2009.

Looking at some of our other key metrics, at the end of the quarter we had cash and cash equivalents of $21 million and total debt of $212 million for net debt position of $191 million. This is a $16 million decrease from a net debt position of $207 million at the end of the third quarter. Currently, our incremental borrowing rate is 1.3%. Total availability under our line of credit is $350 million and as of March 31, the unused portion of the line was approximately $140 million. As a reminder, our credit facility expires in January of 2013.

Companywide DSOs were 51 days, this is a one day improvement from the third quarter’s DSO of 52 days. We look to make progress in this area to return to our 50 day target for this particular metric in 2011. Accounts receivable reserve was $9.5 million or 6.3% of the gross AR balance. This compares to the third quarter AR reserve of $10 million or 6.2% of the gross AR balance. Moving on inventory, our net inventory was $51.5 million with inventory turns of 8.8 times or 41 days. This compares to the third quarter net inventory of $53.8 million or 9.3 turns. Having reached our established fiscal ’10 goal of eight turns, we will focus on maintaining this metric at approximately nine turns for fiscal 2011. Inventory reserves were $20 million or 28% of gross inventory. This compares to the third quarter inventory reserves of $20.5 million or 27.6% gross inventory.

In the fourth quarter of fiscal ’10 new capital expenditures were $727,000, bringing our fiscal 2010 cap ex to approximately $2.3 million. Interest expense for the fourth quarter was $2.2 million or 0.9% of revenues. This amount excludes a negative non-cash impact of approximately $100,000 attributable to interest rate swaps discussed in today’s press release. This compares to the third quarter interest expense of $2.2 million or 0.9% of revenues which excludes the positive non-cash impact of approximately $300,000 attributable to those swaps.

Our six month order backlog now stands at $203 million compared to $191 million at the end of the third quarter. As a reminder, backlog represents expected revenue related to executed client purchase orders or contracts that we estimate to be complete within 180 days of quarter end. Looking at maintenance revenue which is derived primarily from long term agreements with our voice clients, it stands at $58 million or 24% of our revenues for the fourth quarter.

Revenue under these agreements is recognized ratably over the term of the agreement which is typically one to three years for our commercial clients and three to five years for our government clients. I’d also like to point out that this recurring maintenance revenue amount is a subset of the backlog number that we disclose.

Our team member staffing as of 3/31 was 4,348 and although our team moves between data, voice and hotline segments somewhat for perspective our Black Box team breaks down approximately as follows: 2,600 are mostly voice; 1,200 are mostly data; and 600 are mostly hotline. As of the end of the fourth quarter the weighted average common and common equivalent shares stood at 17,546,000,000 and there were no stock repurchases during the fourth quarter of fiscal 2010.

I’d like to now provide guidance for the upcoming quarter and full fiscal 2011. For the first quarter of 2011 we are targeting reported revenues of $240 to $245 million with operating EPS between $0.70 and $0.75. This operating EPS range includes expected pre-tax amortization of stock based compensation expense of approximately $2.5 million. Our expected tax rate is 38.0% and we expect cap ex to land at about $1 million in our first quarter.

Looking at the full year 2011, we’re targeting reported revenues of between $990 million and $1,010,000,000. This represents approximately 2.2% to 4% organic growth over fiscal 2010. Our operating EPS range is $2.90 to $3.10 and this operating EPS range includes expected pre-tax amortization of stock-based comp expense of approximately $10 million. Again, our expected tax rate is 38.0% and for the full year we expect capital expenditures of approximately $4 to $6 million. Finally, the expected weighted average shares outstanding is estimated at 18.

As a reminder this guidance excludes acquisition related expense and the impact of changes in the fair market value of the company’s interest rate swaps before any new mergers and acquisition activity that has not been announced. With that, I’d like to now turn the call back to Terry.

R. Terry Blakemore

Fiscal year 2010 presented a number of challenges to Black Box, most notably the economic environment slowed the investments that our clients were making in their businesses. In addition, over the last year some of our key partners were facing challenges as well. As they reorganized and merged to ensure that they would be financially and commercially strong when the economy recovers. Finally, we were pleased to bring closure to the SEC investigation and derivative class matters.

On a more positive note, in the last half of our fiscal year we noted signs of stabilization in our client base. We saw an increase in bid and quote activity and most recently a slight uptick in awards. We also knew that as the future of certain of our partners became clearer our clients would have the confidence to invest in their communication platforms. Throughout this difficult economic period, our team at Black Box worked to maintain our profitability through effective cost management. In addition, we identified new products, invested in our key partner relationships and continued to expand our capabilities through strategic acquisitions.

One of our key differentiators and competitive advantages is our ability to offer a portfolio of technical solutions to our clients. With this broad portfolio Black Box is uniquely positioned to match our client’s needs with the best available position. Throughout the year we have been recognized by a number of our partners for excellence. In the first quarter, Black Box was named Communication Reseller of the Year by Polycom. Black Box was also named a Circle of Excellence Partner and was rewarded first place in this category by ShoreTel. This is the highest partner award given by ShoreTel.

In the third quarter we announced that we had signed a new distribution agreement as a reseller with Avaya. We continue to work closely with the Avaya team to enhance our capabilities to serve our clients. Also in the third quarter, the Black Box team was awarded the Service Excellence Award from Aspect. In addition, we announced that we have extended our platinum level partnership with Aspect through late 2012.

Most recently, we announced that we earned a Customer Satisfaction Excellence Gold Star from CISCO. This designation recognizes Black Box for delivering outstanding service to clients in the United States. We believe these recognitions as well as our continuing relationships as the leading channel partners for NEC, and Siemens demonstrate our commitment to the highest levels of technical services and support to our clients and partners.

On the product side, in the fourth quarter our Optinet and Intelli-Pass products were recognized as leading offerings in their respective categories. We expect that our continued investment in our partners, products and team members will generate both top and bottom line returns. As we enter fiscal 2011 we are optimistic that the work we have done over the past 18 months will generate new opportunities.

Our growth in the new year will be primarily driven by the success we continue to earn with the federal government and our large enterprise clients. Our teams servicing those markets both domestically and abroad have done an outstanding job maintaining and growing that business. The combination of a disciplined management approach and strong client relationships has strategically positioned us for an expected increase in business activity in fiscal 2011.

As reflected in our guidance, I am very proud of all of our team’s accomplishments in fiscal 2010 and I look forward to new growth opportunities in fiscal 2011. We will now open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffery Beach – Stifel Nicolaus & Company, Inc.

Jeffery Beach – Stifel Nicolaus & Company, Inc.

I noticed you have mentioned specifically very competitive pricing in data services but you had a nice uptick in the gross margin from the last quarter of 90 basis points. Is the competitive pressure at its worst point and beginning to stabilize? Can you talk about that?

Michael McAndrew

We had a little extra pressure on the GP in the data services, we actually talked about it last quarter and the quarter before, we had a pretty significant job that we were executing that had margins well below our normal standard. I’d say that’s kind of worked itself through the system and where we sit today is fairly reflective to the current market which again is still at the lower end of our expected range in data services. We like to see that between 28% and 30% so I wouldn’t say it’s let up, I would say we’ve kind of rolled off something that was putting some additional pressure on that GP.

Jeffery Beach – Stifel Nicolaus & Company, Inc.

Then the second question I have, you’re an uptick in activity, how recent is that? Is that since the end of your fourth quarter and what markets are you seeing it in? Is it all North America or are you seeing any signs of revival?

R. Terry Blakemore

I guess probably starting back in March through current we’ve seen an uptick primarily with our system integrators. They service many, many clients across the world and we’re partnered up with several system integrators and that business has certainly picked up. Our federal business continues to be strong. There’s a lot of bid and proposal effort going on to support federal business worldwide currently.

We’ve seen some uptick in the retail environment which has been pretty flat over the past year but we’re seeing some of the retailers doing some upgrades and what they call refreshes to some of the stores. Of course, the medical vertical has been fairly strong for us over the past year and that continues as well.

Jeffery Beach – Stifel Nicolaus & Company, Inc.

Anything in Europe?

R. Terry Blakemore

No, Europe has been pretty soft Jeff as you can imagine.

Operator

Your next question comes from Gregory Burns – Sidoti & Company, Inc.

Gregory Burns – Sidoti & Company, Inc.

Can you just give us an update on kind of the progress you’re making ramping up for Avaya? Previously you said you weren’t expecting to see anything meaningful in the near term, is that still the case or how are things progressing there?

R. Terry Blakemore

Our relationship with Avaya is really working out well. We’ve been working hand-in-hand with Avaya’s representatives not only on the Nortel base but on the new Avaya product as well. We’ve had dozens of sales training seminars going on internally with Black Box. We’re not only training in sales, design, engineering, our technical training in the various branch offices and we’ve been very active with Avaya on many road shows where we go with Avaya and talk with customers and invite commercial, retail and government customers to come out and visit with us.

It’s been very active over the past four to six months and we’re certainly hoping to start seeing some sales activity probably next quarter. We’ve had a couple of small successes in selling Avaya equipment but not to the degree that we expect starting hopefully in the next quarter or two.

Operator

Your next question comes from Nat Kellogg – Hudson Securities.

Nat Kellogg – Hudson Securities

Just on the Nortel Avaya thing, [inaudible] helpful color but it sounds like and maybe I’m inferring this wrong but it sounds like you’re sort of talking about selling the Avaya equipment but can you give us an update on what’s going on with sort of Nortel and maybe how the product integration is going and how that’s likely to shake out for you guys?

R. Terry Blakemore

Avaya has worked hard and heavy on some roadmaps that they’ve put out on their website as well. We’ve been using that roadmap on the integration from Nortel to Avaya equipment. But, we’re continuing to get Nortel orders as we have in the past. We’re seeing some upgrades and expansion of some current systems that are out there. I believe the customers are realizing now that both these products are very strong and viable and will be around. On the Avaya side we’re really ramping up, we’re opening up a [inaudible] down in Nashville, Tennessee, we’re working on that currently.

We’re working with Avaya on national accounts. They have Avaya Global Services, they have some direct customers, worldwide customers, a large base of customers. We’re working with Avaya in supporting any effort that they need us in, in that area and in return they’re working with us on our national account internal customer base that we have. I think most of our activity over the next quarters and awards that we’ll see are from proposals and bids that we’re working on now supporting the integrators and the federal government and in the retail market.

Nat Kellogg – Hudson Securities

Then on the end markets, I know you guys have talked about retail being weak in the past and it sounds like that’s getting better and I know one of the other ones you guys have talked about being weak is the financial sector so I’m just curious if you’ve seen any improvement there? Obviously, that can be a big spender when it comes back on. I’m just curious how that’s looking?

R. Terry Blakemore

I would consider that Nat still being a soft vertical for us. We haven’t really lost any of those large financial institutions that we support but there’s just not a lot of action there. We haven’t seen a lot of these capital expenditures being released there.

Nat Kellogg – Hudson Securities

How many folks did you guys say you let go during the quarter?

Michael McAndrew

We let go 80 team members.

Nat Kellogg – Hudson Securities

Just given the fact that you guys talked about your guidance sort of incorporates some modest organic growth, I would have thought you guys would be at a point where you’re holding steady, you’re maybe even slowly starting to hire folks not continuing to cut so I’m just curious if it’s just sort of a structural issue where those folks had expertise in product lines that are growing more slowly, or whether there’s geographic mix or if there’s something going on there or maybe I’m just incorrect on that, maybe it’s the slope of the recovery?

Michael McAndrew

I can give you a little color on that Nat, we had about 25% of those folks were in Europe. The other 75 are in the US but it was closer to a 50/50 split in costs so that’s kind of connecting the dots there. If you looked at our team member count, actually our net change quarter-to-quarter was 40 so we actually did hire in certain growth areas where we reduced in some other areas. Part of the reduction was the reengineering of some of our support efforts that we’ve been working on for the last six months that we were able to execute while not sacrificing some of our service levels to our clients.

At this point our intent is not to be calling out – the way we run our business we’re always going to have ebbs and flows in our team member headcount but we don’t intend on calling that out as we move in to FY ’11. We think given what we see as a stable marketplace and a view of the different verticals and regions that were in pretty good position as we move in to FY ’11.

Nat Kellogg – Hudson Securities

The non the hotline products, I guess that came in down a tad from the third quarter and obviously as that business starts to grow again that’s a nice sort of benefit for you guys as far as mix goes because it’s a little bit higher margin. I’m just curious on sort of if you go back historically how that ramp is coming out of the recession versus the services side? Would you expect the hotline side to ramp first, is it likely to lag the services, just any color you guys have there would be great? I realize it’s always hard to forecast but just typically how do you guys expect it to unfold versus services?

Michael McAndrew

I think what we saw moving in to this cycle is in particular our voice business kind of lagged the down cycle and even in our data side, we have backlog so we kind of lagged the downer on our onsite services where hotline felt it a little earlier. So conversely what we expect to see is the hotline to rebound quicker on a rebound cycle as it will require us to fill up our backlog on the onsite side. A fair question, our view is we expect the hotline business to recover at a more closer in window than some of our other service offerings.

Operator

There are no additional questions in the queue.

R. Terry Blakemore

We thank you for your time today. As a reminder, our press release has been filed on Form 8K and on our BlackBox.com website. As Gary mentioned earlier, we will attend the UBS Global Technology & Services Conference in New York City on June the 10th. Please look for press release describing this event in more detail. I look forward to seeing many of you at one of our upcoming conferences. Again, thanks for joining us tonight and this concludes the conference call.

Operator

Ladies and gentlemen this conference will be available for replay after seven o’clock today until May 27th at Midnight. You may access the AT&T Executive Playback Service at any time by dialing 320-365-3844 and entering the access code of 155720. Once again that number is 320-365-3844, the access code is 155720. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service and you may now disconnect.

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