Black Box F2Q08 (Qtr End 9/29/07) Earnings Call Transcript

Oct.30.07 | About: Black Box (BBOX)

Black Box Corporation (NASDAQ:BBOX)

F2Q08 (Qtr End 9/29/07) Earnings Call

October 30, 2007 5:00 pm ET

Executives

Terry Blakemore - President and CEO

Mike McAndrew - Vice President and CFO

Analysts

Joe Gagnon - Atlantic Equity Research

Liam Burke- Ferris, Baker Watts

Novell Bill - Stifel Nicolaus

Operator

Ladies and Gentlemen thank you for standing by, and welcometo the Second Quarter Fiscal 2008 Earnings Call. At this time all participantsare in a listen-only mode. Later we will conduct a question-and-answer session,and instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to your host,President and CEO of Black Box Corporation, Mr. Terry Blakemore. Please goahead.

Terry Blakemore

Good evening from Pittsburg, Pennsylvania. As you heard myname is Terry Blakemore, President and CEO of Black Box Corporation. With metoday is Mr. Mike McAndrew, our Vice President and Chief Financial Officer.

Earlier today we announced our second quarter fiscal year2008 results by issuing a press release, and furnishing it to the Securities& Exchange Commission on our Form 8-K. We also posted this press release onour website at www.blackbox.com.

We'll start today's call with a brief overview of ourresults and certain additional supplemental information. Following this, wewill fill questions as time permits.

Before we begin and as a reminder, matters discussed in thiscall may contain forward-looking statements that involve risks and uncertaintiesconcerning Black Box's expected financial performance. Actual results maydiffer materially from expected results, and reported results should not beconsidered as an indication of future performance.

Potential factors that could affect our business andfinancial results include change in economic conditions in our end markets andthe general market at large. Additional factors are included in our most recentForm 10-K and a press release included in our ongoing SEC investigation andshareholder derivative lawsuit.

On this call and as presented in today’s press release, wewill discuss some financial information that includes non-GAAP financialmeasures, including operating net income, operating earnings per share, freecash flow, EBITDA, adjusted EBITDA, and organic or same-office comparisons. Wewill limit any non-GAAP financial discussions today to these specific measures.

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 schedulesthat accompany the press release for a reconciliation of non-GAAP financialmeasurements to the most directly comparative GAAP financial measurement andother supplemental information.

With that, let’s take a look at our results. Our secondquarter revenues were $261 million, a 4% decrease from last years' $271million, and a 3% increase over last quarters' $252 million. The year-over-yeardecrease is driven by expected post-transaction revenue attrition from the nextTier 1 acquisition.

Looking more deeply at our second quarter, revenues by thetwo segments will report, the highlights are as follows. First from a servicetype segment perspective, our second quarter revenues were comprised of 58% or$151 million of Voice Services, 23% or $60 million of Hotline Services, and 19%or $50 million of Data Services.

From a year-over-year perspective, for the quarter we arepleased with a 5% organic growth we achieved in the second quarter of 2008. Byorganic growth, we mean revenues excluding the effects of acquisitions in bothperiods. All excluded revenues relate to our North America Voice Service segments.

By service segment, we had 1% organic growth in our WorldwideVoice Services, 8% organic growth in our Worldwide Hotline Services, and 8%organic growth in our [Wireline] Data Services.

Secondly, from a geographic segment perspective, our secondquarter revenues were comprised of 83% or $217 million from North America, 13%or $34 million from Europe, and 4% or $10 million from what we call all others,which is primarily the Pac Rim and Latin America.

Also, we are especially pleased with 4% organic growth inour North American operations and 9% year-over-year organic growth in our internationaloperations. Total revenues for the first half totaled $513 million; thisrepresents a 2% increase from last year's $502 million.

Moving on to profits; our second quarter operating earningsper share were $0.87, a $0.04 decrease from last years' $0.91 and a $0.14increase over last quarters' $0.73.

As noted in our press release, operating earnings per sharedoes exclude amortization of intangible assets on acquisitions, stock-basedcompensation expense, asset write-up depreciation expense on acquisitions,historical stock options granting practices and investigation cost,restructuring, severance and other acquisition integration cost, and the changein fair market value of our interest rate swap.

Further details of these expenses can be found in today'spress release. In total these excluded items represent $0.23 and $0.25 pershare for our second quarter of '08 and the second quarter of '07 respectively.GAAP diluted earnings per share for second quarter of '08 was $0.64, a $0.02decrease from last year's $0.66, and an $0.18 increase over the last quarter's$0.46.

First half operating earnings per share were $1.60, anincrease of 6% from last years' $1.51. In total excluded items represented$0.50 and $0.47 per share for the first half of fiscal 2008 and fiscal 2007respectively.

First half GAAP diluted earnings per share was $1.10, anincrease from $1.04 of last year. Management believes that presenting operatingearnings per share is useful to investors because it provides a meaningfulcomparison of the ongoing operations of the company.

Looking at cash flow, GAAP cash provided by operatingactivities for the quarter was $5 million, compared to $9 million for the sameperiod last year. Second quarter free cash flow was $8 million, compared to $12million last year.

The second quarter's free cash flow of $8 million was usedtowards the following items. $5 million to fund debt reduction, $1 million fordividend payments, $1 million to fund capital expenditures, and $1 millionrelated to an increase in our cash positions.

Management believes that free cash flow defined by thecompany, as cash provided by operating activities less net capital expendituresplus proceeds from option exercises, plus or minus foreign currency translationadjustments is an important measurement of liquidity, as it represents thetotal cash available to the company.

GAAP cash provided by operating activities for the sixmonths was $12 million, compared to $22 million last year. Free cash flow was$15 million, compared to $26 million last year. This free cash flow of $15 millionwas used towards the following items. $8 million was used to fund debtreduction, $3 million to fund prior period acquisition payments, $2 million fordividend payments, $1 million to fund capital expenditures, and $1 millionrelated to an increase in our cash position.

EBITDA for the second quarter of '08 was $28 million,compared to $29 million for the same period last year. Adjusted EBITDA for thequarter was $29 million, down $2 million from $31 million for the same periodlast year. EBITDA for the first half of fiscal 2008 was $50 million, comparedto the $47 million for the same period last year. Adjusted EBITDA for the firsthalf of both fiscal 2008 and 2007 was $53 million.

Management believes that EBITDA, defined as income beforeincome taxes plus interest, depreciation, and amortization is a widely acceptedmeasure of profitability that we believe may be used to measure the company'sability to service its debt. Adjusted EBITDA defined a EBITDA plus non-cashstock compensations expense may also be used to measure the company's abilityto service its debt.

For fiscal year 2008, we continue to target reportedrevenues of approximately $1 billion, corresponding operating earnings pershare in the range of $3.30 to $3.50, and cash provided by operating activitiesin the range of 80% to 90% of operating net income.

Further in connection with the results of the internalinvestigation of our historical stock option granting practices, the company isin the process of implementing a corrective action plan related to the adversetax consequences under section 409A of the U.S. Internal Revenue Code forcertain stock options granted below fair market value to U.S. team members.

The financial statement impact of these remedial actionswill not be known until the corrective plan has been executed and completed,which is expected to occur during our third quarter of 2008. Our targets forfiscal 2008 do exclude these charges as well as other items listed in the pressrelease.

I will now turn the call over to Mike to review some of ourkey metrics for our company.

Mike McAndrew

Thanks Terry. We'll give those metrics. At the end of thesecond quarter, we had cash and cash equivalents of $18 million and total debtof $231 million for a net debt position of $213 million. This is a $7 millionreduction from a net debt of $220 million at the end of the first quarter.

Currently our interest borrowing rate is 6.6%. CompanywideDSOs were 58 days, and this is up 5 days from the first quarters' 53 days.While we typically see an increase in AR from 1Q to 2Q, our established goalfor DSOs remains to 50 days, and as such we look to improve in this areathroughout the balance of the fiscal year.

As a reminder, each DSO day is currently worth approximately$3 million in cash flow, plus an [8] day improvement's potential is $24 millionof incremental cash flow.

Accounts receivable reserve was $14.1 million or 7.0% of thegross AR balance. This compares to the first quarter's AR reserves of $13.7million or 7.8% of the gross AR balance.

Moving to inventory, our net inventory was $69.8 million,and we are pleased to report inventory turns of 7.9 or 46 days, this comparesto the first quarter's net inventory of $69.7 million and 7.5 turns. We arevery close to achieving our established goal of 8 turns, and we look to continuemaking incremental progress on this metric over the balance of fiscal 2008.

Inventory reserves were $21.7 million or 23.7% of grossinventory. This compares to the first quarter's inventory reserves of $22.0million or 24% of gross inventory. This decrease in reserve is a result of thedisposal of fully reserved inventory during the quarter.

From a capital expenditure standpoint, we had new capitalexpenditures of approximately $1 million for the quarter and $2 million for thesix months period. We are currently targeting capital expenditures for FY '08of approximately $4 million to $5 million.

Excluding the non-cash impact of the interest rate swapdiscussed in today's press release, interest expense is currently running about1.7% of revenues. As I've mentioned earlier, our current borrowing rate is6.6%.

Our projected tax rate for fiscal 2008 is 37.2%. This is anincrease from the first quarter’s 36.8%, and it is related to the expected rateof the deferred tax assets related to non-cash book stock-based compensationexpense.

There were minimal stock repurchases during the quarter, andat the end of the second quarter, the weighted average common and common equivalentshares stood at 17,752,000. For the beginning 3Q '08 period, this number isapproximately 17.9 million shares.

Our six months order backlog now stands at a $166 million.This is a slight increase over both the first quarter of ’08 and 2Q '07 backlogwhich were at $165 million.

And our team members staffing stands at approximately 4400.Although our team moves between DV&H, somewhat, for perspective, our BlackBox team breaks down approximately as follows: 2700 are mostly V that is Voice;900 are mostly D that is Data; and 800 are mostly H that is Hotline. And as Imentioned, the team does move around a bit, particularly from a DVH marketingperspective.

I'd like to now turn the call back to Terry to conclude ourcomments.

Terry Blakemore

Okay. Thank you, Mike. In closing we’re very pleased withour overall results for the second quarter. Our Black Box team has deliveredstrong revenues, operating EPS, and operating cash flow over the first sixmonths of the fiscal year, which are consistent with achieving our targetedranges for fiscal year 2008.

Similar to the organic growth achieved in the first quarter,we are particularly pleased with a 5% organic revenue growth realized in thesecond quarter, as well as improved profit margins. The progress in the nextTier 1 integration is continuing to drive the improved operating profitably.

We have a clear strategy with well-defined priorities, as wecontinue to focus on leveraging our financial strength to add high qualityservice provider via merges and acquisitions, while continuing to implementprograms to deliver strong organic growth. The results we have achieved areevidence that our strategy is working.

In summary, our expectations for Black Box in fiscal year2008 remained high. We remain committed to delivering the highest quality technicalDV&H services to our global client base, while executing a business modelthat is delivering strong and substantial operating results, which we believewill translate increased shareholder value.

We'll now open up the call for your questions as timepermits.

Question-and-AnswerSession

Operator

(Operator instructions) And our first question comes fromthe line [Joe Gagnon] of Atlantic Equity Research. Please go ahead.

Joe Gagnon - AtlanticEquity Research

Hi guys, how are you doing?

Terry Blakemore

Fine, Joe. How are you?

Joe Gagnon - AtlanticEquity Research

Good. I have a few questions, on the deferred revenues isthat made up of maintenance contracts or what exactly is in there?

Mike McAndrew

Hi Joe, this Mike, yeah that it is maintenance contractsthat we have built for and receive payment for expected payment for movingforward.

Joe Gagnon - AtlanticEquity Research

Okay. So, it's all maintenance contracts?

Mike McAndrew

Yes Sir.

Joe Gagnon - AtlanticEquity Research

So, why I guess, why was it jumped from like 20 somethingmillion to $52 million after the NextiraOne acquisition? Why did NextiraOnehave so much more in maintenance contract compared to the size of its overallbusiness, compared to your previous voice business?

Mike McAndrew

That was driven by the composition of business that they hadrelative to projects, maintenance in MAC business that was one of the, candidlyone of the attractive parts of that transaction that we found interest in.

Joe Gagnon - AtlanticEquity Research

Yeah, that they had so much in maintenance contract revenuecompared to normal voice companies?

Mike McAndrew

Yes sir.

Joe Gagnon - AtlanticEquity Research

Okay.

Terry Blakemore

They have bought in larger contracts as well.

Joe Gagnon - AtlanticEquity Research

Okay. And then, I have a question on the [Cadec], on theline item versus cost in excess of billings or uncompleted contracts, and thensay billings in excess of cost estimates on earnings on uncompleted contracts.What specifically are those two line items?

Mike McAndrew

Sure. The asset cost in estimated earnings in excessivebillings?

Joe Gagnon - AtlanticEquity Research

Right.

Mike McAndrew

That's essentially revenues that we have recognized from apercent completion standpoint.

Joe Gagnon - AtlanticEquity Research

Right.

Mike McAndrew

Where we have not yet invoiced the client.

Joe Gagnon - AtlanticEquity Research

Okay.

Mike McAndrew

And down on the liability section that is invoices toclients that we have not yet executed the work from, a work in process percentcomplete standpoint. So, it's essentially a sort of a pre-billing.

Joe Gagnon - AtlanticEquity Research

Okay.

Mike McAndrew

Alright.

Joe Gagnon - AtlanticEquity Research

Now, on the acquisition that you made, I guess, was in WashingtonState, that was like sometime in October that that going revenues in the thirdquarter or was that do they the commence after third quarter ended?

Terry Blakemore

The deal out in Washington,we closed that, I think, it was about three weeks ago.

Joe Gagnon - AtlanticEquity Research

Right.

Terry Blakemore

So, it did not contribute to our second quarter, our secondquarter ended in September.

Joe Gagnon - AtlanticEquity Research

Okay.

Terry Blakemore

So, it did not contribute to the results you are seeing heretoday but upon conclusion that deal they will contribute to our performance inour third quarter which is the December ended quarter.

Joe Gagnon - AtlanticEquity Research

Okay. Now, do you know why the deferred revenues fell fromlike $52 million to $35 million, going from your second fiscal quarter to,second fiscal quarter of '07 to your first fiscal quarter of '08?

Mike McAndrew

Yes sir, we had a part of that approximately $60 million wasmade up of a contract that we picked up after Nextira acquisition that wesubsequently relieved post acquisition with a deal we made with that client.

Joe Gagnon - AtlanticEquity Research

So, in other words that went into revenues and earnings?

Terry Blakemore

Right and that was...

Mike McAndrew

Yeah that actually got eliminated against some receivablesthat were due from that client and the relationship was terminated.

Joe Gagnon - AtlanticEquity Research

But did that going to revenues and earnings during that timeperiod, did right, I mean, when you reduced deferred revenues, it goes on theincome statement, right?

Mike McAndrew

Ultimately, in that particular case, it was a sizeablesituation that we did not take that to revenue because it was a closure to acontract issue that we were working for with that particular client.

Joe Gagnon - AtlanticEquity Research

Okay. So, none of that during that time period from 52 to 35were into revenues or earnings?

Mike McAndrew

Yes some said, because not of that $60 million but some ofthe AR that was used to relieve that?

Joe Gagnon - AtlanticEquity Research

Yeah.

Mike McAndrew

Was recognized as revenue approximately half of that.

Joe Gagnon - AtlanticEquity Research

So, half of the $70 million went into revenues and earnings?

Mike McAndrew

That is correct.

Joe Gagnon - AtlanticEquity Research

And where do you see this deferred revenues like going fromhere? I mean, I guess, from my perspective, normally what happens is that yousell new maintenance contracts and that adds to the deferred revenue. And then,as you move on some of the maintenance the deferred revenue goes down, becauseyou are using up what you already having there. Do you think it's going to beflattest or continue to go down?

Mike McAndrew

Yeah, I think, if you look at our last couple of quartersthat number has been roughly around the $32 million to $35 million.

Joe Gagnon - AtlanticEquity Research

Right.

Mike McAndrew

So, obviously, we are relieving some of that maintenancerevenue, but we're also signing up new maintenance contract. So, we expect thatto be barely stable.

Joe Gagnon - AtlanticEquity Research

Okay, alright. Thank you very much.

Mike McAndrew

Yes Sir.

Operator

Thank you. And our next question comes from the line of LiamBurke of Ferris, Baker Watts. Please go ahead.

Liam Burke- Ferris,Baker Watts

Thank you. Terry, could you talk about the competitiveenvironment on the voice services business, particularly pricing or if there isany particularly aggressive competitor out there?

Terry Blakemore

Liam, its pretty much standard, I mean, let say it is acompetitive environment for sure. There is lot of manufacturers that areactually directly competing with channel partners these days, as you are awareof, but it's nothing, we're not seeing any thing as ordinary, we continue tocompete in the market. There is lot of opportunities, as you know; the markethere is fragmented. So, there is a lot of channel partners in the area. We'refocusing on not only the local base but also the national accounts. And we'realso working in some subcontract role supporting a lot of the larger systemintegrators as well.

Liam Burke- Ferris,Baker Watts

On the voice services in particular between I know thatNextira had some business in there, though wasn't as profitable but I wouldthink that as you work through that business and attract new contracts voiceservices gross margins would begin to move directionally up and it looks like adown both sequentially in year-over-year. Is there something particularlyunique to the quarter or is that a trend do you expect and to stabilize at acertain level or?

Terry Blakemore

We did have something that was unique in the quarter, we hada couple of strategic clients that we're very competitive large projects thatwe won after and win after aggressively that have a multi-year of servicesbehind it. So, we did have some GP pressures for the second quarter but thatwas like a one-time event.

Liam Burke- Ferris,Baker Watts

Alright, thank you.

Terry Blakemore

Thank you.

Operator

Okay, thank you. Our next question comes from the line of[Novell Bill] of Stifel Nicolaus. Go ahead.

Novell Bill - StifelNicolaus

Hi guys.

Terry Blakemore

Hello.

Novell Bill - StifelNicolaus

Just looking at your interesting expense kind of from thesecond quarter versus the first quarter, it looks like there is a pretty bigjump there. First quarter, it looks like there is $3.28 million and then now weare looking at ground $6.1 million. And I was wondering on more borrowing howthat happened, it looks like that wasn't fully accounted by the change of thevalue and interest rates volume?

Mike McAndrew

Yeah, that actually, what is driving that Novell is theinterest rate swap. The interest swap in the first quarter, let me get thereactually showed up as a helper of $1.3 million, so if you normalize thatinterest on the 3280 and that 1.32 to it the true interest…

Novell Bill - StifelNicolaus

Okay.

Mike McAndrew

Interest rate without that was about $4.5 million. Okay? Inthe second quarter, we're showing 6.1 and 1.7 of that is the interest rate swapgoing the other way, and so if you back that out it's actually about $4.4million. So, first quarter was 4.5, second quarter is about 4.4.

Novell Bill - StifelNicolaus

Okay.

Mike McAndrew

Okay.

Novell Bill - StifelNicolaus

And then, could you just talk about some of your verticalswhere you're seeing strength versus either if you know, may be where you areseeing some weakness?

Terry Blakemore

Yes, we've had pretty good luck in the second quarter Novellin the hospitality and also in the University of Education vertical, also inthe government we have done quite well in the government with some largecontracts that we've won that are multi-year contracts.

Novell Bill - StifelNicolaus

And anything, where you are seeing weakness?

Terry Blakemore

Not necessarily. Not across the board, no.

Novell Bill - StifelNicolaus

Okay. Alright, thanks.

Operator

Okay, thank you. There are no more questions in queue.Please continue.

Terry Blakemore

Okay. We thank you for your time today and as a reminder ourpress release has been filed on our Form 8-K and it's also on our Black Boxwebsite at www.blackbox.com. In addition, we are planning on filing ourquarterly report on Form 10-Q with the SEC on Thursday, November 8. Again, wethank you for your time this afternoon and this does conclude our conferencecall. Thank you.

Operator

Ladies and gentlemen this conference will be available forreplay after 8:30 pm todaythrough midnight on November13. You may access the AT&T teleconference replay system at any time bydialing 320-365-3844, entering access code 889-657, and number again320-365-3844, access code 889-657.

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!