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BBOX > SEC Filings for BBOX > Form 10-K on 30-May-2013All Recent SEC Filings

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Form 10-K for BLACK BOX CORP


30-May-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A").

The discussion and analysis for the fiscal years ended March 31, 2013, 2012 and 2011 as set forth below in this Item 7 should be read in conjunction with the consolidated financial statements of Black Box, including the related notes. The Company's fiscal year ends on March 31. References to "Fiscal Year" or "Fiscal" mean the Company's fiscal year ended March 31 for the year referenced. All dollar amounts are presented in thousands except for per share amounts or unless otherwise noted.

The Company
Black Box is a leading communications system integrator dedicated to designing, sourcing, implementing and maintaining today's complex communications solutions. The Company's primary service offering is Voice Communications; the Company also offers Data Infrastructure and Technology Products. As of March 31, 2013, the Company had more than 3,000 professional technical experts in approximately 200 offices serving more than 175,000 clients in approximately 150 countries throughout the world. Founded in 1976, Black Box operates subsidiaries on five continents and is headquartered near Pittsburgh in Lawrence, Pennsylvania.


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With respect to Voice Communications, the Company's revenues are primarily generated from the sale and/or installation of new voice communications systems, the support of voice communications systems and moves, adds and changes ("MAC work") as clients' employees change locations or as clients move or remodel their physical space. The Company's diverse portfolio of product offerings allows it to service the needs of its clients independently of the manufacturer that they choose, which it believes is a unique competitive advantage. For the sale of new voice communications systems, most significant orders are subject to competitive bidding processes and, generally, competition can be significant for such new orders. The Company is continually bidding on new projects to replace projects that are completed. New voice communications systems orders often generate an agreement to support the voice communications system, which generally ranges from 1-3 years for commercial clients and 3-5 years for government clients. Historically, such an agreement would result in a fixed fee model over a period of time; however, some of our clients are migrating toward a variable fee model based on time and materials over a period of time. While this shift decreases our contractually obligated revenues and corresponding profits, the Company believes the variable model, which is dependent on the clients need for our services, will generate revenues with similar profitability to the fixed-fee model. Sales of new voice communications systems and, to a lesser extent, MAC work, are dependent upon general economic growth and the Company's clients' capital spending. On the other hand, revenues from support agreements (fixed and variable) contracts generally are not dependent on the economy as clients seek to extend the life of their existing equipment and delay capital spending on new voice communications systems. The Company also has government contracts that generate significant revenues and are not as dependent on the overall economic environment as commercial clients. Maintenance and MAC work revenues are also dependent upon the Company's history and relationship with its clients and its long track record of providing high-quality service. Similarly, the Company's revenues for Data Infrastructure are generated from the installation or upgrade of data networks and MAC work. The installation of new data networks is also dependent upon general economic growth and our clients' capital spending. Installed data networks, however, may need to be upgraded in order to accommodate the growing use of network technology. Additionally, Data Infrastructure projects can include MAC work, similar to Voice Communications, which is dependent on economic factors that are the same as those factors discussed above in relation to the Voice Communications business.

There is and has been a trend toward convergence of voice and data networks, in each of which the Company has technical expertise which the Company believes is a competitive advantage. Both the Voice Communications and Data Infrastructure businesses generate backlog which is defined by the Company as orders and contracts considered to be firm. At March 31, 2013, the Company's total backlog, which relates primarily to Voice Communications and Data Infrastructure, was $369,711 of which $264,027 is expected to be completed within the next twelve months.

The Company generates Technology Products revenues from the sale of technology products such as cables, switches and media infrastructure products through its catalog, Internet Web site and direct sales. The sale of these products is a highly fragmented and competitive business. The Company has been in this business for over 30-years and has developed a reputation for providing high quality products, free 24/7/365 technical support, comprehensive warranties and rapid order fulfillment. With an average order size of less than one thousand dollars, the Company's Technology Products is less impacted by capital spending and more so by general information technology spending. The Company's Technology Products business provides additional distribution and support capabilities along with access to Black Box branded products to both the Voice Communications and Data Infrastructure businesses which provide cost benefits.

The Company services a variety of clients within most major industries, with the highest concentration in government, healthcare, business services, manufacturing, retail, technology and banking. Factors that impact those verticals, therefore, could have an impact on the Company. While the Company generates most of its revenues in North America, the Company also generates revenues from around the world, primarily Europe, such that factors that impact European markets could impact the Company.

The Company strives to develop extensive and long-term relationships with high-quality clients as Management believes that satisfied clients will demand quality services and product offerings even in economic downturns.


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The Company targets strategic acquisitions which it believes will deepen its capabilities and expand market opportunity. The Company has completed several acquisitions from April 1, 2010 through March 31, 2013 that have had an impact on the Company's consolidated financial statements and, more specifically, North America Voice Communications and North America Data Infrastructure for the periods under review. There were no acquisitions during Fiscal 2013. Fiscal 2012 acquisitions include (i) InnerWireless, Inc. ("Innerwireless"), a privately-held company headquartered in Richardson, TX, services clients in every industry from healthcare to Fortune 500 enterprises and was the first Black Box acquisition in the rapidly-growing in-building wireless market and (ii) PS Technologies, LLC, a privately-held company headquartered in Dayton, OH, services clients in the healthcare and government verticals and was the first Black Box acquisition in the rapidly-growing enterprise video communications market. The only Fiscal 2011 acquisition was LOGOS Communications Systems, Inc., a privately-held company headquartered in Westlake, OH, with an active client base which includes commercial, education and various local government agency accounts. These acquisitions are collectively referred to as the "Acquired Companies." References to the Acquired Companies within our comparison of Fiscal 2013 and Fiscal 2012 are intended to describe the Acquired Companies from April 1, 2011 through March 31, 2013. References to the Acquired Companies within our comparison of Fiscal 2012 and Fiscal 2011 are intended to describe the Acquired Companies from April 1, 2010 through March 31, 2012. The results of operations of the Acquired Companies are included within the Company's Consolidated Statements of Operations beginning on their respective acquisition dates. The Company incurs certain expenses such as the amortization of intangible assets on acquisitions, restructuring expense, the goodwill impairment loss, the change in fair value of the interest-rate swaps and the joint venture investment loss that it excludes when evaluating the continuing operations of the Company. The following table summarizes those expenses and their impact on Operating income (loss) and Income (loss) before provision (benefit) for income taxes for the periods presented:

                                                                Fiscal
                                                      2013          2012          2011
Amortization of intangible assets on
acquisitions                                        13,713        12,980        12,111
Restructuring expense                                8,445         1,866         1,793
Goodwill impairment loss                                 -       317,797             -
Impact on Operating income (loss)              $   (22,158 ) $  (332,643 ) $   (13,904 )
Change in fair value of interest-rate swaps            606          (530 )      (2,968 )
Joint venture investment loss                  $     2,670   $         -   $         -
Impact on Income (loss) before provision       $   (25,434 ) $  (332,113 ) $   (10,936 )
(benefit) for income taxes

Fiscal 2013 vs Fiscal 2012 Summary

In Fiscal 2013, revenues decreased by 8% which, on a geographic segment basis, included decreases of 9% in North America, 8% in Europe and 2% in All Other. From a service-type perspective, the 8% total decrease included decreases of 1% for Data Infrastructure, which includes a full year of revenues during Fiscal 2013 from Innerwireless whereas the prior year would have only included a partial year of revenues, 11% for Voice Communications and 9% for Technology Products. Our government (primarily federal) revenue vertical was down 15% as a result of delays in funding as well as project and task order initiation and our commercial revenue vertical was down 10% as a result of slower than expected economic recovery and sluggish client adoption of the rapidly changing communications technology for Voice Communications and lower IT infrastructure spend and investment levels by our end customers for Data Infrastructure which is highly dependent on project-oriented revenues.

We operate in the rapidly changing communication technology market which has inherent market risk. Economic recovery has not been as strong or as consistent in our markets as we had expected. The changes in communications technology have been rapid, and client adoption has been weak. Our management team has responded by providing technology independent solutions to meet our clients' evolving needs. However, in recent years, we have not been able to create or sustain organic growth.

Our response to the changes in our market needs to be decisive. We occupy a unique position in the market and our relationship with our partners and clients provides Black Box with valuable insight into the future of enterprise communications. We believe that communications is an organization's most important process and that our clients are best served with a technology-independent approach to meeting their communications challenges. We also believe that enterprises will adopt best of breed solutions. In response, our strategy includes four areas of focus:

Strengthen and expand our portfolio of high-value communications solutions. As enterprise communications become more complex, we must be prepared to offer our clients the very latest solution alternatives.


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Leverage our centralized expertise with our local skills and relationships. Over time, we have built the most competitive footprint of local technical resources in the industry. We can drive additional products and services through that platform by investing in centralized engineering and project management resources.

Realign our organizational structure and incentive programs. During the year, we announced leadership changes within our executive and operating teams. These changes add focus and accountability to our business.

Implement a consistent, comprehensive market penetration approach. Just as we can leverage our product and service platforms to serve our clients, we can also leverage our local resources more efficiently with focused centralized sales and marketing programs.

Successful implementation of this strategy begins with a transition of our business to a more flexible organization that can adapt to the rapid changes in communications technology. As such, the Company has realigned its organizational structure which will result in new reporting segments (North America Services, North America Products, International Services and International Products) for the purpose of making operational decisions and assessing financial performance which will be effective, on a prospective basis, beginning on April 1, 2013. This is consistent with the proliferation of voice-over-internet-protocol (VOIP) solutions and the adoption of unified communication technologies which has resulted in a trend toward convergence of voice and data networks. We believe that, in the near future, the distinction between our voice and data solution offerings will not be significant. As such, those historical Voice Communications and Data Infrastructure offerings have been aggregated into Services in their respective geography. We will report financial information (revenue through operating income) for these new reporting segments which should provide enhanced visibility and transparency into our operations, our business drivers and the value of our enterprise. We believe that a successful transition will better position Black Box as a comprehensive communications system integrator where we can support our clients with multiple offerings.

As a first step in this transition, we are focused on leveraging our technology-independent service model. We continue to believe that our best of breed, client-focused offering is a competitive advantage for Black Box. With the broad service platform that we have built, we have the opportunity to enable all of our offices with access to a comprehensive portfolio of products and services. The transition of our service model will include more client-focused resources in the field, supported by centralized expertise.

During Fiscal 2013, we worked to align our organizational structure to enable our field with better access to technical expertise and partner resources. Also, we are realigning sales and account management incentives to promote new product penetration, in effect, driving focus and action to cross-selling our portfolio of communications solutions. We believe that these changes will enable us to efficiently and effectively introduce additional new product and service offerings over time and allow us to support multiple offerings for each of our clients which, in turn, should grow our revenues organically and could increase profitability as a result of new product offerings and efficiencies in the delivery model.

The transition that we are implementing is in response to a dynamic market. Although our voice-centric approach has served us well, we recognize that the future of enterprise communications requires a more robust offering. We expect our clients to continue to look to us for creative solutions and we, in turn, expect to deliver them. As we transition, we will continue to be responsive to our clients' evolving views on enterprise communications.

The changes that we have made during Fiscal 2013 did not require significant additional investments. However, we intend to make investments in sales and marketing efforts which could have an impact on our profitability in the near term.

While we have implemented a strategy to profitably grow our revenues in this rapidly changing communication technology market, the success of that strategy and our ability to grow revenues is dependent on a reasonable level of government spending, economic recovery along with IT infrastructure spend and investments by our end customers and client adoption of rapidly-changing communications technology. There is no assurance that this strategy will be successful and any failure could impact our financial condition.

Gross profit margins increased by 0.2% to 32.1% primarily as a result of competitive market conditions for Voice Communications and Technology Products. The Company believes that the addition of new services and products to its existing technology independent service model should result in stable gross profit margins.

Operating income increased 123% which was due to the goodwill impairment loss of $317,797 incurred in the prior year partially offset by a decrease in Revenues. Operating income included $8,445 of restructuring expense which was incurred as a response to the continued weakness in our end markets to better align our costs with revenues in the form of headcount reductions and back office and real estate consolidation initiatives; we expect these actions to result in annualized savings of approximately $12 million. We will continue to evaluate all of our operating costs and investments to ensure an efficient and effective use of our resources.


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As previously noted, certain of our Selling, general and administrative expenses do not change significantly with changes in revenue. As such, we believe that we can realize significant leverage from our Selling, general and administrative expenses with increases in our Revenues.

Diluted EPS increased 112% due to the net after-tax impact of the goodwill impairment loss of $295,996 incurred in the prior year as well as a 6% decrease in our Diluted weighted-average shares outstanding partially offset by a decrease in Revenues. The decrease in our Diluted weighted-average shares outstanding was the result of the repurchase of shares of our common stock noted below.

Cash flow from operations decreased 29% which was due to the decrease in Revenues. We returned value to our investors by repurchasing 1,515,445 shares of common stock for $37,214, paying $5,206 in annual dividends and investing $6,323 of capital expenditures to support our operational infrastructure.

Management is presented with and reviews revenues and operating income (loss) by geographical segment and revenues and gross profit information by service type. The following table provides information on Revenues and Operating income (loss) by reportable geographic segment (North America, Europe and All Other). The table below should be read in conjunction with the following discussions.

                                                           Fiscal
                                    2013                   2012                    2011
                                             % of                    % of                   % of
                                            total                   total                  total
                                     $    revenue           $     revenue           $    revenue
Revenues
North America               $  862,957    86.5%   $   943,717     86.8%   $   931,181    87.2%
Europe                          97,114     9.7%       105,492      9.7%       100,221     9.4%
All Other                       37,715     3.8%        38,319      3.5%        36,827     3.4%
Total                       $  997,786     100%   $ 1,087,528      100%   $ 1,068,229     100%
Operating income (loss)
North America 1             $   47,413            $  (214,448 )           $    76,789
% of North America revenues        5.5 %                (22.7 )%                  8.2 %
Europe 2                    $    5,191            $   (30,347 )           $     8,032
% of Europe revenues               5.3 %                (28.8 )%                  8.0 %
All Other                   $    3,665            $     5,122             $     6,237
% of All Other revenues            9.7 %                 13.4  %                 16.9 %
Total                       $   56,269     5.6%   $  (239,673 )  (22.0)%  $    91,058     8.5%

1 Includes goodwill impairment loss of $277,132 recorded during the third quarter of Fiscal 2012.

2 Includes goodwill impairment loss of $40,665 recorded during the third quarter of Fiscal 2012.


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The following table provides information on Revenues and Gross profit by service type (Data Infrastructure, Voice Communications and Technology Products). The table below should be read in conjunction with the following discussions.

                                                       Fiscal
                                 2013                   2012                   2011
                                          % of                   % of                   % of
                                         total                  total                  total
                                  $    revenue           $    revenue           $    revenue
Revenues
Data Infrastructure      $  243,711    24.4%   $   247,157    22.7%   $   230,719    21.6%
Voice Communications        572,371    57.4%       641,731    59.0%       648,512    60.7%
Technology Products         181,704    18.2%       198,640    18.3%       188,998    17.7%
Total                    $  997,786     100%   $ 1,087,528     100%   $ 1,068,229     100%
Gross profit
Data Infrastructure      $   63,370            $    62,032            $    59,287
% of Data Infrastructure       26.0 %                 25.1 %                 25.7 %
revenues
Voice Communications     $  176,057            $   196,279            $   210,558
% of Voice                     30.8 %                 30.6 %                 32.5 %
Communications revenues
Technology Products      $   80,503            $    88,185            $    87,265
% of Technology Products       44.3 %                 44.4 %                 46.2 %
revenues
Total                    $  319,930    32.1%   $   346,496    31.9%   $   357,110    33.4%

Fiscal 2013 Compared To Fiscal 2012

Total Revenues
Total revenues for Fiscal 2013 were $997,786, a decrease of 8% compared to total revenues for Fiscal 2012 of $1,087,528. The Acquired Companies contributed incremental revenue of $56,647 and $31,453 for Fiscal 2013 and Fiscal 2012, respectively. Excluding the effects of the acquisitions and the negative exchange rate impact of $5,088 in Fiscal 2013 relative to the U.S. dollar, total revenues would have decreased 10% from $1,056,075 in Fiscal 2012 to $946,227 in Fiscal 2013 for the reasons discussed below.

Revenues by Geography

North America
Revenues in North America for Fiscal 2013 were $862,957, a decrease of 9% compared to revenues for Fiscal 2012 of $943,717. The Acquired Companies contributed incremental revenue of $56,647 and $31,453 for Fiscal 2013 and Fiscal 2012, respectively. Excluding the effects of the acquisitions and the negative exchange rate impact of $144 in Fiscal 2013 relative to the U.S. dollar, North American revenues would have decreased 12% from $912,264 in Fiscal 2012 to $806,454 in Fiscal 2013. This decrease was primarily due to a decrease for Voice Communications within the government revenue vertical, primarily caused by delays in funding as well as project and task order initiation and within the financial services, retail services, education and healthcare revenue verticals primarily as a result of slower than expected economic recovery and sluggish client adoption of the rapidly changing communications technology; for Data Infrastructure within the business services, financial services and retail services revenue verticals, primarily as a result of lower IT infrastructure spend and investment levels by our end customers; and for Technology Products within the government and business services revenue verticals, primarily as a result of slower than expected economic recovery and lower IT infrastructure spend and investment levels by our end customers.

Europe
Revenues in Europe for Fiscal 2013 were $97,114, a decrease of 8% compared to revenues for Fiscal 2012 of $105,492. Excluding the negative exchange rate impact of $4,249 in Fiscal 2013 relative to the U.S. dollar, revenues in Europe would have decreased 4% from $105,492 in Fiscal 2012 to $101,363 in Fiscal 2013. This decrease was primarily due to sluggish economic recovery that has affected demand for Data Infrastructure and Technology Products.


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All Other
Revenues for All Other for Fiscal 2013 were $37,715, a decrease of 2% compared to revenues for Fiscal 2012 of $38,319. Excluding the negative exchange rate impact of $695 in Fiscal 2013 relative to the U.S. dollar, All Other revenues would have been relatively consistent at $38,319 in Fiscal 2012 and $38,410 in Fiscal 2013.

Revenue by Service Type

Data Infrastructure
Revenues from Data Infrastructure for Fiscal 2013 were $243,711, a decrease of 1% compared to revenues for Fiscal 2012 of $247,157. The Acquired Companies contributed incremental revenue of $30,107 and $6,025 for Fiscal 2013 and Fiscal 2012, respectively. Excluding the effects of the acquisitions and the negative exchange rate impact of $1,263 in Fiscal 2013 relative to the U.S. dollar for international Data Infrastructure, Data Infrastructure revenues would have decreased 11% from $241,132 in Fiscal 2012 to $214,867 in Fiscal 2013. This decrease was primarily due to lower IT infrastructure spend and investment levels by our end customers in North America within the business services, financial services and retail services revenue verticals and a sluggish economic recovery that has affected demand in Europe.

Voice Communications
Revenues from Voice Communications for Fiscal 2013 were $572,371, a decrease of 11% compared to revenues for Fiscal 2012 of $641,731. The Acquired Companies contributed incremental revenue of $26,540 and $25,428 for Fiscal 2013 and Fiscal 2012, respectively. Excluding the effects of the acquisitions and the negative exchange rate impact of $79 in Fiscal 2013 relative to the U.S. dollar for international Voice Communications,Voice Communications revenues would have decreased 11% from $616,303 in Fiscal 2012 to $545,910 in Fiscal 2013. This decrease was primarily due to delays in funding as well as project and task order initiation in the government revenue vertical and slower than expected economic recovery and sluggish client adoption of the rapidly changing communications technology within business services, retail services, education and healthcare revenue verticals.

Technology Products
Revenues from Technology Products for Fiscal 2013 were $181,704, a decrease of 9% compared to revenues for Fiscal 2012 of $198,640. Excluding the negative exchange rate impact of $3,746 in Fiscal 2013 relative to the U.S. dollar for international Technology Products, Technology Products revenues would have decreased 7% from $198,640 in Fiscal 2012 to $185,450 in Fiscal 2013. This decrease was primarily due to slower than expected economic recovery and lower IT infrastructure spend and investment levels by our end customers in North America within the government and business services revenue verticals and a sluggish economic recovery that has affected demand in Europe.

Gross profit
Gross profit for Fiscal 2013 was $319,930, a decrease of 8% compared to gross profit for Fiscal 2012 of $346,496. Gross profit as a percent of revenues for Fiscal 2013 was 32.1%, an increase of 0.2% compared to gross profit as a . . .

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