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BBOX > SEC Filings for BBOX > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for BLACK BOX CORP


7-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations("MD&A").
The discussion and analysis for the three-months ended June 30, 2013 and 2012 as set forth below in this Part I, Item 2 should be read in conjunction with the response to Part I, Item 1 of this report and the consolidated financial statements of Black Box Corporation ("Black Box," the "Company," "we" or "our"), including the related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission ("SEC") for the fiscal year ended March 31, 2013 (the "Form 10-K"). References to "1Q14" mean the three-month period ending June 30, 2013 while references to "1Q13" mean the three-month period ending June 30, 2012. The Company's fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and generally end on the Saturday nearest each calendar quarter end, adjusted to provide relatively equivalent business days for each fiscal quarter. The actual ending dates for the periods presented as of June 30, 2013 and 2012 were June 29, 2013 and June 30, 2012, respectively. 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 Corporation ("Black Box" or the "Company") is a leading communications system integrator dedicated to designing, sourcing, implementing and maintaining today's complex communications solutions. The Company offers Products and Services that it distributes through two platforms that it has built over its 37-year history.
The Products Platform ("Product") is comprised of global sales and distribution, free 24/7/365 technical support, custom solutions, same-day delivery, lifetime warranties, quality control, global product management and sourcing. The current product categories offered through this platform include:
infrastructure,

high performance keyboard, video and mouse (KVM) switches,

audio-visual (AV), multi-media and digital signage, and

specialty networking.

The Company generates products revenues from the sale of technology products through its catalogs and Internet Web site. The sale of these products are in a highly fragmented and competitive market. The Company has been in this business for over 37 years and has developed a reputation for being a reliable provider of high-quality communications and infrastructure products. With an average order size of less than one thousand dollars, product revenues are less impacted by capital spending and more so by general information technology spending. The Services ("Service") Platform is comprised of engineering and design, network operations centers, technical certifications, local and national sales teams, remote monitoring, on-site service teams and technology partner centers of excellence which include dedicated sales and engineering resources. The primary services offered through this platform include:
communications lifecycle services,

unified communications,

structured cabling,

video/AV services,

in-building wireless and

data center services.

The Company generates service revenues from the design, sale and/or installation of new communications systems, the support of existing communications systems and moves, adds and changes ("MAC work"). The Company's diverse portfolio of offerings allows it to service the needs of its clients independent of the technology that they choose, which it believes is a unique competitive advantage. For the sale and implementation of new 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 maintain and grow service revenues. Projects account for the majority of service revenues and are primarily driven by the overall economic environment and information technology capital spending. The Company also serves government clients whose revenues are not as dependent on the overall economic environment as commercial clients but are subject to governmental budgetary constraints.


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New communications systems orders often generate a post-implementation maintenance agreement to support the 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 earned ratably over the term of the contract. Recently, some of our clients have adopted a variable fee model based on time and materials per occurrence, similar to MAC work. While this shift decreases our contractually obligated revenues, the variable model also generates profitable revenues. Revenues from maintenance contracts generally are not dependent on the economy as clients contract for maintenance to extend the life of their existing equipment and delay capital spending on new communications systems. Maintenance and MAC work revenues are also dependent upon the Company's relationship with its clients and its long track record of providing high-quality service.
Our service business generates backlog which is defined by the Company as orders and contracts considered to be firm. At June 30, 2013, the Company's total backlog which relates primarily to services was $348,274, of which $240,988 is expected to be completed within the next twelve months.
Our two platforms introduce scale, flexibility and leverage to the business, and provide the following competitive advantages:
a diversified client base that ranges from small organizations to many of the world's largest corporations and institutions,

key relationships with leading technology partners,

a broad geographic footprint of approximately 200 offices serving more than 175,000 clients in approximately 150 countries throughout the world,

deep organic resources with 4,044 team members world-wide, approximately 3,000 of whom are technical and engineering talent who provide our clients with on-site and remote services,

dedicated sales force of over 300 direct sales people world-wide, and

a strong financial position with a stable balance sheet and positive cash flow for 37 consecutive years.

The Company services a variety of clients within most major industries, with the highest concentration in the government, business services, manufacturing, banking, retail, healthcare and technology industry verticals. 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. Company management ("Management") 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. In connection with a new management team and a renewed business strategy, the Company has realigned its organizational structure, which resulted in the identification of new operating segments (North America Products, North America Services, International Products and International Services) for the purpose of making operational decisions and assessing financial performance which was effective, on a prospective basis, beginning on April 1, 2013. See Note 4 and Note 14 to the Consolidated Financial Statements for additional information.

1Q14 vs 1Q13 Summary
                                                           1Q14         1Q13   % Change
Revenues                                             $  246,897   $  247,837       (0.4 )%
Gross profit margin                                        31.2 %       32.0 %       (3 )%
Operating income margin                                     5.0 %        4.8 %        4  %
Diluted EPS                                          $     0.43   $     0.34         25  %
Net cash provided by (used for) operating activities $   20,539   $   (3,370 )      710  %

Diluted EPS was $0.43, an increase of 25% compared to Diluted EPS of $0.34 in the same period last year as a result of:
comparable Revenues as a result of an increase in Product Revenues due to two large orders offset by a decrease in Service Revenues due to slower than anticipated client adoption of rapidly changing communications technology in North America,

a $2,243 decrease in Gross profit as a result of a decrease in gross profit margin from 32.0% to 31.2% as a result of lower gross margins on the large orders noted above,


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a $2,680 decrease in Selling, general and administrative expenses which were primarily the result of costs savings from restructuring activity in the prior year and a decrease in restructuring expenses of $1,841, partially offset by current period investments for growth programs,

a $1,007 decrease in Interest expense (income), net resulting from the change in the fair value of the interest-rate swap of $1,103 (from a loss of $646 in 1Q13 to a gain of $457 in 1Q14),

a $871 increase in Provision for income taxes as a result of an increase in Income before provision for income taxes and an increase in the effective rate from 38.0% to 39.5%, and

a 1,176 reduction in Diluted weighted-average common shares outstanding resulting from the Company's common stock repurchases.

Net cash provided by operating activities was $20,539, an increase of 710% compared to Net cash used for operating activities of $3,370 in the same period last year primarily due to a $4,284 decrease in Costs/estimated earnings in excess of billings on uncompleted contracts compared to a $14,127 increase in Costs/estimated earnings in excess of billings on uncompleted contracts. As a reminder, Costs/estimated earnings in excess of billings on uncompleted contracts includes contracts for which contract billing terms do not necessarily coincide with percentage-of-completion revenue recognition.


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Results of Operations
Segments
We conduct our business globally and manage our business by geographic-service
type under the following four operating segments: North America Products, North
America Services, International Products and International Services. The
Revenues, Gross profit and Operating income amounts in the table below are
presented on a basis consistent with accounting principles generally accepted in
the United States. As a result of the segment change (discussed in Note 14 of
the Notes to the Consolidated Financial Statements), the Company has restated
prior period information to conform to the current year's presentation.
                            1Q14        1Q13   % Change
Revenues
North America Products $  21,036   $  21,242         (1 )%
International Products $  27,172   $  24,111         13  %
Total Products         $  48,208   $  45,353          6  %
North America Services $ 189,666   $ 194,026         (2 )%
International Services $   9,023   $   8,458          7  %
Total Services         $ 198,689   $ 202,484         (2 )%
Total Revenues         $ 246,897   $ 247,837          -  %
Gross profit
North America Products $   8,912   $   9,689         (8 )%
% of Revenues               42.4 %      45.6 %       (7 )%
International Products $  10,801   $  10,841          -  %
% of Revenues               39.8 %      45.0 %      (12 )%
Total Products         $  19,713   $  20,530         (4 )%
% of Revenues               40.9 %      45.3 %      (10 )%
North America Services $  55,187   $  56,601         (2 )%
% of Revenues               29.1 %      29.2 %        -  %
International Services $   2,131   $   2,143         (1 )%
% of Revenues               23.6 %      25.3 %       (7 )%
Total Services         $  57,318   $  58,744         (2 )%
% of Revenues               28.8 %      29.0 %       (1 )%
Total Gross Profit        77,031      79,274         (3 )%
% of Revenues               31.2 %      32.0 %       (3 )%
Operating income
North America Products $   1,104   $   1,835        (40 )%
% of Revenues                5.2 %       8.6 %      (40 )%
International Products $   1,649   $   1,927        (14 )%
% of Revenues                6.1 %       8.0 %      (24 )%
Total Products         $   2,753   $   3,762        (27 )%
% of Revenues                5.7 %       8.3 %      (31 )%
North America Services $   9,423   $   7,726         22  %
% of Revenues                5.0 %       4.0 %       25  %
International Services $     276   $     372        (26 )%
% of Revenues                3.1 %       4.4 %      (30 )%
Total Services         $   9,699   $   8,098         20  %
% of Revenues                4.9 %       4.0 %       23  %
Total Operating Income    12,452      11,860          5  %
% of Revenues                5.0 %       4.8 %        4  %


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1Q14 vs 1Q13
Total Revenues were $246,897, a slight decrease when compared to Total Revenues of $247,837 in the same period last year. Product Revenues were $48,208, an increase of 6% compared to Product Revenues of $45,353 in the same period last year primarily due to large orders in both North America Products and International Products sold through integrators within business services whose end-users were government clients. Service Revenues were $198,689, a decrease of 2% compared to Service Revenues of $202,484 in the same period last year primarily due to a decrease in commercial revenues in North America Services resulting from slower than anticipated economic recovery and sluggish client adoption of the rapidly changing communications technology partially offset by an increase in government revenues in North America Services as a result of improved project time-lines on several projects.
Total Gross profit margin was 31.2%, a decrease of 3% compared to Total Gross profit margin of 32.0% in the same period last year. Product Gross profit margin was 40.9%, a decrease of 10% compared to Product Gross profit margin of 45.3% in the same period last year, primarily due to the lower margins on the large orders noted above. Service Gross profit margin was 28.8%, a decrease of 1% compared to Service Gross profit margin of 29.0%, which included an unusual cost overrun, in the same period last year, primarily as a result of the mix of government revenue in relation to total revenues, which traditionally carries lower margins than commercial revenues.
Total Operating income margin was 5.0%, an increase of 4% compared to Total Operating income margin of 4.8% in the same period last year. Product Operating income margin was 5.7%, a decrease of 31% compared to Product Operating income margin of 8.3% in the same period last year, primarily due to the lower margins on the large orders noted above. Service Operating income margin was 4.9%, an increase of 23% compared to Service Operating income margin of 4.0% in the same period last year, primarily due to a decrease in Selling, general and administrative expenses partially offset by lower gross margins as a result of the mix of government revenue in relation to total revenues noted above. The decrease in Selling, general and administrative expenses is the result of costs savings from restructuring activity in the prior year and a decrease in restructuring expenses of $1,841 partially offset by current period investments for growth programs.
Interest expense, Other expense and Income Taxes

                             1Q14      1Q13   % Change
Interest expense          $   923   $ 1,930        (52 )%
% of Revenues                 0.4 %     0.8 %      (50 )%
Income taxes              $ 4,508   $ 3,637         24  %
Effective income tax rate    39.5 %    38.0 %        4  %

1Q14 vs 1Q13
Interest expense was $923, a decrease of 52% compared to Interest expense of $1,930 in the same period last year primarily, as a result of a change in the fair value of the interest-rate swap of $1,103 (from a loss of $646 in 1Q13 to a gain of $457 in 1Q14). Interest expense as a percent of Revenues was 0.4%, a decrease of 50% compared to Interest expense as a percent of Revenues of 0.8% in the same period last year.
Income taxes was $4,508, an increase of 24% compared to Income taxes of $3,637 in the same period last year. The effective income tax rate was 39.5%, an increase of 4% compared to effective income tax rate of 38.0% in the same period last year. The effective tax rate increase from 38.0% to 39.5% was primarily due to the write-off of certain deferred tax assets related to equity awards and the mix of world-wide income taxed at different rates. Liquidity and Capital Resources
Overview
A majority of our revenue is generated through individual sales of products and services. Less than 25% of our revenue is generated from long-term support contracts. We depend on repeat client business, as well as our ability to develop new client business, to sustain and grow our revenue. Most significant orders are subject to a competitive bidding process and, generally, competition can be significant for such new orders. Our business model provides us with flexibility in terms of capital expenditures and other required operating expenses. For the foreseeable future, we expect to continue to generate net cash provided by operating activities that exceeds our capital expenditures and other required operating expenses and will be available for discretionary investments.


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We seek to allocate the net cash provided by our operating activities in a manner that will enhance per share results. Our historical discretionary investments include: strategic acquisitions of high quality growth-oriented companies, a return to our shareholders through dividends and common stock repurchases and repaying our debt.
Liquidity Position
The following is a summary of our capitalization and liquidity position.

                                            1Q14       4Q13       1Q13
Cash and cash equivalents              $  31,575  $  30,720  $  19,847
Working capital                        $ 178,757  $ 184,229  $ 178,397
Long-term debt                         $ 178,255  $ 187,648  $ 200,804
Stockholders' equity                   $ 482,497  $ 482,247  $ 480,442
Unused portion of the Credit Agreement $ 217,621  $ 208,340  $ 194,665

We expect that our cash, the unused portion of the Credit Agreement (hereinafter defined) and net cash provided by operating activities should be sufficient to cover the Company's working capital requirements, capital expenditures, dividend program, potential stock repurchases, potential future acquisitions or strategic investments and other cash needs for at least the next 12 months. Sources and Uses of Cash
The following is a summary of our sources and uses of cash.

                                                          1Q14       1Q13
Net cash provided by (used for) operating activities $  20,539   $ (3,370 )
Net cash provided by (used for) investing activities $  (2,005 ) $ (3,171 )
Net cash provided by (used for) financing activities $ (17,617 ) $  4,134

Net cash provided by (used for) operating activities Net cash provided by operating activities was $20,539, due primarily to Net income of $6,905, inclusive of non-cash charges, a decrease in accounts receivable of $7,530 and a decrease in cost in excess of billings of $4,284, compared to net cash used for operating activities of $3,370 in the same period last year, due primarily to an increase in costs in excess of billings of $14,127 (primarily due to large contracts for which contract billing terms do not necessarily coincide with percentage-of-completion revenue recognition) and a decrease in accrued compensation of $8,732 (primarily due to the payment of Fiscal 2012 year-end bonuses and incentive compensation during 1Q13), partially offset by net income of $5,932, inclusive of non-cash charges, and a decrease in accounts receivable of $7,846. Changes in the above accounts are based on average Fiscal 2014 and Fiscal 2013 exchange rates, as applicable. Changes in working capital, and particularly changes in accounts receivable, costs in excess of billings and billings in excess of cost, can have a significant impact on net cash provided by operating activities, largely due to the timing of payments and receipts. The Company expects that its cash provided by operating activities and the availability under its credit facility will be sufficient to fund the Company's working capital requirements, capital expenditures, dividend program, potential stock repurchases, potential future acquisitions or strategic investments and other cash needs for the next twelve-months.
Net cash provided by (used for) investing activities Capital expenditures
The Company made investments of $2,003 compared to $1,788 in the same period last year which related primarily to information technology infrastructure, computer hardware and software and vehicles.


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Net cash provided by (used for) financing activities Proceeds from long-term debt
Repayment of long-term debt was $9,412, funded by cash flow provided by operations, compared to proceeds from long-term debt of $21,060 in the same period last year, used to fund common stock repurchases and cash flow used by operations.
Common stock repurchases
The Company made discretionary investments in the form of common stock repurchases of $5,440 compared to $16,249 in the same period last year. The Company also made tax payments of $1,322 compared to $983 in the prior year related to share withholding to satisfy employee income taxes due as a result of the vesting of certain restricted stock units and performance shares. Since the inception of the repurchase program in April 1999 through June 30, 2013, the Company has repurchased 9,862,539 shares of common stock for an aggregate purchase price of $378,541, or an average purchase price per share of $38.38. These shares do not include the treasury shares withheld for tax payments due upon the vesting of certain restricted stock units and performance shares. As of June 30, 2013, 637,461 shares were available under repurchase programs. Additional repurchases of common stock may occur from time to time depending upon factors such as the Company's cash flows and general market conditions. There can be no assurance as to the timing or amount of such repurchases. Under the Credit Agreement, the Company is permitted to repurchase its common stock as long as no Event of Default or Potential Default (as defined in the Credit Agreement) shall have occurred and is continuing or shall occur as a result thereof. In addition, no repurchase of common stock is permitted under the Credit Agreement if such event would violate a consolidated leverage ratio required to be maintained under the Credit Agreement. Dividends
The Company made discretionary investments in the form of dividends to its shareholders of $1,291 compared to $1,224 in the prior year. While the Company expects to continue to declare quarterly dividends, the payment of future dividends is at the discretion of the Company's Board of Directors (the "Board") and the timing and amount of any future dividends will depend upon earnings, cash requirements and the financial condition of the Company. Under the Credit Agreement, the Company is permitted to make any distribution or dividend as long as no Event of Default or Potential Default (as defined in the Credit Agreement) shall have occurred and is continuing or shall occur as a result thereof. In addition, no distribution or dividend is permitted under the Credit Agreement if such event would violate a consolidated leverage ratio required to be maintained under the Credit Agreement other than regular quarterly dividends not exceeding $15,000 per year.
Credit Agreement
On March 23, 2012, the Company entered into a Credit Agreement (the "Credit Agreement") with Citizens Bank of Pennsylvania, as administrative agent, and certain other lender parties. The Credit Agreement expires on March 23, 2017. Borrowings under the Credit Agreement are permitted up to a maximum amount of $400,000, which includes up to $25,000 of swing-line loans and $25,000 of letters of credit. The Credit Agreement may be increased by the Company up to an additional $100,000 with the approval of the lenders and may be unilaterally and permanently reduced by the Company to not less than the then outstanding amount of all borrowings. Interest on outstanding indebtedness under the Credit Agreement accrues, at the Company's option, at a rate based on either: (a) the greater of (i) the prime rate per annum of the agent then in effect and
(ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as being the weighted-average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, in each case plus 0% to 0.75% (determined by a leverage ratio based on the Company's consolidated Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA")) or (b) a rate per annum equal to the LIBOR rate plus 0.875% to 1.750% (determined by a leverage ratio based on the Company's consolidated EBITDA). The Credit Agreement requires the Company to maintain compliance with certain non-financial and financial covenants such as leverage and fixed-charge coverage ratios. As of June 30, 2013, the Company was in compliance with all covenants under the Credit Agreement. Legal Proceedings
See Note 15 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10?Q (this "Form 10-Q"), which information is incorporated herein by reference.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term inflation rates are difficult to predict, the Company continues to strive to minimize the effect of inflation through improved productivity and cost reduction programs as well as price adjustments within the constraints of market competition.


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Valuation of Goodwill
During the first quarter of Fiscal 2014, the Company conducted an interim goodwill impairment assessment because data, relevant to a goodwill impairment assessment, was readily available through the reassignment of goodwill using the relative fair market value approach. The first step of the goodwill impairment assessment, used to identify potential impairment, resulted in a surplus of fair value over carrying amount for each of our new reporting units, thus the new reporting units are considered not impaired and the second step of the impairment test is not necessary.
At June 30, 2013, the Company's stock market capitalization was comparable with net book value. Each of the Company's reporting units continues to operate profitably and generate cash flow from operations, and the Company expects that . . .

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