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Edited Transcript of BBOX earnings conference call or presentation 16-Nov-18 7:00pm GMT

Q2 2019 Black Box Corp Earnings Call

PITTSBURGH Dec 26, 2018 (Thomson StreetEvents) -- Edited Transcript of Black Box Corp earnings conference call or presentation Friday, November 16, 2018 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Russo

Black Box Corporation - CFO, Executive VP, Treasurer & Principal Accounting Officer

* Joel T. Trammell

Black Box Corporation - President, CEO & Director

* Ronald Basso

Black Box Corporation - Executive VP of Business Development, General Counsel & Secretary

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Black Box Corporation's Second Quarter Fiscal 2019 Financial Results Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Ron Basso, General Counsel. You may begin.

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Ronald Basso, Black Box Corporation - Executive VP of Business Development, General Counsel & Secretary [2]

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Thank you. Good afternoon, everyone, and welcome to Black Box Corporation's Second Quarter Fiscal 2019 Earnings Conference Call. With me today are our CEO, Joel Trammell; and our CFO, Dave Russo.

Earlier today, we announced our second quarter fiscal 2019 results by issuing a press release and furnishing it to the Securities and Exchange Commission on Form 8-K. We also posted this press release in the Investor Relations section of our website, blackbox.com.

Before we begin, and as a reminder, matters discussed in this call may contain forward-looking statements that involve risks and uncertainties concerning our expected financial performance and the completion of our previously announced merger agreement. 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, including those regarding the pending merger with AGC Networks, are included in our SEC filings and today's press release.

On this call, we may discuss some non-GAAP financial measures. Please refer to the schedule that accompanied the press release for a reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement and other supplemental information. We changed our normal procedure due to the pendency of the launch of our tender offer, we will not have a Q&A session following our remarks today.

With that, I'd like to turn the call over to Joel.

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Joel T. Trammell, Black Box Corporation - President, CEO & Director [3]

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Thanks, Ron. Welcome, and thank you for joining us today. Obviously, our big news is that last Sunday, we executed a merger agreement with AGC Networks. I'm not going into the details of that transaction as you can read those in our recent SEC filings with more to come as the tender offer materials are filed in relation in the near future. I will note that our board, team and advisers have worked incredibly hard to get us to this point. It's not been easy, and we all believe it was absolutely the right thing to do for the company and its stockholders.

Also I want to provide you with some of my observations since the deal was announced. I hope that this announcement would be a welcome relief to those who were concerned with our uncertainty, especially in light of the December maturity of the credit line extended by our banks that we announced in July. I've been pleasantly surprised, however, by the extent to which this news has been positively received by our clients, team members, vendor partners and other constituencies.

In a minute, Dave will talk about our second quarter financial results. While these results are modest on their face, I'm very pleased with them in light of the numerous distractions and challenges that our team members have faced every day since our growing concern announcement last July. Our team members day-in and day-out have found ways around through and over obstacles to make sure that our clients continue to receive the high level of products and services that has become associated with the Black Box name over these past 42 years.

Most of our clients and vendors have continued to allow us to be a critical IT partner, and for that, we are incredibly grateful.

With that, I will turn the call over to Dave to discuss our second quarter results.

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David J. Russo, Black Box Corporation - CFO, Executive VP, Treasurer & Principal Accounting Officer [4]

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Thank you, Joel. During the second quarter, the company completed the sale of the federal services business to Arlington Capital Partners for a cash purchase price of $75 million. The net cash proceeds from this sale after purchase price adjustments, transaction fees and funds deposited into escrow were approximately $63.2 million. As a result of this transaction, the results of the federal services business are included in discontinued operations for all periods during our discussion today.

Revenue for the second quarter of fiscal 2019 was $158.7 million, a decrease of $3.8 million or 2.4% from the prior quarter, principally due to declines in North American service revenues. The year-over-year revenue decline for the quarter was $5.8 million or 3.5%, driven principally by declines in North American products.

Second quarter Products revenue was $32.8 million, an increase of $1.3 million or 4.1% compared to the prior quarter. This increase was primarily due to strong performance in North American products with international products being relatively flat.

Service revenues decreased by $5.1 million or 3.9% to $125.8 million from $130.9 million in the prior sequential quarter, principally due to a decrease in North American unified communications service revenues.

Maintenance revenue, which is derived primarily from long-term unified communication customer service agreements, decreased by 10.3% to $26.7 million.

Six-month order backlog, which consists of confirmed orders that we expect to convert to revenue in the next 180 days, increased by $0.5 million to $127.3 million from last quarter and increased by $5.7 million from the same period last year. The $5.7 million increase over the comparable prior year quarter was driven by increases in both North American services and North American products, with both international products and international services staying relatively flat.

Second quarter total backlog decreased by $9.1 million or 3.6% to $247.3 million compared to the prior quarter, primarily due to declines in North American services and international services, partially offset by increases in North American products. Total backlog compared to the prior year period decreased by $25 million or 9.2% due to our North American services business, offset slightly by increases in North American products.

Gross margin decreased by 120 basis points to 27.3% from 28.5% last quarter due principally to decreases in North American services gross margins. Products gross margin was 42.5% compared to 42.3% last quarter. Products gross margins improved in North American products but were partially offset by declines in international products gross margins.

Services gross margin decreased by 180 basis points to 23.4% compared to 25.2% last quarter, primarily due to the mix of revenues as you see maintenance revenue declined in the current quarter and due to increased project expenses.

SG&A for the quarter was $50.1 million, a decrease of $1.7 million or 3.1% from $51.7 million in the last quarter, due to a $1 million reduction in compensation costs and a $0.5 million reduction in stock compensation costs. Compared to the prior year quarter, SG&A declined by $5 million due principally to a $2.7 million reduction in ERP implementation costs, $3.5 million in reduced compensation and benefit costs, 6 point -- $0.6 million of lower compensation expense and $0.6 million of lower foreign exchange costs, all partially offset by a $2.8 million increase in advisory consulting expenses.

Interest expense was $4.2 million in Q2 compared to $2.6 million in Q1 and $1.8 million in the comparable prior year quarter. The $2.4 million increase compared to the prior year quarter was due to higher interest rates, higher average borrowings and the write-off of unamortized financing fees as we repaid more than $55 million of debt in the second quarter.

The pretax loss was $13.9 million compared to a loss of $10.5 million in the prior quarter. The increase in the pretax loss was principally due to higher interest expense and FASB 52 currency adjustments.

The tax benefit for the second quarter was a $7.7 million benefit on a $13.9 million pretax loss for an effective rate of 55.6%. The variance from the statutory rate was due to the intraperiod tax allocation of valuation allowances between continuing operations and discontinued operations.

The sale of the federal services business during the second quarter resulted in an after-tax gain of $31 million. The diluted loss per share for continuing operations in the second quarter was $0.41, which compares to a $0.59 loss in the prior quarter and $0.82 loss in the same quarter a year ago.

Cash used by continuing operations in operating activities for the quarter was $6.1 million compared to cash used in operating activities of $4.2 million in the prior quarter. The decline in operating cash flow compared to the prior quarter was primarily due to a decrease in gross margin and higher interest expense.

Capital expenditures for continuing operations were $0.4 million in the current quarter compared to $0.4 million in the prior year quarter -- I'm sorry, in the prior sequential quarter and $1.6 million in the second quarter of last year. The majority of this year's -- quarter's spend was for computer hardware.

Turning to the balance sheet. Working capital net of cash and debt declined by $4.5 million compared to the prior quarter. Accounts receivable decreased by $2.5 million in the current quarter and DSO was 52 days, down from 55 days in the prior quarter and up from 51 days in the prior year second quarter.

We believe that our receivable portfolio continues to be of high quality and the DSO will be relatively flat in Q3.

Net debt was $80.2 million compared to $134.4 million in the prior quarter, a decrease of $54.2 million, which was due principally to debt reductions derived from the sale of the federal business. Net debt at the end of the second fiscal quarter of 2018 was $98.7 million.

That concludes my remarks regarding our second fiscal quarter. I will now turn the call over to Ron Basso.

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Ronald Basso, Black Box Corporation - Executive VP of Business Development, General Counsel & Secretary [5]

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Thanks, Dave. We want to thank everyone for your time today. As a reminder, our earnings press release was furnished to the SEC on Form 8-K earlier today and is available at blackbox.com. We thank you all again for your participation on our call today.

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Operator [6]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.