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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
95-3086563
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1000 Park Drive, Lawrence, Pennsylvania
 
15055
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of October 12, 2018, there were 15,237,521 shares of common stock, par value $.001 (the "common stock"), outstanding.

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BLACK BOX CORPORATION
FOR THE QUARTER ENDED SEPTEMBER 29, 2018
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS

 
(Unaudited)

 
In thousands, except par value
September 29, 2018

March 31, 2018

Assets
 
 
Cash and cash equivalents
$
21,943

$
35,600

Accounts receivable, net of allowance for doubtful accounts of $2,454 and $2,982
104,009

99,150

Inventories, net
19,954

26,107

Costs/estimated earnings in excess of billings on uncompleted contracts
50,826

52,696

Other current assets
30,682

26,113

Current assets held for sale
151

47,176

Total current assets
227,565

286,842

Property, plant and equipment, net
19,555

23,152

Intangibles, net
35,414

39,145

Deferred tax asset
4,221

6,474

Other non-current assets
11,009

8,444

Non-current assets held for sale

12,278

Total assets
$
297,764

$
376,335

Liabilities
 
 
Accounts payable
$
43,950

$
49,243

Accrued compensation and benefits
13,897

15,823

Deferred revenue
23,904

27,420

Billings in excess of costs/estimated earnings on uncompleted contracts
12,176

12,547

Short-term debt
101,540

157,500

Other current liabilities
26,323

25,905

Current liabilities held for sale

20,597

Total current liabilities
221,790

309,035

Long-term debt
328

477

Other non-current liabilities
15,701

15,884

Non-current liabilities held for sale

597

Total liabilities
$
237,819

$
325,993

Stockholders’ equity
 
 
Preferred stock authorized 5,000, par value $1.00, none issued
$

$

Common stock authorized 100,000, par value $.001, 15,238 and 15,141 shares outstanding, 27,026 and 26,880 issued
26

26

Additional paid-in capital
511,429

509,960

Retained earnings
(22,842
)
(35,664
)
Accumulated other comprehensive income (loss)
(12,568
)
(7,992
)
Treasury stock, at cost 11,788 and 11,740 shares
(416,100
)
(415,988
)
Total stockholders’ equity
$
59,945

$
50,342

Total liabilities and stockholders’ equity
$
297,764

$
376,335

 
 
 
See Notes to the Consolidated Financial Statements

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BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three-months ended
Six-months ended
 
September 29 and September 30
September 29 and September 30
In thousands, except per share amounts
2018

2017

2018

2017

Revenues
 
 
 
 
Products
$
32,836

$
37,248

$
64,388

$
70,136

Services
125,822

127,217

256,764

255,074

Total
158,658

164,465

321,152

325,210

Cost of sales *

 
 
 
Products
18,874

21,166

37,092

40,193

Services
96,419

93,977

194,400

190,708

Total
115,293

115,143

231,492

230,901

Gross profit
43,365

49,322

89,660

94,309

Selling, general & administrative expenses
50,128

55,079

101,859

113,024

Asset impairment loss
1,586

1,426

1,586

1,426

Intangibles amortization
1,075

1,716

2,153

3,551

Operating income (loss)
(9,424
)
(8,899
)
(15,938
)
(23,692
)
Interest expense, net
4,174

1,808

6,723

3,026

Other expenses (income), net
334

(207
)
815

(77
)
Income (loss) before provision for income taxes
(13,932
)
(10,500
)
(23,476
)
(26,641
)
Provision (benefit) for income taxes
(7,742
)
1,948

(8,412
)
(3,278
)
Income (loss) from continuing operations
(6,190
)
(12,448
)
(15,064
)
(23,363
)
Income (loss) from discontinued operations, net of tax
(1,955
)
1,048

(403
)
2,216

Gain from sale of discontinued operations, net of tax
31,040


31,040


Net income (loss)
$
22,895

$
(11,400
)
$
15,573

$
(21,147
)
Basic earnings (loss) per common share

 
 
 
Continuing operations
$
(0.41
)
$
(0.82
)
$
(0.99
)
$
(1.55
)
Discontinued operations
1.91

0.07

2.02

0.15

Net earnings (loss) per common share
$
1.50

$
(0.75
)
$
1.03

$
(1.40
)
Diluted earnings (loss) per common share
 
 
 
 
Continuing operations
$
(0.41
)
$
(0.82
)
$
(0.99
)
$
(1.55
)
Discontinued operations
1.91

0.07

2.02

0.15

Net earnings (loss) per common share
$
1.50

$
(0.75
)
$
1.03

$
(1.40
)
Weighted-average common shares outstanding

 
 
 
Basic
15,235

15,138

15,175

15,057

Diluted
15,235

15,138

15,175

15,057

Dividends declared per share
$

$

$

$
0.12

* Exclusive of depreciation and intangibles amortization.
See Notes to the Consolidated Financial Statements

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BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three-months ended
Six-months ended
 
September 29 and September 30
September 29 and September 30
In thousands
2018

2017

2018

2017

Income (loss) from continuing operations
$
(6,190
)
$
(12,448
)
$
(15,064
)
$
(23,363
)
Other comprehensive income (loss)
 
 
 
 
Foreign Currency Translation Adjustment
(510
)
2,063

(4,266
)
5,172

Defined Benefit Pension
 
 
 
 
Actuarial gain (loss), net of taxes of $18, $41, $38, and $95
53

64

113

149

Amounts reclassified into results of operations, net of taxes of $18, $12, $33, and $24
53

19

98

37

Derivative Instruments
 
 
 
 
Net change in fair value of cash flow hedges, net of taxes of $199, ($141), ($53), and ($568)
596

(221
)
(158
)
(888
)
Amounts reclassified into results of operations, net of taxes of ($129), $470, ($121), and $717
(386
)
736

(363
)
1,122

Other comprehensive income (loss)
$
(194
)
$
2,661

$
(4,576
)
$
5,592

Comprehensive income (loss) from continuing operations
$
(6,384
)
$
(9,787
)
$
(19,640
)
$
(17,771
)
 
 
 
 
 

See Notes to the Consolidated Financial Statements




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BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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Six-months ended
 
September 29 and September 30
In thousands
2018

2017

Operating Activities
 
 
Net income (loss)
$
15,573

$
(21,147
)
Less: Net income (loss) from discontinued operations
30,637

2,216

Net income (loss) from continuing operations
$
(15,064
)
$
(23,363
)
Adjustments to reconcile net income (loss) to net cash provided by (used for) continuing operating activities

 
Intangibles amortization
$
2,153

$
3,551

Depreciation
4,111

4,499

Loss (gain) on sale of property
74

36

Deferred taxes
(8,286
)
(3,056
)
Stock compensation expense
1,446

3,108

Asset impairment loss
1,586

1,426

Provision for obsolete inventory
1,073

262

Provision for (recovery of) doubtful accounts
291

518

Changes in operating assets and liabilities (net of effects of discontinued operations)

 
Accounts receivable
(2,865
)
9,011

Inventories
4,208

(3,248
)
Costs/estimated earnings in excess of billings on uncompleted contracts
(5,789
)
1,561

All other assets
4,373

(3,083
)
Accounts payable
(2,529
)
3,050

Billings in excess of costs/estimated earnings on uncompleted contracts
(319
)
(1,970
)
All other liabilities
5,256

(8,240
)
Net cash provided by (used for) continuing operating activities
$
(10,281
)
$
(15,938
)
Net cash provided by (used for) discontinued operating activities
2,509

314

Net cash provided by (used for) operating activities
$
(7,772
)
$
(15,624
)
Investing Activities
 
 
Capital expenditures
$
(769
)
$
(2,327
)
Capital disposals
127

61

Net cash provided by (used for) continuing investing activities
$
(642
)
$
(2,266
)
Net cash provided by (used for) discontinued investing activities
63,014

(353
)
Net cash provided by (used for) investing activities
$
62,372

$
(2,619
)
Financing Activities
 
 
Proceeds from (repayments of) long-term debt
$
(48,623
)
$
34,576

Proceeds from (repayments of) short-term debt
(7,029
)
4,950

Deferred financing costs
(3,129
)
(632
)
Purchase of treasury stock
(112
)
(393
)
Payment of dividends

(3,611
)
Increase (decrease) in cash overdrafts
(5,652
)
(1,086
)
Net cash provided by (used for) continuing financing activities
$
(64,545
)
$
33,804

Net cash provided by (used for) discontinued financing activities
(2,130
)

Net cash provided by (used for) financing activities
$
(66,675
)
$
33,804

Foreign currency exchange impact on cash
(1,582
)
654

Increase/(decrease) in cash and cash equivalents
$
(13,657
)
$
16,215

Cash and cash equivalents at beginning of period
$
35,600

$
14,247

Cash and cash equivalents at end of period
$
21,943

$
30,462

Supplemental cash flow
 
 
Cash paid for interest
$
5,264

$
2,375

Cash paid for income taxes
973

224

Non-cash financing activities
 
 
Capital leases
39

19


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See Notes to the Consolidated Financial Statements

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BLACK BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1: Business, Basis of Presentation and Going Concern
Business
Black Box Corporation ("Black Box," or "the Company") is a leading digital solutions provider dedicated to helping customers design, build, manage, and secure their IT infrastructure. The Company offers Services and Products that it distributes through two platforms it has built over its 42-year history. The Services platform is comprised of engineering and design, network operations centers, technical certifications, national and international sales teams, remote monitoring, on-site service teams and technology partner centers of excellence which includes dedicated sales and engineering resources. The primary services offered through this platform include: (i) communications lifecycle services, (ii) unified communications, (iii) structured cabling, (iv) video/AV services (v) in-building wireless and (vi) data center services. The Products platform provides networking solutions through the sale of products including: (i) IT infrastructure, (ii) specialty networking, (iii) multimedia and (iv) keyboard/video/mouse ("KVM") switching. Founded in 1976, Black Box, a Delaware corporation, is headquartered near Pittsburgh in Lawrence, Pennsylvania.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that these consolidated financial statements reflect all normal, recurring adjustments needed to present fairly the Company’s results for the interim periods presented. The results as of and for interim periods presented may not be indicative of the results of operations for any other interim period or for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto 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, 2018 (the "Form 10-K").
The Company’s fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the Saturday generally nearest each calendar quarter end, adjusted to provide relatively equivalent business days for each fiscal quarter. The actual ending dates for the periods presented in these Notes to the Consolidated Financial Statements as of September 30, 2018 and 2017 were September 29, 2018 and September 30, 2017, respectively. References herein to "Fiscal Year" or "Fiscal" mean the Company’s fiscal year ended March 31 for the year referenced. All references to dollar amounts herein are presented in thousands, except per share amounts, unless otherwise noted.
The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on reported net income (loss), comprehensive income (loss), cash flows, total assets or total stockholders' equity.
The preparation of financial statements in conformity with GAAP requires Company management ("Management") to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include project progress towards completion to estimated budget, allowances for doubtful accounts receivable, sales returns, net realizable value of inventories, loss contingencies, warranty reserves, property, plant and equipment, intangible assets and goodwill. Actual results could differ from those estimates. Management believes the estimates made are reasonable.
In the second quarter of Fiscal 2019, the Company completed the sale of its Federal Business (as defined in Note 6). The results of the Federal Business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented. See Note 16 for additional information.
In the second quarter of Fiscal 2018, Management completed a plan to sell the Company's current headquarters' building and adjacent vacant land and move to another local facility that better aligns to the needs of the business. At that time, Management believed it was probable that the sale of the building and land would occur in the next twelve months. As of the third quarter of Fiscal 2018, Management believes that only the sale of certain parcels of the adjacent vacant land is probable to occur in the next twelve months. As of the second quarter of Fiscal 2019, Management continues to believe that only the sale of certain parcels of

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the adjacent vacant land is probable to occur in the next twelve months. These assets, all of which are Property, plant and equipment, are presented as "Current assets held for sale" on the Consolidated Balance Sheets. These assets are reported under the North America Products operating segment.
Going Concern
Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.

Please see Note 6 for a description of and defined terms regarding our Credit Agreement, Amended Credit Agreement, and Second Amended Credit Agreement. On June 29, 2018, the Company and all the Lenders entered into the Second Amendment to our Credit Agreement ("Second Amended Credit Agreement" or "Second Amendment") in order to waive and modify certain covenants and other provisions contained in the Amended Credit Agreement and to fund its ongoing operations with the LIFO Facility. The Company would have defaulted the minimum Adjusted EBITDA covenant and certain other covenants as defined by the Amended Credit Agreement had these defaults not been waived under the Second Amendment. See Note 6 for additional information. We anticipate that our principal sources of liquidity, including this LIFO Facility, will be sufficient to fund our activities through the maturity of the LIFO Facility which is currently expected to be January 17, 2019.

Beyond that date, current conditions raise substantial doubt about our ability to repay our indebtedness under the Second Amended Credit Agreement upon maturity and to meet the covenants as defined under the Second Amendment. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These conditions are based on the Company's recurring losses from operations and negative operating cash flow, which have resulted in the need to take significant steps to generate additional liquidity.

Our ability to continue as a going concern is dependent on raising additional capital to repay our indebtedness when due and to fund our operations and ultimately on generating future profitable operating results. As part of the Company’s review of its strategic alternatives, the Company agreed under the Second Amended Credit Agreement to pursue the sale of its Federal Business (as defined in Note 6). On August 27, 2018, the Company completed the sale of the Federal Business.

On November 11, 2018, Black Box entered into an Agreement and Plan of Merger (the "Merger Agreement") with AGC Networks Pte Ltd. Refer to Note 17 for additional information.

The Company believes the net proceeds from the sale of the Federal Business and the availability under the LIFO will enable the Company to operate through the expected period it will take to close the Merger Agreement, and continues to look into further actions to improve cash flow.

Note 2: Significant Accounting Policies
Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s consolidated financial statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the Form 10-K. The Company's significant accounting policy as it relates to revenues has been updated to reflect ASC 606 (as defined in the Recent Accounting Pronouncements below).

Under ASC 606, the Company recognizes revenues in a manner that best depicts the transfer of promised goods or services to customers for amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services. Products revenues are recognized at the point in time in which control of the products transfer to customers. Services revenues include network integration services, in which revenues are recognized over time either using either a cost-to-cost input method or a time and materials input method as those services are provided. The Company has historically made reasonably accurate estimates of the extent of progress towards completion under the cost-to-cost input method. However, due to uncertainties inherent in the estimation process, actual results could differ materially from those estimates. Services revenues also include on demand services, in which revenues are recognized typically when completed, due to the short-term duration of this work (which typically spans one to thirty days), and maintenance services, in which revenues are recognized over time using a time-based method. These maintenance services are generally pre-billed and are recorded in deferred revenue within the Company’s Consolidated Balance Sheets and recognized into revenues over the service period. Refer to Note 3 for additional information.

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Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU" or the "Update") No. 2014-09, "Revenue from Contracts with Customers", along with subsequent Updates (collectively, "ASC 606" or "the standard"), that outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2017 for public companies. Entities can use either of two methods: (i) retrospective to each prior period presented with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined in the standard. As of April 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Refer to Note 3 for additional information.

In February 2016, the FASB issued ASU 2016-02, "Leases", which requires, as of the commencement date of a lease, a liability for a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This guidance is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2018 with early adoption permitted. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10, "Codification Improvements to Topic 842, Leases," which clarifies how to apply certain aspects of ASU 2016-02. The Company has initiated the process of compiling its lease inventory and is currently evaluating the impact of ASU 2016-02, ASU 2018-10 and ASU 2018-11.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this Update allow for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This Update is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this Update.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This Update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. This Update is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. The new guidance is required to be applied either retrospectively or prospectively to all implementation costs after the date of adoption. The Company is currently evaluating the impact of this Update.

Note 3: Revenues

ASC 606 adoption and cumulative effect
As of April 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, and subsequent Updates (collectively, "ASC 606" or "the standard") using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for periods presented in Fiscal 2019 reflect the application of ASC 606 while the reported results for periods presented in Fiscal 2018 were prepared under ASC 605, Revenue Recognition. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures. The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be entitled in exchange for those goods or services.

Under the modified retrospective method, the Company recognized the cumulative effect of adopting ASC 606 as an adjustment to the opening balance of retained earnings at the beginning of Fiscal 2019. This adjustment to the opening balance of retained earnings was a decrease of $2,752. This decrease in retained earnings was mainly due to the deferral of $1,826 of revenues and gross profit associated with materials costs incurred as part of installation projects in order to best depict the Company's performance on these projects, where progress is measured over time using a cost-to-cost input method; this deferral resulted in a decrease in costs/estimated earnings in excess of billings of $1,371 and an increase in billings in excess of costs/estimated earnings of $455.

11


The adoption of ASC 606 had no impact on the Company’s net cash used for operating activities and only resulted in offsetting adjustments to net loss and various working capital balances.

Disaggregation of revenues
The following tables break down revenues by offering types at the operating segment level. Refer to the Performance obligations section below for further information on these offering types.

 
 
Three-months ended
 
 
September 30, 2018
Offering Types
Timing of Revenue Recognition
North America Products

North America
Services

International Products

International Services

Total

Products
Point in time
$
16,845

$

$
15,991

$

$
32,836

Projects
Over time

45,936


8,232

54,168

Services
Over time

70,344


1,310

71,654

Total
 
$
16,845

$
116,280

$
15,991

$
9,542

$
158,658


 
 
Six-months ended
 
 
September 30, 2018
Offering Types
Timing of Revenue Recognition
North America Products

North America
Services

International Products

International Services

Total

Products
Point in time
$
32,645

$

$
31,743

$

$
64,388

Projects
Over time

91,831


16,490

108,321

Services
Over time

144,912


3,531

148,443

Total
 
$
32,645

$
236,743

$
31,743

$
20,021

$
321,152


Performance obligations
Under ASC 606, revenues are to be recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Companies must determine, at contract inception, whether control of a good or service transfers to a customer over time or at a point in time.

Products revenues represent product-only networking solutions sold through our Products platform. The Company employs point in time revenue recognition to our Products revenues when control of these products transfer to our customers, which generally occurs upon shipment from the Company's location. Payments are due from customers after we satisfy these performance obligations. While it is our standard business practice to control products and services before these products and services are transferred to customers, and thus act as the principal in arrangements, there are certain arrangements in which the Company acts as an agent whereby revenues are recognized for the amounts into which we expect to be entitled to when our performance obligations as the agent are satisfied, which has historically been at a point in time.

Projects include installation projects from our Services platform, which comprise both product sales and corresponding installation services (collectively, installation projects). The Company employs over time revenue recognition to our installation projects either on a cost-to-cost input method or a time and materials input method, depending on the nature and pricing structure of the arrangement. For installation projects, the timing of when payments are due varies by contract, but is often based on certain milestones being met which will not always coincide with the timing in which our performance obligations are satisfied; this results in the costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings accounts as reported within the Company's Consolidated Balance Sheets.

Services revenues include our maintenance services and on demand services. The company employs over time revenue recognition to our maintenance services on a time-based method. Revenues are recognized on our on demand services typically when completed, due to the short-term duration of this work (which typically spans one to thirty days). In limited cases, the Company also provides extended warranties, which are considered separate performance obligations; revenues for these warranties are recognized over time using a time-based method as well. For maintenance services, payments may be due prior to the commencement of the maintenance period, periodically during the maintenance period and/or after the completion of the maintenance period. Payments received in advance of their related maintenance service periods will result in deferred revenue as reported within the Company's Consolidated Balance Sheets.

12



Payment terms do not have any significant financing components and while contracts can have certain types of variable consideration, including discounts, rebates and returns, all of which factor into our estimated amounts of consideration to which the Company will be entitled under ASC 606, these are currently neither significant nor constrained.

Revenues recognized in the three- and six-months ended September 30, 2018 periods from performance obligations satisfied (or partially satisfied) in previous periods, as a result of changes in estimates under the cost-to-cost input method or otherwise, were $1,604 and $1,275, respectively. Revenues related to remaining unsatisfied performance obligations from open contracts that have not yet been recognized through the second quarter of Fiscal 2019 are $237,226, $117,372 of which is expected to be recognized in the next six months.

Contract balances
The following table summarizes information about the Company's contract balances.
Contract Balances
September 30, 2018

March 31,
2018

$ Change

% Change

Accounts receivable, net of allowance for doubtful accounts
$
104,009

$
99,150

$
4,859

5
 %
Costs/estimated earnings in excess of billings on uncompleted contracts
50,826

52,696

(1,870
)
(4
)%
Billings in excess of costs/estimated earnings on uncompleted contracts
12,176

12,547

(371
)
(3
)%
Deferred revenue - current
23,904

27,420

(3,516
)
(13
)%
Deferred revenue - long-term
3,503

2,758

745

27
 %

Accounts receivable increased $4,859 mainly due to the timing of revenues recognized in the quarter, primarily driven by increased collections at the previous fiscal year end. Costs in excess of billings decreased $1,870 as a result of as a result of changes related to infrastructure projects in North American Services. Billings in excess of costs decreased $371 stemming from an increase in average collection days, primarily driven by infrastructure projects in North American Services. Deferred revenue, including the long-term portion which is included in Other liabilities within the Company's Consolidated Balance Sheets, decreased $2,771 as a result of a decline in maintenance services revenues in North American Services. During Fiscal 2019, the Company recognized revenues of $23,610 and $5,490 that was included in deferred revenue and billings in excess of costs at March 31, 2018, respectively.

Practical expedients and policy elections
The Company has taken the practical expedient as outlined in ASC 606-10-65-1(f)(4) which aggregates the effect to the opening balance sheet of all contract modifications that occur through the adoption date. We have also taken the practical expedient as outlined in ASC 340-40-25-4 where we will recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. While the Company has incremental commission costs associated with contracts greater than one year in duration, these amounts earned were not significant during the period. The Company also incurs incremental costs to fulfill contracts, which are capitalized and amortized over the associated contract lives; however, these amounts were not significant.

Regarding policy elections, the Company has elected to account for shipping and handling activities performed by the Company after the transfer of title as activities to fulfill the promise to transfer products and not evaluate whether these activities are promised services that should be treated as separate performance obligations. The Company has also elected to present all sales taxes collected from customers on a net basis.

The impact of applying these practical expedients and policy elections are not significant to our results.

Transition impact
The following tables summarize the impacts of adopting ASC 606 on the Company's consolidated financial statements:


13


Consolidated Balance Sheet
September 30, 2018
In thousands
As reported

Adjustments

Balances without Adoption of ASC 606

Assets
 

 
 

Accounts receivable, net of allowance for doubtful accounts
$
104,009

$
(16
)
$
103,993

Inventories, net
19,954

12

19,966

Costs/estimated earnings in excess of billings on uncompleted contracts
50,826

1,137

51,963

Other assets
30,682

(413
)
30,269

Deferred revenue
23,904

580

24,484

Billings in excess of costs/estimated earnings on uncompleted contracts
12,176

422

12,598

Other liabilities
26,323

714

27,037

Retained earnings
(22,842
)
(2,436
)
(25,278
)

 
Three-months ended
Consolidated Statement of Operations
September 30, 2018
In thousands, except per share amounts
As reported

Adjustments

Balances without Adoption of ASC 606

Revenues
 
 
 
Products
$
32,836

$
232

$
33,068

Services
125,822

(25
)
125,797

Total
158,658

207

158,865

Cost of sales
 
 
 
Products
18,874

100

18,974

Services
96,419

21

96,440

Total
115,293

121

115,414

Gross profit
43,365

86

43,451


 
Six-months ended
Consolidated Statement of Operations
September 30, 2018
In thousands, except per share amounts
As reported

Adjustments

Balances without Adoption of ASC 606

Revenues
 
 
 
Products
$
64,388

$
205

$
64,593

Services
256,764

30

256,794

Total
321,152

235

321,387

Cost of sales
 
 
 
Products
37,092

92

37,184

Services
194,400

24

194,424

Total
231,492

116

231,608

Gross profit
89,660

119

89,779





14


 
Six-months ended
Consolidated Statement of Operating Cash Flows
September 30, 2018
In thousands
As reported

Adjustments

Balances without Adoption of ASC 606

Net income (loss) from continuing operations
$
(15,064
)
$
119

$
(14,945
)
Adjustments to reconcile net income (loss) to net cash provided by (used for) continuing operating activities
 
 
 
Intangibles amortization
2,153


2,153

Depreciation
4,111


4,111

Loss (gain) on sale of property
74


74

Deferred taxes
(8,286
)

(8,286
)
Stock compensation expense
1,446


1,446

Asset impairment loss
1,586


1,586

Provision for obsolete inventory
1,073


1,073

Provision for (recovery of) doubtful accounts
291


291

Changes in operating assets and liabilities
 
 
 
Accounts receivable
(2,865
)
7

(2,858
)
Inventories
4,208

(6
)
4,202

Costs/estimated earnings in excess of billings on uncompleted contracts
(5,789
)
19

(5,770
)
All other assets
4,373

10

4,383

Accounts payable
(2,529
)

(2,529
)
Billings in excess of costs/estimated earnings on uncompleted contracts
(319
)
(8
)
(327
)
All other liabilities
5,256

(141
)
5,115

Net cash provided by (used for) continuing operating activities
$
(10,281
)
$

$
(10,281
)

Note 4: Inventories
The Company’s Inventories consist of the following:
 
September 30, 2018

March 31, 2018

Raw materials
$
1,723

$
1,816

Finished goods
27,523

33,740

Inventory, gross
$
29,246

$
35,556

Excess and obsolete inventory reserves
(9,292
)
(9,449
)
Inventories, net
$
19,954

$
26,107



15

Table of Contents

Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount by intangible asset class:
 
September 30, 2018
March 31, 2018
 
Gross Carrying Amount

Accum. Amort.

Net Carrying Amount

Gross Carrying Amount

Accum. Amort.

Net Carrying Amount

Definite-lived
 
 
 
 
 
 
Non-compete agreements
$
841

$
841

$

$
864

$
864

$

Customer relationships
97,704

73,752

23,952

97,704

71,607

26,097

Total
$
98,545

$
74,593

$
23,952

$
98,568

$
72,471

$
26,097

Indefinite-lived
 
 
 
 
 
 
Trademarks
19,715

8,253

11,462

21,301

8,253

13,048

Total
$
118,260

$
82,846

$
35,414

$
119,869

$
80,724

$
39,145


The Company’s indefinite-lived intangible assets consist solely of the Company’s trademark portfolio. The Company’s definite-lived intangible assets now consist solely of customer relationships.

During the second quarter of Fiscal 2019, the Company lowered its projections of revenue for the foreseeable future as well as removed projections of revenue associated with the discontinued Federal Business. As a result, the Company conducted interim assessments of 1) our definite-lived intangible assets associated with our continuing operations and determined such assets were recoverable as of September 30, 2018, and 2) our Trademarks, where the Company recorded an Intangible asset impairment loss of $4,561 to reduce book value to fair value. This impairment loss includes $2,975 of Trademarks attributable to the Federal Business, which is recorded as an Asset Impairment loss within Income (loss) from discontinued operations in the Company's Consolidated Statements of Operations. See Note 16 for further information regarding the results of discontinued operations. The remainder of the impairment loss of $1,586 was attributable to the continuing operations of the Company, which is recorded as an Asset impairment loss within the Company’s Consolidated Statements of Operations.

The following table summarizes the changes to the net carrying amounts by intangible asset class:
 
Trademarks

Customer relationships

Total

March 31, 2018
$
13,048

$
26,097

$
39,145

Intangibles amortization

(2,153
)
(2,153
)
Foreign currency translation adjustment

8

8

Intangible asset impairment loss
(1,586
)

(1,586
)
September 30, 2018
$
11,462

$
23,952

$
35,414

The following table details the estimated intangibles amortization expense for the remainder of Fiscal 2019, each of the succeeding four fiscal years and the periods thereafter.
Fiscal
 
2019
$
1,929

2020
3,542

2021
3,176

2022
2,184

2023
2,184

Thereafter
10,937

Total
$
23,952



16

Table of Contents

Note 6: Indebtedness
The Company’s short-term debt consists of the following:
In thousands, except par value
September 29, 2018

March 31, 2018

Current portion of long-term debt
 
 
Revolving credit agreement (1)
$
101,540

$
110,000

Term loan (1)

47,500

Other (2)
290

332

Current portion of long-term debt
$
101,830

$
157,832

 
 
 
Long-term debt
 
 
Other (2)
$
387

$
477

Long-term debt
$
387

$
477

 
 
 
Total Debt
$
102,217

$
158,309

(1) Refer below for additional details regarding the Company's amended credit agreement which includes a revolving credit agreement and a term loan. These balances are recorded as Short-term debt within the Company's Consolidated Balance Sheets.
(2) Represents the Company's capital lease obligations. Obligations due in the next twelve months are recorded as Other current liabilities and long-term obligations are recorded as Long-term debt within the Company's Consolidated Balance Sheets.
In addition, the Company finances certain vendor-specific inventory under an unsecured revolving arrangement through third parties which provide extended payment terms beyond those offered by the vendor at no incremental cost to the Company. The outstanding balance for these unsecured revolving arrangements was $2,308 as of September 30, 2018, $2,090 of which is classified as a current liability, and $1,814 as of March 31, 2018, $1,596 of which was classified as a current liability. These balances are recorded as other liabilities within the Company's Consolidated Balance Sheets.
On May 9, 2016, the Company refinanced its then existing $200,000 credit facility in the form of a line of credit pursuant to a new credit agreement (the "Credit Agreement") with PNC Bank, National Association, as administrative agent, Bank of America, N.A., as syndication agent, and certain other lender parties (the "Banks"). The Credit Agreement expires on May 9, 2021. Borrowings under the Credit Agreement were permitted up to a maximum amount of $200,000, and included up to $15,000 of swing-line loans and $25,000 of letters of credit. Interest on outstanding indebtedness under the Credit Agreement accrued, at the Company’s option, at a rate based on either: (a) a Base Rate Option equal to the highest of (i) the federal funds open rate, plus fifty (50) basis points (0.5%), (ii) the bank’s prime rate, and (iii) the daily LIBOR rate, plus 100 basis points (1.0%), in each case plus 0% to 1.00% (determined by a leverage ratio based on the Company’s consolidated EBITDA) or (b) a rate per annum equal to the LIBOR rate plus 1.00% to 2.00% (determined by a leverage ratio based on the Company’s consolidated EBITDA). The Credit Agreement required the Company to maintain compliance with certain non-financial and financial covenants such as leverage and interest coverage ratios.
The Company’s obligations under the Credit Agreement were secured by substantially all of the assets of the Company’s material direct and indirect subsidiaries that are incorporated (or organized) under the laws of the District of Columbia or under the laws of any state or commonwealth of the United States and are guaranteed by such domestic subsidiaries.
On August 9, 2017, the Company and certain of the Banks entered into an Amendment and Joinder Agreement to amend and restate the Credit Agreement (as amended and restated, the “Amended Credit Agreement”) in order to avoid a default of its leverage covenant. Under the Amended Credit Agreement, the credit facility was reduced to $170,000 comprised of a $50,000 term loan and $120,000 line of credit. As of August 9, 2017, $50,000 was borrowed under the term loan and $52,528 remained outstanding under the line of credit. The amortization of the term loan is $1,250 per quarter for four (4) quarters beginning in the quarter ending December 31, 2017 and $2,500 per quarter beginning in the quarter ending December 31, 2018 through the end of the Amended Credit Agreement on May 9, 2021, the same expiration date of the Credit Agreement. Mandatory prepayments of the term loan are required with the net proceeds from certain asset sales, insurance recoveries and debt or equity issuances, as well as from 75% to 50% of any excess cash flow generated in Fiscal 2019 and Fiscal 2020. Interest on the term loan is, at the Company’s option: (i) a Base Rate Option equal to the highest of (x) the federal funds open rate, plus fifty (50) basis points (0.5%), (y) the bank’s prime rate, and (z) the daily LIBOR rate, plus 100 basis points (1.0%), in each case plus 2.5% or (ii) LIBOR plus 3.5%. Interest on outstanding indebtedness under the line of credit accrues, at the Company’s option, at a rate based on either: (a) the Base Rate Option plus 0.25% to 2.00% (determined by a leverage ratio based on the Company’s consolidated EBITDA) or (b) a rate per

17

Table of Contents

annum equal to the LIBOR rate plus 1.25% to 3.00% (determined by a leverage ratio based on the Company’s consolidated EBITDA).
Under the Amended Credit Agreement, the leverage ratio covenant was suspended until the second quarter of Fiscal 2019. The Amended Credit Agreement contains a minimum Adjusted EBITDA covenant and a provision requiring the Company to repay revolving credit loans with any excess cash. During that same period, a covenant will limit capital expenditures to an agreed upon amount. The ability of the Company to make dividends or other distributions (including stock repurchases other than up to a limited dollar amount for tax payments from vested equity awards) has been eliminated.
The leverage ratio covenant that starts in the second quarter of Fiscal 2019 will be 4.00 to 1.00 and will reduce to 3.00 to 1.00 over the remaining life of the credit facility. A fixed charge coverage ratio of 1.00 to 1.00 begins in the second quarter of Fiscal 2019 increasing to 1.10 to 1.00 in the fourth quarter of Fiscal 2019 and thereafter.
The Company’s obligations under the Amended Credit Agreement are secured by substantially all of the assets of the Company and the Company’s direct and indirect subsidiaries that are incorporated (or organized) under the laws of the District of Columbia or under the laws of any state or commonwealth of the United States (a “U.S. Entity”) and are guaranteed by such domestic subsidiaries. Under the Amended Credit Agreement, the Company and each U.S. Entity pledged 65% of the voting ownership interests and 100% of the non-voting ownership interests of its foreign subsidiaries.

On June 29, 2018, the Company and certain direct and indirect wholly-owned subsidiaries of the Company (collectively, the “Guarantors” and together with the Company, the “Loan Parties”) entered into a Second Amendment (the “Second Amended Credit Agreement” or the “Second Amendment”) with PNC Bank, National Association, as administrative agent (the “Agent”), and certain other lenders party thereto (together with the Agent, the “Lenders”) to amend the Credit Agreement entered into among the Loan Parties, the Agent and the Lenders on May 9, 2016 (as amended by the Amendment and Joinder Agreement, dated August 9, 2017, the “Amended Credit Agreement,” and as further amended by the “Second Amended Credit Agreement”).

The Second Amended Credit Agreement established a new “last in first out” senior revolving credit facility in an amount not to exceed $10,000 (the “LIFO Facility”). The borrowings under the LIFO Facility will be used to finance the Company’s cash flow needs, subject to an approved budget and certain variance restrictions, including payments to vendors to allow the Company to operate in the ordinary course of its business. Interest on the LIFO Facility is LIBOR plus 10.0%. The Company entered into the Second Amendment to waive and modify certain covenants and other provisions contained in the Amended Credit Agreement and to fund its ongoing operations with the LIFO Facility. The Company would have defaulted the minimum Adjusted EBITDA covenant and certain other covenants as defined by the Amended Credit Agreement had these defaults not been waived under the Second Amendment.

As part of the Company’s review of its alternatives, the Company has agreed under the Second Amended Credit Agreement to pursue the sale (the “Sale Transaction”) of its federal government IT services business (the “Federal Business”). On August 27, 2018, the Company completed the sale of the Federal Business. All net cash proceeds of the Sale Transaction were used to pay down loans outstanding under the LIFO Facility, and after, repayment of such loans, the Company’s other indebtedness under the Second Amended Credit Agreement.

The Second Amended Credit Agreement, among other things, (i) waived certain potential defaults and events of default under the Amended Credit Agreement; (ii) deferred principal and interest payments on the Company’s existing term loans and revolving loans, except the LIFO Facility, until the maturity of the LIFO Facility; provided that the aggregate amount of deferred principal and interest payments through the closing of the Sale Transaction was due (and was paid) upon such closing; and (iii) modified the interest rates applicable to such outstanding loans so that interest accrues at a rate equal to: (a) for the term loan, the highest of (1) the federal funds open rate plus 0.5%, (2) the Agent’s prime rate or (3) LIBOR plus 1.0% (the “Base Rate”), in each case plus 2.5%, and (b) for the revolving loans, the Base Rate plus an amount between 0.25% and 2.0% (as determined by a leverage ratio based on the Company’s consolidated EBITDA).

The Second Amended Credit Agreement also revised the Company’s covenants under the Amended Credit Agreement to, among other things, (i) suspend the leverage ratio and fixed charge coverage ratio covenants until December 15, 2018; (ii) modify the minimum consolidated EBITDA covenant to require that the Company’s minimum consolidated EBITDA for the three fiscal month period ending on the close of each fiscal month equal or exceed (i) negative $3,000 for the fiscal months ending June 30, 2018, July 31, 2018 and August 31, 2018, and (ii) negative $3,500 for the fiscal months ending September 30, 2018 and thereafter; (iii) reduce the sub-limit for the issuance of letters of credit to $10,000; (iv) require periodic delivery of updated budgets and budget variance reports to the Agent and compliance with certain disbursement and net cash flow variance thresholds; (v) restrict the incurrence of expenses related to implementation of the ERP system; (vii) require that the net cash proceeds from certain asset sales and certain excess cash be used to prepay the Company’s obligations under the Amended Credit Agreement; and (viii) require

18

Table of Contents

the repatriation to the Loan Parties of cash on hand above a certain amount maintained by certain excluded foreign subsidiaries of the Loan Parties and restrict the transfer of assets by the Loan Parties (other than inventory in the course of ordinary business) to such excluded foreign subsidiaries unless accounted for in the budget. As of September 30, 2018, the Company was in compliance with all covenants under the Second Amended Credit Agreement.

The Company’s obligations under the Second Amended Credit Agreement continue to be secured by substantially all of the personal property assets of the Company and all of the Company’s direct and indirect owned subsidiaries that are incorporated (or organized) under the laws of the District of Columbia or under the laws of any state or commonwealth of the United States (other than BBOX Holdings Mexico LLC). In addition, under the Second Amendment, the Company’s obligations are required to be secured by additional collateral, including (i) a first-priority pledge of all of the capital stock of each existing and subsequently acquired or organized subsidiary of the Loan Parties not pledged under the Credit Agreement, with certain exceptions; and (ii) mortgages over certain material real property of the Loan Parties located in the U.S. The Company is also required to cause the execution of deposit account control agreements with respect to certain U.S. bank accounts of the Loan Parties and to deliver to the Agent executed assignment agreements and forms of notice of assignment with respect to certain federal government contracts. Such notices may be sent upon an event of default or potential default. 

Effectiveness of the Second Amendment was subject to certain conditions precedent, each of which were satisfied on June 29, 2018. The outstanding balance of the LIFO Facility and all accrued and unpaid interest, fees and expenses were originally due and payable on December 15, 2018 or the earlier proper termination of the LIFO Facility by the Agent following an event of default. On November 17, 2018, the maturity of the LIFO Facility was extended from December 15, 2018 until January 17, 2019, subject to certain terms and conditions.

The maximum amount of debt outstanding under the Second Amended Credit Agreement, the weighted-average balance outstanding under the Second Amended Credit Agreement and the weighted-average interest rate on all outstanding debt for the three-months ended September 30, 2018 was $159,722, $136,593 and 7.2%, respectively, compared to $140,648, $133,615 and 3.9%, respectively, for the three-months ended September 30, 2017 under the Credit Agreement. The maximum amount of debt outstanding under the Credit Agreement, the weighted-average balance outstanding under the Credit Agreement and the weighted-average interest rate on all outstanding debt for the six-months ended September 30, 2018 was $159,722, $146,390 and 6.4%, respectively, compared to $171,237, $137,054 and 3.3%, respectively, for the six-months ended September 30, 2017.

As of September 30, 2018, the Company had $9,825 outstanding in letters of credit and $10,000 in unused commitments.

Note 7: Derivative Instruments and Hedging Activities
The Company is exposed to certain market risks, including the effect of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business. It does not hold or issue derivatives for speculative trading purposes. The Company is exposed to non-performance risk from the counterparties in its derivative instruments. This risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher and all counterparties are monitored on a continuous basis. The fair value of the Company’s derivatives reflects this credit risk.
The Company enters into foreign currency contracts to hedge exposure to variability in expected fluctuations in foreign currencies. All of the foreign currency contracts have been designated and qualify as cash flow hedges. The effective portion of any changes in the fair value of the derivative instruments is recorded in Accumulated Other Comprehensive Income ("AOCI") until the hedged forecasted transaction occurs or the recognized currency transaction affects earnings. Once the forecasted transaction occurs or the recognized currency transaction affects earnings, the effective portion of any related gains or losses on the cash flow hedge is reclassified from AOCI to the Company’s Consolidated Statements of Operations.
As of September 30, 2018, the Company had open contracts in Australian dollars, Euros and Japanese yen, all of which have been designated as cash flow hedges. These contracts had a notional amount of $2,680 and will expire within 5 months. There was no hedge ineffectiveness during Fiscal 2019 or Fiscal 2018.
The following tables summarize the carrying amounts of derivative assets/liabilities and the impact on the Company’s Consolidated Statements of Operations:

19

Table of Contents

 
 
Asset Derivatives
Liability Derivatives
 
 
September 30,

March 31,

September 30,

March 31,

 
Classification
2018

2018

2018

2018

Derivatives designated as hedging instruments
 

 

 

 

Foreign currency contracts
Other liabilities (current)
 
 
$
48

$
225

Foreign currency contracts
Other assets (current)
$
5

$
45

 
 

 
 
Three-months ended
Six-months ended
 
 
September 30
September 30
 
Classification
2018

2017

2018

2017

Derivatives designated as hedging instruments
 

 

 
 

Gain (loss) recognized in other comprehensive income (effective portion), net of taxes
Other comprehensive
income
$
596

$
(221
)
$
(158
)
$
(888
)
Amounts reclassified from AOCI into results of operations (effective portion), net of taxes
Selling, general &
administrative expenses
(386
)
736

(363
)
1,122


Note 8: Fair Value Disclosures
Recurring fair value measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
 
Level 1

Level 2

Level 3

Total

Assets at Fair Value
 
 
 
 
Defined benefit pension plan assets(1)
$
26,707

$
11,308

$

$
38,015

Foreign currency contracts

5


5

Total Assets at Fair Value
$
26,707

$
11,313

$

$
38,020

Liabilities at Fair Value
 
 
 
 
Foreign currency contracts
$

$
48

$

$
48

(1) The fair value of pension plan assets is measured annually, thus this value is as of March 31, 2018.
Non-recurring fair value measurements
The Company's assets and liabilities that are measured at fair value on a non-recurring basis include non-financial assets and liabilities initially measured at fair value in a business combination.

Note 9: Stockholder's Equity
Accumulated Other Comprehensive Income
The components of AOCI consisted of the following for the periods presented:
 
September 30, 2018

March 31, 2018

Foreign Currency Translation Adjustment
$
(887
)
$
3,379

Derivative Instruments
(469
)
52

Defined Benefit Pension
(11,212
)
(11,423
)
Accumulated other comprehensive income
$
(12,568
)
$
(7,992
)
Common Stock Repurchases


20

Table of Contents

The following table presents information about the Company's common stock repurchases:
 
Three-months ended
Six-months ended
 
September 30
September 30
 
2018

2017

2018

2017

Shares of common stock purchased
1,117


48,761

44,507

Aggregate purchase price
$
2

$

$
114

$
393

Average purchase price
$
1.46

$

$
2.33

$
8.84

During the six-months ended September 30, 2018, the Company made tax payments of $114 and withheld 48,761 shares of common stock, which were designated as treasury shares, at an average price per share of $2.33, in order to satisfy employee income taxes due as a result of the vesting of certain restricted stock units. During the six-months ended September 30, 2017, the Company made tax payments of $393 and withheld 44,507 shares of common stock, which were designated as treasury shares, at an average price per share of $8.84, in order to satisfy employee income taxes due as a result of the vesting of certain restricted stock units.
Since the inception of its repurchase programs beginning in April 1999 and through September 30, 2018, the Company has repurchased 11,392,851 shares of common stock for an aggregate purchase price of $408,621, or an average purchase price per share of $35.87. 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 September 30, 2018, 1,107,149 shares were available under the most recent repurchase programs.
Under the Second Amended Credit Agreement, the Company is no longer permitted to repurchase common stock through its repurchase program but is allowed to repurchase a limited amount of shares for tax payments related to the vesting of certain restricted stock units and performance shares, as applicable. This restriction is in effect until May 9, 2021, the termination date of the Second Amended Credit Agreement. See Note 6 for additional information regarding our Second Amended Credit Agreement.

Note 10: Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act was enacted, which among numerous provisions reduced the federal statutory corporate tax rate from 35% to 21%. Based on the provisions of the Tax Reform, the Company adjusted its estimated annual effective income tax rate to incorporate the lower federal corporate tax rate into the tax provision for the current quarter ended September 30, 2018. Under the new Global Intangible Low-Taxed Income (GILTI) tax rules of the Tax Reform, and the application of ASC 740, Income Taxes, the Company’s accounting policy is to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) and has been incorporated into the tax provision for the current quarter ended September 30, 2018.

Pursuant to SEC Staff Accounting Bulletin 118 (regarding the application of ASC 740 associated with the enactment of the Tax Reform), the Company continues to evaluate the impact of various domestic and international provisions of the Tax Reform as well as the impact of additional guidance that may be provided. The final impact of the Tax Reform may differ due to changes in interpretations, assumptions made by the Company, and the issuance of additional guidance.

The Company's benefit from income taxes for the three-months ended September 30, 2018 was $7,742, an effective tax rate of 55.6% on a loss before provision for income taxes of $13,932, compared to a provision for income taxes of $1,948, an effective tax rate of (18.6)% on a loss before provision for income taxes of $10,500 for the three-months ended September 30, 2017. The Company's benefit from income taxes for the six-months ended September 30, 2018 was $8,412, an effective tax rate of 35.8% on loss before benefit for income taxes of $23,476, compared to a benefit for income taxes of $3,278, an effective tax rate of 12.3% on loss before benefit for income taxes of $26,641 for the six-months ended September 30, 2017. The effective tax rate increase from 12.3% to 35.8% was primarily due to the intraperiod tax allocation of valuation allowances between continuing and discontinued operations.
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.

Fiscal 2015 through Fiscal 2017 remain open to examination by the Internal Revenue Service and Fiscal 2013 through Fiscal 2017 remain open to examination by certain state and foreign taxing jurisdictions.


21

Table of Contents

A valuation allowance is provided on deferred tax assets if determined that it is more likely than not that the asset will not be realized. The Company considers all available evidence, both positive and negative, in assessing the need for a valuation allowance in each taxing jurisdiction. The evidence considered in evaluating deferred tax assets includes but is not limited to cumulative financial income over the three-year period ended September 30, 2018, excluding significant one-time charges for impairment (goodwill and other), the composition and reversal patterns of existing taxable and deductible temporary differences between financial reporting and tax, and subjective projected future income.

Based on the available evidence, a valuation allowance release (benefit) of $6,214 has been recorded against U.S. deferred tax assets and certain foreign net operating losses for the three-months ended September 30, 2018. Future positive and negative events, such as the significant underperformance relative to projected or future operating results, will be monitored accordingly and a determination will be made on the ability to realize deferred tax assets at that time.

Note 11: Stock-based Compensation
In August 2008, the Company’s stockholders approved the 2008 Long-Term Incentive Plan, as amended (the "Incentive Plan"), which replaced the 1992 Stock Option Plan, as amended, and the 1992 Director Stock Option Plan, as amended. As of September 30, 2018, the Incentive Plan is authorized to issue stock options, restricted stock units and performance shares, among other types of awards, for up to 6,676,734 shares of common stock, par value $0.001 per share (the "common stock").
The Company recognized stock-based compensation expense of $522 and $981 for the three-months ended September 30, 2018 and 2017, respectively, and $1,446 and $3,108 for the six-months ended September 30, 2018 and 2017, respectively. The Company recognized total income tax benefit for stock-based compensation arrangements of $131 and $365 for the three-months ended September 30, 2018 and 2017, respectively, and $361 and $1,156 for the six-months ended September 30, 2018 and 2017, respectively. Stock-based compensation expense is recorded in Selling, general & administrative expenses within the Company’s Consolidated Statements of Operations.
Stock options
Stock option awards are granted with an exercise price equal to the closing market price of the common stock on the date of grant; such stock options generally become exercisable in equal amounts over a three-year period and have a contractual life of ten years from the grant date. The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, which includes the following weighted-average assumptions.
 
Six-months ended
 
September 30
 
2018

2017

Expected life (in years)
5.0

6.1

Risk-free interest rate
2.9
%
2.1
%
Annual forfeiture rate
6.3
%
2.7
%
Expected volatility
59.8
%
45.3
%
Dividend yield
%
3.9
%
The following table summarizes the Company’s stock option activity:
 
Shares (in 000’s)

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Life (Years)
Intrinsic Value (000’s)

March 31, 2018
1,110

$
19.30

 
 
Granted
1,960

2.80

 
 
Exercised


 
 
Forfeited or cancelled
(357
)
17.78

 
 
September 30, 2018
2,713

$
7.58

8.0
$

Exercisable
663

$
20.66

3.3
$


22

Table of Contents

The weighted-average grant-date fair value of options granted during the six-months ended September 30, 2018 and 2017 was $1.44 and $2.51, respectively. The intrinsic value of options exercised during the six-months ended September 30, 2018 and 2017 was $0 and $0, respectively. The aggregate intrinsic value in the preceding table is based on the closing stock price of the common stock on September 28, 2018, which was $1.03.
The following table summarizes certain information regarding the Company’s non-vested stock options:
 
Shares (in 000’s)

Weighted-Average Grant-Date Fair Value

March 31, 2018
402

$
2.89

Granted
1,960

1.44

Vested
(148
)
3.34

Forfeited
(162
)
1.74

September 30, 2018
2,052

$
1.56

As of September 30, 2018, there was $2,397 of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.3 years.
Restricted stock units
Restricted stock unit awards are subject to a service condition and typically vest in equal amounts over a three-year period from the grant date. The fair value of restricted stock units is determined based on the number of restricted stock units granted and the closing market price of the common stock on the date of grant.
The following table summarizes the Company’s restricted stock unit activity:
 
Shares (in 000’s)

Weighted-Average Grant-Date Fair Value

March 31, 2018
360

$
9.70

Granted
15

0.95

Vested
(146
)
11.06

Forfeited
(47
)
9.62

September 30, 2018
182

$
7.92

The total fair value of shares that vested during the six-months ended September 30, 2018 and 2017 was $338 and $1,894, respectively.
As of September 30, 2018, there was $953 of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 1.4 years.

23

Table of Contents

Performance share awards
Performance share awards are subject to one of the performance goals - the Company's Relative Total Shareholder Return ("TSR") Ranking or cumulative Adjusted EBITDA - each over a three-year period. The Company’s Relative TSR Ranking metric is based on the three-year cumulative return to stockholders from the change in stock price and dividends paid between the starting and ending dates. The fair value of performance share awards (subject to cumulative Adjusted EBITDA) is determined based on the number of performance shares granted and the closing market price of the common stock on the date of grant. The fair value of performance share awards (subject to the Company’s Relative TSR Ranking) is estimated on the grant date using the Monte-Carlo simulation valuation method.
There have been no performance share awards granted in Fiscal 2019. The following table summarizes the Company’s performance share award activity:
 
Shares (in 000’s)

Weighted-Average Grant-Date Fair Value

March 31, 2018
327

$
11.14

Granted


Vested
(46
)
19.56

Forfeited
(37
)
9.58

September 30, 2018
244

$
9.77

The total fair value of shares that vested during the six-months ended September 30, 2018 and 2017 was $0 and $0, respectively, as there were no payouts because certain performance obligations were not met.

As of September 30, 2018, there was $380 of total unrecognized pre-tax stock-based compensation expense related to non-vested performance share awards, which is expected to be recognized over a weighted-average period of 1.4 years.

Note 12: Earnings (loss) Per Share
The following table details the computation of basic and diluted earnings (loss) per common share from continuing and discontinued operations for the periods presented (share numbers in table in thousands):
 
Three-months ended
Six-months ended
 
September 30
September 30
 
2018

2017

2018

2017

Net income (loss)
$
22,895

$
(11,400
)
$
15,573

$
(21,147
)
Less: Net income (loss) from discontinued operations
29,085

1,048

30,637

2,216

Net income (loss) from continuing operations
$
(6,190
)
$
(12,448
)
$
(15,064
)
$
(23,363
)
 
 
 
 
 
Weighted-average common shares outstanding (basic)
15,235

15,138

15,175

15,057

Effect of dilutive securities from equity awards




Weighted-average common shares outstanding (diluted)
15,235

15,138

15,175

15,057

 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
Continuing operations
$
(0.41
)
$
(0.82
)
$
(0.99
)
$
(1.55
)
Discontinued operations
1.91

0.07

2.02

0.15

Net earnings (loss) per common share
$
1.50

$
(0.75
)
$
1.03

$
(1.40
)
 
 
 
 
 
Diluted earnings (loss) per common share
 
 
 
 
Continuing operations
$
(0.41
)
$
(0.82
)
$
(0.99
)
$
(1.55
)
Discontinued operations
1.91

0.07

2.02

0.15

Net earnings (loss) per common share
$
1.50

$
(0.75
)
$
1.03

$
(1.40
)
 
 
 
 
 

24

Table of Contents

The Weighted-average common shares outstanding (diluted) computation is not impacted during any period where the exercise price of a stock option is greater than the average market price. There were 3,020,924 and 2,507,792 non-dilutive equity awards outstanding for the three-months ended September 30, 2018 and 2017, respectively, and 3,020,924 and 2,507,792 non-dilutive equity awards outstanding for the six-months ended September 30, 2018 and 2017, respectively, that are not included in the corresponding period Weighted-average common shares outstanding (diluted) computation.



25

Table of Contents

Note 13: Segment Information
The Company conducts business globally and is managed on a geographic-service type basis consisting of four operating segments which are (i) North America Products, (ii) North America Services, (iii) International Products and (iv) International Services. These operating segments are also the Company's reporting units for purposes of testing goodwill for impairment and its reporting segments for financial reporting purposes. Revenues within our North America segments are primarily attributed to the United States while revenues within our International segments are attributed to countries in Europe, the Pacific Rim and Latin America.
The accounting policies of the operating segments are the same as those of the Company. The Company allocates resources to its operating segments and evaluates the performance of the operating segments based upon operating income.
The financial results for the Company's reporting segments are as follows:
 
North America Products

North America Services

International Products

International Services

Total

2Q19
 
 
 
 
 
Revenues
$
16,845

$
116,280

$
15,991

$
9,542

$
158,658

Gross profit
7,520

27,379

6,442

2,024

43,365

Operating income (loss)
(500
)
(8,025
)
(694
)
(205
)
(9,424
)
Depreciation
447

1,310

140

86

1,983

Intangibles amortization

1,075



1,075

Restructuring expense
9

75

101


185

Asset impairment loss

1,586



1,586

Capital expenditures
105

165

49

63

382

Assets (as of September 30)
40,207

209,789

35,691

12,077

297,764

 
 
 
 
 
 
2Q18
 
 
 
 
 
Revenues
$
19,858

$
118,834

$
17,390

$
8,383

$
164,465

Gross profit
9,145

31,365

6,937

1,875

49,322

Operating income (loss)
1,848

(8,704
)
(361
)
(1,682
)
(8,899
)
Depreciation
451

1,434

175

107

2,167

Intangibles amortization

1,591

125


1,716

Restructuring expense
(659
)
697

(1,073
)
1,182

147

Asset impairment loss

1,426



1,426

Capital expenditures
204

971

120

258

1,553

Assets (as of September 30)
62,527

261,777

43,112

15,431

382,847

 
 
 
 
 
 
2QYTD19
 
 
 
 
 
Revenues
$
32,645

$
236,743

$
31,743

$
20,021

$
321,152

Gross profit
14,272

58,491

13,024

3,873

89,660

Operating income (loss)
(1,768
)
(12,133
)
(1,092
)
(945
)
(15,938
)
Depreciation
912

2,716

287

196

4,111

Intangibles amortization

2,153



2,153

Restructuring expense
9

223

125

26

383

Asset impairment loss

1,586



1,586

Capital expenditures
251

328

105

85

769

 
 
 
 
 
 
2QYTD18
 
 
 
 
 
Revenues
$
37,121

$
240,565

$
33,015

$
14,509

$
325,210

Gross profit
16,924

61,279

13,019

3,087

94,309

Operating income (loss)
374

(17,956
)
(4,102
)
(2,008
)
(23,692
)
Depreciation
900

3,076

339

184

4,499

Intangibles amortization

3,313

238


3,551

Restructuring expense
647

1,975

640

1,207

4,469

Asset impairment loss

1,426



1,426

Capital expenditures
333

1,347

373

274

2,327



26


Note 14: Commitments and Contingencies
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints arising out of the normal course of business. Based on the facts currently available to the Company, Management believes these matters are adequately provided for, covered by insurance, without merit or not probable that an unfavorable material outcome will result.

There has been no other significant or unusual activity during Fiscal 2019.

Note 15: Restructuring

The Company has incurred and continues to incur costs related to facility consolidations, such as idle facility rent obligations and the write-off of leasehold improvements, and employee severance (collectively referred to as "restructuring expense") in a continued effort to consolidate back office functions and to make its organization more efficient. These restructuring activities are compartmentalized and are not part of an overall plan and therefore the Company cannot estimate the total amount to be incurred in connection with the activity. Employee severance is generally payable within the next twelve months with certain facility costs extending through Fiscal 2019.

The following table summarizes the changes to the restructuring liability for the periods presented.
 
Employee
Severance

Facility
Closures

Total

Balance at March 31, 2018
$
2,652

$
104

$
2,756

Restructuring expense
394

(11
)
383

Cash expenditures
(1,460
)
(82
)
(1,543
)
Balance at September 30, 2018
$
1,586

$
11

$
1,597


The restructuring liability amount shown above is classified as a current liability under other liabilities on the Company’s Consolidated Balance Sheets for the period ended September 30, 2018.

The following table summarizes restructuring expense, which is recorded in Selling, general & administrative expenses in the Company’s Consolidated Statements of Operations, for the six-months ended September 30, 2018, for the Company’s reporting segments:
 
North America Products

North America Services

International Products

International Services

Total

Employee Severance
$
9

$
234

$
125

$
26

$
394

Facility Closures

(11
)


(11
)
Total
$
9

$
223

$
125

$
26

$
383


Company management is continuing to assess ways to align costs with revenues to improve profitability.

27


Note 16: Discontinued Operations

On August 27, 2018, the Company completed the sale of the Federal Business for $75.0 million in cash. The sale resulted in a gain of $31.0 million, net of tax of $8.9 million. The results of the Federal Business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented. The Federal Business was previously included in the North America Services reporting segment.

The results of discontinued operations in our Consolidated Statements of Operations were as follows:

 
Three-months ended
Six-months ended
 
September 29 and September 30
September 29 and September 30
In thousands, except per share amounts
2018

2017

2018

2017

Revenues
$
16,898

$
29,699

$
45,203

$
60,598

Cost of sales *
12,564

22,528

33,290

45,811

Selling, general & administrative expenses
3,693

5,251

8,803

10,576

Asset impairment loss
2,975


2,975


Intangibles amortization
262

393

657

788

Operating income (loss)
(2,596
)
1,527

(522
)
3,423

Interest expense (income), net
(6
)
(7
)
(4
)
(7
)
Income (loss) before provision for income taxes
(2,590
)
1,534

(518
)
3,430

Provision (benefit) for income taxes
(635
)
486

(115
)
1,214

Income (loss) from continuing operations
$
(1,955
)
$
1,048

$
(403
)
$
2,216

 
 
 
 
 
* Exclusive of depreciation and intangibles amortization.

The carrying amounts of major assets and liabilities of the Federal Business that were classified as held for sale on the Consolidated Balance Sheet as of March 31, 2018 were as follows:
In thousands
March 31, 2018

Assets
 
Accounts receivable, net
$
15,360

Inventories, net
885

Costs/estimated earnings in excess of billings on uncompleted contracts
29,662

Other current assets
1,073

Current assets held for sale
$
46,980

Property, plant and equipment, net
1,087

Intangibles, net
11,035

Other non-current assets
156

Non-current assets held for sale
$
12,278

Liabilities
 
Accounts payable
$
15,541

Accrued compensation and benefits
1,436

Deferred revenue
293

Billings in excess of costs/estimated earnings on uncompleted contracts
2,120

Other current liabilities
1,207

Current liabilities held for sale
$
20,597

Other liabilities
597

Non-current liabilities held for sale
$
597

 
 




28


Note 17: Subsequent Event

On November 11, 2018, Black Box entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGC Networks Pte Ltd., a company organized under the laws of Singapore (“Top Parent”), BBX Main Inc., a Delaware corporation and a wholly owned subsidiary of Top Parent (“Parent”), BBX Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“BBX Intermediate”), and Host Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of BBX Intermediate (“Merger Sub”, and, together with Top Parent, Parent and BBX Intermediate, the “Parent Entities” and each, a “Parent Entity”). Pursuant to the terms of the Merger Agreement, Top Parent, Parent and BBX Intermediate have agreed to cause Merger Sub to commence a tender offer to purchase any and all of the outstanding shares of common stock, par value $0.001 per share, of the Company, at a price of $1.08 per Share, net to the holder thereof, in cash, without interest thereon. The transaction is expected to close prior to the end of the calendar year.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
The discussion and analysis for the three-months and six-months ended September 30, 2018 and 2017 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, 2018 (the "Form 10-K"). References to “2Q19” mean the three-month period ended September 30, 2018 while references to "2Q18" mean the three-month period ended September 30, 2017. References to "2QYTD19" mean the six-month period ended September 30, 2018 while references to "2QYTD18" mean the six-month period ended September 30, 2017. 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 September 30, 2018 and 2017 were September 29, 2018 and September 30, 2017, 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.
Recent Developments

Agreement and Plan of Merger
On November 11, 2018, Black Box entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGC Networks Pte Ltd., a company organized under the laws of Singapore (“Top Parent”), BBX Main Inc., a Delaware corporation and a wholly owned subsidiary of Top Parent (“Parent”), BBX Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“BBX Intermediate”), and Host Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of BBX Intermediate (“Merger Sub”, and, together with Top Parent, Parent and BBX Intermediate, the “Parent Entities” and each, a “Parent Entity”). Pursuant to the terms of the Merger Agreement, Top Parent, Parent and BBX Intermediate have agreed to cause Merger Sub to commence a tender offer to purchase any and all of the outstanding shares of common stock, par value $0.001 per share, of the Company, at a price of $1.08 per Share, net to the holder thereof, in cash, without interest thereon.

The Black Box Board of Directors unanimously approved the merger agreement following a thorough review of the full range of available strategic, financial and capital structure alternatives, which Black Box commenced and announced on February 6, 2018. The transaction is expected to close prior to the end of the calendar year.

Sale of Federal Business
On August 27, 2018, the Company closed on its previously announced agreement to sell its Federal Government IT Services Business (the “Federal Business”) to Arlington Capital Partners, a leading private equity firm with a focus on businesses in government services and other adjacent markets, for a cash purchase price of $75.0 million. Arlington Capital Partners purchased 100% of the equity interests of the Federal Business on a debt-free, cash-free basis. The net cash proceeds from the sale of the Federal Business, after purchase price adjustments of $5.6 million, transaction fees and expenses of $3.2 million as well as $3.0 million of funds deposited into escrow for the finalization of certain closing items as well as certain indemnifications, were used to pay Bank fees, interest on bank debt and indebtedness. After fees and interest, the new $10 million LIFO senior revolving credit facility was paid first and the Term Loan was paid in full, with the remaining funds reducing the original Revolving Credit Line. The LIFO line is available for future borrowings, subject to continued compliance with the Second Amended Credit Agreement.

Second Amendment to the Credit Agreement

29

Table of Contents

On June 29, 2018, the Company and certain direct and indirect wholly-owned subsidiaries of the Company (collectively, the “Guarantors” and together with the Company, the “Loan Parties”) entered into a Second Amendment (the “Second Amended Credit Agreement” or the “Second Amendment”) with PNC Bank, National Association, as administrative agent (the “Agent”), and certain other lenders party thereto (together with the Agent, the “Lenders”) to amend the Credit Agreement entered into among the Loan Parties, the Agent and the Lenders on May 9, 2016 (as amended by the Amendment and Joinder Agreement, dated August 9, 2017, the “Amended Credit Agreement,” and as further amended by the “Second Amended Credit Agreement”).

The Second Amended Credit Agreement established a new “last in first out” senior revolving credit facility in an amount not to exceed $10,000 (the “LIFO Facility”). The borrowings under the LIFO Facility will be used to finance the Company’s cash flow needs, subject to an approved budget and certain variance restrictions, including payments to vendors to allow the Company to operate in the ordinary course of its business. Interest on the LIFO Facility is LIBOR plus 10.0%. The Company entered into the Second Amendment to waive and modify certain covenants and other provisions contained in the Amended Credit Agreement and to fund its ongoing operations with the LIFO Facility. The Company would have defaulted the minimum Adjusted EBITDA covenant and certain other covenants as defined by the Amended Credit Agreement had these defaults not been waived under the Second Amendment.

The Company
Black Box is a leading digital solutions provider dedicated to helping customers design, build, manage and secure their IT infrastructure. The Company offers Services and Products that it distributes through two platforms that it has built over its 42-year history.
Our Services platform is comprised of engineering and design, project management, field service management, network operations centers, our national technology team, national and international sales teams and technology solutions centers which include dedicated sales and engineering resources. The primary services offered through this platform include managed services, infrastructure services (including wired and wireless network solutions, structured cabling and video/AV services), communications lifecycle services, unified communications and data center services.

The Company generates revenues in its Services business from the design, sale and/or installation of new communications and network infrastructure systems, the support of existing systems and on demand services. We periodically generate revenues from contracts performed over time that may result in an asset on our balance sheet for multiple periods constituting part of our working capital. We have not experienced significant collectability issues related to such contracts. For the sale and implementation of new communications systems or other major projects, 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 for services revenues. Projects account for the majority of Services 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.

New communications systems orders often generate post-implementation maintenance via a fixed fee model where revenues are earned ratably over the term of the agreement (generally 1-3 years for commercial clients and 3-5 years for government clients) or a variable fee model that is based on time and materials per occurrence, similar to on demand services. Maintenance revenues 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 on demand services revenues are also dependent upon the Company's relationship with its clients and its long track record of providing high-quality service.

The Company's Services business generates backlog which is defined by the Company as orders and contracts considered to be firm. At September 30, 2018, the Company's total backlog, which relates primarily to Services, was $247,317, of which $173,476 is expected to be completed within the next twelve months.

Under our Products platform, we provide networking solutions through the sale of products for KVM switching, IT infrastructure, specialty networking and multimedia.

Our Products revenues are generated from sales to key channel partners and system integrators and through a global distribution network. Products sells through a direct sales team as well as through its internet site and catalogs. In order to meet client demand, we keep a moderate level of inventory which consumes part of our working capital. The market for these products is a highly fragmented and competitive. The Company has participated in this market for 40+ years and has earned a reputation for providing high quality products, rapid order fulfillment and free 24/7/365 technical support. The Company's Products revenues is driven both by general information technology spending and capital budgets.


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Table of Contents

Our platforms introduce scale, flexibility and leverage to the business, and provide the following competitive advantages:

A diversified client base: We have built a diversified client base that ranges from small organizations to many of the world's largest corporations and institutions. Black Box clients participate in many industries, including technology, business services, healthcare, manufacturing, banking and retail, among others. Revenues from our clients are segmented with approximately 60% from large companies (i.e., revenues greater than $1 billion, including federal governments), approximately 20% from medium-sized companies (i.e., revenues between $50 million and $1 billion, including state governments) and approximately 20% from small companies (i.e., revenues less than $50 million, including local governments). We strive to develop extensive and long-term relationships with high-quality clients as we believe that satisfied clients will demand quality services and product offerings even in economic downturns. Also, we believe that our distinctive portfolio of products and services will allow us to leverage the relationships and introduce additional offerings to satisfied clients.

Key relationships with leading technology partners: We have built long-term relationships with all major communications equipment manufacturers and we are a top partner with the market leaders.

Broad geographic footprint: We have built a global footprint with offices throughout the world.

Deep organic resources: We have 2,849 team members world-wide, with the collective experience and certifications to serve our clients with on-site and remote capabilities.

Dedicated sales force: We have a team of direct sales people world-wide.

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. 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 from us even in economic downturns.

2QYTD19 vs 2QYTD18 Summary
 
2QYTD19

2QYTD18

% Change

Revenues
$
321,152

$
325,210

(1.2
)%
Gross profit margin
27.9
 %
29.0
 %
(3.8
)%
Operating income (loss) margin
(5.0
)%
(7.3
)%
n/m

Diluted earnings (loss) per share from continuing operations
$
(0.99
)
$
(1.55
)
n/m

Net cash provided by (used for) continuing operating activities
$
(10,281
)
$
(15,938
)
n/m

n/m = not meaningful
Diluted loss per share from continuing operations was $0.99, compared to $1.55 in the same period last year as a result of:
an $11,165 decrease in selling, general and administrative expenses which was primarily the result of $4,766 lower compensation and benefit costs, $4,579 lower costs relating to the implementation of SAP, $4,086 lower restructuring costs, $1,662 lower stock compensation expense, and $1,076 lower foreign exchange expense, all partially offset by a $5,774 increase in financial advisory costs, and
a $5,134 increase in the benefit for income taxes primarily due to the intraperiod tax allocation of valuation allowances between continuing and discontinued operations. These improvements were partially offset by:
a $4,649 decrease in gross profit as a result of a $2,002 decrease in Services gross profit due to revenue growth in lower margin International Services combined with declining revenue in higher margin North American Services along with margin compression due to higher costs, and a $2,647 decrease in Products gross profit due to declining revenue in both International Products and North American Products, and
a $3,697 increase in interest expense resulting from higher interest rates and higher average debt.

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Table of Contents

Net cash used for continuing operating activities was $10,281, which included net loss of $15,064 and positive cash from working capital of $2,335, compared to net cash used for continuing operating activities of $15,938, which included net loss of $23,363 and negative cash from working capital of $2,919, in the same period last year.



32

Table of Contents

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 (loss) amounts in the table below are presented on a basis consistent with GAAP.
 
2Q19

2Q18

% Change

 
2QYTD19

2QYTD18

% Change

Revenues
 
 
 
 
 
 
 
North America Products
$
16,845

$
19,858

(15
)%
 
$
32,645

$
37,121

(12
)%
International Products
$
15,991

$
17,390

(8
)%
 
$
31,743

$
33,015

(4
)%
Products
$
32,836

$
37,248

(12
)%
 
$
64,388

$
70,136

(8
)%
North America Services
$
116,280

$
118,834

(2
)%
 
$
236,743

$
240,565

(2
)%
International Services
$
9,542

$
8,383

14
 %
 
$
20,021

$
14,509

38
 %
Services
$
125,822

$
127,217

(1
)%
 
$
256,764

$
255,074

1
 %
Total Revenues
$
158,658

$
164,465

(4
)%
 
$
321,152

$
325,210

(1
)%
Gross Profit
 
 
 
 
 
 
 
North America Products
$
7,520

$
9,145

(18
)%
 
$
14,272

$
16,924

(16
)%
% of Revenues
44.6
 %
46.1
 %
(3
)%
 
43.7
 %
45.6
 %
(4
)%
International Products
$
6,442

$
6,937

(7
)%
 
$
13,024

$
13,019

 %
% of Revenues
40.3
 %
39.9
 %
1
 %
 
41.0
 %
39.4
 %
4
 %
Products
$
13,962

$
16,082

(13
)%
 
$
27,296

$
29,943

(9
)%
% of Revenues
42.5
 %
43.2
 %
(2
)%
 
42.4
 %
42.7
 %
(1
)%
North America Services
$
27,379

$
31,365

(13
)%
 
$
58,491

$
61,279

(5
)%
% of Revenues
23.5
 %
26.4
 %
(11
)%
 
24.7
 %
25.5
 %
(3
)%
International Services
$
2,024

$
1,875

8
 %
 
$
3,873

$
3,087

25
 %
% of Revenues
21.2
 %
22.4
 %
(5
)%
 
19.3
 %
21.3
 %
(9
)%
Services
$
29,403

$
33,240

(12
)%
 
$
62,364

$<