Black Box Corporation: Subscriber Crowdsourcing Signals Steep Financial Risk
Black Box Corporation provides digital solutions and infrastructure to U.S. corporations and the government, generating nearly $1 billion in sales annually. However, this operator has come under significant financial stress, as previously highlighted within our High Risk Report published in early 2018. As the year progressed, CreditRiskMonitor’s proprietary subscriber crowdsourcing data further highlighted acute financial risk.
CreditRiskMonitor is a leading web-based financial risk analysis and news service designed for credit, supply chain and financial professionals. Subscribers include thousands of risk professionals worldwide, including employees from more than 35% of the Fortune 1000. A few important features of CreditRiskMonitor's service are:
- Commercial credit report coverage spanning more than 58,000 global public companies and more than 80,000 of the largest U.S. private companies
- The FRISK® score, which is 96%-accurate* in predicting public company financial stress and bankruptcy risk
- Proprietary subscriber crowdsourcing, a powerful scoring model that derives research patterns from thousands of financial experts globally
Crowdsourcing Risk Expertise
CreditRiskMonitor has collected click data for nearly 20 years and, based on our research, we have determined that certain click patterns within our commercial credit reports will demonstrate legitimate concern about company financial risk. This typically involves the subscriber, generally a credit or purchasing manager, performing thorough research and analysis on a business.
Crowdsourcing data picks up on aggregate research activities that indicate concern, thereby highlighting financially risky scenarios, and anonymously informs all subscribers that are doing business with that company. In other words, CreditRiskMonitor service offers an electronic credit community using real-time objective data.
Credit managers, as part of their risk assessment process, primarily care about receiving payment for supplied product. Purchasing managers need to make sure that they will continue to receive products or services reliably. If these parties choose to change credit limits or buy less product, respectively, it can significantly influence a subject company's finances. Extensive research generally precedes such decisions, which is reflected in CreditRiskMonitor's crowdsourcing behavioral data and are thereby incorporated into the FRISK® score.
For Black Box Corporation, subscriber crowdsourcing has sent a negative signal for the past 12 months and began showing material concern starting in July of 2018. The recent spike pushed the FRISK® down to a bottom-rung score of “1,” the worst risk category. This score represents a probability of bankruptcy range of 10-to-50% between now and November 2019.
Black Box Corporation has reported high single-digit declines in net sales and erosion in gross margins, indicative of waning pricing power, for the last three fiscal years. More importantly, EBITDA has been negative for five consecutive quarters now. EBITDA deterioration was significant to the company, where creditors had to make an amendment to a credit agreement in August of 2017. Effectively, a minimum adjusted EBITDA covenant was removed and the total borrowing base was reduced.
Interestingly, Black Box Corporation’s working capital is positive within its reported filings, yet a footnote discloses that the calculation excludes short-term debt. CreditRiskMonitor warned subscribers of Black Box’s deteriorating liquidity through its standardized financial presentations and news alerts for nearly one year.
Corresponding with poor earnings performance, free cash flow has been negative over the course of the last five quarters. As of the first quarter of 2018, its cash ratio came in at 7%, significantly below the industry peer median of 50%. Its working capital deficit was $34.5 million, which exists primarily due to previously accelerated debt. Adding back deferred revenue, the net balance would improve to negative $6.2 million – still a weak figure.
In late August 2018, management announced the closing of the sale of its Federal Business segment for $75 million in cash. Net of fees and expenses, which totaled $11.8 million, the transaction would result in net proceeds of $63.2 million. This cash is being used to boost liquidity and reduce debt, however incremental operating earnings from that business line is now gone. Despite this asset sale, management has disclosed that it continues to work with financial advisor Raymond James to pursue additional strategic alternatives.
Given Black Box Corporation's poor operating performance and negative tangible net worth, it’s highly unlikely that the company can raise external capital. Additional assets have yet to be identified for sale, but M&A activity could be a consideration. Regardless, subscribers should take extra care with Black Box Corporation given its elevated risk of bankruptcy based on its FRISK® score of “1”:
Public companies in the technology sector in 2018 are generally viewed as having low financial risk, but situations like Black Box Corporation tell a different story. Hopefully the company can turn its business around, but credit restrictions, negative EBITDA and limited cash on hand are significant challenges. Currently, Black Box Corporation's FRISK® score is slotted within the most severe financial risk threshold within the scale.
More recently, the crowdsourcing component of the FRISK® score has started to flash negative signs, highlighting increasing concern among the company’s suppliers and customers. This aggregate research pattern data is cutting edge information, particularly given it can turn into influential business decisions. Crowdsourcing is actionable real-time data that is far more valuable than subjective backward-looking surveys. The research actions of our highly trained risk professional subscribers is telling us that the situation at Black Box Corporation should be watched closely today.
*As backtested on U.S. public companies; results may vary for private companies and by country. All references to the FRISK® score’s accuracy on the CreditRiskMonitor website are qualified by this statement.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.