BLACK BOX CORPORATION 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
OR
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o |
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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)
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Delaware
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95-3086563 |
(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
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15055 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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 is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 July 30, 2008, there were 17,516,305 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
FOR THE QUARTER ENDED JUNE 28, 2008
INDEX
2
PART
I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK
BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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June 28, 2008 |
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In thousands, except par value |
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(Unaudited) |
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March 31, 2008* |
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Assets |
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Cash and cash equivalents |
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$ |
25,238 |
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$ |
26,652 |
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Accounts receivable, net of allowance for doubtful accounts of $11,582
and $12,612 |
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162,696 |
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162,289 |
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Inventories, net |
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64,683 |
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67,537 |
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Costs/estimated earnings in excess of billings on uncompleted contracts |
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57,614 |
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58,611 |
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Prepaid and other current assets |
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34,050 |
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31,529 |
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Total current assets |
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344,281 |
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346,618 |
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Property, plant and equipment, net |
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32,172 |
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32,822 |
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Goodwill |
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587,158 |
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586,856 |
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Intangibles: |
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Customer relationships, net |
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68,880 |
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67,331 |
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Other intangibles, net |
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32,594 |
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32,524 |
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Other assets |
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7,278 |
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7,700 |
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Total assets |
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$ |
1,072,363 |
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$ |
1,073,851 |
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Liabilities |
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Accounts payable |
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$ |
74,299 |
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$ |
71,670 |
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Accrued compensation and benefits |
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21,608 |
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22,654 |
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Deferred revenue |
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37,566 |
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37,467 |
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Billings in excess of costs/estimated earnings on uncompleted contracts |
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17,098 |
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19,946 |
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Income taxes |
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14,986 |
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13,810 |
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Other liabilities |
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41,942 |
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47,040 |
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Total current liabilities |
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207,499 |
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212,587 |
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Long-term debt |
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190,722 |
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195,904 |
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Other liabilities |
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21,938 |
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25,086 |
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Total liabilities |
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420,159 |
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433,577 |
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Stockholders equity |
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Preferred stock authorized 5,000, par value $1.00, none issued |
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-- |
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-- |
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Common stock authorized 100,000, par value $.001, 17,516 and 17,516
shares issued and outstanding |
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25 |
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25 |
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Additional paid-in capital |
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443,762 |
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443,380 |
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Retained earnings |
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491,703 |
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479,921 |
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Accumulated other comprehensive income |
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39,809 |
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40,043 |
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Treasury stock, at cost 7,626 and 7,626 shares |
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(323,095 |
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(323,095 |
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Total stockholders equity |
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652,204 |
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640,274 |
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Total liabilities and stockholders equity |
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$ |
1,072,363 |
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$ |
1,073,851 |
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* Derived from audited financial statements
See Notes to the Consolidated Financial Statements
3
BLACK
BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three (3) months ended June 28 and 30, |
In thousands, except per share amounts |
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2008 |
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2007 |
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Revenues |
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Hotline products |
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$ |
55,639 |
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$ |
56,139 |
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On-Site services |
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186,914 |
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196,152 |
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Total |
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242,553 |
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252,291 |
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Cost of sales |
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Hotline products |
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27,982 |
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29,362 |
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On-Site services |
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126,429 |
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131,699 |
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Total |
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154,411 |
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161,061 |
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Gross profit |
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88,142 |
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91,230 |
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Selling, general & administrative expenses |
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66,468 |
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72,743 |
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Intangibles amortization |
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1,826 |
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2,318 |
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Operating income |
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19,848 |
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16,169 |
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Interest expense (income), net |
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(265 |
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3,280 |
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Other expenses (income), net |
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(96 |
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(67 |
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Income before provision for income taxes |
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20,209 |
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12,956 |
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Provision for income taxes |
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7,376 |
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4,768 |
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Net income |
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$ |
12,833 |
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$ |
8,188 |
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Earnings per common share |
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Basic |
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$ |
0.73 |
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$ |
0.47 |
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Diluted |
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$ |
0.73 |
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$ |
0.46 |
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Weighted average common shares outstanding |
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Basic |
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17,516 |
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17,527 |
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Diluted |
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17,518 |
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17,639 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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See Notes to the Consolidated Financial Statements
4
BLACK
BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three (3) months ended June 28 and 30, |
In thousands |
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2008 |
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2007 |
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Operating Activities |
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Net income |
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$ |
12,833 |
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$ |
8,188 |
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Adjustments to reconcile net income to net cash provided by (used
for) operating activities: |
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Intangibles amortization and depreciation |
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4,252 |
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5,273 |
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Loss on sale of property |
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6 |
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481 |
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Deferred taxes |
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936 |
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(7,789 |
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Tax impact from stock options |
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160 |
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4,404 |
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Stock compensation expense |
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542 |
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1,716 |
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Change in fair value of interest-rate swap |
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(2,708 |
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(1,308 |
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Changes in operating assets and liabilities (net of acquisitions): |
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Accounts receivable, net |
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799 |
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320 |
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Inventories, net |
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3,983 |
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3,312 |
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All other current assets excluding deferred tax asset |
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(1,694 |
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(1,996 |
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Liabilities exclusive of long-term debt |
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(6,681 |
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(4,897 |
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Net cash provided by (used for) operating activities |
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$ |
12,428 |
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$ |
7,704 |
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Investing Activities |
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Capital expenditures |
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$ |
(652 |
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$ |
(984 |
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Capital disposals |
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22 |
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-- |
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Acquisition of businesses (payments)/recoveries |
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(6,286 |
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-- |
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Prior merger-related (payments)/recoveries |
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165 |
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(3,250 |
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Net cash provided by (used for) investing activities |
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$ |
(6,751 |
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$ |
(4,234 |
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Financing Activities |
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Proceeds from borrowings |
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$ |
52,575 |
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$ |
47,445 |
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Repayment of borrowings |
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(58,448 |
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(50,818 |
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Deferred financing costs |
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(112 |
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-- |
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Payment of dividends |
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(1,051 |
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(1,052 |
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Net cash provided by (used for) financing activities |
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$ |
(7,036 |
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$ |
(4,425 |
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Foreign currency exchange impact on cash |
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$ |
(55 |
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$ |
93 |
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Increase / (decrease) in cash and cash equivalents |
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$ |
(1,414 |
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$ |
(862 |
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Cash and cash equivalents at beginning of period |
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$ |
26,652 |
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$ |
17,157 |
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Cash and cash equivalents at end of period |
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$ |
25,238 |
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$ |
16,295 |
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Supplemental Cash Flow: |
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Cash paid for interest |
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$ |
2,877 |
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$ |
4,714 |
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Cash paid for income taxes |
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5,210 |
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8,145 |
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Non-cash financing activities: |
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Dividends payable |
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1,051 |
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1,052 |
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Capital leases |
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244 |
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192 |
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See Notes to the Consolidated Financial Statements
5
BLACK
BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Business and Basis of Presentation
Business
Black Box Corporation (Black Box or the Company) is the worlds largest dedicated network
infrastructure services provider. Black Box offers one-source network infrastructure services for
communication systems. The Companys service offerings include design, installation, integration,
monitoring and maintenance of voice, data and integrated communication systems. The Companys
primary service offering is voice solutions, while providing premise cabling and other data-related
services and products. The Company provides 24/7/365 technical support for all of its solutions
which encompasses all major voice and data manufacturers as well as 118,000 network infrastructure
products (Hotline products) that it sells through its catalog and Internet Web site (such catalog
and Internet Web site business, together with technical support for such business, being referred
to as Hotline Services) and its Voice Services and Data Services (collectively referred to as
On-Site services) offices. With more than 3,000 professional technical experts and 188 offices,
as of June 30, 2008, Black Box serves more than 175,000 clients in 141 countries throughout the
world. Founded in 1976, Black Box, a Delaware corporation, operates subsidiaries on five
continents and 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 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 accounting principles generally accepted in the
United States for complete financial statements. The Company believes that these consolidated
financial statements reflect all normal, recurring adjustments needed to present fairly the
Companys results for the interim periods presented. The results as of and for interim periods 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 Companys most recent Annual Report on Form 10-K as filed with the
Securities and Exchange Commission (SEC) for the fiscal year ended March 31, 2008 (the Form
10-K).
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes to the Consolidated Financial Statements as of June 30, 2008 and 2007 were June 28,
2008 and June 30, 2007. References herein to Fiscal Year or Fiscal mean the Companys 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
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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 allowances for doubtful accounts receivable, sales returns, net realizable value of
inventories, loss contingencies, warranty reserves, intangible assets and goodwill. Actual results
could differ from those estimates. Management believes the estimates made are reasonable.
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three (3) months ended June 30, 2008.
Note 2: Significant Accounting Policies / Recent Accounting Pronouncements
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys Consolidated Financial
Statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Form 10-K. Additional significant accounting policies adopted during Fiscal 2009 are disclosed
below.
Fair Value Measurements
The Companys assets and liabilities recorded at fair value are categorized based upon a fair value
hierarchy in accordance with Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements (SFAS 157). The fair value hierarchy ranks the quality and reliability of
the information used to determine fair value.
6
The levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are observable for the asset or
liability (e.g., interest rates); and inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3: Inputs that are both significant to the fair value measurement and unobservable.
Assets and liabilities measured at fair value are based on one or more of the valuation techniques
noted in SFAS 157. The valuation techniques are described below.
Market approach: The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets or liabilities.
Cost approach: The cost approach is based on the amount that currently would be required to
replace the service capacity of an asset (current replacement cost).
Income approach: The income approach uses valuation techniques to convert future amounts to a
single present amount.
The fair value of foreign currency contracts is determined using the market approach and primarily
based on observable foreign exchange spot rates. The fair value of the interest-rate swap (as
defined below) is determined using the income approach and is predominately based on observable
interest rates and yield curves. The fair value of certain of the Companys financial instruments,
including Cash and cash equivalents, Accounts receivable, Accounts payable and Long-term debt
approximates the carrying value due to the relatively short maturity of such instruments. There
have been no changes in the Companys valuation techniques used to measure fair values during the
three (3) months ended June 30, 2008. See Recent Accounting Pronouncements within this Note 2
and Note 14 for further reference.
Recent Accounting Pronouncements
Fair Value Measurements
In September, 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. In February, 2008,
the FASB issued FASB Staff Position (FSP) SFAS 157-1, Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13, which removes certain leasing
transactions from the scope of SFAS 157. On April 1, 2008, the Company adopted the provisions of
SFAS 157 with the exception of a one-year deferral of implementation for non-financial assets and
liabilities that are not recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) as provided by FSP SFAS 157-2, Effective Date of FASB
Statement No. 157. The significant categories of assets and liabilities included in the Companys
deferred implementation of SFAS 157 are non-financial assets and liabilities initially measured at
fair value in a business combination and impairment assessments of long-lived assets, goodwill and
intangible assets. The requirements of SFAS 157 were applied prospectively. The adoption of SFAS
157 did not have a material impact on the Companys consolidated financial statements. See
Significant Accounting Policies within this Note 2 and Note 14 for further reference.
Business Combinations
In December, 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring
that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed and any non-controlling interest at
their fair values as of the acquisition date. SFAS 141(R) requires, among other things, that
acquisition-related costs be recognized separately from the acquisition. For the Company, SFAS
141(R) applies prospectively to business combinations for which the acquisition date is on or after
April 1, 2009.
7
Non-controlling Interests
In December, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan Amendment to Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160
amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements.
SFAS 160 requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. The provisions of SFAS 160 are
effective for the Company as of April 1, 2009. The Company believes the adoption of SFAS 160 will
not have a material impact on the Companys consolidated financial statements.
Derivative Disclosures
In March, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position, financial performance and cash flows.
SFAS 161 is effective for the Company beginning on April 1, 2009. The Company is evaluating the
impact of the adoption of SFAS 161 on its consolidated financial statements.
Useful lives of Intangible Assets
In April, 2008, the FASB issued FSP FASB 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing
assumptions about renewal or extension used in estimating the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) and
expands the disclosure requirements of SFAS 142. The provisions of FSP 142-3 are effective for the
Company as of April 1, 2009. The provisions of FSP 142-3 for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements shall be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. The Company is evaluating the
impact of the adoption of FSP 142-3 on its consolidated financial statements.
Generally Accepted Accounting Principles Hierarchy
In May, 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This statement identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in accordance with generally accepted accounting
principles in the United States. This statement is effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is
evaluating the impact of the adoption of SFAS 162 on its consolidated financial statements.
Note 3: Inventories
The Companys inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
March 31, 2008 |
|
|
Raw materials |
|
$ |
1,773 |
|
|
$ |
1,736 |
|
Finished goods |
|
|
83,954 |
|
|
|
86,174 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
85,727 |
|
|
|
87,910 |
|
Excess and obsolete inventory reserves |
|
|
(21,044 |
) |
|
|
(20,373 |
) |
|
|
|
|
|
|
|
Inventory, net |
|
$ |
64,683 |
|
|
$ |
67,537 |
|
|
Note 4: Goodwill
The following table summarizes changes to Goodwill at the Companys reporting units for the three
(3) months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
All Other |
|
|
Total |
|
|
Balance as of March 31, 2008 |
|
$ |
502,517 |
|
|
$ |
82,022 |
|
|
$ |
2,317 |
|
|
$ |
586,856 |
|
Currency translation |
|
|
-- |
|
|
|
(32 |
) |
|
|
(13 |
) |
|
|
(45 |
) |
Current period acquisitions (Note 8) |
|
|
2,969 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,969 |
|
Prior period acquisitions |
|
|
(2,622 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(2,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008 |
|
$ |
502,864 |
|
|
$ |
81,990 |
|
|
$ |
2,304 |
|
|
$ |
587,158 |
|
|
8
Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
March 31, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Definite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
10,268 |
|
|
$ |
5,413 |
|
|
$ |
4,855 |
|
|
$ |
9,776 |
|
|
$ |
4,991 |
|
|
$ |
4,785 |
|
Customer relationships |
|
|
78,489 |
|
|
|
9,609 |
|
|
|
68,880 |
|
|
|
75,526 |
|
|
|
8,195 |
|
|
|
67,331 |
|
Acquired backlog |
|
|
10,862 |
|
|
|
10,862 |
|
|
|
-- |
|
|
|
10,862 |
|
|
|
10,862 |
|
|
|
-- |
|
|
|
|
|
|
Total |
|
$ |
99,619 |
|
|
$ |
25,884 |
|
|
$ |
73,735 |
|
|
$ |
96,164 |
|
|
$ |
24,048 |
|
|
$ |
72,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
135,611 |
|
|
$ |
34,137 |
|
|
$ |
101,474 |
|
|
$ |
132,156 |
|
|
$ |
32,301 |
|
|
$ |
99,855 |
|
|
The Companys indefinite-lived intangible assets consist solely of the Companys trademark
portfolio. The Companys definite-lived intangible assets are comprised of employee non-compete
contracts, backlog and customer relationships obtained through business acquisitions.
The following table summarizes the changes to carrying amounts of intangible assets for the three
(3) months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Competes |
|
|
Customer |
|
|
|
|
|
|
Trademarks |
|
|
and Backlog |
|
|
Relationships |
|
|
Total |
|
|
Balance at March 31, 2008 |
|
$ |
27,739 |
|
|
$ |
4,785 |
|
|
$ |
67,331 |
|
|
$ |
99,855 |
|
Amortization expense |
|
|
-- |
|
|
|
(412 |
) |
|
|
(1,414 |
) |
|
|
(1,826 |
) |
Current period acquisitions (Note 8) |
|
|
-- |
|
|
|
482 |
|
|
|
2,963 |
|
|
|
3,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
$ |
27,739 |
|
|
$ |
4,855 |
|
|
$ |
68,880 |
|
|
$ |
101,474 |
|
|
Intangible amortization was $1,826 and $2,318 for the three (3) months ended June 30, 2008 and
2007, respectively. The Company acquired definite-lived intangibles from the completion of an
acquisition during Fiscal 2009 (see Note 8). Intangibles amortization for this Fiscal 2009
acquisition is based on preliminary allocations of purchase price and is dependant upon certain
estimates and assumptions, which are preliminary and may vary from the amounts reported herein.
The following table details the estimated intangible amortization expense for the remainder of
Fiscal 2009, each of the succeeding four fiscal years and the periods thereafter. These estimates
are based on the carrying amounts of intangible assets as of June 30, 2008 that are subject to
change pending the outcome of purchase accounting related to certain acquisitions:
|
|
|
|
|
Fiscal |
|
|
|
|
|
2009 |
|
$ |
5,679 |
|
2010 |
|
|
7,445 |
|
2011 |
|
|
6,872 |
|
2012 |
|
|
6,559 |
|
2013 |
|
|
6,000 |
|
Thereafter |
|
|
41,180 |
|
|
|
|
|
Total |
|
$ |
73,735 |
|
|
Note 6: Indebtedness
The Companys long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
March 31, 2008 |
|
|
Revolving credit agreement |
|
$ |
189,050 |
|
|
$ |
194,470 |
|
Capital lease obligations |
|
|
2,795 |
|
|
|
2,261 |
|
Other |
|
|
537 |
|
|
|
562 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
192,382 |
|
|
$ |
197,293 |
|
Less: current portion (included in Other liabilities) |
|
|
(1,660 |
) |
|
|
(1,389 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
190,722 |
|
|
$ |
195,904 |
|
|
9
Revolving Credit Agreement
On January 30, 2008, the Company entered into a Third Amended and Restated Credit Agreement dated
as of January 30, 2008 (the Credit Agreement) with Citizens Bank of Pennsylvania, as agent, and a
group of lenders. The Credit Agreement expires on January 30, 2013. Borrowings under the Credit
Agreement are permitted up to a maximum amount of $350,000, which includes up to $20,000 of
swing-line loans and $25,000 of letters of credit. The Credit Agreement may be increased by the
Company up to an additional $100,000 with the approval of the lenders and may be unilaterally and
permanently reduced by the Company to not less than the then outstanding amount of all borrowings.
Interest on outstanding indebtedness under the Credit Agreement accrues, at the Companys option,
at a rate based on either: (a) the greater of (i) the prime rate per annum of the agent then in
effect and (ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as
being the weighted average of the rates on overnight Federal funds transactions arranged by Federal
funds brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus
0.50% to 1.125% (determined by a leverage ratio based on the Companys consolidated EBITDA). The
Credit Agreement requires the Company to maintain compliance with certain non-financial and
financial covenants such as leverage and fixed-charge coverage ratios. As of June 30, 2008, the
Company was in compliance with all financial covenants 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 three (3) months ended June 30, 2008 was $222,820, $211,197 and 3.7%, respectively,
compared to $262,565, $252,110 and 6.6%, respectively, for the three (3) months ended June 30,
2007.
Capital lease obligations
The capital lease obligations are primarily for equipment. The lease agreements have remaining
terms ranging from less than one year to five years with interest-rates ranging from 3.2% to 11.7%.
Other
Other debt is comprised of other third-party, non-employee loans. The loans have remaining terms
of less than one to four years with interest-rates ranging from 0.0% to 8.2%.
Unused available borrowings
As of June 30, 2008, the Company had $5,534 outstanding in letters of credit and $155,416 available
under the Credit Agreement.
Note 7: Derivative Instruments and Hedging Activities
Foreign Currency Contracts:
The Company enters into foreign currency contracts to hedge exposure to variability in expected
fluctuations in foreign currencies. As of June 30, 2008, the Company had open contracts in
Australian and Canadian dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner, Pounds
sterling, Swedish krona, Swiss francs and Japanese yen which have been designated as cash flow
hedges. These contracts had a notional amount of $47,759 and mature within the next nine (9)
months.
The Company recorded an unrecognized gain of $192 ($117 net of tax) and an unrecognized loss of
$108 ($66 net of tax) as of June 30, 2008 and March 31, 2008, respectively, in Accumulated Other
Comprehensive Income (AOCI) within the Companys Consolidated Balance Sheets related to all open
foreign currency contracts and the related underlying hedged forecasted transaction on those
respective dates. Unrecognized gains and losses are expected to be credited to earnings over the
life of the maturing contracts as the hedged forecasted transaction occurs and it is expected that
those gains and losses will be offset by currency gains and losses on the items being hedged.
The Company recognized gains of $58 ($35 net of tax) and $96 ($59 net of tax) for the three (3)
months ended June 30, 2008 and 2007, respectively, related to foreign currency transactions. There
was no hedge ineffectiveness for the three (3) months ended June 30, 2008 and 2007, respectively.
Interest-rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest-rates.
10
On July 26, 2006, the Company entered into a five-year interest-rate
swap (interest-rate swap) which has been used to
effectively convert a portion of the Companys variable rate
debt to fixed rate. The interest-rate swap has a notional value of
$100,000 reducing to $50,000 after three years and does not qualify for hedge accounting. The Company recognizes
gains/losses related to the change in fair value of the interest-rate swap which is included in
Interest expense (income) within the Companys Consolidated Statements of Income. The Company
recognized gains of $2,708 and $1,308 for the three (3) months ended June 30, 2008 and 2007,
respectively, related to the change in fair value of the interest-rate swap. The Company recorded
a liability of $3,603 and $6,311 as of June 30, 2008 and March 31, 2008, respectively, related to
the cumulative change in fair value of the interest-rate swap, on those respective dates, which is
a long-term liability recorded in Other liabilities within the Companys Consolidated Balance
Sheets.
Note 8: Acquisitions
Fiscal 2009 acquisitions:
During the first quarter of Fiscal 2009, the Company acquired UCI Communications LLC (UCI), a
privately-held company based out of Mobile, AL. UCI has an active customer base which includes
commercial, education and various government agency accounts. In connection with the UCI
acquisition, the Company has made a preliminary allocation to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the
estimated fair market value of customer relationships and non-compete agreements. The Company
estimates that the definite-lived intangibles are to be amortized over a period of five to 20
years. The acquisition of UCI did not have a material impact on the Companys consolidated
financial statements.
Fiscal 2008 acquisitions:
During the fourth quarter of Fiscal 2008, the Company acquired BellSouth Communication Systems, LLC
d/b/a AT&T Communication Systems Southeasts (AT&T) NEC TDM voice CPE business line in AT&Ts
southeast region (AT&Ts southeast NEC TDM business). In connection with the acquisition of
AT&Ts southeast NEC TDM business, the Company has made a preliminary allocation to goodwill and
definite-lived intangible assets, respectively. These definite-lived intangible assets recorded
represent the estimated fair market value of acquired customer relationships which the Company
estimates are to be amortized over a period of eight years.
During the third quarter of Fiscal 2008, the Company acquired B & C Telephone, Inc. (B&C), a
privately-held company based out of Spokane, Washington. B&C has an active customer base which
includes commercial, financial, healthcare and various government agency accounts. In connection
with the B&C acquisition, the Company has made a preliminary allocation to goodwill and
definite-lived intangible assets, respectively. These definite-lived intangible assets recorded
represent the estimated fair market value of acquired customer relationships and non-compete
agreements which the Company estimates are to be amortized over a period of five to 20 years.
The acquisitions of B&C and AT&Ts southeast NEC TDM business, both individually and in the
aggregate, did not have a material impact on the Companys consolidated financial statements.
As disclosed above, the allocation of the purchase price for UCI, AT&Ts southeast NEC TDM business
and B&C is based on preliminary estimates of the fair values of certain assets acquired and
liabilities assumed as of the date of the acquisition. Management is currently assessing the fair
values of the tangible and intangible assets acquired and liabilities assumed. The preliminary
allocations of purchase price are dependant upon certain estimates and assumptions, which are
preliminary and may vary from the amounts reported herein.
The results of operations of UCI, AT&Ts southeast NEC TDM business and B&C are included within the
Companys Consolidated Statements of Income beginning on their respective acquisition dates.
Note 9: Restructuring
In connection with certain acquisitions, 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 in an attempt to right-size the organization and
more appropriately align the expense structure with anticipated revenues and changing market demand
for its solutions and services. Employee severance is generally payable within the next six (6)
months with certain facility costs extending through Fiscal 2014.
During the three (3) months ended June 30, 2008 and 2007, the Company incurred $182 and $2,371,
respectively, of costs related to employee severance and $0 and $1,220, respectively, of costs
related to facility consolidations. These costs have been recorded in Selling, general &
administrative expenses in the Companys Consolidated Statements of Income.
11
The following table summarizes the changes to the restructuring reserve for the three (3) months
ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance |
|
|
Facility Closures |
|
|
Total |
|
|
Balance at March 31, 2008 |
|
$ |
2,438 |
|
|
$ |
10,154 |
|
|
$ |
12,592 |
|
Restructuring charge |
|
|
182 |
|
|
|
-- |
|
|
|
182 |
|
Acquisition adjustments |
|
|
62 |
|
|
|
-- |
|
|
|
62 |
|
Cash expenditures |
|
|
(1,646) |
|
|
|
(1,508) |
|
|
|
(3,154) |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
$ |
1,036 |
|
|
$ |
8,646 |
|
|
$ |
9,682 |
|
|
Of the $9,682 above, $5,835 is classified as a current liability under Other liabilities on the
Companys Consolidated Balance Sheets for the period ended June 30, 2008.
Note 10: Income Taxes
The Company recorded tax expense of $7,376, an effective tax rate of 36.5%, and $4,768, an
effective tax rate of 36.8%, for the three (3) months ended June 30, 2008 and 2007, respectively.
The effective rate for the three (3) months ended June 30, 2008 of 36.5% differs from the federal
statutory rate primarily due to interest and penalties related to uncertain income tax positions
accounted for in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, foreign currency exchange effects on previously-taxed income and the expected write-off of
deferred tax assets related to book stock-based compensation expense.
The Company provides for income taxes at the end of each interim period based on the estimated
effective tax rate for the full fiscal year. Cumulative adjustments to the Companys estimate are
recorded in the interim period in which a change in the estimated annual effective rate is
determined.
During Fiscal 2008, the Internal Revenue Service (IRS) commenced an examination of the Companys
U.S. federal income tax return for Fiscal 2006 and continued its examination of the Companys U.S.
federal income tax return for Fiscal 2004 and Fiscal 2005. The IRS has not yet proposed any
adjustment to the Companys filing position in connection with these examinations. Upon completion
of these examinations, it is reasonably possible that the total amount of recognized and
unrecognized benefits may change. Any adjustment to the unrecognized tax benefits would impact the
effective tax rate. The Company cannot make an estimate of the impact on the effective rate for
any potential adjustment at this time.
Fiscal 2007 remains open to examination by the IRS. Fiscal 2004 through Fiscal 2007 remain open to
examination by state and foreign taxing jurisdictions.
Note 11: Stock-based Compensation
Stock-based Compensation
The Company has two stock option plans, the 1992 Stock Option Plan, as amended (the Employee
Plan), and the 1992 Director Stock Option Plan, as amended (the Director Plan). As of June 30,
2008, the Employee Plan is authorized to issue stock options and stock appreciation rights (SARs)
for up to 9,200,000 shares of common stock, par value $.001 (the common stock). The Employee
Plan provides that stock options are to be granted by a committee appointed by the Board of
Directors of the Company (the Board) to employees of the Company; such stock options generally
become exercisable in equal amounts over a three-year period and have a contractual life of ten
(10) years from the grant date. As of June 30, 2008, the Director Plan is authorized to issue
stock options and SARs for up to 270,000 shares of common stock. The Director Plan provides that
stock options are to be granted by the Board or a committee appointed by the Board; such options
generally become exercisable in equal amounts over a three-year period and have a contractual life
of ten (10) years from the grant date. No SARs have been issued under either plan.
The Company recognized stock-based compensation expense of $542 ($344 net of tax) or $0.02 per
diluted share and $1,716 ($1,084 net of tax) or $0.06 per diluted share for the three (3) months
ended June 30, 2008 and 2007, respectively. Stock-based compensation expense is recorded in
Selling, general & administrative expense within the Companys Consolidated Statements of Income.
12
The following table summarizes the Companys stock option activity for the three (3) months ended
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, 2008 |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Exercise Price (per |
|
Shares in thousands |
|
Shares |
|
|
share) |
|
|
Outstanding at March 31, 2008 |
|
|
2,584 |
|
|
$ |
40.27 |
|
Granted |
|
|
1,074 |
|
|
|
28.85 |
|
Exercised |
|
|
-- |
|
|
|
-- |
|
Forfeited or expired |
|
|
(33) |
|
|
|
41.14 |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
3,625 |
|
|
$ |
36.88 |
|
Exercisable at June 30, 2008 |
|
|
2,519 |
|
|
$ |
40.28 |
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
8.65 |
|
|
The Company granted 1,074 and 0 stock options for the three (3) months ended June 30, 2008 and
2007, respectively. The weighted average fair value of stock options granted for the three (3)
months ended June 30, 2008 were based on the Black-Scholes option pricing model using the following
weighted average assumptions.
|
|
|
|
|
|
|
1Q09 |
|
|
Expected life (in years) |
|
|
4.8 |
|
Risk free interest-rate |
|
|
3.4% |
|
Annual forfeiture rate |
|
|
2.4% |
|
Volatility |
|
|
30.4% |
|
Dividend yield |
|
|
0.7% |
|
|
The following table summarizes certain information regarding the Companys non-vested shares during
the three (3) months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted- |
|
|
|
Shares |
|
|
Average Grant- |
|
|
|
(in 000s) |
|
|
Date Fair Value |
|
|
Non-vested as of March 31, 2008 |
|
|
85 |
|
|
$ |
18.35 |
|
Granted |
|
|
1,074 |
|
|
|
8.65 |
|
Forfeited |
|
|
-- |
|
|
|
-- |
|
Vested |
|
|
(53) |
|
|
|
18.46 |
|
Non-vested as of June 30, 2008 |
|
|
1,106 |
|
|
$ |
8.93 |
|
|
The following table summarizes certain information regarding the Companys outstanding stock
options at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
|
Out- |
|
Remaining |
|
Average |
|
Intrinsic |
|
Exer- |
|
Remaining |
|
Average |
|
Intrinsic |
Range of |
|
standing |
|
Contractual |
|
Exercise |
|
Value |
|
cisable |
|
Contractual |
|
Exercise |
|
Value |
Exercise Prices |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
$19.95 - $26.60
|
|
|
1 |
|
|
|
0.3 |
|
|
$ |
21.94 |
|
|
$ |
8 |
|
|
|
1 |
|
|
|
0.3 |
|
|
$ |
21.94 |
|
|
$ |
8 |
|
$26.60 - $33.25
|
|
|
1,118 |
|
|
|
9.7 |
|
|
|
28.89 |
|
|
|
-- |
|
|
|
44 |
|
|
|
3.6 |
|
|
|
29.95 |
|
|
--
|
$33.25 - $39.90
|
|
|
1,210 |
|
|
|
7.0 |
|
|
|
38.03 |
|
|
|
-- |
|
|
|
1,178 |
|
|
|
6.9 |
|
|
|
38.00 |
|
|
--
|
$39.90 - $46.55
|
|
|
1,260 |
|
|
|
2.8 |
|
|
|
42.38 |
|
|
|
-- |
|
|
|
1,260 |
|
|
|
2.8 |
|
|
|
42.38 |
|
|
--
|
$46.55 - $53.20
|
|
|
17 |
|
|
|
2.4 |
|
|
|
50.72 |
|
|
|
-- |
|
|
|
17 |
|
|
|
2.4 |
|
|
|
50.72 |
|
|
--
|
$53.20 - $59.85
|
|
|
17 |
|
|
|
1.9 |
|
|
|
58.15 |
|
|
|
-- |
|
|
|
17 |
|
|
|
1.9 |
|
|
|
58.15 |
|
|
--
|
$59.85 - $66.50
|
|
|
2 |
|
|
|
1.5 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
2 |
|
|
|
1.5 |
|
|
|
63.22 |
|
|
--
|
|
|
|
|
|
$19.95 - $66.50
|
|
|
3,625 |
|
|
|
6.3 |
|
|
$ |
36.88 |
|
|
$ |
8 |
|
|
|
2,519 |
|
|
|
4.7 |
|
|
$ |
40.28 |
|
|
$ |
8 |
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on the Companys average stock price (i.e., the average of the open and close prices of the
common stock) on June 30, 2008 of $28.10, which would have been received by the option holders had
all option holders exercised their options as of that date. As of June 27, 2008, there was $8,971
of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options
granted under the plans which is expected to be recognized over a weighted average period of 2.8
years.
13
Note 12: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations for the three (3) months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Net income, as reported |
|
$ |
12,833 |
|
|
$ |
8,188 |
|
|
Weighted average common shares outstanding (basic) |
|
|
17,516 |
|
|
|
17,527 |
|
Effect of dilutive securities from employee stock options |
|
|
2 |
|
|
|
112 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
17,518 |
|
|
|
17,639 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.73 |
|
|
$ |
0.47 |
|
Dilutive earnings per common share |
|
$ |
0.73 |
|
|
$ |
0.46 |
|
|
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. During
the three (3) months ended June 30, 2008 and 2007, there were 2,514,877 and 2,266,762 non-dilutive
stock options outstanding, respectively, that are not included in the corresponding period Weighted
average common shares outstanding (diluted) computation.
Note 13: Comprehensive income and AOCI
The following table details the computation of comprehensive income for the three (3) months ended
June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Net income |
|
$ |
12,833 |
|
|
$ |
8,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(417) |
|
|
|
2,224 |
|
Net change in fair value of cash flow hedging instruments |
|
|
218 |
|
|
|
151 |
|
Amounts reclassified into results of operations |
|
|
(35) |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
(234) |
|
|
$ |
2,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
12,599 |
|
|
$ |
10,622 |
|
|
|
|
|
|
|
|
|
|
The components of AOCI consisted of the following as of June 30, 2008 and March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
March 31, 2008 |
|
|
Foreign currency translation adjustment |
|
$ |
40,166 |
|
|
$ |
40,583 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges |
|
|
117 |
|
|
|
(66) |
|
Unrecognized gain on defined benefit pension |
|
|
(474) |
|
|
|
(474) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
39,809 |
|
|
$ |
40,043 |
|
|
14
Note 14: Fair Value Disclosures
As discussed in Note 2, the Company adopted SFAS 157 on April 1, 2008 with the exception of a
one-year deferral of implementation for non-financial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). The following table presents information about the Companys assets and liabilities
measured at fair value on a recurring basis as of June 30, 2008, and indicate the fair value
hierarchy of the valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of June 30, 2008 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Foreign currency contracts |
|
$ |
-- |
|
|
$ |
1,412 |
|
|
$ |
-- |
|
|
$ |
1,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value as of June 30, 2008 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Foreign currency contracts |
|
$ |
-- |
|
|
$ |
484 |
|
|
$ |
-- |
|
|
$ |
484 |
|
Interest-rate swap |
|
|
-- |
|
|
|
3,603 |
|
|
|
-- |
|
|
|
3,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
-- |
|
|
$ |
4,087 |
|
|
$ |
-- |
|
|
$ |
4,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15: Commitments and Contingencies
Regulatory Matters
As previously-disclosed, on October 2, 2007, the Company was contacted by the United States
Department of Justice which informed the Company that it was reviewing allegations by the United
States General Services Administration (GSA) that certain of the Companys pricing practices
under a GSA Multiple Award Schedule contract violated the Civil False Claims Act. The Company has
executed an agreement with the United States tolling the statute of limitations on any action by
the United States through September 30, 2008 in order for the parties to discuss the merits of
these allegations prior to the possible commencement of any litigation by the United States.
At the conclusion of this matter, the Company could be subject to damages, penalties or other
costs, either through settlement or judgment, which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Internal
Revenue Code of 1986, as amended produced and disseminated false financial statements and SEC
filings to the Companys stockholders and to the market that improperly recorded and accounted for
the backdated option grants, concealed the alleged improper backdating of stock options and
obtained substantial benefits from sales of Company stock while in the possession of material
inside information. The complaints seek damages on behalf of the Company against certain current
and former officers and directors and allege breach of fiduciary duty, unjust enrichment,
securities law violations and other claims. The two lawsuits have been consolidated into a single
action as In re Black Box Corporation Derivative Litigation, Master File No. 2:06-CV-1531-JFC, and
plaintiffs filed an amended consolidated shareholder derivative complaint on August 31, 2007. The
parties have stipulated that responses by the defendants, including the Company, are due on or
before September 15, 2008, and the court has entered an order to that effect. The Company may have
indemnification obligations arising out of this matter to its current and former directors and
officers named in this litigation. The Company may incur costs or expenses in relation to this
matter that could be material.
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 the matters described
under this caption Litigation Matters are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
15
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007 and Fiscal 2008, and expects to continue to incur additional expenses during the
remainder of Fiscal 2009, in relation to the following previously-disclosed items (i) the review by
the Audit Committee of the Board (the Audit Committee) of the Companys historical stock option
granting practices and related accounting for stock option grants, (ii) the informal inquiry and
formal order of investigation by the SEC regarding the Companys past stock option granting
practices, (iii) the derivative action relating to the Companys historical stock option granting
practices filed against the Company as a nominal defendant and certain of the Companys current and
former directors and officers, as to whom it may have indemnification obligations and (iv) related
matters. See the Explanatory Note preceding Part I, Item 1 of the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2007 for more information regarding the Audit
Committees review and related matters. As of June 30, 2008, the total amount of such fees is
$6,633, of which $4,429 has been paid by the insurance company. The insurance policy limit under
which such payments have been made is $5,000. The Company did not incur any expenses related to
these matters during the three (3) months ended June 30, 2008 and 2007. The amount of expenses
that the Company could incur in the future with respect to these matters that are not covered by
insurance could be material.
There has been no other significant or unusual activity during Fiscal 2009.
Note 16: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on revenues, operating income and assets by geographic region for the purpose of making
operational decisions and assessing financial performance. Additionally, Management is presented
with and reviews revenues and gross profit by service type. The accounting policies of the
individual operating segments are the same as those of the Company.
The following table presents financial information about the Companys reportable segments by
geographic region for the three (3) months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
North America |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
196,336 |
|
|
$ |
210,002 |
|
Operating income |
|
|
14,484 |
|
|
|
10,582 |
|
Depreciation |
|
|
2,268 |
|
|
|
2,824 |
|
Intangibles amortization |
|
|
1,804 |
|
|
|
2,290 |
|
Assets (as of June 30) |
|
|
961,199 |
|
|
|
995,426 |
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
35,768 |
|
|
$ |
32,799 |
|
Operating income |
|
|
3,813 |
|
|
|
3,948 |
|
Depreciation |
|
|
127 |
|
|
|
103 |
|
Intangibles amortization |
|
|
18 |
|
|
|
17 |
|
Assets (as of June 30) |
|
|
159,528 |
|
|
|
140,833 |
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
10,449 |
|
|
$ |
9,490 |
|
Operating income |
|
|
1,551 |
|
|
|
1,639 |
|
Depreciation |
|
|
31 |
|
|
|
28 |
|
Intangibles amortization |
|
|
4 |
|
|
|
11 |
|
Assets (as of June 30) |
|
|
21,642 |
|
|
|
18,423 |
|
|
The sum of the segment revenues, operating income, depreciation and intangibles amortization equals
the consolidated revenues, operating income, depreciation and intangibles amortization. The
following reconciles segment assets to total consolidated Assets as of June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Segment assets for North America, Europe and All Other |
|
$ |
1,142,369 |
|
|
$ |
1,154,682 |
|
Corporate eliminations |
|
|
(70,006) |
|
|
|
(74,490) |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
1,072,363 |
|
|
$ |
1,080,192 |
|
|
16
The following table presents financial information about the Company by service type for the three
(3) months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Data Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,884 |
|
|
$ |
46,165 |
|
Gross profit |
|
|
13,287 |
|
|
|
14,177 |
|
|
|
|
|
|
|
|
|
|
Voice Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
140,030 |
|
|
$ |
149,987 |
|
Gross profit |
|
|
47,198 |
|
|
|
50,276 |
|
|
|
|
|
|
|
|
|
|
Hotline Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
55,639 |
|
|
$ |
56,139 |
|
Gross profit |
|
|
27,657 |
|
|
|
26,777 |
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
Note 17: Subsequent Events
On July 28, 2008, the Company acquired Mutual Telecom Services Inc. (MTS), a privately-held
company based out of Needham, MA. MTS is a global telecommunications services and solutions
provider primarily servicing clients in the Department of Defense and other federal agencies.
Annual historical revenues of MTS are approximately $46,000.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis for the three (3) months ended June 30, 2008 and 2007 as set forth
below in this Item 2 should be read in conjunction with the response to Part 1, Item 1 of this
report and the consolidated financial statements of Black Box Corporation (Black Box or the
Company), including the related notes, and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the Companys most recent Annual Report on Form
10-K as filed with the Securities and Exchange Commission (SEC) for the fiscal year ended March
31, 2008 (the Form 10-K). The Companys fiscal year ends on March 31. The fiscal quarters
consist of 13 weeks and end on the Saturday nearest each calendar quarter end. The actual ending
dates for the periods presented as of June 30, 2008 and 2007 were June 28, 2008 and June 30, 2007.
References to Fiscal Year or Fiscal mean the Companys fiscal year ended March 31 for the year
referenced. All dollar amounts are presented in thousands unless otherwise noted.
Black Box is the worlds largest dedicated network infrastructure services provider. Black Box
offers one-source network infrastructure services for communication systems. The Companys service
offerings include design, installation, integration, monitoring and maintenance of voice, data and
integrated communication systems. The Companys primary service offering is voice solutions, while
providing premise cabling and other data-related services and products. The Company provides
24/7/365 technical support for all of its solutions which encompasses all major voice and data
manufacturers as well as 118,000 network infrastructure products (Hotline products) that it sells
through its catalog and Internet Web site (such catalog and Internet Web site business, together
with technical support for such business, being referred to as Hotline Services) and its Voice
Services and Data Services (collectively referred to as On-Site services) offices. With more
than 3,000 professional technical experts and 188 offices, as of June 30, 2008, Black Box serves
more than 175,000 clients in 141 countries throughout the world. Founded in 1976, Black Box, a
Delaware corporation, operates subsidiaries on five continents and is headquartered near Pittsburgh
in Lawrence, Pennsylvania.
Company management (Management) is presented with and reviews revenues and operating income by
geographical segment. In addition, revenues and gross profit information by service type are
provided herein for purposes of further analysis.
The Company has completed several acquisitions from April 1, 2007 through June 30, 2008 that have
had an impact on the Companys consolidated financial statements and, more specifically, North
America Voice Services for the periods under review. During Fiscal 2009, the Company acquired UCI
Communications LLC (UCI). Fiscal 2008 acquisitions include (i) B & C Telephone, Inc. (B&C) and
(ii) BellSouth Communication Systems, LLC d/b/a AT&T Communication Systems Southeasts (AT&T) NEC
TDM voice CPE business line in AT&Ts southeast region (AT&Ts southeast NEC TDM business). The
acquisitions noted above are collectively referred to as the Acquired Companies. The results of
operations of the Acquired Companies are included within the Companys Consolidated Statements of
Income beginning on their respective acquisition dates.
The Company incurs certain expenses (i.e., stock-based compensation expense and expenses incurred
as a result of certain acquisitions) that it excludes when evaluating the continuing operations of
the Company. The following table is included to provide a schedule of the current and an estimate
of these future expenses for Fiscal 2009 (by quarter) based on information available to the Company
as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q09 |
|
|
2Q09 |
|
|
3Q09 |
|
|
4Q09 |
|
|
Fiscal 2009 |
|
|
Selling, general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
448 |
|
|
$ |
467 |
|
|
$ |
453 |
|
|
$ |
471 |
|
|
$ |
1,839 |
|
Stock-based compensation expense |
|
|
542 |
|
|
|
854 |
|
|
|
853 |
|
|
|
835 |
|
|
|
3,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
990 |
|
|
|
1,321 |
|
|
|
1,306 |
|
|
|
1,306 |
|
|
|
4,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on acquisitions |
|
|
1,791 |
|
|
|
1,863 |
|
|
|
1,863 |
|
|
|
1,863 |
|
|
|
7,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,781 |
|
|
$ |
3,184 |
|
|
$ |
3,169 |
|
|
$ |
3,169 |
|
|
$ |
12,303 |
|
|
18
The following table is included to provide a schedule of these expenses during Fiscal 2008 (by
quarter).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q08 |
|
|
2Q08 |
|
|
3Q08 |
|
|
4Q08 |
|
|
Fiscal 2008 |
|
|
Selling, general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
659 |
|
|
$ |
448 |
|
|
$ |
457 |
|
|
$ |
614 |
|
|
$ |
2,178 |
|
Stock-based compensation expense |
|
|
1,716 |
|
|
|
1,155 |
|
|
|
(152 |
) |
|
|
498 |
|
|
|
3,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,375 |
|
|
|
1,603 |
|
|
|
305 |
|
|
|
1,112 |
|
|
|
5,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on acquisitions |
|
|
2,269 |
|
|
|
1,298 |
|
|
|
1,335 |
|
|
|
1,599 |
|
|
|
6,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,644 |
|
|
$ |
2,901 |
|
|
$ |
1,640 |
|
|
$ |
2,711 |
|
|
$ |
11,896 |
|
|
The following table provides information on Revenues and Operating income by reportable geographic
segment (North America, Europe and All Other). The table below should be read in conjunction with
the following discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
% of total |
|
|
|
|
|
|
% of total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
196,336 |
|
|
|
81.0% |
|
|
$ |
210,002 |
|
|
|
83.2% |
|
Europe |
|
|
35,768 |
|
|
|
14.7% |
|
|
|
32,799 |
|
|
|
13.0% |
|
All Other |
|
|
10,449 |
|
|
|
4.3% |
|
|
|
9,490 |
|
|
|
3.8% |
|
|
|
|
|
|
Total |
|
$ |
242,553 |
|
|
|
100% |
|
|
$ |
252,291 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
14,484 |
|
|
|
|
|
|
$ |
10,582 |
|
|
|
|
|
% of North America revenues |
|
|
7.4% |
|
|
|
|
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
3,813 |
|
|
|
|
|
|
$ |
3,948 |
|
|
|
|
|
% of Europe revenues |
|
|
10.7% |
|
|
|
|
|
|
|
12.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
$ |
1,551 |
|
|
|
|
|
|
$ |
1,639 |
|
|
|
|
|
% of All Other revenues |
|
|
14.8% |
|
|
|
|
|
|
|
17.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,848 |
|
|
|
8.2% |
|
|
$ |
16,169 |
|
|
|
6.4% |
|
|
19
The following table provides information on Revenues and Gross profit by service type (Data
Services, Voice Services and Hotline Services). The table below should be read in conjunction with
the following discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended June 30, |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
% of total |
|
|
|
|
|
|
% of total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
46,884 |
|
|
|
19.3% |
|
|
$ |
46,165 |
|
|
|
18.3% |
|
Voice Services |
|
|
140,030 |
|
|
|
57.7% |
|
|
|
149,987 |
|
|
|
59.4% |
|
Hotline Services |
|
|
55,639 |
|
|
|
23.0% |
|
|
|
56,139 |
|
|
|
22.3% |
|
|
|
|
|
|
Total |
|
$ |
242,553 |
|
|
|
100% |
|
|
$ |
252,291 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
13,287 |
|
|
|
|
|
|
$ |
14,177 |
|
|
|
|
|
% of Data Services revenues |
|
|
28.3% |
|
|
|
|
|
|
|
30.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services |
|
$ |
47,198 |
|
|
|
|
|
|
$ |
50,276 |
|
|
|
|
|
% of Voice Services revenues |
|
|
33.7% |
|
|
|
|
|
|
|
33.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services |
|
$ |
27,657 |
|
|
|
|
|
|
$ |
26,777 |
|
|
|
|
|
% of Hotline Services revenues |
|
|
49.7% |
|
|
|
|
|
|
|
47.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,142 |
|
|
|
36.3% |
|
|
$ |
91,230 |
|
|
|
36.2% |
|
|
First quarter of Fiscal 2009 (1Q09) compared to first quarter of Fiscal 2008 (1Q08):
Total
Revenues
Total revenues for 1Q09 were $242,553, a decrease of 4% compared to total revenues for 1Q08 of
$252,291. The Acquired Companies contributed incremental revenue of $7,893 and $0 for 1Q09 and
1Q08, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $4,614 in 1Q09 relative to the U.S. dollar, total revenues would have decreased 9% from
$252,291 to $230,046 for the reasons discussed below.
Revenues
by Geography
North America
Revenues in North America for 1Q09 were $196,336, a decrease of 7% compared to revenues for 1Q08 of
$210,002. The Acquired Companies contributed incremental revenue of $7,893 and $0 for 1Q09 and
1Q08, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $510 in 1Q09 relative to the U.S. dollar, North American revenues would have decreased
11% from $210,002 to $187,933. The Company believes that this decrease is primarily due to
expected post-merger client attrition from the USA Commercial operations of NextiraOne, LLC, which
was acquired in April 2006 (NextiraOne), and the previously-disclosed termination of the
Companys distribution agreement with Avaya, Inc.
Europe
Revenues in Europe for 1Q09 were $35,768, an increase of 9% compared to revenues for 1Q08 of
$32,799. Excluding the positive exchange rate impact of $3,302 in 1Q09 relative to the U.S.
dollar, Europe revenues would have decreased 1% from $32,799 to $32,466. The Company believes the
decrease is due to softer demand for its Hotline Services during the year offset in part by the
success in the Companys Data, Voice and Hotline (DVH) cross-selling initiatives.
All Other
Revenues for All Other for 1Q09 were $10,449, an increase of 10% compared to revenues for 1Q08 of
$9,490. Excluding the positive exchange rate impact of $802 in 1Q09 relative to the U.S. dollar,
All Other revenues would have increased 2% from $9,490 to $9,647.
20
Revenue by Service Type
Data Services
Revenues from Data Services for 1Q09 were $46,884, an increase of 2% compared to revenues for 1Q08
of $46,165. Excluding the positive exchange rate impact of $1,425 in 1Q09 relative to the U.S.
dollar for its International Data Services, Data Service revenues would have decreased 2% from
$46,165 to $45,459. The Company believes this decrease in Data Services revenues is primarily due
to lower demand levels in its North American segment.
Voice Services
Revenues from Voice Services for 1Q09 were $140,030, a decrease of 7% compared to revenues for 1Q08
of $149,987. The Acquired Companies contributed incremental revenue of $7,893 and $0 for 1Q09 and
1Q08, respectively. Excluding the effects of the acquisitions, Voice Services revenues would have
decreased 12% from $149,987 to $132,137. The Company believes that this decrease is primarily due
to expected post-merger client attrition from the USA Commercial operations of NextiraOne and the
previously-disclosed termination of the Companys distribution agreement with Avaya, Inc. There
was no exchange rate impact on Voice Services revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 1Q09 were $55,639, a decrease of 1% compared to revenues for
1Q08 of $56,139. Excluding the positive exchange rate impact of $3,189 in 1Q09 relative to the
U.S. dollar for its International Hotline Services, Hotline Service revenues would have decreased
7% from $56,139 to $52,450. The Company believes this decrease in Hotline Services revenues is
primarily due to softer demand for this service offset in part by the success of the Companys DVH
cross-selling initiatives.
Gross profit
Gross profit dollars for 1Q09 were $88,142, a decrease of 3% compared to gross profit dollars for
1Q08 of $91,230. Gross profit as a percent of revenues for 1Q09 was 36.3%, an increase of 0.1%
compared to gross profit as a percentage of revenues for 1Q08 of 36.2%. The Company believes the
percent increase was due primarily to the impact of reduced product cost, increased selling price
and product mix in Hotline Services partially offset by lower margin projects compared to the prior
year in Data Services.
Gross profit dollars for Data Services for 1Q09 were $13,287, or 28.3% of revenues, compared to
gross profit dollars for 1Q08 of $14,177, or 30.7% of revenues. Gross profit dollars for Voice
Services for 1Q09 were $47,198, or 33.7% of revenues, compared to gross profit dollars for 1Q08 of
$50,276, or 33.5% of revenues. Gross profit dollars for Hotline Services for 1Q09 were $27,657, or
49.7% of revenues, compared to gross profit dollars for 1Q08 of $26,777, or 47.7% of revenues.
Selling,
general & administrative expenses
Selling, general & administrative expenses for 1Q09 were $66,468, a decrease of $6,275 compared to
Selling, general & administrative expenses for 1Q08 of $72,743. Selling, general & administrative
expenses as a percent of revenue for 1Q09 were 27.4% compared to 28.8% for 1Q08. The decrease in
Selling, general & administrative expense dollars and Selling, general & administrative expenses as
a percent of revenue over the prior year was primarily due to restructuring/integration costs of
$4,030 incurred during 1Q08 for which there was no comparable expense during 1Q09 and a decrease in
non-cash stock-based compensation expense of $1,174.
Intangibles amortization
Intangibles amortization for 1Q09 was $1,826, a decrease of $492 compared to Intangible
amortization for 1Q08 of $2,318. The decrease was primarily attributable to the amortization
run-out for certain intangible assets partially offset by the finalization of purchase accounting
and the addition of intangible assets from acquisitions completed subsequent to 1Q08.
Operating income
Operating income for 1Q09 was $19,848, or 8.2% of revenues, an increase of $3,679 compared to
Operating income for 1Q08 of $16,169, or 6.4% of revenues.
Interest expense (income), net
Net interest income for 1Q09 was $265 compared to net interest expense for 1Q08 of $3,280. The
Companys interest-rate swap contributed gains due to the change in fair value of $2,708 and $1,308
for 1Q09 and 1Q08, respectively. Excluding the effect of the interest-rate swap, net interest
expense would have decreased $2,145 from $4,588 to $2,443. This decrease in net interest expense
is due to a decrease in the weighted average outstanding debt and weighted average interest-rate
from $252,110 and 6.6%, respectively, for 1Q08 to $211,197 and 3.7%, respectively, for 1Q09.
21
Provision
for income taxes
The tax provision for 1Q09 was $7,376, an effective tax rate of 36.5%. This compares to the tax
provision for 1Q08 of $4,768, an effective tax rate of 36.8%. The Company anticipates that its
deferred tax asset is realizable in the foreseeable future.
Net
income
As a result of the foregoing, Net income for 1Q09 was $12,833, or 5.3% of revenues, compared to Net
income for 1Q08 of $8,188, or 3.2% of revenues.
Liquidity and Capital Resources
Operating
Activities
Net cash provided by operating activities during 1Q09 was $12,428. Significant factors
contributing to the source of cash were: net income of $12,833 inclusive of non-cash charges of
$4,252 and $542 for amortization / depreciation expense and stock compensation expense,
respectively, as well as, decreases in net inventory of $3,983, costs in excess of billings of
$1,040 and the deferred tax provision of $1,096, and increases in trade accounts payable of $1,910
and accrued taxes of $1,167. Significant factors contributing to a use of cash include a non-cash
charge of $2,708 for the change in fair value of interest rate swap, as well as decreases in billings
in excess of costs of $3,321, accrued expenses of $2,755, restructuring reserves of $2,973 and an
increase in prepaid and other current assets of $2,813. Changes in the above accounts are based
on average Fiscal 2009 exchange rates.
Net cash provided by operating activities during 1Q08 was $7,704. Significant factors contributing
to the source of cash were: net income of $8,188 inclusive of non-cash charges of $5,273 and $1,716
for amortization / depreciation expense and stock compensation expense, respectively, a decrease in
net inventory of $3,312 and a decrease in the tax benefit from stock options of $4,404.
Significant factors contributing to a use of cash were a non-cash charge of $1,308 for the change
in fair market value of interest rate swap, a decrease in the deferred tax provision of $7,789, an
increase in other assets of $1,996 and an increase in accounts payable of $4,519. Changes in the
above accounts are based on average Fiscal 2008 exchange rates.
As of June 30, 2008 and 2007, the Company had cash and cash equivalents of $25,238 and $16,295,
respectively, working capital of $136,782 and $120,531, respectively, and a current ratio of 1.66
and 1.54, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Investing
Activities
Net cash used by investing activities during 1Q09 was $6,751. Significant factors contributing to
the cash outflow were: $6,286 to acquire UCI, $2,456 for holdbacks and contingent fee payments
related to prior period acquisitions and $652 for gross capital expenditures. A significant source
of cash inflow was $2,622 for the return of previously-escrowed amounts relating to the acquisition
of the USA Commercial and Government and Canadian operations of NextiraOne, LLC.
Net cash used by investing activities during 1Q08 was $4,234. Significant factors contributing to
the cash outflow were: $984 for gross capital expenditures and $3,250 for holdbacks and contingent
fee payments related to prior period acquisitions.
Financing
Activities
Net cash used by financing activities during 1Q09 was $7,036. Significant factors contributing to
the cash outflow were $5,873 of net payments on long term debt and $1,051 for the payment of
dividends.
Net cash used by financing activities during 1Q08 was $4,425. Significant factors contributing to
the cash outflow were $3,373 of net payments on long-term debt and $1,052 for the payment of
dividends.
22
Total
Debt
Revolving
Credit Agreement On January 30, 2008, the Company entered into a Third Amended and
Restated Credit Agreement dated as of January 30, 2008 (the Credit Agreement) with Citizens Bank
of Pennsylvania, as agent, and a group of lenders. The Credit Agreement expires on January 30,
2013. Borrowings under the Credit Agreement are permitted up to a maximum amount of $350,000,
which includes up to $20,000 of swing-line loans and $25,000 of letters of credit. The Credit
Agreement may be increased by the Company up to an additional $100,000 with the approval of the
lenders and may be unilaterally and permanently reduced by the Company to not less than the then
outstanding amount of all borrowings. Interest on outstanding indebtedness under the Credit
Agreement accrues, at the Companys option, at a rate based on either: (a) the greater of (i) the
prime rate per annum of the agent then in effect and (ii) 0.50% plus the rate per annum announced
by the Federal Reserve Bank of New York as being the weighted average of the rates on overnight
Federal funds transactions arranged by Federal funds brokers on the previous trading day or (b) a
rate per annum equal to the LIBOR rate plus 0.50% to 1.125% (determined by a leverage ratio based
on the Companys consolidated EBITDA). The Credit Agreement requires the Company to maintain
compliance with certain non-financial and financial covenants such as leverage and fixed charge
coverage ratios. As of June 30, 2008, the Company was in compliance with all financial covenants
under the Credit Agreement.
As of June 30, 2008, the Company had total debt outstanding of $192,382. Total debt was comprised
of $189,050 outstanding under the Credit Agreement, $2,795 of obligations under capital leases and
$537 of various other third-party, non-employee loans. 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 three (3) months ended June 30,
2008 was $222,820, $211,197 and 3.7%, respectively, compared to $262,565, $252,110 and 6.6%,
respectively, for the three (3) months ended June 30, 2007.
Dividends
Fiscal 2009
1Q09 - The Companys Board of Directors (the Board) declared a cash dividend of $0.06 per share
on all outstanding shares of the common stock. The dividend totaled $1,051 and was paid on July
14, 2008 to stockholders of record at the close of business on June 30, 2008.
Fiscal 2008
1Q08 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on July 13, 2007 to stockholders of record
at the close of business on June 29, 2007.
While the Company expects to continue to declare quarterly dividends, the payment of future
dividends is at the discretion of the Board and the timing and amount of any future dividends will
depend upon earnings, cash requirements and financial condition of the Company. Under the Credit
Agreement, the Company is permitted to make any distribution or dividend or repurchase its common
stock as long as no Event of Default or Potential Default (each as defined in the Credit Agreement)
occurs or is continuing.
Repurchase of Common Stock
There were no repurchases of common stock during either of the three (3) months ended June 30, 2008
and 2007.
Since the inception of the repurchase program in April 1999 through June 30, 2008, the Company has
repurchased 7,626,195 shares of common stock for an aggregate purchase price of $323,095, or an
average purchase price per share of $42.37. As of June 30, 2008, 873,805 shares were available
under repurchase programs approved by the Board. Additional repurchases of common stock may occur
from time to time depending upon factors such as the Companys cash flows and general market
conditions. While the Company expects to continue to repurchase shares of common stock for the
foreseeable future, there can be no assurance as to the timing or amount of such repurchases.
Under the Companys Credit Agreement, the Company is permitted to make any distribution or dividend
or repurchase its common stock as long as no Event of Default or Potential Default (each as defined
in the Credit Agreement) occurs or is continuing, and may not repurchase its common stock if the
leverage ratio (after taking into consideration the payment made to repurchase such common stock)
would exceed 2.75 to 1.0 or if the availability to borrow under the Credit Facility would be less
than $20 million.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007, Fiscal 2008 and Fiscal 2009, and expects to continue to incur additional expenses
during the remainder of Fiscal 2009, in relation to the following previously-disclosed items: (i)
the review by the Audit Committee of the Board (the Audit Committee) of the Companys historical
stock option granting practices and related accounting for stock option grants, (ii) the informal
inquiry and formal order of investigation by the SEC regarding the Companys past stock option
granting practices, (iii) the derivative action relating to the Companys historical stock option
granting practices filed against the Company as a nominal defendant and certain of the Companys
current and former directors and officers, as to whom it may have indemnification obligations and
(iv) related matters. See the Explanatory Note preceding Part I, Item 1 of the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2007 for more information regarding the
Audit Committees review and related matters. As of June 30, 2008, the total amount of such fees
is $6,633, of which $4,429 has been paid by the insurance company. The insurance policy limit
under which such payments have been made is $5,000. The Company did
not incur any expenses related to these matters during the three (3) months ended June 30, 2008 and
2007. The amount of expenses that the Company could incur in the future with respect to these
matters that are not covered by insurance could be material.
23
Legal Proceedings
See the matter discussed in Part II, Item 1, Legal Proceedings, of this Quarterly Report on Form
10-Q (the Form 10-Q), which information is incorporated herein by reference.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term inflation
rates are difficult to predict, the Company continues to strive to minimize the effect of inflation
through improved productivity and cost reduction programs as well as price adjustments within the
constraints of market competition.
Critical Accounting Policies/ Impact of Recently Issued Accounting Pronouncements
Critical Accounting Policies
The Companys critical accounting policies require the most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and are the most important to the portrayal of Companys consolidated
financial statements. The Companys critical accounting policies are disclosed in Part II, Item 1,
Managements Discussion and Analysis of Financial Condition and Results of Operations, of the
Form 10-K. There have been no changes to the Companys critical accounting policies during the
three (3) months ended June 30, 2008.
Impact of Recently Issued Accounting Pronouncements
Fair Value Measurements
In September, 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. In February, 2008, the FASB issued FASB Staff
Position (FSP) SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13, which removes certain leasing transactions from
the scope of SFAS 157. On April 1, 2008, the Company adopted the provisions of SFAS 157 with the
exception of a one-year deferral of implementation for non-financial assets and liabilities that
are not recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually) as provided by FSP SFAS 157-2, Effective Date of FASB Statement No. 157. The
significant categories of assets and liabilities included in the Companys deferred implementation
of SFAS 157 are non-financial assets and liabilities initially measured at fair value in a business
combination and impairment assessments of long-lived assets, goodwill and intangible assets. The
requirements of SFAS 157 were applied prospectively. The adoption of SFAS 157 did not have a
material impact on the Companys consolidated financial statements. See Note 2 and Note 14 of the
Notes to the Consolidated Financial Statements for further reference.
See Note 2 of the Notes to the Consolidated Financial Statements for further discussion of recently
issued accounting standards and the related impact on the Companys consolidated financial
statements.
Cautionary Forward Looking Statements
When included in the Form 10-Q or in documents incorporated herein by reference, the words
expects, intends, anticipates, believes, estimates and analogous expressions are intended
to identify forward-looking statements. Such statements are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially from those projected.
Such risks and uncertainties include, among others, the final outcome of the review of the
Companys stock option granting practices, including the related SEC investigation, shareholder
derivative lawsuit, tax matters and insurance/indemnification matters, and the impact of any
actions that may be required or taken as a result of such review, SEC investigation, shareholder
derivative lawsuit, tax matters or insurance/indemnification matters, levels of business activity
and operating expenses, expenses relating to corporate compliance requirements, cash flows, global
economic and business conditions, successful integration of acquisitions, including the NextiraOne
business, the timing and costs of restructuring programs, successful marketing of DVH services,
successful implementation of the Companys M&A program, including identifying appropriate targets,
consummating transactions and successfully integrating the businesses, competition, changes in
foreign, political and economic conditions, fluctuating foreign currencies compared to the U.S.
dollar, rapid changes in technologies, client preferences, the Companys arrangements with
suppliers of voice equipment and technology and various other matters, many of which are beyond the
Companys control. These forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and speak only
as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or any changes in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any statement is based.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest-rate volatility and foreign currency exchange rates volatility. Market risk is measured
as the potential negative impact on earnings, cash flows or fair values resulting from a
hypothetical change in interest-rates or foreign currency exchange rates over the next year. The
Company does not hold or issue any other financial derivative instruments (other than those
specifically noted below) nor does it engage in speculative trading of financial derivatives.
Interest-rate Risk
The Companys primary interest-rate risk relates to its long-term debt obligations. As of June 30,
2008, the Company had total long-term obligations of $189,050 under the Credit Agreement. Of the
outstanding debt, $100,000 was in variable rate debt that was effectively converted to a fixed rate
through an interest-rate swap agreement (discussed in more detail below) during Fiscal 2007 and
$89,050 was in variable rate obligations. As of June 30, 2008, an instantaneous 100 basis point
increase in the interest-rate of the variable rate debt would reduce the Companys net income in
the subsequent fiscal quarter by $226 ($144 net of tax) assuming the Company employed no
intervention strategies.
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest-rates.
On July 26, 2006, the Company entered into an interest-rate swap which has been used to effectively
convert a portion of the Companys variable rate debt to fixed rate. The interest-rate swap has a
notional value of $100,000 reducing to $50,000 after three years and does not qualify for hedge
accounting. Changes in the fair market value of the interest-rate swap are recorded as an asset or
liability within the Companys Consolidated Balance Sheets and Interest expense (income) within the
Companys Consolidated Statements of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency contracts to reduce the foreign currency exposure
related to certain intercompany transactions, primarily trade receivables and loans. 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 Companys Consolidated Statements of
Income. In the event it becomes probable that the hedged forecasted transaction will not occur,
the ineffective portion of any gain or loss on the related cash flow hedge would be reclassified
from AOCI to the Companys Consolidated Statements of Income.
As of June 30, 2008, the Company had open foreign currency contracts in Australian and Canadian
dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner, Pounds sterling, Swedish krona,
Swiss francs and Japanese yen. The open contracts have contract rates ranging from 1.1181 to
1.1355 Australian dollar, 1.0025 to 1.0496 Canadian dollar, 4.7851 to 4.8725 Danish krone, 0.6340
to 0.7218 Euro, 11.0853 to 11.1098 Mexican peso, 4.9810 to 5.5360 Norwegian kroner, 0.4899 to
0.5207 Pounds sterling, 6.0053 to 6.5030 Swedish krona, 1.0277 to 1.0431 Swiss franc and 105.47 to
110.10 Japanese yen, all per U.S. dollar. The total open contracts had a notional amount of
$47,759 and will expire within nine (9) months.
25
Item 4. Controls and Procedures.
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
Management, including the Companys Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), is responsible for establishing and maintaining adequate disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)) for the Company. Management assessed the effectiveness of the
Companys disclosure controls and procedures as of June 30, 2008. Based upon this assessment,
Management has concluded that the Companys disclosure controls and procedures were effective as of
June 30, 2008 to provide reasonable assurance that information required to be disclosed by the
Company in the reports filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and to
provide reasonable assurance that information required to be disclosed by the Company in such
reports is accumulated and communicated to Management, including its principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal
quarter that have materially affected or are reasonably likely to materially affect the Companys
internal control over financial reporting.
Limitations on the Effectiveness of Controls
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of its inherent limitations, the
Companys internal control over financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
26
PART
II OTHER INFORMATION
Item 1. Legal Proceedings.
Except as noted below, there have been no material developments in legal proceedings during the
three (3) months ended June 30, 2008. See Part I, Item 3, Legal Proceedings, of the Form 10-K
for more information regarding legal proceedings as of March 31, 2008.
Regulatory Matters
As previously-disclosed, on October 2, 2007, the Company was contacted by the United States
Department of Justice which informed the Company that it was reviewing allegations by the United
States General Services Administration (GSA) that certain of the Companys pricing practices
under a GSA Multiple Award Schedule contract violated the Civil False Claims Act. The Company has
executed an agreement with the United States tolling the statute of limitations on any action by
the United States through September 30, 2008 in order for the parties to discuss the merits of
these allegations prior to the possible commencement of any litigation by the United States.
27
Item 6. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
Description
of Fiscal 2009 Annual Incentive Plan
(1) |
|
|
|
10.2
|
|
Form of 2008 Long-Term Incentive Cash Award Agreement for Fiscal 2009 (1) |
|
|
|
21.1
|
|
Subsidiaries of the Registrant (1) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 (1) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 (1) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |
(1) Filed herewith
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
BLACK BOX CORPORATION |
|
|
|
|
|
|
|
Dated: August 7, 2008 |
|
|
|
|
|
|
|
|
|
|
|
/s/ Michael McAndrew |
|
|
|
|
Michael McAndrew, Vice President, Chief
Financial Officer, Treasurer, Secretary and
Principal Accounting Officer
|
|
|
29
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
Description
of Fiscal 2009 Annual Incentive Plan (1) |
|
|
|
10.2
|
|
Form
of 2008 Long-Term Incentive Cash Award Agreement for Fiscal 2009
(1) |
|
|
|
21.1
|
|
Subsidiaries
of the Registrant
(1) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002
(1) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002
(1) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(1) |
(1) Filed herewith
30