Black Box Corporation 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2005
Commission File No. 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
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(I.R.S. Employer Identification No.) |
incorporation or organization)
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1000 Park Drive
Lawrence, Pennsylvania 15055
(Address of principal executive offices)
724-746-5500
(Registrants telephone number, including area code)
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of February 7, 2006, there were 17,473,821 shares of common stock ($0.001 par value)
outstanding.
BLACK BOX CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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In thousands, except par value |
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December 31, |
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March 31, |
Unaudited |
|
2005 |
|
2005 |
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Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,143 |
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|
$ |
11,592 |
|
Accounts receivable, net of allowance for doubtful accounts of
$8,301 and $7,342 |
|
|
125,632 |
|
|
|
116,865 |
|
Lease receivables |
|
|
465 |
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|
1,697 |
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Inventories, net |
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|
53,448 |
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|
57,176 |
|
Costs and estimated earnings in excess of billings on
uncompleted contracts |
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|
28,093 |
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|
25,695 |
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Deferred tax asset |
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|
11,084 |
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|
|
9,236 |
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Net current assets of discontinued operations |
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|
376 |
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|
549 |
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Other current assets |
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17,642 |
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14,724 |
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Total current assets |
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248,883 |
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|
237,534 |
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Property, plant and equipment, net |
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36,117 |
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|
38,268 |
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Goodwill, net |
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|
468,871 |
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|
444,567 |
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Other intangibles, net |
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55,573 |
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|
44,157 |
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Lease receivables, net of current portion |
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|
0 |
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|
|
473 |
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Deferred tax asset |
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|
3,979 |
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|
3,793 |
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Net assets of discontinued operations, net of current portion |
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|
153 |
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|
373 |
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Other assets |
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4,327 |
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3,725 |
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Total assets |
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$ |
817,903 |
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$ |
772,890 |
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Liabilities |
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Current maturities of long-term debt |
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$ |
716 |
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$ |
692 |
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Current maturities of discounted lease rentals |
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|
70 |
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|
890 |
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Accounts payable |
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39,487 |
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36,032 |
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Billings in excess of costs and estimated earnings on
uncompleted contracts |
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11,604 |
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8,947 |
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Deferred revenue |
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21,473 |
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21,456 |
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Accrued liabilities: |
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Compensation and benefits |
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12,650 |
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|
13,073 |
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Restructuring |
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4,589 |
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|
6,709 |
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Other liabilities |
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|
40,274 |
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|
33,905 |
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Income taxes |
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|
9,013 |
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|
3,295 |
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Total current liabilities |
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139,876 |
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|
124,999 |
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Long-term debt |
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141,304 |
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147,196 |
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Discounted lease rentals |
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3 |
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30 |
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Other liabilities |
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|
169 |
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|
75 |
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Restructuring reserve |
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7,970 |
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9,889 |
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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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Common stock authorized 100,000, par value $.001, 17,406 and
16,840 shares outstanding |
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24 |
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24 |
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Additional paid-in capital |
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355,981 |
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336,290 |
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Retained earnings |
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458,252 |
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428,632 |
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Treasury stock, at cost, 6,935 shares |
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(296,811 |
) |
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(296,797 |
) |
Accumulated other comprehensive income |
|
|
11,135 |
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|
22,552 |
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Total stockholders equity |
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528,581 |
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490,701 |
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Total liabilities and stockholders equity |
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$ |
817,903 |
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$ |
772,890 |
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See Notes To Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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Three months ended |
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Nine Months ended |
In thousands, except per share amounts |
|
December 31, |
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January 1, |
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December 31, |
|
January 1, |
Unaudited |
|
2005 |
|
2005 |
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2005 |
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2005 |
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Revenues |
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$ |
182,135 |
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$ |
126,896 |
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$ |
546,467 |
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$ |
377,846 |
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Cost of sales |
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108,733 |
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75,878 |
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328,243 |
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222,633 |
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Gross profit |
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73,402 |
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51,018 |
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218,224 |
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155,213 |
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Selling, general and
administrative |
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50,441 |
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36,762 |
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152,008 |
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107,886 |
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Restructuring charges |
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0 |
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0 |
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5,290 |
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0 |
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Intangibles amortization |
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1,349 |
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59 |
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4,235 |
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187 |
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Operating income |
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21,612 |
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14,197 |
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56,691 |
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47,140 |
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Interest expense, net |
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2,397 |
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|
519 |
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6,686 |
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1,436 |
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Other expense, net |
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|
114 |
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|
46 |
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|
79 |
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|
93 |
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Income before provision
for income taxes |
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19,101 |
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13,632 |
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|
49,926 |
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|
45,611 |
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Provision for income taxes |
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6,590 |
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|
4,383 |
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|
17,224 |
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15,736 |
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Net income |
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$ |
12,511 |
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$ |
9,249 |
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$ |
32,702 |
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$ |
29,875 |
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Earnings per common share |
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Basic |
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$ |
0.72 |
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$ |
0.54 |
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$ |
1.92 |
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$ |
1.71 |
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Diluted |
|
$ |
0.70 |
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$ |
0.52 |
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$ |
1.88 |
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$ |
1.66 |
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Weighted average common
shares outstanding |
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Basic |
|
|
17,286 |
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|
17,293 |
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|
17,050 |
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|
17,499 |
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Diluted |
|
|
17,786 |
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|
17,694 |
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|
17,362 |
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|
17,949 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.18 |
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|
$ |
0.17 |
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|
See Notes To Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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In thousands |
|
Nine months ended |
Unaudited |
|
December 31, 2005 |
|
January 1, 2005 |
|
Operating Activities |
|
|
|
|
|
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|
Net income |
|
$ |
32,702 |
|
|
$ |
29,875 |
|
Adjustments to reconcile net income to cash provided
by operating activities: |
|
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|
|
|
|
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Depreciation and amortization |
|
|
11,013 |
|
|
|
4,557 |
|
Deferred tax (benefit)/provision |
|
|
(2,083 |
) |
|
|
1,775 |
|
Tax impact from exercised options |
|
|
(3,347 |
) |
|
|
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|
Stock compensation expense |
|
|
|
|
|
|
680 |
|
Changes in operating assets and liabilities (net of
acquisitions): |
|
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|
Accounts receivable, net |
|
|
73 |
|
|
|
1,153 |
|
Inventories, net |
|
|
5,673 |
|
|
|
(2,412 |
) |
Other current assets |
|
|
1,270 |
|
|
|
888 |
|
Proceeds from lease contracts |
|
|
1,746 |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(8,135 |
) |
|
|
(2,111 |
) |
|
Net cash provided by operating activities |
|
|
38,912 |
|
|
|
34,405 |
|
|
Investing Activities |
|
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|
|
|
|
|
|
Capital expenditures |
|
|
(3,151 |
) |
|
|
(2,579 |
) |
Capital disposals |
|
|
1,232 |
|
|
|
730 |
|
Acquisition of businesses, net of cash acquired |
|
|
(40,682 |
) |
|
|
|
|
Prior merger-related payments |
|
|
(378 |
) |
|
|
(498 |
) |
|
Net cash used in investing activities |
|
|
(42,979 |
) |
|
|
(2,347 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
Repayment of borrowings |
|
|
(164,698 |
) |
|
|
(91,596 |
) |
Proceeds from borrowings |
|
|
157,280 |
|
|
|
95,632 |
|
Repayments on discounted lease rentals |
|
|
(847 |
) |
|
|
|
|
Proceeds from the exercise of options |
|
|
16,344 |
|
|
|
7,310 |
|
Payment of dividends |
|
|
(3,049 |
) |
|
|
(2,809 |
) |
Deferred financing costs |
|
|
|
|
|
|
(235 |
) |
Purchase of treasury stock |
|
|
(14 |
) |
|
|
(37,585 |
) |
|
Net cash provided / (used) in financing activities |
|
|
5,016 |
|
|
|
(29,283 |
) |
|
Foreign currency exchange impact on cash |
|
|
(398 |
) |
|
|
(1,134 |
) |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
551 |
|
|
|
1,641 |
|
Cash and cash equivalents at beginning of year |
|
|
11,592 |
|
|
|
9,306 |
|
|
Cash and cash equivalents at end of year |
|
$ |
12,143 |
|
|
$ |
10,947 |
|
|
Supplemental Cash Flow: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
5,817 |
|
|
$ |
1,425 |
|
Cash paid for income taxes |
|
|
13,539 |
|
|
|
14,022 |
|
Non-cash financing activities: |
|
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|
|
|
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|
|
Dividends payable |
|
|
1,044 |
|
|
|
1,039 |
|
Capital leases |
|
|
834 |
|
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|
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|
See Notes To Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein 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.
Black Box Corporation (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 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 Form 10-K as filed with the Securities and Exchange
Commission (SEC) for the fiscal year ended March 31, 2005.
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 as December 31, 2005 and 2004 were December 31, 2005 and January 1, 2005.
Note 2: Significant Accounting Policies
Principles of Consolidation
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires 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 and intangible assets. Actual results could differ from those
estimates. Management believes the estimates made are reasonable.
6
Stock-Based Compensation
Stock options are granted to certain employees and members of the Companys Board of Directors at
the fair market value of the Companys stock on the date of the grant. The Company accounts for
its stock-based compensation plans under the provisions of Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees (APB
No. 25), as amended, and related guidance.
Under this guidance, there are no charges or credits to income with respect to stock options.
The pro forma information below is based on provisions of SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123) as amended by SFAS No. 148 Accounting for Stock-Based Compensation Transition
and Disclosure issued in December 2002 (SFAS No. 148). SFAS No. 148 requires that the pro forma
information regarding net income and earnings per share are determined as if the Company had
accounted for its employee stock options under the fair value method as prescribed by SFAS No. 123.
The following table shows the effects on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123,
as amended, to the stock-based
awards:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
|
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income |
|
|
|
As reported |
|
$ |
12,511 |
|
|
$ |
9,249 |
|
|
$ |
32,702 |
|
|
$ |
29,875 |
|
|
|
Add: |
|
Stock-based employee
compensation expense
included in reported
net income, net of
related tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
Deduct: |
|
Stock-based
compensation expense
determined by the
fair value method for
all awards, net of
related tax |
|
|
(17,703 |
) |
|
|
(2,482 |
) |
|
|
(22,925 |
) |
|
|
(7,501 |
) |
Net income |
|
|
|
Pro forma |
|
$ |
(5,192 |
) |
|
$ |
6,767 |
|
|
$ |
9,777 |
|
|
$ |
22,819 |
|
|
Earnings per share: |
|
|
|
Basic as reported |
|
$ |
0.72 |
|
|
$ |
0.54 |
|
|
$ |
1.92 |
|
|
$ |
1.71 |
|
|
|
|
|
Basic pro forma |
|
$ |
(0.30 |
) |
|
$ |
0.39 |
|
|
$ |
0.57 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.70 |
|
|
$ |
0.52 |
|
|
$ |
1.88 |
|
|
$ |
1.66 |
|
|
|
|
|
Diluted pro forma |
|
$ |
(0.29 |
) |
|
$ |
0.38 |
|
|
$ |
0.56 |
|
|
$ |
1.27 |
|
|
For options with a vesting period, compensation expense is recognized on a ratable basis over
the service period which corresponds to the vesting period. Compensation expense is recognized
immediately for options that are granted fully vested on the date of the grant. The incremental
fair value of each option grant is estimated on the date of grant using the Black-Scholes options
pricing model. The model requires the use of various assumptions. The following assumptions were
used in the nine months ended:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
|
Expected life (in years) |
|
|
5.6 |
|
|
|
5.0 |
|
Risk free interest rate |
|
|
4.17 |
% |
|
|
3.32 |
% |
Volatility |
|
|
49 |
% |
|
|
55 |
% |
Dividend yield |
|
|
0.6 |
% |
|
|
0.3 |
% |
|
On
October 31, 2005, in response to the issuance of SFAS
No. 123(R) (as defined below), the Compensation Committee
of the Board of Directors of the Company authorized the acceleration
of the vesting of all of the Companys
outstanding out-of-the-money unvested stock options held by current
employees, including officers, and
directors. Approximately 405,224 options that would otherwise have vested from time to time over
the next three years became immediately exercisable. Such stock options had an exercise price
greater than $39.77, the approximate fair market value of the
Companys common stock, par value $.001 per share (the
Common Stock) on October 31,
2005. The accelerated vesting of these options increased the pro-forma compensation expense for
the three months ended December 31, 2005 by approximately $3,521, net of tax.
On October 31, 2005, the Company issued options to purchase
approximately 984,000 shares of Common Stock which were granted fully vested, the effect of which increased the pro-forma compensation expense for the three months ended December 31, 2005 by
approximately $11,962, net of tax.
7
During the second quarter of Fiscal 2005 (fiscal year ending March 31, 2005), the Company recorded
compensation expense, as a result of a modification to a retiring directors stock option
agreements. Based on the guidance under FIN 44, Accounting for Certain Transactions Involving
Stock Compensation, the Company recorded compensation expense in the amount of $680. The expense
was recorded as a component of Selling, General and Administrative expense.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods
in order to conform to the Fiscal 2006 (fiscal year ending March 31, 2006) presentation.
Recent Accounting Pronouncements
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised 2004) Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) is a revision of SFAS No.
123, supersedes APB No. 25 and amends FASB Statement No. 95 Statement of Cash Flows. SFAS No.
123(R) requires that companies recognize all share-based payments to employees and directors,
including grants of employee and director stock options, in the financial statements. The
recognized cost will be based on the fair value of the equity or liability instruments issued. Pro
forma disclosure of this cost will no longer be an alternative under
SFAS No. 123(R). SFAS No. 123(R) is effective for public companies at the beginning of the first annual reporting period that
begins after June 15, 2005.
As permitted by SFAS No. 123, the Company currently accounts for its stock-based compensation plans
under APB No. 25s intrinsic value method and, as such, generally recognizes no compensation cost
for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will
have a significant impact on the Companys results of operations, although it will have no impact
on the Companys overall financial position or cash flows. The impact of adopting SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted SFAS No. 123(R)
in prior periods, and assuming that, in the third quarter of Fiscal
2006, the Company would have accelerated the vesting of options and
would have granted fully vested options as discussed above, the impact would
have approximated the amounts in its pro forma disclosure as described in the disclosure of pro
forma net income and earnings per share in Note 2 to Consolidated Financial Statements. Based on
SFAS No. 123(R), the Company will transition to the new requirements by using the modified
prospective transition method. This transition method requires compensation cost to be recognized
for all share-based payments granted after the date of adoption and for all unvested awards
existing on the date of adoption.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an operating cash flow as required under
current standards. This requirement will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the
future because they are dependant on, among other things, when employees or directors exercise
stock options.
8
The Company plans to adopt SFAS No. 123(R) as of the first day of the first quarter of Fiscal 2007,
or April 1, 2006, as required.
Foreign Earnings Repatriation
In October 2004, the American Jobs Creation Act of 2004 was signed into law. The law provides
for a special one-time deduction of 85% of certain foreign earnings that are repatriated. The law
also includes a tax deduction of up to 9% of the lesser of (a) qualified production activities
income or (b) taxable income. An issue arose as to whether that deduction should be accounted for
as a special deduction or a tax rate reduction under FASB Statement No. 109.
In December 2004, the FASB issued Staff Position No. FAS 109-1 Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004 (SFAS No. 109). The FASB staff believes that the
deduction should be accounted for as a special deduction in accordance with SFAS No. 109. The
Company is currently assessing the impact of this special deduction.
In December 2004, the FASB issued Staff Position No. FAS 109-2 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004
(FAS No. 109-2). FAS No. 109-2 allows additional time to assess the effect of repatriating
international earnings under the law and requires explanatory disclosures from those who need the
additional time.
The Company is evaluating the effects of the law and recent regulations on its plan for
reinvestment or repatriation of international earnings. The possible amounts of unremitted
earnings available for repatriation under the law and the potential range of income tax effects of
such repatriation cannot be reasonably estimated as of the time of this filing.
Segments
In
February 2005, the FASB issued Emerging Issues Task Force (EITF)
No. 04-10, Determining Whether to Aggregate Segments That
Do Not Meet the Quantitative Thresholds (EITF
No. 04-10). This statement
clarifies the aggregation criteria of operating segments as defined
in SFAS No. 131 (as defined below). The effective date of this statement is for
fiscal years ending after September 15, 2005. The Company
believes that its current segment reporting complies with EITF
No. 04-10.
Accounting
Changes and Error Corrections
In May
2005, the FASB issued Statement of Financial Accounting Standards
No. 154, Accounting
Changes and Error Corrections (SFAS No. 154). This statement replaces
Accounting Principles Board Opinion No. 20 Accounting
Changes cumulative effect accounting with accounting treatment
based on retroactive restatement
of comparative financials statements. It applies to all voluntary
changes in accounting principle and defines retrospective
application to differentiate it from restatements due to
incorrect accounting. The provisions of this statement are effective
for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Companys adoption of
SFAS No. 154 had no impact on its financial position, results of
operations or cash flows.
Note 3: Inventories
Inventory balances, net of reserves for excess and obsolete inventories:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
March 31, 2005 |
|
Raw materials |
|
$ |
1,477 |
|
|
$ |
1,447 |
|
Finished goods |
|
|
65,507 |
|
|
|
68,275 |
|
|
Subtotal |
|
|
66,984 |
|
|
|
69,722 |
|
Excess and obsolete inventory reserves |
|
|
(13,536 |
) |
|
|
(12,546 |
) |
|
Inventory, net |
|
$ |
53,448 |
|
|
$ |
57,176 |
|
|
Note 4: Goodwill and Other Intangible Assets
On April 1, 2001, the Company adopted SFAS No. 142 Goodwill and Other Intangible Assets. Under
this Statement, goodwill and intangible assets with indefinite useful lives are not amortized. As
required by the Statement, the Company performs an impairment test annually, or as often as
impairment indicators are present. The Companys policy is to evaluate its non-amortizable
intangible assets for impairment during the third quarter of each fiscal year. The Company
performed the most recent test during the third quarter of Fiscal 2006, and concluded that no
impairment existed. The Companys only intangibles, as identified in SFAS No. 141 Business
Combinations (SFAS No. 141), other than goodwill, are its trademarks, non-compete agreements,
customer relationships and acquired backlog.
9
Changes in the carrying amount of goodwill, net of accumulated amortization of $40,328 and $40,424
at December 31, 2005 and March 31, 2005, respectively, by reporting segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
Europe |
|
All Other |
|
Total |
|
Balance as of March 31, 2005 |
|
$ |
371,865 |
|
|
$ |
70,734 |
|
|
$ |
1,968 |
|
|
$ |
444,567 |
|
Currency translation |
|
|
23 |
|
|
|
(6,405 |
) |
|
|
27 |
|
|
|
(6,355 |
) |
Goodwill on businesses acquired |
|
|
30,685 |
|
|
|
|
|
|
|
|
|
|
|
30,685 |
|
Actual earnout payments |
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
41 |
|
Other |
|
|
(288 |
) |
|
|
221 |
|
|
|
|
|
|
|
(67 |
) |
|
Balance as of December 31, 2005 |
|
$ |
402,285 |
|
|
$ |
64,550 |
|
|
$ |
2,036 |
|
|
$ |
468,871 |
|
|
At December 31, 2005, certain merger agreements provided for contingent payments of up to
$4,588. If future operating performance goals are met, goodwill will be adjusted for the amount of
the contingent payments.
The Companys amortizable intangible assets are comprised of the appraised fair market values of
employee non-compete contracts, backlog and customer relationships obtained through business
acquisitions. The Company has the following definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
March 31, 2005 |
|
|
Gross |
|
|
|
Net |
|
Gross |
|
|
|
|
|
Net |
|
|
Carrying |
|
Accum. |
|
Carrying |
|
Carrying |
|
Accum. |
|
Carrying |
|
|
Amount |
|
Amort. |
|
Amount |
|
Amount |
|
Amort. |
|
Amount |
|
Non-compete agreements |
|
$ |
4,843 |
|
|
$ |
1,657 |
|
|
$ |
3,186 |
|
|
$ |
2,676 |
|
|
$ |
1,105 |
|
|
$ |
1,571 |
|
Customer relationships |
|
|
25,042 |
|
|
|
709 |
|
|
|
24,333 |
|
|
|
11,699 |
|
|
|
114 |
|
|
|
11,585 |
|
Acquired backlog |
|
|
3,903 |
|
|
|
3,588 |
|
|
|
315 |
|
|
|
3,930 |
|
|
|
668 |
|
|
|
3,262 |
|
|
Total |
|
$ |
33,788 |
|
|
$ |
5,954 |
|
|
$ |
27,834 |
|
|
$ |
18,305 |
|
|
$ |
1,887 |
|
|
$ |
16,418 |
|
|
Intangible asset amortization is computed using the straight-line method based upon the
estimated useful lives of the respective assets, which range from one to twenty years.
Intangible asset amortization expense was $1,349 and $59 for the three months ended December 31,
2005 and 2004, respectively, and $4,235 and $187 for the nine months ended December 31, 2005 and 2004, respectively. The
Company acquired definite-lived intangibles from the completion of six acquisitions during the
first nine months of Fiscal 2006 (see Note 11). The estimated definite-lived intangibles recorded
of $15,668 were based on a preliminary allocation pending completion of third party valuation,
which is expected to be completed during the fourth quarter of Fiscal 2006. The Company recorded
amortization expense of $143 during the nine months ended December 31, 2005 for these
definite-lived assets.
Excluding the newly acquired definite-lived intangibles, the Companys estimated amortization
expense for fiscal years ending March 31 are as follows:
|
|
|
|
|
Years Ending March 31, |
|
2006 |
|
$ |
5,056 |
|
2007 |
|
|
870 |
|
2008 |
|
|
671 |
|
2009 |
|
|
588 |
|
2010 |
|
|
588 |
|
Thereafter |
|
|
8,645 |
|
|
|
|
|
|
|
|
$ |
16,418 |
|
10
Intangible assets not subject to amortization consist solely of the Companys trademark
portfolio. The net carrying amount was $27,739 at December 31, 2005 and March 31, 2005.
The changes in the carrying amount of goodwill and intangible assets, net of accumulated
amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
Competes and |
|
Customer |
|
|
|
|
December 31, 2005 |
|
Trademarks |
|
Backlog |
|
Relationships |
|
Goodwill |
|
Total |
|
Balance at beginning of period |
|
$ |
27,739 |
|
|
$ |
4,833 |
|
|
$ |
11,585 |
|
|
$ |
444,567 |
|
|
$ |
488,724 |
|
Change in net intangible assets
during the period related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
|
|
|
|
|
(3,639 |
) |
|
|
(596 |
) |
|
|
|
|
|
|
(4,235 |
) |
Currency translation |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
(6,355 |
) |
|
|
(6,372 |
) |
Acquisitions (Note 11) |
|
|
|
|
|
|
2,324 |
|
|
|
13,344 |
|
|
|
30,685 |
|
|
|
46,353 |
|
Actual earnout payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
41 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
(67 |
) |
|
Balance at end of period |
|
$ |
27,739 |
|
|
$ |
3,501 |
|
|
$ |
24,333 |
|
|
$ |
468,871 |
|
|
$ |
524,444 |
|
|
Note 5: Indebtedness
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
March 31, 2005 |
|
Revolving credit agreement |
|
$ |
140,000 |
|
|
$ |
146,560 |
|
Capital lease obligations |
|
|
1,768 |
|
|
|
772 |
|
Other |
|
|
252 |
|
|
|
556 |
|
|
Total debt |
|
|
142,020 |
|
|
|
147,888 |
|
Less: current portion |
|
|
(716 |
) |
|
|
( 692 |
) |
|
Long-term debt |
|
$ |
141,304 |
|
|
$ |
147,196 |
|
|
On January 24, 2005, the Company entered into a Second Amended and Restated Credit Facility
(together with an amendment dated February 17, 2005, the Credit Agreement) with Citizens Bank of
Pennsylvania, as agent, and a group of lenders. The Credit Agreement expires on August 31, 2008.
During the three months ended December 31, 2005, the maximum amount and weighted average balance
outstanding under the Credit Agreement were $158,635 and $149,737, respectively. As of December
31, 2005, the Company had $3,065 outstanding in letters of credit and $96,935 available under the
Credit Agreement. The weighted average interest rate on all
outstanding debt was 5.59% and 2.77%
for the three months ended December 31, 2005 and 2004, respectively, and 4.86% and 2.31% for the
nine months ended December 31, 2005 and 2004, respectively. At December 31, 2005, the Company was
in compliance with all required covenants under the Credit Agreement.
The capital lease obligations are primarily for facilities and equipment. The lease agreements
have remaining terms ranging from two to five years with interest rates ranging from 7.60% to
9.25%.
Other debt is composed of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of one to four years with interest
rates ranging from 1.23% to 9.50%.
11
Note 6: Derivative Instruments and Hedging Activities
The Company enters into derivative instruments to hedge exposure to variability in expected
fluctuations in foreign currencies. All of the Companys derivatives have been designated and
qualify as cash flow hedges. There was no hedge ineffectiveness during the three months ended
December 31, 2005.
At December 31, 2005, the Company had open contracts in Australian and Canadian dollar, Danish
krone, Euro, Japanese yen, Norwegian kroner, Pound sterling, Swedish krona and Swiss franc. These
contracts had a notional amount of approximately $38,673 and a fair value of $37,248 and mature
within the next fifteen months.
For the three months ended December 31, 2005, the Company recognized in earnings approximately $66
in net losses on matured contracts. As of December 31, 2005, a loss of $272 was included in other
comprehensive income (loss) (OCI). This loss is expected to be charged to earnings over the life
of the maturing contracts as the hedged transactions occur and it is expected that the loss will
be offset by currency gains on the items being hedged.
Note 7: Earnings Per Share
The following table details this calculation for the three and nine months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income, as reported |
|
$ |
12,511 |
|
|
$ |
9,249 |
|
|
$ |
32,702 |
|
|
$ |
29,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
17,286 |
|
|
|
17,293 |
|
|
|
17,050 |
|
|
|
17,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities from
employee and
director stock options |
|
|
500 |
|
|
|
401 |
|
|
|
312 |
|
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
outstanding |
|
|
17,786 |
|
|
|
17,694 |
|
|
|
17,362 |
|
|
|
17,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.72 |
|
|
$ |
0.54 |
|
|
$ |
1.92 |
|
|
$ |
1.71 |
|
Diluted earnings per share |
|
$ |
0.70 |
|
|
$ |
0.52 |
|
|
$ |
1.88 |
|
|
$ |
1.66 |
|
|
|
|
There is no impact to the weighted average share calculations during any period where the
exercise price of a stock option is greater than the average market price during the same period.
There were 563,406 and 2,050,707 non-dilutive options outstanding during the three months ended
December 31, 2005 and 2004, respectively, and 2,494,091 and 889,942 non-dilutive options
outstanding during the nine months ended December 31, 2005 and 2004, respectively, that are not
included in the above calculation.
12
Note 8: Comprehensive Income and Stockholders Equity
Comprehensive income for the three and nine months ended December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income |
|
$ |
12,511 |
|
|
$ |
9,249 |
|
|
$ |
32,702 |
|
|
$ |
29,875 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment |
|
|
(2,246 |
) |
|
|
9,950 |
|
|
|
(11,292 |
) |
|
|
9,993 |
|
Unrealized
(losses)/gains on
derivatives designated
and qualified as cash
flow hedges, net of
reclassification of
unrealized
(losses)/gains on
expired derivatives |
|
|
(358 |
) |
|
|
523 |
|
|
|
(125 |
) |
|
|
(231 |
) |
|
Comprehensive income |
|
$ |
9,907 |
|
|
$ |
19,722 |
|
|
$ |
21,285 |
|
|
$ |
39,637 |
|
|
The components of accumulated other comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
March 31, 2005 |
|
Foreign currency translation adjustment |
|
$ |
11,407 |
|
|
$ |
22,699 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
(272 |
) |
|
|
(147 |
) |
|
Total accumulated other comprehensive income |
|
$ |
11,135 |
|
|
$ |
22,552 |
|
|
During the
nine months ended December 31, 2005, additional paid-in-capital increased $19,691 from
the exercise of stock options to purchase 566,682 shares of Common
Stock. The increase was comprised of $16,344 from the exercise of
options, net of tax and a tax benefit of $3,347.
Note 9: Commitments and Contingencies
Litigation
The Company is, as a normal part of its business operations, a party to legal proceedings. Based
on the facts currently available, management believes legal matters are adequately provided for,
covered by insurance, without merit or not probable that an unfavorable outcome will result.
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Companys best
estimate of probable liability under those warranties.
There has been no significant or unusual activity during the three months ended December 31, 2005.
As of December 31, 2005 and March 31, 2005, the Company has recorded a warranty reserve of $1,855
and $1,895, respectively.
13
The accrual for product warranties is classified with other accrued expenses in the Consolidated
Balance Sheets. The expense for product warranties is classified with cost of sales in the
Consolidated Income Statements.
Note 10: Restructuring and Other Charges
During the first quarter of Fiscal 2006 and fourth quarter of Fiscal 2005,
the Company recorded restructuring and other charges of $5,290 and $5,059, respectively.
The Fiscal 2006 restructuring charge of $5,290 is related to staffing level adjustments and real
estate consolidations. The Fiscal 2005 charge was comprised of restructuring expense of $3,019
related to staffing level adjustments and real estate consolidations, as well as other charges of
$2,040 related to the resolution of a previously disclosed litigation matter. The restructuring
charges are discussed in further detail below.
As announced in Fiscal 2005, the Company initiated a restructuring plan intended to right-size the
organization and bring its expense structure in-line with anticipated revenues and changing market
demand for its solutions and services. The restructuring charges recorded during the first quarter
of Fiscal 2006 and fourth quarter of Fiscal 2005 of $5,290 and $3,019, respectively, relate to
staffing level adjustments and real estate consolidations in the Europe and North America segments.
With the additional charges incurred during the first quarter of Fiscal 2006, the Company has
completed its restructuring plan.
As a result of the first quarter Fiscal 2006 restructuring actions, approximately 90 and 34
employees were involuntarily terminated in the Companys Europe and North America segments,
respectively, resulting in a restructuring charge related to staffing level adjustments of $2,951
and $522 in Europe and North America, respectively. The Company also recorded a charge of $1,817
in the first quarter of Fiscal 2006 related to idle facility rent obligations and the write-off of
leasehold improvements related to these facilities resulting in a restructuring charge of $791 and
$1,026 related to real estate consolidations in Europe and North America, respectively. The
Company anticipates a majority of the remaining costs to be paid by the end of Fiscal 2006 with the
exception of certain facility costs, which will extend through Fiscal 2012 (fiscal year ending
March 31, 2012).
In the fourth quarter Fiscal 2005, approximately 28 employees were involuntarily terminated in the
Companys Europe segment resulting in a restructuring charge of $613. The Company also recorded a
charge of $2,406 in the fourth quarter of Fiscal 2005 related to idle facility rent obligations and
the write-off of leasehold improvements related to these facilities. $390 and $2,016 of the fourth
quarter Fiscal 2005 expense related to real estate consolidations in Europe and North America,
respectively.
Also, during the fourth quarter of Fiscal 2005, the Company recorded a charge of $2,040 that was classified
with restructuring and other charges on the Consolidated Income Statements. The charge was related
to a previously disclosed adverse arbitration award. The charge was comprised of $1,778 awarded to
the plaintiff, which included interest, fees and costs, as well as $262 of legal fees incurred by
the Company previously capitalized in Goodwill. As of March 31, 2005, the Company accrued the
plaintiffs award of $1,778 within accrued liabilities on the Consolidated Balance Sheet. On May
6, 2005, the Company paid the award of $1,778 in satisfaction of this judgment in full.
Upon completion of the acquisition of Norstan, Inc. (Norstan) during the fourth quarter of 2005,
Company management committed to a plan of reorganization of Norstans operations. In connection
with these integration actions, the Company incurred severance costs of $2,887 for the separation
of approximately 150 employees. In addition, the Company incurred integration costs for facility
consolidations of $11,874. These costs were included in the purchase price allocation for Norstan
in accordance with SFAS No. 141. The Company anticipates a majority of the severance costs to be
paid by the end of Fiscal 2006, with certain facility costs extending through Fiscal 2012.
14
As a result of the second quarter Fiscal 2006 acquisition of substantially all of the assets and
certain liabilities of Universal Solutions of North America, L.L.C. and related entities
(Universal), the Companys management committed to a plan of reorganization of Universals
operations. In connection with these integration actions, the Company incurred integration costs
for facility consolidations of $375. These costs were included in the purchase price allocation
for Universal in accordance with SFAS No. 141. Facility costs to be paid are anticipated to extend
through Fiscal 2008.
The following table summarizes the restructuring and other charges and the remaining reserves
reflected on the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
December 31, 2005 |
|
Employee Severance |
|
Facility Closures |
|
Total |
|
Balance at beginning of period |
|
$ |
2,789 |
|
|
$ |
13,809 |
|
|
$ |
16,598 |
|
Restructuring charge |
|
|
3,473 |
|
|
|
1,817 |
|
|
|
5,290 |
|
Acquisition restructuring |
|
|
97 |
|
|
|
375 |
|
|
|
472 |
|
Asset write-downs |
|
|
|
|
|
|
(636 |
) |
|
|
(636 |
) |
Cash expenditures |
|
|
(5,401 |
) |
|
|
(3,764 |
) |
|
|
(9,165 |
) |
|
Balance at end of period |
|
$ |
958 |
|
|
$ |
11,601 |
|
|
$ |
12,559 |
|
|
Note 11: Acquisitions
During the third quarter of Fiscal 2006, the Company purchased Communication is World InterActive
Networking, Inc. (C=WIN) and Converged Solutions Group,
LLC (CSG). C=WIN has an active customer
base which includes commercial and various government agency accounts. CSG has an active customer
base which includes commercial, education, health care and various government agency accounts.
The acquisitions primarily provide planning, installation and maintenance services for voice
and data network systems in 15 states.
The acquisitions did not materially impact the Companys net sales or net income during the three
months ended December 31, 2005. In connection with the acquisitions, the Company has prepared
preliminary allocations of goodwill and definite-lived intangible assets of $10,253 and $5,548,
respectively. The definite-lived intangible assets recorded represent the estimated fair market
value of acquired customer relationships and non-compete agreements. The Company estimates that the
definite-lived intangibles are to be amortized over a period of four to twenty years.
The allocation of the purchase price of the acquisitions is based upon preliminary estimates of the
fair values of certain assets acquired and liabilities assumed as of the date of the acquisition.
Management, with the assistance of independent valuation specialists, is currently assessing the
fair values of the tangible and intangible assets acquired and liabilities assumed. This
preliminary allocation of the purchase price is dependant upon certain estimates and assumptions,
which are preliminary and may vary from the amounts herein.
On
December 21, 2005, the Company signed a non-binding letter of
intent to acquire the USA and Canadian Commercial and USA Government
Operations of NextiraOne, LLC. The Company is not subject to any
legally binding obligation to consummate the transaction and no such
obligation will exist until a definitive purchase agreement is
negotiated and signed. The acquisition is further dependent upon the
satisfactory completion of the Companys due diligence
investigation, board approval, financing, regulatory approval and
other customary closing conditions. There is no assurance that a
definitive purchase agreement will be entered into or, if such
agreement is entered into, that the foregoing conditions will be met
and that the transaction will close.
Note 12: Segment Reporting
As required by SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131), the Company reports the results of its operating segments on a
geographic basis. During the fourth quarter of Fiscal 2003 (fiscal year ended March 31, 2003), the
Company changed its primary segments to be on a geographic basis. This is consistent with how the
Company is organized and how the
15
business is managed on a day-to-day basis. The primary reportable segments are comprised of North
America, Europe and All Other. Consistent with SFAS No. 131, the Company aggregates similar
operating segments into reportable segments.
The accounting policies of the various segments are the same as those described in the Notes to the
Companys Consolidated Financial Statements for the year ended March 31, 2005 contained in the
Companys Annual Report on Form 10-K. The Company evaluates the performance of each segment based
on operating income. Inter-segment sales and segment interest income or expense and expenditures
for segment assets are not presented to or reviewed by management and, therefore, are not presented
below.
Summary information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
143,173 |
|
|
$ |
78,642 |
|
|
$ |
426,788 |
|
|
$ |
242,966 |
|
Operating income |
|
|
15,740 |
|
|
|
8,345 |
|
|
|
44,136 |
|
|
|
27,090 |
|
Depreciation |
|
|
2,093 |
|
|
|
1,302 |
|
|
|
6,110 |
|
|
|
3,237 |
|
Amortization |
|
|
1,272 |
|
|
|
14 |
|
|
|
3,747 |
|
|
|
56 |
|
Segment assets |
|
|
763,006 |
|
|
|
556,067 |
|
|
|
763,006 |
|
|
|
556,067 |
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
29,950 |
|
|
$ |
38,947 |
|
|
$ |
92,899 |
|
|
$ |
107,337 |
|
Operating income |
|
|
4,101 |
|
|
|
4,016 |
|
|
|
7,161 |
|
|
|
13,365 |
|
Depreciation |
|
|
155 |
|
|
|
295 |
|
|
|
517 |
|
|
|
934 |
|
Amortization |
|
|
70 |
|
|
|
39 |
|
|
|
463 |
|
|
|
116 |
|
Segment assets |
|
|
122,829 |
|
|
|
142,293 |
|
|
|
122,829 |
|
|
|
142,293 |
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,012 |
|
|
$ |
9,307 |
|
|
$ |
26,780 |
|
|
$ |
27,543 |
|
Operating income |
|
|
1,771 |
|
|
|
1,836 |
|
|
|
5,394 |
|
|
|
6,685 |
|
Depreciation |
|
|
36 |
|
|
|
61 |
|
|
|
151 |
|
|
|
199 |
|
Amortization |
|
|
7 |
|
|
|
6 |
|
|
|
25 |
|
|
|
15 |
|
Segment assets |
|
|
16,258 |
|
|
|
16,633 |
|
|
|
16,258 |
|
|
|
16,633 |
|
|
Operating income for the nine months ended December 31, 2005 for North America and Europe was
reduced by $1,548 and $3,742, respectively, for restructuring and other charges incurred during the
first quarter.
The sum of the segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
March 31, 2005 |
|
Assets for North America, Europe and
All Other segments |
|
$ |
902,093 |
|
|
$ |
856,101 |
|
Corporate eliminations |
|
|
(84,190 |
) |
|
|
(83,211 |
) |
|
Total consolidated assets |
|
$ |
817,903 |
|
|
$ |
772,890 |
|
|
16
Management is also presented with and reviews revenues by service type. The following
information is presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data services |
|
$ |
47,083 |
|
|
$ |
53,410 |
|
|
$ |
152,568 |
|
|
$ |
152,136 |
|
Voice services |
|
|
82,281 |
|
|
|
16,219 |
|
|
|
233,620 |
|
|
|
53,619 |
|
Hotline services |
|
|
52,771 |
|
|
|
57,267 |
|
|
|
160,279 |
|
|
|
172,091 |
|
|
Total Revenues |
|
$ |
182,135 |
|
|
$ |
126,896 |
|
|
$ |
546,467 |
|
|
$ |
377,846 |
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
The Company offers one-source network infrastructure services for: data networks (Data Services),
including structured cabling for wired and wireless systems; voice systems (Voice Services),
including new and upgraded telephony systems; and 24/7/365 hotline technical support (Hotline
Services) for more than 118,000 network infrastructure products that it sells through its catalog,
Internet Web site and on-site services offices.
The Company manages its business based on geographic segments: North America, Europe and All
Other. In addition, certain revenue and gross profit information by service type is also provided
herein for purposes of further analysis. During the first quarter of Fiscal 2006, the Company
recorded a pre-tax charge for restructuring of approximately $5.3 million. There were no
restructuring charges incurred during the second and third quarter of Fiscal 2006 and in the first
nine months of Fiscal 2005. In addition, the Company incurred non-cash charges during the first,
second and third quarters of Fiscal 2006 of $5.4 million pre-tax in connection with acquisition
related expenses from the fourth quarter Fiscal 2005 purchase of Norstan.
The following table has been included to provide the allocation of the first, second and third
quarters of Fiscal 2006 actual acquisition related expenses, the
estimated allocation of such expenses in the fourth quarter of Fiscal
2006 (4Q06) and the estimated total expenses for Fiscal 2007 to Fiscal 2025,
directly related to the acquisition of Norstan:
Dollars in Thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&L Impact: |
|
1Q06 |
|
2Q06 |
|
3Q06 |
|
4Q06 |
|
FY06 Total |
|
FY07 to FY25 |
|
Gross Profit |
|
$ |
1,543 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,543 |
|
|
$ |
|
|
SG&A |
|
|
169 |
|
|
|
155 |
|
|
|
126 |
|
|
|
40 |
|
|
|
490 |
|
|
|
|
|
Intangibles
amortization |
|
|
1,119 |
|
|
|
1,119 |
|
|
|
1,119 |
|
|
|
464 |
|
|
|
3,821 |
|
|
|
11,028 |
|
|
|
|
Total |
|
$ |
2,831 |
|
|
$ |
1,274 |
|
|
$ |
1,245 |
|
|
$ |
504 |
|
|
$ |
5,854 |
|
|
$ |
11,028 |
|
|
During April 2005, the Company completed the acquisitions of Telecommunication Systems
Management, Inc. (TSM), GTC Technology Group, Inc. and Technology Supply, Inc. (collectively
referred to as GTC) and Business Communications, Inc.,
Bainbridge Communications, Inc., BCI of
Tampa, LLC and Networx, L.L.C. (collectively referred to as BCI). These companies primarily
provide full-service voice communication solutions and services in the Florida and Virginia
markets. The
acquisitions increase the
17
Companys operational footprint in these marketplaces, provide an opportunity to expand into large
complex and multi-site customer solutions services and provide additional technical expertise and
product offerings in the voice market. The results of operations for these acquisitions are
included in the Companys financial statements from the completion date of the acquisition. The
revenues for these acquisitions are included in North America and Voice Services revenues.
During August 2005, the Company completed the acquisition of substantially all of the assets and
certain liabilities of Universal. Universal primarily provides planning, installation and
maintenance services for voice and data network systems in 14 states. The acquisition increases
the Companys operational footprint in these marketplaces, provides an opportunity to expand into
large complex and multi-site customer solutions services and provide additional technical expertise
and product offerings in the voice market. The results of operations for this acquisition are
included in the Companys financial statements from the completion date of the acquisition. The
revenues for this acquisition are included in North America and Voice Services revenues.
During December 2005, the Company completed the acquisitions of C=WIN and CSG. These companies
primarily provide voice communication solutions and services in 15 states. The acquisitions
increase the Companys operational footprint in these marketplaces, provide an opportunity to
expand into large complex and multi-site customer solutions services and provide additional
technical expertise and product offerings in the voice market. The results of operations for these
acquisitions are included in the Companys financial statements from the completion date of the
acquisition. The revenues for these acquisitions are included in North America and Voice Services
revenues.
On
December 21, 2005, the Company signed a non-binding letter of
intent to acquire the USA and Canadian Commercial and USA Government
Operations of NextiraOne, LLC. The Company is not subject to any
legally binding obligation to consummate the transaction and no such
obligation will exist until a definitive purchase agreement is
negotiated and signed. The acquisition is further dependent upon the
satisfactory completion of the Companys due diligence
investigation, board approval, financing, regulatory approval and
other customary closing conditions. There is no assurance that a
definitive purchase agreement will be entered into or, if such
agreement is entered into, that the foregoing conditions will be met
and that the transaction will close.
18
Dollars in Thousands, unless Otherwise Indicated
The tables below should be read in conjunction with the following discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
(3Q06) |
|
(3Q05) |
|
(3Q06YTD) |
|
(3Q05YTD) |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
143,173 |
|
|
|
79% |
|
|
$ |
78,642 |
|
|
|
62% |
|
|
$ |
426,788 |
|
|
|
78% |
|
|
$ |
242,966 |
|
|
|
64% |
|
Europe |
|
|
29,950 |
|
|
|
16% |
|
|
|
38,947 |
|
|
|
31% |
|
|
|
92,899 |
|
|
|
17% |
|
|
|
107,337 |
|
|
|
29% |
|
All Other |
|
|
9,012 |
|
|
|
5% |
|
|
|
9,307 |
|
|
|
7% |
|
|
|
26,780 |
|
|
|
5% |
|
|
|
27,543 |
|
|
|
7% |
|
|
|
|
Total |
|
$ |
182,135 |
|
|
|
100% |
|
|
$ |
126,896 |
|
|
|
100% |
|
|
$ |
546,467 |
|
|
|
100% |
|
|
$ |
377,846 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
15,740 |
|
|
|
|
|
|
$ |
8,345 |
|
|
|
|
|
|
$ |
44,136 |
|
|
|
|
|
|
$ |
27,090 |
|
|
|
|
|
% of North America
revenues |
|
|
11.0 |
% |
|
|
|
|
|
|
10.6 |
% |
|
|
|
|
|
|
10.3 |
% |
|
|
|
|
|
|
11.1 |
% |
|
|
|
|
Europe |
|
$ |
4,101 |
|
|
|
|
|
|
$ |
4,016 |
|
|
|
|
|
|
$ |
7,161 |
|
|
|
|
|
|
$ |
13,365 |
|
|
|
|
|
% of Europe
revenues |
|
|
13.7 |
% |
|
|
|
|
|
|
10.3 |
% |
|
|
|
|
|
|
7.7 |
% |
|
|
|
|
|
|
12.5 |
% |
|
|
|
|
All Other |
|
$ |
1,771 |
|
|
|
|
|
|
$ |
1,836 |
|
|
|
|
|
|
$ |
5,394 |
|
|
|
|
|
|
$ |
6,685 |
|
|
|
|
|
% of All Other
revenues |
|
|
19.7 |
% |
|
|
|
|
|
|
19.7 |
% |
|
|
|
|
|
|
20.1 |
% |
|
|
|
|
|
|
24.3 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
21,612 |
|
|
|
|
|
|
$ |
14,197 |
|
|
|
|
|
|
$ |
56,691 |
|
|
|
|
|
|
$ |
47,140 |
|
|
|
|
|
% of Total revenues |
|
|
11.9 |
% |
|
|
|
|
|
|
11.2 |
% |
|
|
|
|
|
|
10.4 |
% |
|
|
|
|
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charges and
acquisition related
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,245 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6,898 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,245 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
10,640 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
% of Total revenues |
|
|
0.7 |
% |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
% |
|
|
|
|
|
19
Information on revenues and gross profit for Data Services, Voice Services and Hotline
Services is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
(3Q06) |
|
(3Q05) |
|
(3Q06YTD) |
|
(3Q05YTD) |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
|
|
$ |
|
|
revenues |
By Service Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
47,083 |
|
|
|
26% |
|
|
$ |
53,410 |
|
|
|
42% |
|
|
$ |
152,568 |
|
|
|
28% |
|
|
$ |
152,136 |
|
|
|
40% |
|
Voice Services |
|
|
82,281 |
|
|
|
45% |
|
|
|
16,219 |
|
|
|
13% |
|
|
|
233,620 |
|
|
|
43% |
|
|
|
53,619 |
|
|
|
14% |
|
Hotline Services |
|
|
52,771 |
|
|
|
29% |
|
|
|
57,267 |
|
|
|
45% |
|
|
|
160,279 |
|
|
|
29% |
|
|
|
172,091 |
|
|
|
46% |
|
|
|
|
Total |
|
$ |
182,135 |
|
|
|
100% |
|
|
$ |
126,896 |
|
|
|
100% |
|
|
$ |
546,467 |
|
|
|
100% |
|
|
$ |
377,846 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
14,794 |
|
|
|
|
|
|
$ |
16,149 |
|
|
|
|
|
|
$ |
45,800 |
|
|
|
|
|
|
$ |
46,011 |
|
|
|
|
|
% of Data Services revenues |
|
|
31.4 |
% |
|
|
|
|
|
|
30.2 |
% |
|
|
|
|
|
|
30.0 |
% |
|
|
|
|
|
|
30.2 |
% |
|
|
|
|
Voice Services |
|
$ |
32,145 |
|
|
|
|
|
|
$ |
5,469 |
|
|
|
|
|
|
$ |
91,156 |
|
|
|
|
|
|
$ |
18,607 |
|
|
|
|
|
% of Voice Services revenues |
|
|
39.1 |
% |
|
|
|
|
|
|
33.7 |
% |
|
|
|
|
|
|
39.0 |
% |
|
|
|
|
|
|
34.7 |
% |
|
|
|
|
Hotline Services |
|
$ |
26,463 |
|
|
|
|
|
|
$ |
29,400 |
|
|
|
|
|
|
$ |
81,268 |
|
|
|
|
|
|
$ |
90,595 |
|
|
|
|
|
% of Hotline Services
revenues |
|
|
50.1 |
% |
|
|
|
|
|
|
51.3 |
% |
|
|
|
|
|
|
50.7 |
% |
|
|
|
|
|
|
52.6 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
73,402 |
|
|
|
|
|
|
$ |
51,018 |
|
|
|
|
|
|
$ |
218,224 |
|
|
|
|
|
|
$ |
155,213 |
|
|
|
|
|
% of Total revenues |
|
|
40.3 |
% |
|
|
|
|
|
|
40.2 |
% |
|
|
|
|
|
|
39.9 |
% |
|
|
|
|
|
|
41.1 |
% |
|
|
|
|
|
Third Quarter Fiscal 2006 (3Q06) Compared to Third Quarter Fiscal 2005 (3Q05):
Total Revenues
Total revenues for 3Q06 were $182,135, an increase of 44% compared to 3Q05 total revenues of
$126,896. The increase was primarily due to the incremental revenue from the acquisition of Norstan
in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and
CSG during the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results.
Excluding the effects of the acquisitions and the negative impact of exchange rates of $2,949
relative to the U.S. dollar, revenues would have decreased $2,183, a decrease of 2% from 3Q05.
Revenues by Geography
North America Revenues
Revenues in North America were $143,173 for 3Q06, an increase of 82% compared to $78,642 for 3Q05.
The increase was primarily due to the incremental revenue from the acquisition of Norstan in the
fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in
the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results. Excluding
the effects of the acquisitions and the positive impact of exchange rates of $42 relative to the
U.S. dollar, revenues would have increased 5%. The overall increase is due to increased demand in
Data Services and Voice Services and success in the Companys DVH (Data, Voice and Hotline) Services cross-selling initiatives.
20
Europe Revenues
Revenues in Europe were $29,950 for 3Q06, a decrease of 23% compared to $38,947 for 3Q05. The
overall decrease was generally due to weak economic conditions that affected client demand and
$2,613 of negative impact of exchange rates relative to the U.S. dollar. If exchange rates
relative to the U.S. dollar had remained unchanged from 3Q05, Europe revenues would have decreased
a total of $6,384 to $32,563, a decrease of 16%.
All Other Revenues
Revenues for All Other were $9,012 for 3Q06, a decrease of 3% compared to $9,307 for 3Q05. If
exchange rates relative to the U.S. dollar had remained unchanged from 3Q05, All Other revenues
would have increased $378 to $9,390, an increase of 1%.
Revenue by Service Type
Data Services
Revenues from Data Services were $47,803 for 3Q06, a decrease of 10% compared to $53,410 for 3Q05.
The Company believes the overall decrease in Data Services revenue was due to decreased demand in
the European market and $908 of negative impact of exchange rates relative to the U.S. dollar for
its international Data Services. If exchange rates relative to the U.S. dollar had remained
unchanged from 3Q05, Data Services revenues would have decreased a total of $4,699, a decrease of
9%.
Voice Services
Revenues from Voice Services were $82,281 for 3Q06, an increase of 407% compared to $16,219 for
3Q05. The increase was primarily due to the incremental revenue from the acquisition of Norstan in
the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG
in the first nine months of Fiscal 2006, which added $60,371 of revenues to 3Q06 results.
Excluding the effects of the acquisitions, Voice Services revenues increased 35% over 3Q05. The
Company believes the overall increase in Voice Services revenues was due to increased demand for
these services and success in cross-selling initiatives with the Companys other service lines.
There was no exchange rate impact on Voice Service revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services were $52,771 for 3Q06, a decrease of 8% compared to $57,267 for
3Q05. The Company believes the overall decline in Hotline Services revenues was due to decreased
demand for these services and $2,041 of negative impact of exchange rates relative to the U.S.
dollar for its international Hotline Services. If exchange rates relative to the U.S. dollar had
remained unchanged from 3Q05, Hotline Services revenues would have decreased a total of $2,455, a
decrease of 4%.
Gross Profit
Gross profit dollars for 3Q06 increased to $73,402 from $51,018 for 3Q05. The increase in gross
profit dollars over the prior year was due to the increase in revenues. Gross profit as a percent
of revenues for 3Q06 of 40.3% of revenues was comparable to 40.2% of revenues for 3Q05.
21
Gross profit dollars for Data Services were $14,794, or 31.4% of revenues, for 3Q06 compared to
$16,149, or 30.2% of revenues, for 3Q05. Gross profit dollars for Voice Services were $32,145, or
39.1% of revenues, for 3Q06 compared to $5,469, or 33.7% of revenues, for 3Q05. Gross profit
dollars for Hotline Services were $26,463, or 50.1% of revenues, for 3Q06 compared to $29,400, or
51.3% of revenues, for 3Q05.
SG&A Expenses
Selling, general and administrative (SG&A) expenses for 3Q06 were $50,441, an increase of $13,679
over SG&A expenses of $36,762 for 3Q05. SG&A expenses as a percent of revenue for 3Q06 were 27.7%
of revenues comparable to 29.0% of revenues for 3Q05. The dollar increase is due to the fourth
quarter Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN
and CSG in the first nine months of Fiscal 2006.
Intangibles Amortization
Intangibles amortization for 3Q06 increased to $1,349 from $59 for 3Q05. The increase was
primarily attributable to the addition of $15,971 of intangible assets acquired through the Norstan
acquisition during the fourth quarter of Fiscal 2005. The Company recorded an additional $1,119 of
amortization expense in 3Q06 due to these intangibles. For Fiscal 2006, the Company expects to
incur in total $3,821 of additional amortization expense relative to these acquired intangibles and
approximately $600 annually thereafter until Fiscal 2025. In 3Q06, the Company recorded $103 of
amortization expense related to definite-lived intangibles in the acquisitions of TSM, GTC and BCI.
As of 3Q06, the Company has not recorded amortization expense relative to definite-lived
intangibles acquired through the 2Q06 acquisition of Universal and 3Q06 acquisitions of C=WIN and
CSG. The Company expects to finalize the valuation of these
intangibles by 4Q06. See Note 11 to the Notes to
Consolidated Financial Statements for further details related to
these acquisitions.
Operating Income
Operating income for 3Q06 was $21,612, or 11.9% of revenues, compared to $14,197, or 11.2% of
revenues, for 3Q05. The impact of the Norstan acquisition related expenses on operating income
were $1,245, or 1% of revenues.
Interest Expense, Net
Net interest expense for 3Q06 increased to $2,397 from $519 for 3Q05 due to an increase in the
weighted average outstanding debt of approximately $149,737 for 3Q06 compared to approximately
$52,727 for 3Q05. The increase in debt relates primarily to the fourth quarter Fiscal 2005
acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the first
nine months of Fiscal 2006. In addition, the weighted average interest rate outstanding for 3Q06
was 5.59%, an increase of 2.82% compared to the 3Q05 rate of 2.77%.
Provision for Income Taxes
The tax provision for 3Q06 was $6,590, an effective tax rate of 34.5%. This compares to the tax
provision for 3Q05 of $4,383, an effective tax rate of 32.2%. The tax rate for 3Q06 was higher than
3Q05 due to the Companys reassessment of the annual effective rate in 3Q05 to reflect the effect
of implementing various international tax planning strategies.
22
The annual effective tax rate is lower than the U.S. statutory rate of 35.0% primarily due to
foreign income taxes at rates lower than 35.0%. The Company anticipates that its deferred tax
asset is realizable in the foreseeable future.
Net Income
Net income for 3Q06 was $12,511, or 6.9% of revenues, compared to $9,249, or 7.3% of revenues, for
3Q05. The increase in net income dollars is primarily due to the increase in revenues and gross
profit, offset in part by increased interest expense and the impact of acquisition related expenses
described above.
Nine Months Fiscal 2006 (3Q06YTD) Compared to Nine Months Fiscal 2005 (3Q05YTD):
Total Revenues
Total revenues for 3Q06YTD were $546,467, an increase of 45% compared to 3Q05YTD total revenues of
$377,846. The increase was primarily due to the incremental revenue from the acquisition of
Norstan in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal,
C=WIN and CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD
results. Excluding the effects of the acquisitions and $1,622 of negative impact of exchange rates
relative to the U.S. dollar, revenues would have been comparable to 3Q05YTD.
Revenues by Geography
North America Revenues
Revenues in North America were $426,788 for 3Q06YTD, an increase of 76% compared to $242,966 for
3Q05YTD. The increase was primarily due to the incremental revenue from the acquisition of Norstan
in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and
CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD results.
Excluding the effects of the acquisitions and the positive impact of exchange rates of $211
relative to the U.S. dollar, revenues would have increased 6%. The overall increase is due to
increased demand in Data Services and Voice Services and success in the Companys DVH (Data, Voice
and Hotline) Services cross-selling initiatives.
Europe Revenues
Revenues in Europe were $92,889 for 3Q06YTD, a decrease of 13% compared to $107,337 for 3Q05YTD.
The overall decrease was generally due to weak economic conditions that affected client demand and
$1,703 of negative impact of exchange rates relative to the U.S. dollar. If exchange rates
relative to the U.S. dollar had remained unchanged from 3Q05YTD, Europe revenues would have
decreased a total of $12,745 to $94,592, a decrease of 12%.
All Other Revenues
Revenues for All Other were $26,780 for 3Q06YTD, a decrease of 3% compared to $27,543 for 3Q05YTD.
If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05TYD, All Other
revenues would have decreased a total of $633 to $26,910, a decrease of 2%.
23
Revenues by Service Type
Data Services
Revenues from Data Services were $152,568 for 3Q06YTD, no change compared to $152,136 for 3Q05YTD.
If exchange rates relative to the U.S. dollar had remained unchanged from 3Q05YTD, Data Services
revenues would have increased a total of $1,077, an increase of 1%.
Voice Services
Revenues from Voice Services were $233,620 for 3Q06YTD, an increase of 336% compared to $53,619 for
3Q05YTD. The increase was primarily due to the incremental revenue from the acquisition of Norstan
in the fourth quarter of Fiscal 2005 and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and
CSG in the first nine months of Fiscal 2006, which added $168,873 of revenues to 3Q06YTD results.
Excluding the effects of the acquisitions, Voice Services revenues increased 21% over 3Q05YTD. The
Company believes the overall increase in Voice Services revenues was due to increased demand for
these services and success in cross-selling initiatives with the Companys other service lines.
There was no exchange rate impact on Voice Service revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services were $160,279 for 3Q06YTD, a decrease of 7% compared to $172,091 for
3Q05YTD. The Company believes the overall decline in Hotline Services revenues was due to
decreased demand for these services and $977 negative impact of exchange rates relative to the U.S.
dollar for its international Hotline Services. If exchange rates relative to the U.S. dollar had
remained unchanged from 3Q05YTD, Hotline Services revenues would have decreased a total of $10,835,
a decrease of 6%.
Gross Profit
Gross profit dollars for 3Q06YTD increased to $218,224 from $155,213 for 3Q05YTD. The increase in
gross profit dollars over prior year was due to the increase in revenues. Gross profit as a
percent of revenues for 3Q06YTD of 39.9% was comparable to 41.1% of revenues for 3Q05YTD. The
decrease in gross profit percentage was due to service mix.
Gross profit dollars for Data Services for 3Q06YTD was $45,800, or 30.0% of revenues, compared to
$46,011, or 30.2% of revenues, for 3Q05YTD. Gross profit dollars for Voice Services for 3Q06YTD was
$91,156, or 39.0% of revenues, compared to $18,607, or 34.7% of revenues, for 3Q05YTD. Gross
profit dollars for Hotline Services for 3Q06YTD was $81,268, or 50.7% of revenues, compared to
$90,595, or 52.6% of revenues, for 3Q05YTD.
SG&A Expenses
SG&A expenses for 3Q06YTD were $152,008, an increase of $44,122 over SG&A expenses of $107,886 for
3Q05YTD. SG&A expenses as a percent of revenues for 3Q06YTD were 27.8% of revenues compared to
28.6% of revenues for 3Q05YTD. The dollar increase is due to the fourth quarter Fiscal
2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG in the
first nine months of Fiscal 2006 and $5,290 of restructuring and other charges during the first
quarter of Fiscal 2006.
24
Intangibles Amortization
Intangibles amortization for 3Q06YTD increased to $4,235 from $187 for 3Q05YTD. The increase was
primarily attributable to the addition of $15,971 of intangible assets acquired through the Norstan
acquisition during the fourth quarter of Fiscal 2005. The Company recorded an additional $3,357 of
amortization expense in 3Q06YTD due to these intangibles. For Fiscal 2006, the Company expects to
incur in total $3,821 of additional amortization expense relative to these acquired intangibles and
approximately $600 annually thereafter until Fiscal 2025. In 3Q06YTD, the Company recorded $143 of
amortization expense related to definite-lived intangibles in the acquisitions of TSM, GTC and BCI.
As of 3Q06, the Company has not recorded amortization expense relative to definite-lived
intangibles acquired through the 2Q06 acquisition of Universal and 3Q06 acquisitions of C=WIN and
CSG. The Company expects to finalize the valuation of these
intangibles by 4Q06. See Note 4 to the Notes to
Consolidated Financial Statements for further details related to
these acquisitions.
Operating Income
Operating income for 3Q06YTD was $56,691, or 10.4% of revenues, compared to $47,140, or 12.5% of
revenues, for 3Q05YTD. The impact of restructuring charges and acquisition related expenses on
operating income for 3Q06YTD was $10,640, or 1.9% of revenues.
Net Interest Expense
Net interest expense for 3Q06YTD increased to $6,686 from $1,436 for 3Q05YTD due to an increase in
the weighted average outstanding debt of approximately $159,476 for 3Q06YTD compared to
approximately $50,968 for 3Q05YTD. The increase in debt relates primarily to the fourth quarter
Fiscal 2005 acquisition of Norstan and the acquisitions of TSM, GTC, BCI, Universal, C=WIN and CSG
in the first nine months of Fiscal 2006. In addition, the weighted average interest rate
outstanding for 3Q06YTD was 4.86%, an increase of 2.55% compared to the 3Q05YTD rate of 2.31%.
Provision for Income Taxes
The tax provision for 3Q06YTD was $17,224, an effective tax rate of 34.5%. This compares to the
tax provision for 3Q05YTD of $15,736, an effective tax rate of 34.5%.
The annual effective tax rate is lower than the U.S. statutory rate of 35.0% primarily due to
foreign income taxes at rates lower than 35.0%. The Company anticipates that its deferred tax
asset is realizable in the foreseeable future.
Net Income
Net income for 3Q06YTD was $32,702, or 6.0% of revenues, and is comparable to net income of
$29,875, or 7.9% of revenues, for 3Q05YTD. The increase in net income dollars is primarily due to
increases in revenue and gross profit offset in part by the 1Q06 restructuring charge, increased
interest expense and the impact of acquisition related expenses.
25
Liquidity and Capital Resources
Operating Activities
As of the end of 3Q06 and 3Q05, the Company had working capital of $109,007 and $120,356,
respectively. The Companys current ratio was 1.78 and 2.88 as of the end of 3Q06 and 3Q05,
respectively. The decrease in the current ratio is primarily driven by liabilities assumed as part
of the acquisitions completed during the fourth quarter of Fiscal 2005 and the first nine months of
Fiscal 2006.
Net cash
provided by operating activities during 3Q06YTD and 3Q05YTD was
$38,912 and $34,405,
respectively. The Companys major source of cash from operations was net income and the net
change in accounts receivable. The Companys primary use of cash from operations was the net
change in accounts payable and accrued liabilities.
The Company anticipates that approximately $1,200 to $1,500 will be incurred during Fiscal 2006
for the ongoing monitoring and testing requirements of Section 404 of the Sarbanes-Oxley Act of
2002. As of the end of 3Q06, the Company has incurred approximately
$831 related to these requirements.
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 in investing activities during 3Q06YTD and 3Q05YTD was $42,979 and $2,347,
respectively. The Companys primary use of cash during 3Q06YTD was related to the acquisition of
businesses.
During 3Q06YTD, gross capital expenditures were $3,151, while capital disposals were $1,232.
Gross capital expenditures for Fiscal 2006 are projected to be $4,000 to $6,000 and will be spent
primarily on information systems, general equipment and facility improvements.
During 3Q06YTD, the Company paid $40,682 to acquire TSM, GTC, BCI, Universal, C=WIN and CSG, net
of cash acquired in the transactions. The cash impact of prior merger-related payments made
during 3Q06YTD was $378. See Note 11 of the Notes to Consolidated Financial Statements for
additional detail on acquisitions made during the first nine months of Fiscal 2006.
Financing Activities
Net cash provided by financing activities during 3Q06YTD was $5,016
compared to the net cash used in 3Q05YTD of $29,283. Cash provided by financing activities for 3Q06YTD resulted primarily from
$16,344 cash received from the exercise of stock options, partially offset by cash used of $3,049
for payment of dividends and $7,418 for net repayment of debt.
26
Total Debt
Borrowings under the Credit Agreement are permitted up to a maximum amount of $240,000, which
includes up to $15,000 of swingline loans and $25,000 of letters of credit. The Credit Agreement
may be increased by the Company up to an additional $60,000 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 0.75% to 1.50% (determined by a leverage ratio based on the Companys
EBITDA). The majority of the Companys borrowings were under the LIBOR option. The Credit
Agreement expires on August 31, 2008.
The Companys total debt at the end of 3Q06 of $142,020 was comprised of $140,000 under the Credit
Agreement, $1,768 of obligations under capital leases and $252 of various other third-party,
non-employee loans. The weighted average interest rate on all indebtedness of the Company during
3Q06 and 3Q05 was approximately 5.59% and 2.31%, respectively. In addition, as of the end of
3Q06, the Company had $3,065 of letters of credit outstanding and $96,935 available under the
Credit Agreement.
The Credit Agreement includes financial covenants requiring a minimum net worth, leverage and
fixed charge coverage ratio. At the end of 3Q06, the Company was in compliance with all required
covenants under the Credit Agreement.
Dividends
During 3Q06, the Companys Board of Directors declared a cash dividend of $0.06 per share on all
outstanding shares of the Companys Common Stock.
The dividend totaled $1,044 and was paid on January 13, 2006 to stockholders of record at the
close of business on December 31, 2005. The dividend declared during 4Q06 of $0.06 per share will
be paid on April 14, 2006 to stockholders of record on March 31, 2006. While the Company expects to continue
to declare dividends for the foreseeable future, there can be no assurance as to the timing or
amount of such dividends.
Repurchase of Common Stock
During 3Q06, the Company repurchased approximately 117 shares for $5. Since inception of the
repurchase program in April 1999 through December 31, 2005, the Company has repurchased in
aggregate approximately 6,935,000 shares of Common Stock for approximately $297,000. Funding
for the stock repurchases came primarily from existing cash flow from operations. Additional
repurchases of 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 the Common Stock for the foreseeable future, there can be no assurance as to the timing or
amount of such repurchases.
Foreign Currency Exchange Impact
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, 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, although
intercompany sales to the Companys subsidiaries in Brazil, Chile, Mexico and Singapore are
denominated in U.S. dollars.
27
The Company has entered and will continue in the future, on a selective basis, to enter into
foreign currency forward contracts to reduce the foreign currency exposure related to certain intercompany
transactions, primarily trade receivables and loans. All of the 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 OCI 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 OCI to earnings. In the event the hedged
forecasted transaction does not occur, or it becomes probable that it will not occur, the
ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from
OCI to earnings at that time.
At of the end of 3Q06, the open foreign exchange contracts were in Euro, Pound sterling, Canadian
dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner and Australian
dollar. The open contracts have contract rates of 0.7850 to 0.8527 Euro, 0.5365 to 0.5821 Pound
sterling, 1.1751 to 1.1794 Canadian dollar, 1.2149 to 1.3114 Swiss franc, 119.12 to 119.59 Japanese
yen, 7.7377 to 8.0770 Swedish krona, 5.9275 to 6.3749 Danish krone, 6.2087 to 6.8638 Norwegian
kroner and 1.3077 to 1.3691 Australian dollar, all per U.S. dollar.
The total open contracts, with a notional amount of approximately $38,673, have a fair value of
$37,248 and will expire within fifteen months.
Critical Accounting Policies
The Companys critical accounting policies are described in the Notes to the Companys
Consolidated Financial Statements for the year ended March 31, 2005 contained in the Companys
Annual Report on Form 10-K. There have been no significant changes to these policies during the
subsequent quarters.
New Accounting Pronouncements
See Notes to Consolidated Financial Statements.
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 effects
of inflation through improved productivity and cost reduction programs as well as price adjustments
within the constraints of market competition.
Forward Looking Statements
When included in this Quarterly Report on 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, general
economic and business conditions, competition, changes in foreign, political and economic
conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid changes in
technologies, client preferences, the ability of the Company to identify, acquire and operate
additional technical service companies 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
Quarterly Report on 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.
28
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 rates and foreign currency exchange rates. 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.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. At December
31, 2005, the Company had total long-term obligations, including the current portion of those
obligations, of $142,020. Of that amount, $2,020 was in fixed rate obligations and $140,000 was
in variable rate obligations. For the amounts in variable rate debt at December 31, 2005, an
instantaneous 100 basis point increase in the interest rate would reduce the Companys expected net
income in the subsequent quarter by $245, assuming the Company employed no intervention strategies.
The Company has no interest rate hedging agreements.
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, 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. To mitigate
this risk, the Company has entered and will continue in the future, on a selective basis, to enter
into foreign currency forward contracts to reduce the foreign currency exposure related to certain
intercompany transactions. At December 31, 2005, the Company had total open contracts valued at
approximately $38,673 with a fair value of approximately $37,248.
The Company does not hold or issue any other financial derivative instruments nor does it engage in
speculative trading of financial derivatives.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q as of December 31, 2005,
an evaluation was performed, under the supervision and with the participation of Company
management, including the Chief Executive Officer (CEO)
and the Chief Financial Officer (CFO), of
the effectiveness of the design and operation of the Companys disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Act)).
Based on that evaluation, management, including the CEO and CFO, has concluded that, as of the end
of the period covered by this Quarterly Report on Form 10-Q, the Companys disclosure controls and
procedures were effective in all material respects at the reasonable assurance level to ensure that
information required to be disclosed in reports that the Company files or submits under the Act is
recorded, processed, summarized and timely reported in accordance with the rules and forms of the
SEC.
29
The scope of managements assessment of the effectiveness of internal control over financial
reporting includes all of the Companys material businesses except for Norstan, a material business
acquired on January 25, 2005 representing approximately 18% and 21% of total assets as of December
31, 2005 and March 31, 2005, respectively. The Norstan portion of the business will be included in
the current year assessment to be completed as of March 31, 2006.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls, fraud, the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
In the third fiscal quarter ended December 31, 2005, there had been no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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(d) Maximum Number |
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(c) Total Number of |
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(or Approximate |
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Shares (or Units) |
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Dollar Value) of |
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Purchased as Part |
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Shares (or Units) |
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(a) Total Number of |
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(b) Average Price |
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of Publicly |
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that May Yet Be |
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Shares (or Units) |
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Paid per Share |
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Announced Plans or |
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Purchased Under the |
Period |
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Purchased |
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(or Unit) |
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Programs |
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Plans or Programs(1) |
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October 2 to
October 30, 2005 |
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$ |
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564,970 |
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October 31, to
November 27, 2005 |
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117 |
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45.44 |
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117 |
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564,853 |
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November 28, to
December 31, 2005 |
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564,853 |
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Total |
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117 |
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$ |
45.44 |
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117 |
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564,853 |
(2) |
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(1) |
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As of October 1, 2005, 564,970 shares were available for repurchase under
repurchase programs approved by the Board of Directors and announced on November 20, 2003 and
August 12, 2004. |
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(2) |
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The repurchase programs have no expiration date and no programs were terminated
prior to the full repurchase of the authorized amount. |
Additional repurchases of 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 the Common Stock for the foreseeable future, there can be no assurance as to
the timing or amount of such repurchases.
30
Item 6. Exhibits.
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Exhibit |
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Number |
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Description |
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21.1
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Subsidiaries of Registrant (1) |
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31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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32.1
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Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities and 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) |
31
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.
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BLACK BOX CORPORATION
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Dated: February 9, 2006 |
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By: |
/s/ Michael McAndrew
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Michael McAndrew, Vice President, |
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Chief Financial Officer, Treasurer, Secretary,
and Principal Accounting Officer |
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32
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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21.1
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Subsidiaries of Registrant (1) |
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31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and
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 and
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 and 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) |
33