Black Box Corporation 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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95-3086563 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
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15055 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
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).o Yes þ No
As of August 14, 2007, there were 17,527,227 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
FOR THE QUARTER ENDED JUNE 30, 2007
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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In thousands, except par value |
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June 30, 2007 |
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March 31, 2007 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
16,295 |
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$ |
17,157 |
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Accounts receivable, net of allowance for doubtful accounts of $13,711
and $14,253 |
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162,384 |
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161,733 |
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Inventories, net |
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69,745 |
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72,807 |
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Costs/estimated earnings in excess of billings on uncompleted contracts |
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62,296 |
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61,001 |
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Prepaid and other current assets |
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33,215 |
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31,057 |
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Total current assets |
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343,935 |
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343,755 |
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Property, plant and equipment, net |
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37,237 |
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39,051 |
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Goodwill, net |
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569,438 |
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568,647 |
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Intangibles: |
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Customer relationships, net |
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67,048 |
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68,016 |
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Other intangibles, net |
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31,916 |
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33,258 |
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Other assets |
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30,618 |
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37,364 |
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Total assets |
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$ |
1,080,192 |
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$ |
1,090,091 |
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Liabilities |
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Accounts payable |
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$ |
79,492 |
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$ |
74,727 |
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Accrued compensation and benefits |
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20,529 |
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21,811 |
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Deferred revenue |
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32,574 |
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35,630 |
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Billings in excess of costs/estimated earnings on uncompleted contracts |
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18,446 |
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19,027 |
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Income taxes |
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13,574 |
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13,430 |
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Other liabilities |
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58,789 |
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62,071 |
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Total current liabilities |
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223,404 |
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226,696 |
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Long-term debt |
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234,999 |
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238,194 |
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Other liabilities |
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20,321 |
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25,505 |
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Total liabilities |
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478,724 |
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490,395 |
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Stockholders equity |
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Preferred stock authorized 5,000, par value $1.00, none issued |
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-- |
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-- |
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Common stock authorized 100,000, par value $.001, 17,527 and 17,527
shares issued and outstanding |
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25 |
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25 |
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Additional paid-in capital |
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438,595 |
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441,283 |
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Retained earnings |
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452,048 |
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450,022 |
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Accumulated other comprehensive income |
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27,833 |
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25,399 |
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Treasury stock, at cost 7,436 and 7,436 shares |
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(317,033) |
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(317,033) |
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Total stockholders equity |
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601,468 |
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599,696 |
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Total liabilities and stockholders equity |
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$ |
1,080,192 |
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$ |
1,090,091 |
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See Notes to the Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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Three months ended (Unaudited) |
In thousands, except per share amounts |
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June 30, 2007 |
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July 1, 2006 |
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Revenues |
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Hotline products |
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$ |
56,139 |
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$ |
52,225 |
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On-Site services |
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196,152 |
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178,170 |
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Total |
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252,291 |
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230,395 |
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Cost of Sales |
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Hotline products |
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29,362 |
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25,461 |
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On-Site services |
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131,699 |
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119,090 |
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Total |
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161,061 |
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144,551 |
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Gross profit |
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91,230 |
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85,844 |
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Selling, general & administrative expenses |
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72,743 |
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70,202 |
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Intangibles amortization |
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2,318 |
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1,506 |
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Operating income |
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16,169 |
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14,136 |
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Interest expense (income), net |
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3,280 |
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3,640 |
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Other expenses (income), net |
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(67) |
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115 |
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Income before provision for income taxes |
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12,956 |
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10,381 |
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Provision for income taxes |
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4,768 |
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3,568 |
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Net income |
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$ |
8,188 |
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$ |
6,813 |
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Earnings per common share |
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Basic |
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$ |
0.47 |
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$ |
0.39 |
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Diluted |
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$ |
0.46 |
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$ |
0.37 |
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Weighted average common shares outstanding |
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Basic |
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17,527 |
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17,626 |
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Diluted |
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17,639 |
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18,262 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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See Notes to the Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended (Unaudited) |
In thousands |
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June 30, 2007 |
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July 1, 2006 |
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Operating Activities |
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Net income |
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$ |
8,188 |
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$ |
6,813 |
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Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
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Intangibles amortization and depreciation |
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5,273 |
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3,806 |
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Loss on sale of property |
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481 |
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-- |
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Deferred taxes |
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(7,789) |
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(508) |
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Stock compensation expense |
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1,716 |
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3,249 |
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Tax impact from stock options |
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4,404 |
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779 |
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Change in fair value of interest rate swap |
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(1,308) |
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-- |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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320 |
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11,218 |
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Inventories, net |
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3,312 |
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(1,066) |
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All other current assets excluding deferred tax asset |
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(1,996) |
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(2,115) |
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Liabilities exclusive of long-term debt |
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(4,897) |
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(9,569) |
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Net cash provided by (used for) operating activities |
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$ |
7,704 |
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$ |
12,607 |
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Investing Activities |
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Capital expenditures |
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$ |
(984) |
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$ |
(1,523) |
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Capital disposals |
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-- |
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30 |
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Acquisition of businesses (payments)/recoveries |
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-- |
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(129,161) |
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Prior merger-related (payments)/recoveries |
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(3,250) |
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(1,350) |
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Net cash provided by (used for) investing activities |
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$ |
(4,234) |
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$ |
(132,004) |
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Financing Activities |
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Proceeds from borrowings |
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$ |
47,445 |
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$ |
194,522 |
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Repayment of borrowings |
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(50,818) |
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(73,769) |
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Repayment on discounted lease rentals |
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-- |
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(21) |
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Proceeds from exercise of options |
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-- |
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3,530 |
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Payment of dividends |
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(1,052) |
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(1,055) |
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Net cash provided by (used for) financing activities |
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$ |
(4,425) |
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$ |
123,207 |
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Foreign currency exchange impact on cash |
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$ |
93 |
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$ |
(657) |
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Increase / (decrease) in cash and cash equivalents |
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$ |
(862) |
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$ |
3,153 |
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Cash and cash equivalents at beginning of period |
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$ |
17,157 |
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$ |
11,207 |
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Cash and cash equivalents at end of period |
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$ |
16,295 |
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$ |
14,360 |
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Supplemental Cash Flow: |
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Cash paid for interest |
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$ |
4,714 |
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$ |
2,601 |
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Cash paid for income taxes |
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8,145 |
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2,685 |
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Non-cash financing activities: |
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Dividends payable |
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1,052 |
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1,061 |
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Capital leases |
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192 |
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109 |
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See Notes to the Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box Corporation
(Black Box or the Company) have been prepared in accordance with accounting principles
generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements.
The Company believes that these consolidated financial statements reflect all normal, recurring
adjustments needed to present fairly the Companys results for the interim periods presented. The
results for interim periods may not be indicative of the results of operations for any other
interim period or for the full year. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Companys most recent Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (SEC) for the fiscal year ended
March 31, 2007 (the Form 10-K).
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes to the Consolidated Financial Statements as of June 30, 2007 and 2006 were June 30,
2007 and July 1, 2006. References to Fiscal Year or Fiscal mean the Companys fiscal year ended
March 31 for the year referenced. All references to dollar amounts herein are presented in
thousands, except per share amounts.
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, intangible assets and goodwill. Actual results could differ from
those estimates. Management believes the estimates made are reasonable.
Reclassification
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three (3) month periods ended June 30, 2007.
Note 2: Significant Accounting Policies / Recent Accounting Pronouncements
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys Consolidated Financial
Statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Companys Form 10-K. Additional significant accounting policies adopted during Fiscal 2008 are
disclosed below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be more likely
than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount most
likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Companys Consolidated Statements of
Income.
Recent Accounting Pronouncements
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits an entity to elect to measure eligible items at
fair value (fair value option) including many financial instruments. The provisions of SFAS 159
are effective for the Company as of April 1, 2008. If the fair value option is elected, the Company
will report unrealized gains and losses on items for which the
6
fair value option has been elected
in earnings at each subsequent reporting date. Upfront costs and fees related to items for which
the fair value option is elected shall be recognized in earnings as incurred and not deferred. The
fair value option may be applied for a single eligible item without electing it for other identical
items, with certain exceptions, and must be applied to the entire eligible item and not to a
portion of the eligible item. The Company is currently evaluating the irrevocable election of the
fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The requirements of SFAS 157 will be applied
prospectively except for certain derivative instruments that would be adjusted through the opening
balance of retained earnings in the period of adoption. The Company is evaluating the impact of the
adoption of SFAS 157 on the Companys consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 requires that realization of an uncertain income tax position must be
more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest and sets forth new
disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal year
beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as required. The
adoption of FIN 48 resulted in a decrease to beginning retained earnings of $5,110 representing the
cumulative effect adjustment. The adjustment to beginning retained earnings is summarized in the
following table. See Significant Accounting Policies within this Note 2 and Note 14 for further
reference.
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Retained Earnings |
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Balance as of April 1, 2007 |
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$ |
450,022 |
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Adjustment for adoption of FIN 48 |
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(5,110) |
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Balance as currently reported |
|
$ |
444,912 |
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Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on the Companys consolidated financial statements.
Note 3: Inventories
The Companys inventories consist of the following:
|
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|
|
|
|
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|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
Raw materials |
|
$ |
1,811 |
|
|
$ |
1,774 |
|
Finished goods |
|
|
89,968 |
|
|
|
93,794 |
|
|
|
|
|
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Subtotal |
|
$ |
91,779 |
|
|
$ |
95,568 |
|
Excess and obsolete inventory reserves |
|
|
(22,034) |
|
|
|
(22,761) |
|
|
|
|
|
|
Inventory, net |
|
$ |
69,745 |
|
|
$ |
72,807 |
|
|
Note 4: Goodwill
The following table summarizes changes to goodwill at the Companys reporting units during the
period.
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North |
|
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|
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America |
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Europe |
|
|
All Other |
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Total |
|
|
Balance as of March 31, 2007 |
|
$ |
493,462 |
|
|
$ |
73,065 |
|
|
$ |
2,120 |
|
|
$ |
568,647 |
|
Currency translation |
|
|
(7) |
|
|
|
1,172 |
|
|
|
23 |
|
|
|
1,188 |
|
Prior Period Acquisitions |
|
|
(397) |
|
|
|
-- |
|
|
|
-- |
|
|
|
(397) |
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2007 |
|
$ |
493,058 |
|
|
$ |
74,237 |
|
|
$ |
2,143 |
|
|
$ |
569,438 |
|
|
At June 30, 2007, certain merger agreements provided for contingent payments (earn-out) of up to
$2,294. If future operating performance goals of the acquired companies are met, goodwill will be
adjusted for the amount of the contingent payments.
7
Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
March 31, 2007 |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Definite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
8,008 |
|
|
$ |
3,831 |
|
|
$ |
4,177 |
|
|
$ |
7,963 |
|
|
$ |
3,414 |
|
|
$ |
4,549 |
|
Customer relationships |
|
|
71,989 |
|
|
|
4,941 |
|
|
|
67,048 |
|
|
|
71,989 |
|
|
|
3,973 |
|
|
|
68,016 |
|
Acquired backlog |
|
|
10,783 |
|
|
|
10,783 |
|
|
|
-- |
|
|
|
10,783 |
|
|
|
9,813 |
|
|
|
970 |
|
|
|
|
|
|
Total |
|
$ |
90,780 |
|
|
$ |
19,555 |
|
|
$ |
71,225 |
|
|
$ |
90,735 |
|
|
$ |
17,200 |
|
|
$ |
73,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
126,772 |
|
|
$ |
27,808 |
|
|
$ |
98,964 |
|
|
$ |
126,727 |
|
|
$ |
25,453 |
|
|
$ |
101,274 |
|
|
The Companys indefinite-lived intangible assets consist solely of the Companys trademark
portfolio obtained through business acquisitions. The Companys definite-lived intangible assets
are comprised of employee non-compete contracts, backlog and customer relationships also obtained
through business acquisitions.
The following table summarizes the changes to carrying amounts of intangible assets during the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Competes |
|
|
Customer |
|
|
|
|
|
|
Trademarks |
|
|
and Backlog |
|
|
Relationships |
|
|
Total |
|
|
Balance at March 31, 2007 |
|
$ |
27,739 |
|
|
$ |
5,519 |
|
|
$ |
68,016 |
|
|
$ |
101,274 |
|
Amortization expense |
|
|
-- |
|
|
|
(1,350) |
|
|
|
(968) |
|
|
|
(2,318) |
|
Currency translation |
|
|
-- |
|
|
|
8 |
|
|
|
-- |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
27,739 |
|
|
$ |
4,177 |
|
|
$ |
67,048 |
|
|
$ |
98,964 |
|
|
Intangible asset amortization expense was $2,318 and $1,506 for the three (3) month period ended
June 30, 2007 and 2006, respectively.
The following table details the estimated intangible amortization expense during the remainder of
Fiscal 2008, each of the succeeding five fiscal years and the periods thereafter.
These estimates are based on the carrying amounts of intangible assets as of June 30, 2007 that are
subject to change pending the outcome of purchase accounting related to certain acquisitions:
|
|
|
|
|
Fiscal years ending March 31, |
|
|
|
|
2008 |
|
$ |
4,039 |
|
2009 |
|
|
5,221 |
|
2010 |
|
|
5,093 |
|
2011 |
|
|
4,521 |
|
2012 |
|
|
4,119 |
|
2013 |
|
|
3,961 |
|
Thereafter |
|
|
44,271 |
|
|
|
|
Total |
|
$ |
71,225 |
|
|
Note 6: Indebtedness
The Companys long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
Revolving credit agreement |
|
$ |
233,500 |
|
|
$ |
236,715 |
|
Capital lease obligations |
|
|
2,162 |
|
|
|
2,123 |
|
Other |
|
|
37 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
235,699 |
|
|
$ |
238,880 |
|
Less: current portion (included in Other liabilities) |
|
|
(700) |
|
|
|
(686) |
|
|
|
|
|
|
Long-term debt |
|
$ |
234,999 |
|
|
$ |
238,194 |
|
|
8
Revolving Credit Agreement - On March 28, 2006, the Company entered into a Second Amendment to the
Second Amended and Restated Credit Agreement dated January 24, 2005, as amended February 17, 2005
(collectively, the Credit Agreement) with Citizens Bank of Pennsylvania, as agent, and a group of
lenders. The Credit Agreement expires on March 28, 2011. Borrowings under the Credit Agreement are
permitted up to a maximum amount of $310,000, which includes up to $15,000 of swing line loans and
$25,000 of letters of credit. The Credit Agreement may be increased by the Company up to an
additional $90,000 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
1.25% (determined by a leverage ratio based on the Companys EBITDA). The Credit Agreement requires
the Company to maintain compliance with certain non-financial and financial covenants such as
minimum net worth, leverage and fixed charge coverage ratios. As of June 30, 2007, the Company was
in compliance with all financial covenants under the Credit Agreement.
The maximum amount of debt outstanding under the Credit Agreement, the weighted average balance
outstanding under the Credit Agreement and the weighted average interest rate on all outstanding
debt for the three (3) month period ended June 30, 2007 was $262,565, $252,110 and 6.6%,
respectively, compared to $266,055, $221,584 and 6.1%, respectively, for the three (3) month period
ended June 30, 2006.
Capital lease obligations The capital lease obligations are primarily for equipment. The lease
agreements have remaining terms ranging from less than one year to five years with interest rates
ranging from 3.83% to 11.73%.
Other - Other debt is comprised of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one to three years with
interest rates ranging from 0.0% to 5.9%.
Unused available borrowings - As of June 30, 2007, the Company had $5,234 outstanding in letters of
credit and $71,266 available under the Credit Agreement.
Note 7: Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts:
The Company enters into foreign currency forward contracts to hedge exposure to variability in
expected fluctuations in foreign currencies. As of June 30, 2007, the Company had open contracts
in Australian and Canadian dollars, Danish krone, Euros, Mexican pesos, Japanese yen, Norwegian
kroner, Pounds sterling, Swedish krona and Swiss francs, which have been designated as cash flow
hedges. These contracts had a notional amount of approximately $67,896 and a fair value of $67,290
and mature within the next twenty-one months.
As of June 30, 2007, an unrecognized gain of $961 ($587 net of tax) on all open foreign currency
forward contracts is included within the Companys Consolidated Balance Sheets as a component of
Other comprehensive income (OCI). This unrecognized gain is expected to be credited to earnings
over the life of the maturing contracts as the hedged forecasted transaction occurs and it is
expected that the gain will be offset by currency losses on the items being hedged.
The Company recognized gains of $96 ($59 net of tax) and $186 into earnings on matured contracts
for the three (3) month periods ended June 30, 2007 and 2006, respectively. There was no hedge
ineffectiveness for the three (3) month periods ended June 30, 2007 and 2006.
Interest Rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate long
term debt, the Company has implemented an interest-rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused
by interest rate volatility. The Companys goal is to manage interest-rate sensitivity by modifying
the re-pricing characteristics of certain balance sheet liabilities so that the net-interest margin
is not, on a material basis, adversely affected by the movements in interest rates.
On July 26, 2006, the Company entered into a five-year interest rate swap (interest rate swap)
which has been used to effectively convert a portion of the Companys variable rate debt to fixed
rate. The interest rate swap has a notional value of $100,000 reducing to $50,000 after three
years and does not qualify for hedge accounting. For the three (3) month period ended June 30,
2007, the Company recognized a gain of $1,308 related to the change in fair value of the interest
rate swap included in Interest expense (income) within the Companys Consolidated Statements of
Income. As of June 30, 2007, the Company has recorded a liability of $426 related to the cumulative
change in fair value of the interest rate swap which is a long-term liability recorded in Other
liabilities within the Companys Consolidated Balance Sheets.
9
Note 8: Acquisitions
Current fiscal year acquisitions:
There have been no acquisitions during the three (3) month period ended June 30, 2007.
Fiscal 2007 acquisitions:
During the fourth quarter of Fiscal 2007, the Company acquired ADS Telecom, Inc. (ADS), a
privately-held company based out of Orlando, FL. ADS has an active customer base which includes
commercial, financial, healthcare and various government agency accounts. In connection with the
ADS acquisition, the Company has made a preliminary allocation to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the
estimated fair market value of customer relationships and non-compete agreements. The Company
estimates that the definite-lived intangibles are to be amortized over a period of five to 20
years.
During third quarter of Fiscal 2007, the Company acquired Nortech Telecommunications, Inc. (NTI), a
privately-held company based out of Chicago, IL. In connection with the NTI acquisition, the
Company has made a preliminary allocation to goodwill and definite-lived intangible assets,
respectively. The definite-lived intangible assets recorded represent the estimated fair market
value of customer relationships and non-compete agreements. The Company estimates that the
definite-lived intangibles are to be amortized over a period of five to 20 years.
The allocation of the purchase price for ADS and NTI is based on 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. The preliminary
allocations of purchase price are dependant upon certain estimates and assumptions, which are
preliminary and may vary from the amounts reported herein. The acquisitions of ADS and NTI, taken
individually, did not have a material impact on the Companys consolidated financial statements.
During the first quarter of Fiscal 2007, the Company acquired the privately-held USA Commercial and
Government and Canadian operations of NextiraOne, LLC (NextiraOne). The acquired operations
service commercial and various government agency clients. In connection with the NextiraOne
acquisition, the Company has allocated $73,995 and $24,100 to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the fair
market value of customer relationships and non-compete agreements. The Company estimates that the
definite-lived intangibles are to be amortized over a period of one to 20 years.
Also, during first quarter Fiscal 2007, the Company acquired Nu-Vision Technologies, Inc. and
Nu-Vision Technologies, LLC (collectively referred to as NUVT). The acquired operations provide
planning, installation, monitoring and maintenance services for voice and data network systems.
NUVT has an active customer base, which includes commercial, education and various government
agency accounts. In connection with the NUVT acquisition, the Company has allocated $15,058 and
$18,601 to goodwill and definite-lived intangible assets, respectively. The definite-lived
intangible assets recorded represent the fair market value of acquired backlog, customer
relationships and non-compete agreements. The Company estimates that the definite-lived intangibles
are to be amortized over a period of one to 20 years.
The results of operations of ADS, NTI, NextiraOne and NUVT are included within the Companys
Consolidated Statements of Income beginning on their respective acquisition dates.
Note 9: Restructuring
In connection with acquisitions during Fiscal 2007, the Company has incurred costs related to
facility consolidations, such as idle facility rent obligations and the write-off of leasehold
improvements, and employee severance in an attempt to right-size the organization and more
appropriately align the expense structure with anticipated revenues and changing market demand for
its solutions and services. The majority of Fiscal 2007 costs were incurred in connection with
acquisitions and as such were included in the purchase price allocation. Employee severance is
generally payable within the next twelve months with certain facility costs extending through
Fiscal 2014.
During the first quarter of Fiscal 2008, the Company incurred $3,591 of costs related to facility
consolidations and employee severance. These costs have been recorded in Selling, general &
administrative expenses in the Companys Consolidated Statements of Income.
10
The following table summarizes the changes to the restructuring reserve during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance |
|
|
Facility Closures |
|
|
Total |
|
|
Balance at March 31, 2007 |
|
$ |
3,006 |
|
|
$ |
16,422 |
|
|
$ |
19,428 |
|
Restructuring charge |
|
|
2,371 |
|
|
|
1,220 |
|
|
|
3,591 |
|
Asset write-downs |
|
|
-- |
|
|
|
(411) |
|
|
|
(411) |
|
Cash expenditures |
|
|
(2,103) |
|
|
|
(1,914) |
|
|
|
(4,017) |
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
3,274 |
|
|
$ |
15,317 |
|
|
$ |
18,591 |
|
|
Of the $18,591 above, $10,009 is classified as a current liability under Other liabilities on the
Companys Consolidated Balance Sheets for the period ended June 30, 2007.
Note 10: Stock-based Compensation
Stock-Based Compensation
The Company has two stock option plans, the 1992 Stock Option Plan, as amended (the Employee
Plan), and the 1992 Director Stock Option Plan, as amended (the Director Plan). As of June 30,
2007, the Employee Plan is authorized to issue stock options and stock appreciation rights (SARs)
for up to 9,200,000 shares of common stock. The Employee Plan provides that options are to be
granted by a committee appointed by the Companys Board of Directors (the Board) to key employees
of the Company; such stock options generally become exercisable in equal amounts over a three-year
period. As of June 30, 2007, the Director Plan is authorized to issue stock options and SARs for up
to 270,000 shares of common stock. The Director Plan provides that options are to be granted by the
Board or a committee appointed by the Board; such options generally become exercisable in equal
amounts over a three-year period. No SARs have been issued under either plan.
During the three (3) month periods ended June 30, 2007 and 2006, the Company recognized non-cash
stock-based compensation expense of $1,716 ($1,084 net of tax) or $0.06 per diluted share and
$3,249 ($2,112 net of tax) or $0.12 per diluted share, respectively, which is recorded in Selling,
general & administrative expense within the Companys Consolidated Statements of Income.
The following table summarizes the Companys stock option activity for the three (3) month period
ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, 2007 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Exercise |
|
Shares in thousands |
|
Shares |
|
|
Price (per share) |
|
|
Outstanding at beginning of period |
|
|
4,621 |
|
|
$ |
38.66 |
|
Granted |
|
|
-- |
|
|
|
-- |
|
Exercised |
|
|
-- |
|
|
|
-- |
|
Forfeited or expired |
|
|
(1,632) |
|
|
|
37.16 |
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,989 |
|
|
$ |
39.47 |
|
Exercisable at end of period |
|
|
2,668 |
|
|
$ |
40.02 |
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
-- |
|
|
The Audit Committee of the Board (the Audit Committee) and other relevant Board committees are
committed to a continued review and implementation of procedural enhancements and remedial actions
in light of the findings of the Audit Committees review of the Companys historical stock option granting practices
as disclosed in Note 3 of the Notes to the Consolidated Financial Statements in the Form 10-K. Consistent with its obligation to act in the best
interests of the Company taking into account all relevant facts and circumstances, the Audit
Committee is continuing to assess the appropriateness of a broad range of possible procedural
enhancements and potential remedial measures in light of the findings of its review.
While the Audit Committee has not completed its consideration of all such steps, procedural
enhancements may include recommendations regarding improved stock option administration procedures
and controls, training and monitoring compliance with those procedures, corporate recordkeeping,
corporate risk assessment, evaluation of the internal compliance environment and other remedial
steps that may be appropriate. Any such procedural enhancements will be recommended by the Audit
Committee to the Board and/or appropriate Board committee for adoption. In advance of action by
the Audit Committee, the Company has implemented additional procedures to its
process for approving stock option grants that are focused on formalized documentation of
appropriate approvals and determination of grant terms to employees.
The Audit Committees ongoing review includes an evaluation of the role of and possible claims or
other remedial actions against current and former Company personnel who may be found to have had
responsibility for identified problems during the period from
1992 to the present (the Review Period). Accordingly, the Audit Committee has begun to address
and is addressing and expects to continue to address issues of individual conduct or
responsibility, including those of the Board, Chief Executive Officers (CEO) and Chief Financial
Officers serving during the Review Period. In connection therewith, based on the findings of the
Audit Committee as to Fred C. Young, the Companys former
11
CEO who resigned on May 20, 2007, the
Audit Committee concluded and recommended to the Board, and the Board determined, that Mr. Young
could have been terminated due to Cause for Termination (as defined in his agreement dated May 11,
2004) at the time Mr. Young resigned as a director and as an officer of the Company on May 20,
2007. In light of that determination and the terms of the agreements with Mr. Young, all
outstanding stock options held by Mr. Young (1,455,402 shares) terminated as of the date of his
resignation.
This event occurred during the first quarter of Fiscal 2008 and the Company has determined that it
should be considered a first quarter of Fiscal 2008 event for accounting purposes. This event had
the following impacts on the Companys consolidated financial statements and related notes for the
three month period ended June 30, 2007: (1) decrease in outstanding stock options of 1,455,402, (2)
immaterial impact on the Diluted earnings per common share computation, (3) a decrease in deferred
tax assets of $4,637 with the offsetting entry of $3,899 to Additional paid-in capital and (4)
additional tax expense impact of approximately $738.
The Audit Committee may recommend additional remedial measures that appropriately address the
issues raised by its findings. Such potential remedial measures may include an evaluation of the
role of and possible claims or other remedial actions against current and former Company personnel
who may be found to have been responsible for identified problems during the Review Period.
The following table summarizes certain information regarding the Companys outstanding stock
options at June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
|
Out- |
|
Remaining |
|
Average |
|
Intrinsic |
|
Exer- |
|
Remaining |
|
Average |
|
Intrinsic |
Range of |
|
standing |
|
Contractual |
|
Exercise |
|
Value |
|
cisable |
|
Contractual |
|
Exercise |
|
Value |
Exercise Prices |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
$19.95 - $26.60
|
|
|
14 |
|
|
|
1.3 |
|
|
$ |
21.94 |
|
|
$ |
272 |
|
|
|
14 |
|
|
|
1.3 |
|
|
$ |
21.94 |
|
|
$ |
272 |
|
$26.60 - $33.25
|
|
|
117 |
|
|
|
3.4 |
|
|
|
29.65 |
|
|
|
1,317 |
|
|
|
117 |
|
|
|
3.4 |
|
|
|
29.65 |
|
|
|
1,317 |
|
$33.25 - $39.90
|
|
|
1,413 |
|
|
|
7.9 |
|
|
|
37.35 |
|
|
|
5,002 |
|
|
|
1,092 |
|
|
|
8.0 |
|
|
|
38.06 |
|
|
|
3,090 |
|
$39.90 - $46.55
|
|
|
1,432 |
|
|
|
4.4 |
|
|
|
42.43 |
|
|
|
178 |
|
|
|
1,432 |
|
|
|
4.4 |
|
|
|
42.43 |
|
|
|
178 |
|
$46.55 - $53.20
|
|
|
9 |
|
|
|
2.2 |
|
|
|
50.60 |
|
|
|
-- |
|
|
|
9 |
|
|
|
2.2 |
|
|
|
50.60 |
|
|
|
-- |
|
$53.20 - $59.85
|
|
|
2 |
|
|
|
2.5 |
|
|
|
55.88 |
|
|
|
-- |
|
|
|
2 |
|
|
|
2.5 |
|
|
|
55.88 |
|
|
|
-- |
|
$59.85 - $66.50
|
|
|
2 |
|
|
|
2.5 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
2 |
|
|
|
2.5 |
|
|
|
63.22 |
|
|
|
-- |
|
|
|
|
|
|
$19.95 - $66.50
|
|
|
2,989 |
|
|
|
6.0 |
|
|
$ |
39.47 |
|
|
$ |
6,769 |
|
|
|
2,668 |
|
|
|
5.8 |
|
|
$ |
40.02 |
|
|
$ |
4,857 |
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on the Companys average stock price (i.e., the average of the open and close prices of the
common stock) on June 30, 2007 of $40.89, which would have been received by the option holders had
all option holders exercised their options as of that date. As of June 30, 2007, there was
approximately $2,257 of total unrecognized pre-tax stock-based compensation expense related to
non-vested stock options granted under the plans which is expected to be recognized over a weighted
average period of 2.3 years.
Note 11: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Net income, as reported |
|
$ |
8,188 |
|
|
$ |
6,813 |
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
17,527 |
|
|
|
17,626 |
|
Effect of dilutive securities from employee stock options |
|
|
112 |
|
|
|
636 |
|
|
| |
|
|
Weighted average common shares outstanding (diluted) |
|
|
17,639 |
|
|
|
18,262 |
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.47 |
|
|
$ |
0.39 |
|
|
|
|
|
|
Dilutive earnings per common share |
|
$ |
0.46 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Weighted average common shares outstanding (diluted) computation is not impacted during any
period where the exercise price of a stock option is greater than the average market price. There
were 2,266,762 and 489,573 non-dilutive stock options outstanding during the three (3) month
periods ended June 30, 2007 and 2006, respectively, that are not included in the corresponding
period Weighted average common shares outstanding (diluted) computation.
12
Note 12: Comprehensive income and Accumulated other comprehensive income (AOCI )
The following table details the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
8,188 |
|
|
$ |
6,813 |
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
2,224 |
|
|
|
6,525 |
|
Net change in fair value of cash flow hedging instruments |
|
|
151 |
|
|
|
(46) |
|
Amounts reclassified into results of operations |
|
|
59 |
|
|
|
(186) |
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
2,434 |
|
|
$ |
6,293 |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
10,622 |
|
|
$ |
13,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of AOCI consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
Foreign currency translation adjustment |
|
$ |
25,576 |
|
|
$ |
23,352 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges |
|
|
587 |
|
|
|
377 |
|
Unrecognized gain on defined benefit pension |
|
|
1,670 |
|
|
|
1,670 |
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
27,833 |
|
|
$ |
25,399 |
|
|
Note 13: Commitments and Contingencies
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the SEC relating to the Companys stock option practices from
January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order of investigation in
connection with this matter, and, on May 29, 2007, the Company received a document subpoena from
the SEC acting pursuant to such order. The Company has cooperated with the SEC in this matter and
intends to continue to do so.
As previously disclosed, the Audit Committee, with the assistance of outside legal counsel, is
conducting an independent review of the Companys historical stock option grant practices and
related accounting for stock option grants. See the Explanatory Note preceding Part I, Item 1 of
the Form 10-K for more information regarding this and related matters.
On September 20, 2006, the Company received formal notice from the Internal Revenue Service (IRS)
regarding its intent to begin an audit of the Companys tax years 2004 and 2005. In connection with
this normal recurring audit, the IRS has requested certain documentation with respect to stock
options for the Companys 2004 and 2005 tax years. The Company has produced various documents
requested by the IRS and is currently in the process of responding to additional documentation
requests.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines, penalties or other costs which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Code, produced
and disseminated false financial statements and SEC filings to the Companys stockholders and to
the market that improperly recorded and accounted for the backdated option grants, concealed the
alleged improper backdating of stock options and obtained substantial benefits from sales of
Company stock while in the possession of material inside information. The complaints seek damages
on behalf of the Company against certain current and former officers and directors and allege
breach of fiduciary duty, unjust enrichment, securities law violations and other claims. The
two lawsuits have been consolidated into a single action as In re Black Box Corporation Derivative
Litigation, Master File No. 2:06-CV-1531-TMH, and plaintiffs filed a consolidated amended complaint
on January 29, 2007. The parties have stipulated that responses by the defendants, including the
Company, are due on or before September 4, 2007. The Company may have indemnification obligations
arising out of this matter to its current and former directors and officers named in this
litigation. The Company has made a claim for such costs under an insurance policy.
13
The Company is, as a normal part of its business operations, a party to legal proceedings in
addition to those described in current and previous filings. Based on the facts currently
available to the Company, management believes the matters described under this caption Litigation
Matters are adequately provided for, covered by insurance, without merit or not probable that an
unfavorable outcome will result.
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. As of June 30, 2007 and March 31, 2007, the
Company has recorded a warranty reserve of $4,667 and $4,214, respectively.
There has been no other significant or unusual activity during Fiscal 2008.
Note 14: Uncertainty in Income Taxes
As discussed in Note 2, the Company adopted FIN 48 on April 1, 2007. As a result of the adoption of
FIN 48, the Company recorded a $5,110 reduction to the beginning balance of Retained earnings
representing the cumulative effect of a change in accounting principle, an increase to current
liabilities of $3,656 recorded within Income taxes and a decrease to non-current assets of $1,454
recorded within Other assets, each of which is reflected within the Companys Consolidated Balance
Sheets. At the adoption date of April 1, 2007, the gross liability for income taxes associated
with uncertain tax positions was $6,974. If the uncertain tax positions are recognized they would
all favorably affect the Companys effective tax rate. The Company includes interest and penalties
related to uncertain tax positions within the Provision for income taxes within the Companys
Consolidated Statements of Income. As of April 1, 2007, the Company has recorded approximately
$806 of interest and penalties related to uncertain tax positions. The Company did not make any
significant adjustments to these amounts during the three (3) month period ended June 30, 2007.
During Fiscal 2007, the IRS commenced examination of the Companys
U.S. federal income tax return, for Fiscal 2004 and Fiscal 2005. The IRS has not yet proposed any
adjustment to the Companys filing positions in connection with this examination. Upon completion
of this examination, it is reasonably possible that the total amount of unrecognized benefits will
change. Any adjustment to the unrecognized tax benefits would impact the effective tax rate. The
Company can not make an estimate of the impact on the effective rate for any potential adjustment
at this time.
Fiscal 2006 and Fiscal 2007 remain open to examination by the IRS. Fiscal 2004 through Fiscal 2007
remain open to examination by state and foreign taxing jurisdictions.
14
Note 15: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on net revenues, operating income and assets by geographic region for the purpose of
making operational decisions and assessing financial performance. Additionally, Management is
presented with and reviews net revenues and gross profit by service type. The accounting policies
of the individual operating segments are the same as those of the Company.
The following table presents financial information about the Companys reportable segments by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
North America |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
210,002 |
|
|
$ |
192,572 |
|
Operating income |
|
|
10,582 |
|
|
|
9,397 |
|
Depreciation |
|
|
2,824 |
|
|
|
2,161 |
|
Amortization |
|
|
2,290 |
|
|
|
1,457 |
|
Segment assets |
|
|
995,426 |
|
|
|
1,031,765 |
|
Europe |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
32,799 |
|
|
$ |
29,345 |
|
Operating income |
|
|
3,948 |
|
|
|
3,143 |
|
Depreciation |
|
|
103 |
|
|
|
119 |
|
Amortization |
|
|
17 |
|
|
|
40 |
|
Segment assets |
|
|
140,833 |
|
|
|
124,252 |
|
All Other |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,490 |
|
|
$ |
8,478 |
|
Operating income |
|
|
1,639 |
|
|
|
1,596 |
|
Depreciation |
|
|
28 |
|
|
|
20 |
|
Amortization |
|
|
11 |
|
|
|
9 |
|
Segment assets |
|
|
18,423 |
|
|
|
15,636 |
|
|
The sum of 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:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Segment assets for North America, Europe and All Other |
|
$ |
1,154,682 |
|
|
$ |
1,171,653 |
|
Corporate eliminations |
|
|
(74,490) |
|
|
|
(78,042) |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
1,080,192 |
|
|
$ |
1,093,611 |
|
|
The following table presents financial information about the Company by service type:
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Data Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,165 |
|
|
$ |
44,531 |
|
Gross Profit |
|
|
14,177 |
|
|
|
13,317 |
|
Voice Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
149,987 |
|
|
$ |
133,639 |
|
Gross Profit |
|
|
50,276 |
|
|
|
45,763 |
|
Hotline Services |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
56,139 |
|
|
$ |
52,225 |
|
Gross Profit |
|
|
26,777 |
|
|
|
26,764 |
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The discussion and analysis for the three (3) month periods ended June 30, 2007 and 2006 as
set forth below in this Item 2 should be read in conjunction with the response to Part 1, Item 1 of
this report and the consolidated financial statements of the Company, including the related notes,
and Managements Discussion and Analysis of Financial Condition and Results of Operations
included in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2007 (the
Form 10-K). All dollar amounts are presented in thousands unless otherwise noted.
The Company
Black Box is the worlds largest dedicated network infrastructure services provider. Black Box
offers one-source network infrastructure services for communication systems. The Companys service
offerings include design, installation, integration, monitoring and maintenance of voice, data and
integrated communication systems. The Companys primary service offering is voice solutions, while
providing premise cabling and other data related services and products. The Company provides
24/7/365 technical support for all of its solutions which encompass all major voice and data
manufacturers as well as 118,000 network infrastructure products that it sells through its catalog
and Internet Web site and its Voice and Data services (collectively referred to as On-Site
services) offices. References herein to Fiscal Year or Fiscal mean the Companys fiscal year
ended March 31 for the year referenced.
Management is presented with and reviews revenues and operating income by geographical segment. In
addition, revenues and gross profit information by service type are provided herein for purposes of
further analysis.
The Company has completed several acquisitions from April 1, 2006 through June 30, 2007 that have a
significant impact on the Companys consolidated financial statements and, more specifically, North
America Voice Services for the periods under review. Fiscal 2007 acquisitions include (i) USA
Commercial and Government and Canadian operations of NextiraOne, LLC (NextiraOne), (ii) Nu-Vision
Technologies, Inc. and Nu-Vision Technologies, LLC (collectively referred to as NUVT), (iii)
Nortech Telecommunications, Inc. (NTI) and (iv) ADS Telecom, Inc. (ADS). The acquisitions
noted above are collectively referred to as the Acquired Companies. The results of operations of
the Acquired Companies are included in the Companys Consolidated Statements of Income beginning on
their respective acquisition dates.
In connection with certain acquisitions, the Company incurs expenses that it excludes when
evaluating the continuing operations of the Company. The following table is included to provide a
schedule of the past acquisition-related expenses during Fiscal 2007 (by quarter).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
2Q07 |
|
|
3Q07 |
|
|
4Q07 |
|
|
Fiscal 2007 |
|
|
Selling General & Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up
depreciation
expense on
acquisitions |
|
$ |
-- |
|
|
$ |
1,191 |
|
|
$ |
713 |
|
|
$ |
742 |
|
|
$ |
2,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
intangible assets
on acquisitions |
|
|
1,433 |
|
|
|
1,894 |
|
|
|
2,621 |
|
|
|
4,127 |
|
|
|
10,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,433 |
|
|
$ |
3,085 |
|
|
$ |
3,334 |
|
|
$ |
4,869 |
|
|
$ |
12,721 |
|
|
The following table is included to provide a schedule of the current and an estimate of future
acquisition-related expenses for Fiscal 2008 (by quarter) based on the acquisition activity through
June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q08 |
|
|
2Q08 |
|
|
3Q08 |
|
|
4Q08 |
|
|
Fiscal 2008 |
|
|
Selling
General & Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up
depreciation
expense on
acquisitions |
|
$ |
659 |
|
|
$ |
496 |
|
|
$ |
439 |
|
|
$ |
440 |
|
|
$ |
2,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
intangible assets
on acquisitions |
|
|
2,269 |
|
|
|
1,307 |
|
|
|
1,307 |
|
|
|
1,286 |
|
|
|
6,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,928 |
|
|
$ |
1,803 |
|
|
$ |
1,746 |
|
|
$ |
1,726 |
|
|
$ |
8,203 |
|
|
16
The following table provides information on revenues and operating income by reportable geographic
segment (North America, Europe and All Other). The table below should be read in conjunction with
the following discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of total |
|
|
|
|
|
|
% of total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
210,002 |
|
|
|
83.2% |
|
|
$ |
192,572 |
|
|
|
83.6% |
|
Europe |
|
|
32,799 |
|
|
|
13.0% |
|
|
|
29,345 |
|
|
|
12.7% |
|
All Other |
|
|
9,490 |
|
|
|
3.8% |
|
|
|
8,478 |
|
|
|
3.7% |
|
|
|
|
|
|
Total |
|
$ |
252,291 |
|
|
|
100% |
|
|
$ |
230,395 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
10,582 |
|
|
|
|
|
|
$ |
9,397 |
|
|
|
|
|
% of North America revenues |
|
|
5.0% |
|
|
|
|
|
|
|
4.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
3,948 |
|
|
|
|
|
|
$ |
3,143 |
|
|
|
|
|
% of Europe revenues |
|
|
12.0% |
|
|
|
|
|
|
|
10.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
$ |
1,639 |
|
|
|
|
|
|
$ |
1,596 |
|
|
|
|
|
% of All Other revenues |
|
|
17.3% |
|
|
|
|
|
|
|
18.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,169 |
|
|
|
6.4% |
|
|
$ |
14,136 |
|
|
|
6.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
8,674 |
|
|
|
|
|
|
$ |
5,797 |
|
|
|
|
|
Europe |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
All Other |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,674 |
|
|
|
3.4% |
|
|
$ |
5,797 |
|
|
|
2.5% |
|
|
The following table provides information on revenues and gross profit by service type (Data
Services, Voice Services and Hotline Services). The table below should be read in conjunction with
the following discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of total |
|
|
|
|
|
|
% of total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
46,165 |
|
|
|
18.3% |
|
|
$ |
44,531 |
|
|
|
19.3% |
|
Voice Services |
|
|
149,987 |
|
|
|
59.4% |
|
|
|
133,639 |
|
|
|
58.0% |
|
Hotline Services |
|
|
56,139 |
|
|
|
22.3% |
|
|
|
52,225 |
|
|
|
22.7% |
|
|
|
|
|
|
Total |
|
$ |
252,291 |
|
|
|
100% |
|
|
$ |
230,395 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
14,177 |
|
|
|
|
|
|
$ |
13,317 |
|
|
|
|
|
% of Data Services revenues |
|
|
30.7% |
|
|
|
|
|
|
|
29.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services |
|
$ |
50,276 |
|
|
|
|
|
|
$ |
45,763 |
|
|
|
|
|
% of Voice Services revenues |
|
|
33.5% |
|
|
|
|
|
|
|
34.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services |
|
$ |
26,777 |
|
|
|
|
|
|
$ |
26,764 |
|
|
|
|
|
% of Hotline Services revenues |
|
|
47.7% |
|
|
|
|
|
|
|
51.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,230 |
|
|
|
36.2% |
|
|
$ |
85,844 |
|
|
|
37.3% |
|
|
The Company has received notification that its distribution agreement with Avaya, Inc. will be
terminated effective September 8, 2007.
17
The Company is in discussions with Avaya concerning the
future business relationship of the parties and the handling of key accounts. The Company is
evaluating the potential financial impact of this event as well as potential business strategies to
minimize such impact. The Company currently anticipates that this impact will not have a material
impact on its Fiscal 2008 operating results.
FIRST QUARTER FISCAL 2008 (1Q08) COMPARED TO FIRST QUARTER FISCAL 2007 (1Q07):
Total Revenues
Total revenues for 1Q08 were $252,291, an increase of 10% compared to total revenues for 1Q07 of
$230,395. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $72,027 and $60,174 for 1Q08 and 1Q07, respectively. Excluding the effects of the
acquisitions and the positive exchange rate impact of $2,392 relative to the U.S. dollar, total
revenues would have increased 4% from $170,221 to $177,872 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 1Q08 were $210,002, an increase of 9% compared to revenues for 1Q07
of $192,572. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $72,027 and $60,174 for 1Q08 and 1Q07, respectively. Excluding the effects of the
acquisitions and the positive exchange rate impact of $106 relative to the U.S. dollar, North
American revenues would have increased 4% from $132,398 to $137,869. The Company believes this
increase is due to the success in the Companys Data, Voice and Hotline (DVH) cross-selling
initiatives.
Europe
Revenues in Europe for 1Q08 were $32,799, an increase of 12% compared to revenues for 1Q07 of
$29,345. Excluding the positive exchange rate impact of $2,207 relative to the U.S. dollar, Europe
revenues would have increased 4% from $29,345 to $30,592. The Company believes the increase is due
to the success in the Companys DVH cross-selling initiatives.
All Other
Revenues for All Other for 1Q08 were $9,490, an increase of 12% compared to revenues for 1Q07 of
$8,478. Excluding the positive exchange rate impact of $79 relative to the U.S. dollar, All Other
revenues would have increased 11% from $8,478 to $9,411.
Revenue by Service Type
Data Services
Revenues from Data Services for 1Q08 were $46,165, an increase of 4% compared to revenues for 1Q07
of $44,531. Excluding the positive exchange rate impact of $934 relative to the U.S. dollar for its
International Data Services, Data Services revenues would have increased 2% from $44,531 to $45,231.
The Company believes the increase in Data Services revenues is due to the success in the Companys
DVH cross-selling initiatives coupled with stable end-user markets.
Voice Services
Revenues from Voice Services for 1Q08 were $149,987, an increase of 12% compared to revenues for
1Q07 of $133,639. The increase was primarily due to the incremental revenue from the Acquired
Companies, which added $72,027 and $60,174 for 1Q08 and 1Q07, respectively. Excluding the effects
of the acquisitions, Voice Services revenues would have increased 6% from $73,465 to $77,960. The
Company believes that the increase in Voice Services revenues is primarily due to the success in
the Companys DVH cross-selling initiatives. There was no exchange rate impact on Voice Services
revenues as all of the Companys Voice Services revenues is denominated in U.S. dollars coupled
with stable end-user markets.
Hotline Services
Revenues from Hotline Services for 1Q08 were $56,139, an increase of 7% compared to revenues for
1Q07 of $52,225. Excluding the positive exchange rate impact of $1,458 relative to the U.S. dollar
for its International Hotline Services, Hotline Services revenues would have increased 5% from
$52,225 to $54,681. The Company believes this increase in Hotline Services revenues is primarily
due to the success in the Companys DVH cross-selling initiatives and increases in web-based sales
coupled with stable end-user markets.
Gross Profit
Gross profit dollars for 1Q08 were $91,230, an increase of 6% compared to gross profit dollars for
1Q07 of $85,844. The Company
believes the increase in gross profit dollars was primarily due to the acquisition of the Acquired
Companies. Gross profit as a percent of revenues for 1Q08 was 36.2%, a decrease of 1.1% compared to
gross profit as a percentage of revenues for 1Q07 of 37.3%. The Company believes the
18
percent
decrease was due primarily to the impact of lower gross profit in its Voice Services segment driven
by the acquisition of NextiraOne and the impact of lower gross profit in its Hotline Services
segment driven by increased product costs and product mix.
Gross profit dollars for Data Services for 1Q08 were $14,177, or 30.7% of revenues, compared to
gross profit dollars for 1Q07 of $13,317, or 29.9% of revenues. Gross profit dollars for Voice
Services for 1Q08 were $50,276, or 33.5% of revenues, compared to gross profit dollars for 1Q07 of
$45,763, or 34.2% of revenues. Gross profit dollars for Hotline Services for 1Q08 were $26,777, or
47.7% of revenues, compared to gross profit dollars for 1Q07 of $26,764, or 51.2% of revenues.
Selling, general & administrative expenses
Selling, general & administrative expenses for 1Q08 were
$72,743, an increase of $2,541 compared to
Selling, general & administrative expenses for 1Q07 of $70,202. Selling, general & administrative
expenses as a percent of revenue for 1Q08 were 28.8% compared to 30.5% for 1Q07. The increase in
Selling, general & administrative expense dollars and decrease in Selling, general & administrative
expenses as a percent of revenue over the prior year was primarily due to increases in
restructuring/integration costs of $2,915 and non-cash asset write-up depreciation expense of $659
partially offset by a decrease in non-cash stock based compensation expense of $1,533.
Intangibles amortization
Intangibles amortization for 1Q08 was $2,318, an increase of $812 compared to Intangibles
amortization for 1Q07 of $1,506. The increase was primarily attributable to the amortization of
intangible assets acquired through the purchase of the Acquired Companies.
Operating income
Operating income for 1Q08 was $16,169, or 6.4% of revenues, an increase of $2,033 compared to
Operating income for 1Q07 of $14,136, or 6.1% of revenues.
Interest Expense, net
Net interest expense for 1Q08 was $3,280, a decrease of $360 compared to net interest expense for
1Q07 of $3,640. The decrease in interest expense is due to a $1,308 gain related to the change in
fair value of the Companys interest rate swap partially offset by an increase in the weighted
average outstanding debt and weighted average interest rate from approximately $221,584 and 6.1%,
respectively, for 1Q07 to approximately $252,110 and 6.6%, respectively, for 1Q08.
Provision for Income Taxes
The tax provision for 1Q08 was $4,768, an effective tax rate of 36.8%. This compares to the tax
provision for 1Q07 of $3,568, an effective tax rate of 34.4%. The tax rate for 1Q08 was higher than
1Q07 due to changes in the overall mix of taxable income among worldwide offices, the loss of the
extraterritorial income deduction for federal income tax purposes and the expected write-off of
deferred tax assets related to book stock option compensation.
Net Income
As a result of the foregoing, net income for 1Q08 was $8,188, or 3.2% of revenues, compared to net
income for 1Q07 of $6,813, or 3.0% of revenues.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 1Q08 was $7,704. Significant factors contributing
to the source of cash were: net income of $8,188 inclusive of non-cash charges of $5,273 and $1,716
for amortization / depreciation expense and stock compensation expense, respectively, a decrease in
net inventory of $3,312 and a decrease in the tax benefit from stock options of $4,404.
Significant factors contributing to a use of cash were, a non-cash charge of $1,308 for the change
in fair market value of interest rate swap, a decrease in the deferred tax provision of
$7,789, an increase in other assets of $1,996 and an increase in accounts payable of $4,519.
Changes in the above accounts are based on average Fiscal 2008 exchange rates.
19
Net cash provided by operating activities during 1Q07 was $12,607. Significant factors contributing
to a source of cash were: net income of $6,813 and decrease in accounts receivable of $11,579.
Significant factors contributing to a use of cash were: increase in net inventory of $1,066 and
increase in estimated earnings in excess of billings on uncompleted contracts of $7,674. Non-cash
items included amortization and depreciation expense and stock compensation expense of $3,806 and
$3,249, respectively. Changes in the above accounts are based on average Fiscal 2007 exchange
rates.
As of June 30, 2007 and 2006, the Company had cash and cash equivalents of $16,295 and $14,360,
respectively, working capital of $120,531 and $100,673, respectively, and a current ratio of 1.54
and 1.41, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Cash Flows from Investing Activities
Net cash used by investing activities during 1Q08 was $4,234. Significant factors contributing to a
use of cash were: $984 for gross capital expenditures and $3,250 for holdbacks and contingent fee
payments related to prior period acquisitions.
Net cash used by investing activities during 1Q07 was $132,004. Significant factors contributing to
a use of cash were: $1,523 for gross capital expenditures and $129,161 to acquire NextiraOne and
NUVT.
Cash Flows from Financing Activities
Net cash used by financing activities during 1Q08 was $4,425. Significant factors contributing to
the cash outflow were $3,373 of net payments on long term debt and $1,052 for the payment of
dividends.
Net cash provided by financing activities during 1Q07 was $123,207. Significant factors
contributing to the cash inflow were $120,753 of net borrowings on long term debt and $3,530 from
the exercise of stock options. Significant uses of cash were $1,055 for the payment of dividends.
Total Debt
Revolving Credit Agreement - On March 28, 2006, the Company entered into the Second Amendment to
the Second Amended and Restated Credit Agreement dated January 24, 2005, as amended February 17,
2005 (collectively, and previously defined as the Credit Agreement) with Citizens Bank of
Pennsylvania, as agent, and a group of lenders. The Credit Agreement expires on March 28, 2011.
Borrowings under the Credit Agreement are permitted up to a maximum amount of $310,000, which
includes up to $15,000 of swing line loans and $25,000 of letters of credit. The Credit Agreement
may be increased by the Company up to an additional $90,000 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 1.25% (determined by a leverage ratio based on the Companys EBITDA). The
Credit Agreement requires the Company to maintain compliance with certain non-financial and
financial covenants such as minimum net worth, leverage and fixed charge coverage ratios. As of
June 30, 2007, the Company was in compliance with all financial covenants under the Credit
Agreement.
As of June 30, 2007, the Company had total debt outstanding of $235,699. Total debt was comprised
of $233,500 outstanding under the credit agreement, $2,162 of obligations under capital leases and
$37 of various other third-party, non-employee loans. The maximum amount of debt outstanding under
the Credit Agreement, the weighted average balance outstanding under the Credit Agreement and the
weighted average interest rate on all outstanding debt for the three (3) month period ended June
30, 2007 was $262,565, $252,110 and 6.6%, respectively, compared to $266,055, $221,584 and 6.1%,
respectively, for the three (3) month period ended June 30, 2006.
Dividends
1Q08 - The Companys Board of Directors (the Board) declared a cash dividend of $0.06 per share
on all outstanding shares of the common stock. The dividend totaled $1,052 and was paid on July 13,
2007 to stockholders of record at the close of business on June 29, 2007.
1Q07 - The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,061 and was paid on July 14, 2006 to stockholders of record at the close of business on June 30,
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.
20
Repurchase of Common Stock
There were no repurchases of common stock during either of the three (3) month periods ended June
30, 2007 and 2006.
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 common stock for the foreseeable future, there can be no assurance as to the
timing or amount of such repurchases.
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys consolidated
financial statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements
within the Form 10-K. Additional significant accounting policies or amendments to
previously-disclosed policies adopted during Fiscal 2008 are disclosed below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be more likely
than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount most
likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Companys Consolidated Statements of
Income.
Impact of Recently Issued Accounting Pronouncements
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits an entity to elect to measure eligible items at
fair value (fair value option) including many financial instruments. The provisions of SFAS 159
are effective for the Company as of April 1, 2008. If the fair value option is elected, the Company
will report unrealized gains and losses on items for which the fair value option has been elected
in earnings at each subsequent reporting date. Upfront costs and fees related to items for which
the fair value option is elected shall be recognized in earnings as incurred and not deferred. The
fair value option may be applied for a single eligible item without electing it for other identical
items, with certain exceptions, and must be applied to the entire eligible item and not to a
portion of the eligible item. The Company is currently evaluating the irrevocable election of the
fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The Company is evaluating the impact of the adoption of
SFAS 157 on the Companys consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 requires that realization of an uncertain income tax position must be
more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest and sets forth new
disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal year
beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as required. The
adoption of FIN 48 resulted in a decrease in accumulated deficit and a decrease in tax liabilities
through a cumulative effect adjustment of $5,110. The adjustment to accumulated deficit is
summarized in the following table. See Note 2 and Note 14 of the Notes to the Consolidated
Financial Statements for further reference.
|
|
|
|
|
|
|
Retained Earnings |
|
|
Balance as of April 1, 2007 |
|
$ |
450,022 |
|
Adjustment for adoption of FIN 48 |
|
|
(5,110) |
|
|
|
|
Balance as currently reported |
|
$ |
444,912 |
|
|
21
Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on Companys 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 effect of
inflation through improved productivity and cost reduction programs as well as price adjustments
within the constraints of market competition.
Cautionary 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, the timing and
final outcome of the ongoing review of the Companys stock option practices, including the related
SEC investigation, shareholder derivative lawsuit, NASDAQ process regarding listing of the common
stock and tax matters, and the impact of any actions that may be required or taken as a result of
such review, SEC investigation, shareholder derivative lawsuit, NASDAQ process or tax matters,
levels of business activity and operating expenses, expenses relating to corporate compliance
requirements, cash flows, global economic and business conditions, successful integration of
acquisitions, including the NextiraOne business, the timing and costs of restructuring programs,
successful marketing of DVH (Data, Voice, Hotline) services, successful implementation of our M&A
program, including identifying appropriate targets, consummating transactions and successfully
integrating the businesses, competition, changes in foreign, political and economic conditions,
fluctuating foreign currencies compared to the U.S. dollar, rapid changes in technologies, client
preferences, the ability of the Company to identify, acquire and operate additional technical
services companies, the Companys arrangements with suppliers of voice equipment and technology and
various other matters, many of which are beyond the Companys control. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and speak only as of the date of this 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest rate volatility and foreign currency exchange rates volatility. Market risk is measured as
the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical
change in interest rates or foreign currency exchange rates over the next year. The Company does
not hold or issue any other financial derivative instruments (other than those specifically noted
below) nor does it engage in speculative trading of financial derivatives.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. As of June 30,
2007, the Company had total long-term obligations under the Credit Agreement of $233,500, including
the current portion of those obligations of $700. Of the outstanding debt, $100,000 was in variable
rate debt that was effectively converted to a fixed rate through an interest rate swap agreement
during Fiscal 2007 and $133,500 was in variable rate obligations. As of June 30, 2007, an
instantaneous 100 basis point increase in the interest rate of the variable rate debt would reduce
the Companys net income in the subsequent fiscal quarter by $329 ($211 net of tax) assuming the
Company employed no intervention strategies.
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest rates.
22
On July 26, 2006, the Company entered into an interest rate swap which has been used to effectively
convert a portion of the Companys variable rate debt to fixed rate. The interest rate swap has a
notional value of $100,000 reducing to $50,000 after three years and does not qualify for hedge
accounting. Changes in the fair market value of the interest rate swap are recorded as an asset or
liability in the Companys Consolidated Balance Sheets and Interest expense (income) in the
Companys Consolidated Statements of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency forward contracts to reduce the foreign currency
exposure related to certain intercompany transactions, primarily trade receivables and loans. All
of the foreign currency forward 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
Other comprehensive income (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 the Companys Consolidated Statements of Income. In the
event it becomes probable that the hedged forecasted transaction will not occur, the ineffective
portion of any gain or loss on the related cash flow hedge would be reclassified from OCI to the
Companys Consolidated Statements of Income.
As of June 30, 2007, the Company had open foreign exchange contracts in Australian and Canadian
dollars, Danish krone, Euros, Mexican pesos, Japanese yen, Norwegian kroner, Pounds sterling,
Swedish krona and Swiss francs. The open contracts have contract rates ranging from 1.1787 to
1.2980 Australian dollar, 1.0958 to 1.1412 Canadian dollar, 5.5010 to 5.7285 Danish krone, 0.7273
to 0.7947 Euro, 0.0924 to 0.0924 Mexican pesos, 105.47 to 110.10 Japanese yen, 5.8992 to 6.3675
Norwegian kroner, 0.4984 to 0.5380 Pounds sterling, 6.1960 to 7.0579 Swedish krona and 1.1930 to
1.2275 Swiss franc, all per U.S. dollar. The total open contracts had a notional amount of
approximately $67,896, have a fair value of $67,290 and will expire within twenty-one months.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q (Form 10-Q), an
evaluation was performed, under the supervision and with the participation of Company management,
including the Chief Executive Officer (CEO) and 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 Exchange
Act), as of June 30, 2007. Based on that evaluation, management, including the CEO and the CFO,
has concluded that, as of the end of the period covered by this 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.
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
As of March 31, 2007, based on the conclusions of the Board, related to the findings of the review
of the Audit Committee of the Board (the Audit Committee) of the Companys historical stock
option practices, a material weakness existed due to the potential for management override of
controls. The material weakness no longer exists as of the date of this filing since the member of the Companys management referenced in the Audit Committees findings is no longer employed by the Company. Management has and will
continue to adopt all recommendations from
the Board and Audit Committee related to this matter.
There have been no other significant changes in the Companys internal controls or in other factors
which could significantly affect internal controls subsequent to the date the Companys management
carried out its evaluation.
23
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the SEC relating to the Companys stock option practices from
January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order of investigation in
connection with this matter, and, on May 29, 2007, the Company received a document subpoena from
the SEC acting pursuant to such order. The Company has cooperated with the SEC in this matter and
intends to continue to do so.
As previously disclosed, the Audit Committee, with the
assistance of outside legal counsel, is conducting an independent review of the Companys
historical stock option grant practices and related accounting for stock option grants. See the
Explanatory Note preceding Part I, Item 1 of the Form 10-K for more information regarding this
and related matters.
On September 20, 2006, the Company received formal notice from the Internal Revenue Service (IRS)
regarding its intent to begin an audit of the Companys tax years 2004 and 2005. In connection with
this normal recurring audit, the IRS has requested certain documentation with respect to stock
options for the Companys 2004 and 2005 tax years. The Company has produced various documents
requested by the IRS and is currently in the process of responding to additional documentation
requests.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines or penalties which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Code, produced
and disseminated false financial statements and SEC filings to the Companys stockholders and to
the market that improperly recorded and accounted for the backdated option grants, concealed the
alleged improper backdating of stock options and obtained substantial benefits from sales of
Company stock while in the possession of material inside information. The complaints seek damages
on behalf of the Company against certain current and former officers and directors and allege
breach of fiduciary duty, unjust enrichment, securities law violations and other claims. The two
lawsuits have been consolidated into a single action as In re Black Box Corporation Derivative
Litigation, Master File No. 2:06-CV-1531-TMH, and plaintiffs filed a consolidated amended complaint
on January 29, 2007. The parties have stipulated that responses by the defendants, including the
Company, are due on or before September 4, 2007. The Company may have indemnification obligations
arising out of this matter to its current and former directors and officers named in this
litigation. The Company has made a claim for such costs under an insurance policy.
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints
arising out of the normal course of business.
Based on the facts currently available to the Company, management believes the matters described
under this caption Litigation Matters are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
24
Item 6. Exhibits.
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|
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Exhibit |
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|
Number |
|
Description |
|
|
|
10.1
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1992 Stock Option Plan, as amended through August 9, 2007 (1) |
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10.2
|
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1992 Director Stock Option Plan, as amended through August 9, 2007 (1) |
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|
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31.1
|
|
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) |
(1) Filed herewith.
25
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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|
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BLACK BOX CORPORATION |
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|
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|
|
|
|
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Dated: August 16, 2007 |
|
|
|
|
|
|
|
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By:
|
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/s/ Michael McAndrew
Michael McAndrew, Vice President,
|
|
|
|
|
|
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Chief Financial Officer, Treasurer, Secretary
and Principal Accounting Officer |
|
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26
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
1992 Stock Option Plan, as amended through August 9, 2007 (1) |
|
|
|
10.2
|
|
1992 Director Stock Option Plan, as amended through August 9, 2007 (1) |
|
|
|
31.1
|
|
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) |
(1) Filed herewith.