Black Box 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 July 1, 2006
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
(State or other jurisdiction of incorporation or organization)
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95-3086563
(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
(Address of principal executive offices)
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15055
(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 ¨ 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 8, 2006, there were 17,680,303 shares of Common Stock, par value $.001, outstanding.
BLACK BOX CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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July 1, 2006 |
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March 31, 2006 |
In thousands, except par value |
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Unaudited |
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Assets |
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Cash and cash equivalents |
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$ |
14,360 |
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$ |
11,207 |
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Accounts receivable, net of allowance for doubtful accounts of
$15,884 and $9,517 |
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172,315 |
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116,713 |
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Lease receivables |
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1,071 |
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512 |
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Inventories, net |
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68,243 |
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53,926 |
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Costs and estimated earnings in excess of billings on
uncompleted contracts |
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55,400 |
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23,803 |
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Deferred tax asset |
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8,873 |
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8,973 |
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Net current assets of discontinued operations |
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404 |
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467 |
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Other current assets |
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27,187 |
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15,523 |
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Total current assets |
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347,853 |
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231,124 |
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Property, plant and equipment, net |
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39,029 |
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35,124 |
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Goodwill, net |
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593,188 |
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468,724 |
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Customer relationships, net |
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54,036 |
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24,657 |
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Other intangibles, net |
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35,471 |
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30,783 |
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Lease receivables, net of current portion |
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987 |
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Deferred tax asset |
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3,189 |
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4,231 |
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Other assets |
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3,982 |
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5,091 |
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Total assets |
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$ |
1,077,735 |
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$ |
799,734 |
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Liabilities |
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Current maturities of long-term debt |
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$ |
704 |
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$ |
1,049 |
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Current maturities of discounted lease rentals |
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9 |
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30 |
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Accounts payable |
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73,753 |
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44,943 |
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Billings in excess of costs and estimated earnings on
uncompleted contracts |
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15,483 |
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8,648 |
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Deferred revenue |
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53,365 |
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22,211 |
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Accrued liabilities: |
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Compensation and benefits |
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25,644 |
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13,954 |
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Restructuring reserve |
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16,090 |
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3,292 |
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Other liabilities |
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52,245 |
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27,817 |
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Income taxes |
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6,300 |
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5,924 |
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Total current liabilities |
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243,593 |
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127,868 |
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Long-term debt |
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243,886 |
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122,673 |
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Restructuring reserve |
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14,646 |
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7,406 |
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Other liabilities |
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16,863 |
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887 |
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Stockholders Equity |
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Preferred stock authorized 5,000, par value $1.00, none issued |
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Common stock authorized 100,000, par value $.001, 17,680 and
17,593 shares outstanding |
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25 |
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25 |
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Additional paid-in capital |
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367,618 |
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362,810 |
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Retained earnings |
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468,599 |
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461,853 |
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Treasury stock, at cost, 6,935 and 6,935 shares |
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(296,824 |
) |
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(296,824 |
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Accumulated other comprehensive income |
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19,329 |
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13,036 |
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Total stockholders equity |
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558,747 |
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540,900 |
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Total liabilities and stockholders equity |
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$ |
1,077,735 |
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$ |
799,734 |
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See Notes to Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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In thousands, except per share amounts |
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Three months ended |
Unaudited |
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July 1, 2006 |
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July 2, 2005 |
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Revenues |
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Hotline products |
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$ |
52,225 |
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$ |
53,452 |
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On-site services |
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178,170 |
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125,830 |
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Total |
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230,395 |
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179,282 |
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Cost of sales |
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Hotline products |
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25,461 |
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25,874 |
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On-site services |
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119,090 |
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82,468 |
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Total |
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144,551 |
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108,342 |
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Gross profit |
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85,844 |
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70,940 |
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Selling, general and administrative
expenses |
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68,573 |
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50,920 |
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Restructuring and other charges |
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5,290 |
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Intangibles amortization |
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1,506 |
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1,558 |
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Operating income |
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15,765 |
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13,172 |
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Interest expense, net |
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3,640 |
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1,959 |
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Other expense, net |
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115 |
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(75 |
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Income before provision for income taxes |
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12,010 |
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11,288 |
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Provision for income taxes |
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4,203 |
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3,894 |
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Net income |
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$ |
7,807 |
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$ |
7,394 |
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Earnings per common share |
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Basic |
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$ |
0.44 |
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$ |
0.44 |
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Diluted |
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$ |
0.43 |
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$ |
0.43 |
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Weighted average common shares outstanding |
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Basic |
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17,626 |
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16,845 |
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Diluted |
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18,262 |
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17,042 |
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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 Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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In thousands |
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Three months ended |
Unaudited |
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July 1, 2006 |
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July 2, 2005 |
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Operating Activities |
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Net income |
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$ |
7,807 |
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$ |
7,394 |
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Adjustments to reconcile net income to cash provided
by operating activities: |
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Depreciation and amortization |
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3,806 |
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3,791 |
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Deferred tax provision/(benefit) |
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1,248 |
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(2,493 |
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Stock compensation expense |
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1,620 |
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Tax impact from exercised options |
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342 |
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(31 |
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Changes in operating assets and liabilities (net of acquisitions): |
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Accounts receivable, net |
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11,218 |
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4,785 |
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Inventories, net |
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(1,066 |
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5,032 |
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Other current assets |
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(3,111 |
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(7,371 |
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Proceeds from lease contracts |
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312 |
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735 |
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Accounts payable and accrued liabilities |
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(9,569 |
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(1,039 |
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Net cash provided by operating activities |
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12,607 |
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10,803 |
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Investing Activities |
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Capital expenditures |
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(1,523 |
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(492 |
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Capital disposals |
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30 |
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813 |
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Acquisition of businesses, net of cash acquired |
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(129,161 |
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(13,492 |
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Prior merger-related (payments)/recoveries |
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(1,350 |
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44 |
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Net cash used in investing activities |
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(132,004 |
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(13,127 |
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Financing Activities |
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Repayment of borrowings |
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(73,769 |
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(53,177 |
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Proceeds from borrowings |
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194,522 |
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56,249 |
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Repayments on discounted lease rentals |
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(21 |
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(423 |
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Proceeds from the exercise of options |
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3,530 |
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136 |
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Payment of dividends |
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(1,055 |
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(1,011 |
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Net cash provided by financing activities |
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123,207 |
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1,774 |
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Foreign currency exchange impact on cash |
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(657 |
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(34 |
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Increase/(decrease) in cash and cash equivalents |
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3,153 |
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(584 |
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Cash and cash equivalents at beginning of year |
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11,207 |
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11,592 |
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Cash and cash equivalents at end of year |
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$ |
14,360 |
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$ |
11,008 |
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Supplemental Cash Flow: |
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Cash paid for interest |
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$ |
2,601 |
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$ |
2,140 |
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Cash paid for income taxes |
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2,685 |
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1,240 |
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Non-cash financing activities: |
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Dividends payable |
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1,061 |
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1,011 |
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Capital leases |
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109 |
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390 |
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See Notes to Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
Black Box Corporation (the Company) believes that these consolidated financial statements reflect
all normal, recurring adjustments needed to present fairly the Companys results for the interim
periods presented. The results for interim periods may not be indicative of the results of
operations for any other interim period or for the full year.
These financial statements should be read in conjunction with the financial statements and notes
thereto included in the Companys most recent Annual Report on Form 10-K as filed with the
Securities and Exchange Commission (SEC) for the fiscal year ended March 31, 2006.
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes as of June 30, 2006 and 2005 were July 1, 2006 and July 2, 2005. References to Fiscal
Year or Fiscal mean the Companys fiscal year ended March 31 for the year referenced.
Note 2: Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements include allowances for
doubtful accounts receivable, sales returns, net realizable value of inventories, loss
contingencies, warranty reserves and intangible assets. Actual results could differ from those
estimates. Management believes the estimates made are reasonable.
Stock-Based Compensation
Stock options are granted to certain employees and members of the Companys Board of Directors at
the fair market value of the Companys stock on the date of the grant. On April 1, 2006, the
Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated fair values. SFAS
123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in Fiscal 2007.
6
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
grant-date using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in the Companys
Consolidated Statements of Income. Prior to the adoption of SFAS 123(R), the Company accounted for
share-based awards to employees and directors using the intrinsic value method in accordance with
APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Under the intrinsic value method, no share-based compensation expense related to stock options had
been recognized in the Companys Consolidated Financial Statements because the exercise price of
the Companys stock options granted to employees and directors equaled the fair market value of the
underlying stock at the grant-date.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires
the application of the accounting standard as of April 1, 2006, the first day of the Companys
fiscal year 2007. The Companys Consolidated Financial Statements as of and for the three months
ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Companys Consolidated Financial Statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation
expense recognized under SFAS 123(R) for the three months ended June 30, 2006 was $1,620 ($1,053
net of tax), or approximately $0.06 per diluted share and was recorded to Selling, General and
Administrative expense. There was no share-based compensation expense recognized during the three
months ended June 30, 2005. The incremental fair value of each option grant is estimated on the
date of the grant using the Black-Scholes options pricing model. The model requires the use of
various assumptions. The fair value of grants issued during the first quarter of Fiscal 2007 was
estimated on the grant-date with the following weighted average assumptions:
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1Q07 |
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1Q06 |
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Expected life (in years) |
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5.7 |
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5.1 |
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Risk free interest rate |
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3.66 |
% |
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3.89 |
% |
Annual forfeiture rate |
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1.54 |
% |
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2.27 |
% |
Volatility |
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43.21 |
% |
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59.13 |
% |
Dividend yield |
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|
0.60 |
% |
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|
0.70 |
% |
|
The Company calculates expected volatility based on historical volatility of its common stock,
par value $.001 per share (the Common Stock). The dividend yield assumption is based on the
Companys historical and projected dividend payouts. The risk-free interest rate assumption is
based upon observed interest rates appropriate for the term of the Companys employee stock
options. The annual forfeiture rate and expected holding period assumptions were estimated based
on historical experience.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods
in order to conform to the Fiscal 2007 first quarter (fiscal quarter ending June 30, 2006)
presentation.
7
Recent Accounting Pronouncements
Accounting
for Income Taxes
In July 2006, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48). This Interpretation 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. The Interpretation 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 plans
to adopt the Interpretation as of April 1, 2007 as required. The Interpretation is currently being
evaluated by the Company for its full impact and at this time, the Company believes it has properly
and adequately provided for all income tax positions and therefore expects minimal impact from
adopting the Interpretation.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154).
This Statement replaces APB No. 20 Accounting Changes cumulative effect accounting with
accounting treatment based on retroactive restatement of comparative financials statements. It
applies to all voluntary changes in accounting principle and defines retrospective application to
differentiate it from restatements due to incorrect accounting. The provisions of this Statement
are effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Companys adoption of SFAS 154 had no impact on its financial position,
results of operations or cash flows.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations
(FIN 47). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS
No. 143, Accounting for Asset Retirement Obligations, which refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement of the liability
when sufficient information exists. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. There was no impact to the Company upon adoption of FIN 47.
Segments
In February 2005, the FASB issued Emerging Issues Task Force (EITF) No. 04-10, Determining
Whether to Aggregate Segments That Do Not Meet the Quantitative Thresholds (EITF 04-10). This
Statement clarifies the aggregation criteria of operating segments as defined in SFAS 131 (as
defined below in Note 14 of the Notes to Consolidated Financial Statements). The effective date of
this Statement is for fiscal years ending after September 15, 2005. The Company believes that its
current segment reporting complies with EITF 04-10.
8
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) is a revision of SFAS 123,
supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires that
companies recognize all share-based payments to employees, including grants of employee stock
options, in the financial statements. The recognized cost will be based on the fair value of the
equity or liability instruments issued. Pro forma disclosure of this cost is no longer an
alternative under SFAS 123(R). The Company adopted SFAS 123(R) as of
April 1, 2006, the first day
of the Companys Fiscal Year 2007, using the modified prospective transition method. This
transition method requires compensation cost to be recognized for all share-based payments granted
after the date of adoption and for all unvested awards existing on the date of adoption. The
Companys Consolidated Financial Statements as of and for the three months ended June 30, 2006
reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method,
the Companys Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). However, had the Company adopted SFAS
123(R) in prior periods, the impact would have approximated the amounts in its disclosure of pro
forma net income and earnings per share in Note 13 of the Notes to Consolidated Financial
Statements.
The impact on future reporting periods of adopting SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as required under past standards. This
requirement will reduce net operating cash flows and increase net financing cash flows in future
reporting periods. The Company cannot estimate what those amounts will be in the future because
they are dependant on, among other things, when employees exercise stock options. The amount of
operating cash flows recognized for such excess tax deductions was $3,200, $3,472 and $6,789 during
Fiscal 2006, 2005 and 2004, respectively.
Note 3: Inventories
Inventory balances, net of reserves for excess and obsolete inventories:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
March 31, 2006 |
|
Raw materials |
|
$ |
1,516 |
|
|
$ |
1,426 |
|
Finished goods |
|
|
92,438 |
|
|
|
66,787 |
|
|
Subtotal |
|
|
93,954 |
|
|
|
68,213 |
|
Excess and obsolete inventory reserves |
|
|
(25,711 |
) |
|
|
(14,287 |
) |
|
Inventory, net |
|
$ |
68,243 |
|
|
$ |
53,926 |
|
|
Note 4: Goodwill and Other Intangible Assets
As required by SFAS No. 142 Goodwill and Other Intangible Assets, goodwill and intangible assets
with indefinite useful lives are not amortized. Also, the Company is required to perform an
impairment test annually, or as often as impairment indicators are present. The Companys policy
is to evaluate its non-amortizable intangible assets for impairment during the third quarter of
each fiscal year. The Company performed the most recent test during the third quarter of Fiscal
2006, and concluded that no impairment existed. The Companys only intangibles, as identified in
SFAS No. 141 Business Combinations (SFAS 141), other than goodwill, are its trademarks,
non-compete agreements, customer relationships and acquired backlog.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
Europe |
|
All Other |
|
Total |
|
Balance as of March 31, 2006 |
|
$ |
400,998 |
|
|
$ |
65,684 |
|
|
$ |
2,042 |
|
|
$ |
468,724 |
|
Currency translation |
|
|
29 |
|
|
|
4,110 |
|
|
|
(30 |
) |
|
|
4,109 |
|
Goodwill on businesses acquired |
|
|
120,355 |
|
|
|
|
|
|
|
|
|
|
|
120,355 |
|
Actual earnout payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
521,382 |
|
|
$ |
69,794 |
|
|
$ |
2,012 |
|
|
$ |
593,188 |
|
|
At June 30, 2006, certain merger agreements provided for contingent payments of up to $4,588.
If future operating performance goals are met, goodwill will be adjusted for the amount of the
contingent payments.
The Companys intangible assets are comprised of the appraised fair market values of employee
non-compete contracts, backlog and customer relationships obtained through business acquisitions.
The Company has the following definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
March 31, 2006 |
|
|
Gross |
|
|
|
|
|
Net |
|
Gross |
|
|
|
|
|
Net |
|
|
Carrying |
|
Accum. |
|
Carrying |
|
Carrying |
|
Accum. |
|
Carrying |
|
|
Amount |
|
Amort. |
|
Amount |
|
Amount |
|
Amort. |
|
Amount |
|
Non-compete agreements |
|
$ |
7,209 |
|
|
$ |
2,227 |
|
|
$ |
4,982 |
|
|
$ |
4,894 |
|
|
$ |
1,851 |
|
|
$ |
3,043 |
|
Customer relationships |
|
|
55,689 |
|
|
|
1,653 |
|
|
|
54,036 |
|
|
|
25,654 |
|
|
|
997 |
|
|
|
24,657 |
|
Acquired backlog |
|
|
7,239 |
|
|
|
4,489 |
|
|
|
2,750 |
|
|
|
3,935 |
|
|
|
3,934 |
|
|
|
1 |
|
|
Total |
|
$ |
70,137 |
|
|
$ |
8,369 |
|
|
$ |
61,768 |
|
|
$ |
34,483 |
|
|
$ |
6,782 |
|
|
$ |
27,701 |
|
|
Intangible asset amortization is computed using the straight-line method based upon the
estimated useful lives of the respective assets, which range from one to 20 years.
Intangible asset amortization expense for the three months ended June 30, 2006 and 2005 was $1,506
and $1,558, respectively. The Company acquired definite-lived intangibles from the completion of
two acquisitions during the first quarter of Fiscal 2007 (see Note 9). The estimated
definite-lived intangibles recorded of $32,416 were based on a preliminary allocation pending
completion of third party valuation, which is expected to be completed during the second quarter of
Fiscal 2007. The Company recorded amortization expense of $838 during the three months ended June 30, 2006 for these definite-lived assets.
Excluding the newly acquired definite-lived intangibles, the Companys estimated amortization
expense for fiscal years ending March 31 is as follows:
|
|
|
|
|
Years Ending March 31, |
|
2007 |
|
$ |
2,135 |
|
2008 |
|
|
2,097 |
|
2009 |
|
|
1,953 |
|
2010 |
|
|
1,903 |
|
2011 |
|
|
995 |
|
Thereafter |
|
|
18,618 |
|
|
|
|
$ |
27,701 |
|
|
Intangible assets not subject to amortization consist solely of the Companys trademark
portfolio. The net carrying amount was $27,739 at June 30, 2006 and March 31, 2006.
10
The changes in the carrying amount of goodwill and intangible assets, net of accumulated
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
Non-Competes and |
|
Customer |
|
|
|
|
June 30, 2006 |
|
Trademarks |
|
Backlog |
|
Relationships |
|
Goodwill |
|
Total |
|
Balance at beginning of period |
|
$ |
27,739 |
|
|
$ |
3,044 |
|
|
$ |
24,657 |
|
|
$ |
468,724 |
|
|
$ |
524,164 |
|
Change in net intangible assets
during the period related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
|
|
|
|
|
(850 |
) |
|
|
(656 |
) |
|
|
|
|
|
|
(1,506 |
) |
Currency translation |
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
4,109 |
|
|
|
4,165 |
|
Acquisitions (Note 9) |
|
|
|
|
|
|
5,482 |
|
|
|
30,035 |
|
|
|
120,355 |
|
|
|
155,872 |
|
|
Balance at end of period |
|
$ |
27,739 |
|
|
$ |
7,732 |
|
|
$ |
54,036 |
|
|
$ |
593,188 |
|
|
$ |
682,695 |
|
|
Note 5: Indebtedness
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
March 31, 2006 |
|
Revolving credit agreement |
|
$ |
242,565 |
|
|
$ |
121,303 |
|
Capital lease obligations |
|
|
1,826 |
|
|
|
1,891 |
|
Other |
|
|
199 |
|
|
|
528 |
|
|
Total debt |
|
|
244,590 |
|
|
|
123,722 |
|
Less: current portion |
|
|
(704 |
) |
|
|
(1,049 |
) |
|
Long-term debt |
|
$ |
243,886 |
|
|
$ |
122,673 |
|
|
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 on
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.
During the three months ended June 30, 2006, the Company increased net borrowings under the Credit
Agreement by approximately $121,262, primarily to fund acquisitions (see Note 9). During the three
months ended June 30, 2006, the maximum amount and weighted average balance outstanding under the
Credit Agreement were $266,055 and $221,584, respectively. As of June 30, 2006, the Company had
$3,065 outstanding in letters of credit and $64,370 available under the Credit Agreement. The
weighted average interest rate on all outstanding debt during the three months ended June 30, 2006
and June 30, 2005 was approximately 6.06% and 4.05%, respectively. At June 30, 2006, the Company
was in compliance with all required covenants under the Credit Agreement.
The capital lease obligations are primarily for facilities and equipment. The lease agreements
have remaining terms ranging from less than one year to four years with interest rates ranging from
3.83% to 10.83%.
Other debt is composed of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one year to five years
with interest rates ranging from 0% to 7.1%.
11
Note 6: Derivative Instruments and Hedging Activities
The Company enters into derivative instruments to hedge exposure to variability in expected
fluctuations in foreign currencies. All of the Companys derivatives have been designated and
qualify as cash flow hedges. There was no hedge ineffectiveness during the three months ended June
30, 2006.
At June 30, 2006, the Company had open contracts in Australian and Canadian dollar, Danish krone,
Euro, Japanese yen, Norwegian kroner, Pound sterling, Swedish krona and Swiss franc. These
contracts had a notional amount of approximately $63,129 and a fair value of $62,777 and mature
within the next thirty-three months.
For the three months ended June 30, 2006, the Company recognized in earnings approximately $186 in
net gains on matured contracts. As of June 30, 2006, a gain of $910 was included in other
comprehensive income (loss) (OCI). This gain is expected to be credited to earnings over the
life of the maturing contracts as the hedged transactions occur and it is expected that the gain
will be offset by currency losses on the items being hedged.
Subsequent to June 30, 2006, the Company entered into an interest rate swap agreement with a
notional value of $100,000, the effect of which will be to effectively convert a portion of the
variable interest rate-based debt to a fixed rate portion.
Note 7: Earnings Per Share
The following table details this calculation for the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
Net income, as reported |
|
$ |
7,807 |
|
|
$ |
7,394 |
|
|
|
|
|
Weighted average shares outstanding |
|
|
17,626 |
|
|
|
16,845 |
|
|
Effect of dilutive securities from employee stock options |
|
|
636 |
|
|
|
197 |
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
18,262 |
|
|
|
17,042 |
|
|
|
|
|
Basic earnings per share |
|
$ |
0.44 |
|
|
$ |
0.44 |
|
Dilutive earnings per share |
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
There is no impact to the weighted average share calculations during any period where the
exercise price of a stock option is greater than the average market price during the same period.
There were 489,573 and 2,867,000 non-dilutive options outstanding during the three months ended June
30, 2006 and 2005 respectively that are not included in the above calculation.
12
Note 8: Comprehensive Income and Stockholders Equity
Comprehensive income for the three months ended June 30, 2006 and 2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
Net income |
|
$ |
7,807 |
|
|
$ |
7,394 |
|
Other
comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
6,525 |
|
|
|
(9,764 |
) |
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired derivatives |
|
|
(232 |
) |
|
|
158 |
|
|
Comprehensive
income (loss) |
|
$ |
14,100 |
|
|
$ |
(2,212 |
) |
|
The components of accumulated other comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
March 31, 2006 |
|
Foreign currency translation adjustment |
|
$ |
19,561 |
|
|
$ |
12,041 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
(232 |
) |
|
|
995 |
|
|
Total accumulated other comprehensive income |
|
$ |
19,329 |
|
|
$ |
13,036 |
|
|
During first quarter of Fiscal 2007, additional paid-in-capital increased $4,808. The
increase was comprised of $1,620 in stock compensation expense plus $3,530 less the tax benefit of
$342 from the exercise of 87,265 stock options.
Note 9: Acquisitions
During the first quarter of Fiscal 2007, the Company acquired the USA Commercial and Government and
Canadian operations of NextiraOne, LLC (NextiraOne).
The following table summarizes the fair value of the NextiraOne assets acquired and liabilities
assumed at the date of acquisition.
|
|
|
|
|
|
|
At April 30, 2006 |
|
Current assets, primarily consisting of accounts receivable and
inventories |
|
$ |
87,562 |
|
Property, plant and equipment |
|
|
4,434 |
|
Other non-current assets |
|
|
3,208 |
|
Intangible assets |
|
|
19,743 |
|
Goodwill |
|
|
102,776 |
|
|
Total assets acquired |
|
$ |
217,723 |
|
Current liabilities, primarily consisting of deferred revenue, restructuring
reserve and accrued expenses |
|
|
100,700 |
|
Other non-current liabilities, primarily consisting of restructuring reserve |
|
|
28,250 |
|
|
Net assets acquired |
|
$ |
88,773 |
|
|
|
|
|
|
|
The amounts assigned to intangible assets are shown below: |
|
|
|
|
|
|
|
|
|
|
Backlog |
|
$ |
3,300 |
|
Customer relationships and
contracts |
|
|
16,443 |
|
|
Total intangible assets |
|
$ |
19,743 |
|
|
13
The amortization period is estimated to be one year for backlog and 20 years for customer
relationships and contracts.
The
Company obtained various contractual obligations in the form of
operating leases for facilities and vehicles as part of the NextiraOne
acquisition. The following table summarizes those obligations as of
June 30, 2006, and are in addition to the contractual obligations previously
disclosed in the Companys Annual Report on Form 10-K dated
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
More than 5 years |
|
Operating
lease obligations |
|
41,612 |
|
15,872 |
|
21,517 |
|
4,223 |
|
|
|
The
transaction resulted in $102,776 of goodwill. The Company paid a premium for NextiraOne in
order to further expand its operational footprint in the voice and data technology markets. In
addition, the purchase increased the Companys solutions offerings, providing for a stronger
worldwide technical services partner for its collective clients.
The
Company paid a cash total of $97,305 for all outstanding interest in
NextiraOne. This amount included an estimate for the equity book
value (total assets less total liabilities, as adjusted by the
parties for certain items) as of the closing date. The actual equity
book value adjustment is expected to be confirmed within the next two quarters,
at which time the final purchase price will be determined. The cash
total above has been reflected on the Companys Consolidated
Statements of Cash Flows as an Investing Activity in the first
quarter of Fiscal 2007.
As of the
first quarter of Fiscal 2007, the Company has included an equity book
value adjustment of $10,535. This amount is included in Other Current
Assets of $27,187 on the Companys Consolidated Balance Sheet as
of June 30, 2006 as a receivable from the seller and is
considered collectable.
As part of
the purchase price paid, $42,143 (Escrow Amount) was
allocated to escrow accounts, which include a general holdback and specifically set aside
funds to satisfy defined items including: litigation matters,
accounts receivable matters, and vendor and leasing
disputes. These amounts will be paid from time to time based on the
terms set forth in the agreement. The Escrow Amount has been
reflected on the Companys Consolidated Statements of Cash Flows
as an Investing Activity in the first quarter of Fiscal 2007.
After consummation of the acquisition, the Company began to integrate NextiraOne products,
employees and facilities with its own. In connection with these integration actions, the Company
incurred severance costs of $8,694 for the separation of approximately 250 employees. In addition,
the Company incurred integration costs for facility consolidations of $15,767. These costs were
properly included in the purchase price allocation for NextiraOne, in accordance with the SFAS 141.
The majority of the severance costs will be paid in Fiscal 2007 with certain facility costs
extending through Fiscal 2014.
Also, during the first quarter of Fiscal 2007, the Company acquired Nu-Vision Technologies, Inc.
and Nu-Vision Technologies, LLC (collectively referred to as NUVT). In connection with the NUVT
acquisition, the Company has prepared preliminary allocations of goodwill and definite-lived
intangible assets of $20,682 and $12,673, respectively. The definite-lived intangible assets
recorded represent the estimated 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 allocation of the purchase price of these acquisitions is based upon preliminary estimates of
the fair values of certain assets acquired and liabilities assumed as of the date of the
acquisition. Management, with the assistance of independent valuation specialists, is currently
assessing the fair values of the tangible and intangible assets acquired and liabilities assumed.
This preliminary allocation of the purchase price is dependant upon certain estimates and
assumptions, which are preliminary and may vary from the amounts herein.
The acquisitions contributed on-site services revenues of approximately $60,158 and are included in
the first quarter of Fiscal 2007 results.
14
The following unaudited pro forma summary presents the Companys results of operations as if the
acquisitions of NextiraOne and NUVT had occurred on April, 1 2005 and does not purport to represent
what the Companys results of operations would have been had the acquisitions occurred on such date
or at the beginning of the period indicated, or to project the Companys results of operations for
any future date or period, or to be a fair reflection of the assets
purchased at the date of acquisition. The pro forma results of
operations exclude the impact of nonrecurring or extraordinary adjustments, together with related income tax effects.
These pro forma results of operations do not include the effects of cost synergies and one-time
nonrecurring transactions associated with the acquisition.
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, |
|
|
2006 |
|
2005 |
|
Pro forma revenue |
|
$259,903 |
|
$304,568 |
Pro forma income from
operations, net of tax |
|
10,608 |
|
12,115 |
Pro forma
per share income from operations, net of tax: |
|
|
|
|
|
|
|
|
Basic |
|
$0.60 |
|
$0.72 |
Diluted |
|
$0.58 |
|
$0.71 |
|
During the first quarter of Fiscal 2006, the Company acquired 100% of the issued and
outstanding equity interests of Telecommunication Systems Management, Inc. (TSM), GTC Technology
Group, Inc. and Technology Supply, Inc. (collectively referred to as GTC) and Business
Communications, Inc., Bainbridge Communication, Inc., BCI of Tampa, LLC and Networx, L.L.C.
(collectively referred to as BCI). These companies primarily provide full-service voice
communication solutions and services in the Florida and Virginia markets. In connection with the
acquisitions, the Company has allocated goodwill and definite-lived
intangible assets of $8,369 and
$5,846, respectively. The definite-lived intangible assets recorded represent the fair market
value of acquired customer relationships and non-compete agreements. The definite-lived
intangibles are being amortized over a period of five to 20 years.
During the second quarter of Fiscal 2006, the Company acquired substantially all of the assets and
certain liabilities of Universal Solutions of North America, L.L.C. and related entities
(Universal). Universal primarily provides planning, installation and maintenance services for
voice and data network systems in 14 states. In connection with the acquisition, the Company has
allocated goodwill and definite-lived intangible assets of $8,860 and
$8,010, respectively. The
definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The definite-lived
intangibles are being amortized over a period of four to 20 years.
During the third quarter of Fiscal 2006, the Company purchased 100% of the issued and outstanding
equity interests of Communication is World InterActive Networking, Inc. (C=WIN) and Converged
Solutions Group, LLC (CSG). C=WIN has an active customer base which includes commercial and
various government agency accounts. CSG has an active customer base which includes commercial,
education, health care and various government agency accounts. The C=WIN and CSG acquisitions
primarily provide planning, installation and maintenance services for voice and data network
systems in 15 states. In connection with the acquisitions, the Company has prepared preliminary
allocations of goodwill and definite-lived intangible assets of $10,328 and $5,561, respectively.
The definite-lived intangible assets recorded represent the estimated fair market value of acquired
customer relationships and non-compete agreements. The Company estimates that the definite-lived
intangibles are to be amortized over a period of four to 20 years.
The results of operations of TSM, GTC, BCI, Universal, C=WIN and CSG are included in the Companys
Consolidated Statements of Income beginning on their respective acquisition dates. The
acquisitions taken individually did not have a material impact on the Companys results of
operations. The costs of the acquisitions were funded with borrowings under the Credit Agreement
described in Note 5.
The following acquired companies will collectively be referred to as Acquired Companies: TSM,
GTC, BCI, Universal, C=WIN, CSG, NextiraOne and NUVT.
15
Note 10: Commitments and Contingencies
Litigation
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 its legal matters are
adequately provided for, covered by insurance, without merit or not probable that an unfavorable
outcome will result.
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Companys best
estimate of probable liability under those warranties.
There has
been no significant or unusual activity other than the acquisitions
discussed in Note 9 during the three months ended June 30, 2006. As
of June 30, 2006 and March 31, 2006, the Company has recorded a warranty reserve of $5,780 and
$1,383, respectively.
The
accrual for product warranties is classified with other Accrued
Liabilities in the Consolidated
Balance Sheets. The expense for product warranties is classified with cost of sales in the
Consolidated Income Statements.
Note 11: Pension Plan Costs
NextiraOne, acquired on April 30, 2006, is the sponsor of a non-contributory defined benefit plan
(the CWA Plan) for the Communication Workers of America Local 1109 (CWA 1109). Benefits from
the CWA Plan are based upon years of service and rates negotiated by the Company and CWA 1109.
Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement
Income Security Act of 1974.
The following table summarizes the net periodic benefit costs beginning after the acquisition date
through the end of the first quarter of Fiscal 2007:
|
|
|
|
|
|
|
May 1, 2006 to |
|
|
June 30, 2006 |
|
Service cost |
|
$ |
71 |
|
Interest cost |
|
|
116 |
|
Expected return on plan assets |
|
|
(108 |
) |
Amortization of prior service cost |
|
|
|
|
Amortization of unrealized gains and losses |
|
|
42 |
|
|
Net periodic benefit cost |
|
$ |
121 |
|
|
As of April 30, 2006, the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets were $25,400, $25,400 and $18,697 respectively. A liability of $6,703
representing the unfunded portion of the CWA Plan is included in the
Other Liabilities (long-term)
balance of $16,863 on the Companys Consolidated Balance Sheet as of June 30, 2006.
The following are the weighted-average assumptions utilized for this plan:
|
|
|
|
|
|
|
April 30, 2006 |
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
N/A |
|
Expected long-term rate of return |
|
|
8.00 |
% |
|
16
Note 12: Restructuring and Other Charges
As announced in Fiscal 2005, the Company initiated a restructuring plan intended to right-size the
organization and bring its expense structure in-line with anticipated revenues and changing market
demand for its solutions and services. The restructuring charges recorded during the first quarter
of Fiscal 2006 and fourth quarter of Fiscal 2005 of $5,290 and $3,019, respectively, relate to
staffing level adjustments and real estate consolidations in the Europe and North America segments.
With the additional charges incurred during the first quarter of Fiscal 2006, the Company has completed its restructuring plan.
As a result of the first quarter Fiscal 2006 restructuring actions, approximately 90 and 34
employees were involuntarily terminated in its Europe and North America segments, respectively,
resulting in a restructuring charge related to staffing level adjustments of $2,951 and $522 in
Europe and North America, respectively. The Company also recorded a charge of $1,817 in the first
quarter of Fiscal 2006 related to idle facility rent obligations and the write-off of leasehold
improvements related to these facilities resulting in a restructuring charge of $791 and $1,026
related to real estate consolidations in Europe and North America, respectively. The majority of
the costs were paid by the end of Fiscal 2006, with the exception of certain facility costs, which
extend through Fiscal 2012 (fiscal year ending March 31, 2012).
As a result of the acquisition of NextiraOne, the Company committed to a plan of reorganization of
NextiraOnes operations. In connection with these integration actions, the Company incurred
severance costs of $8,694 for the separation of approximately 250 employees. In addition, the
Company incurred integration costs for facility consolidations of $15,767. These costs were
included in the purchase price allocation for NextiraOne in accordance with SFAS 141. For the
three months ended June 30, 2006, the Company paid $3,470 related to these obligations. The
Company anticipates a majority of the severance costs to be paid by the end of Fiscal 2007, with
certain facility costs extending through Fiscal 2014.
The following table summarizes the restructuring and other charges and the remaining reserves
reflected on the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
June 30 2006 |
|
Employee Severance |
|
Facility Closures |
|
Total |
|
Balance at beginning of period |
|
$ |
260 |
|
|
$ |
10,438 |
|
|
$ |
10,698 |
|
Acquisition adjustments |
|
|
8,864 |
|
|
|
15,884 |
|
|
|
24,748 |
|
Cash expenditures |
|
|
(2,668 |
) |
|
|
(2,042 |
) |
|
|
(4,710 |
) |
|
Balance at end of period |
|
$ |
6,456 |
|
|
$ |
24,280 |
|
|
$ |
30,736 |
|
|
Note 13: Stock-based Compensation
Share-based compensation expense recognized during the current period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires
forfeitures to be estimated at the time of grant in order to estimate the amount of share-based
awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based
compensation expense recognized in the Companys Consolidated Statements of Income for the first
quarter of Fiscal 2007 includes (i) compensation expense for share-based awards granted prior to,
but not yet vested as of March 31, 2006, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment
awards granted subsequent to March 31, 2006 based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R).
On November 10, 2005, the FASB issued Staff Position No. SFAS 123(R)-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards (SFAS 123(R)-3). The
alternative transition method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding
upon adoption of SFAS 123(R). The Company is in the process of evaluating whether to adopt the
provisions of SFAS 123(R)-3.
17
The following table illustrates the effect on net income and earnings per share for the three
months ended June 30, 2005 as if the Company had applied the fair value recognition provisions of
SFAS 123(R):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
|
|
|
|
|
ended June 30, |
|
|
|
|
|
|
|
2005 |
|
|
Net income |
|
|
|
As reported |
|
$ |
7,394 |
|
|
|
Plus: |
|
Stock-based compensation expense included in reported net income, net of related tax |
|
|
|
|
|
|
Less: |
|
Stock-based compensation expense determined by the fair value method for all awards, net of related tax |
|
|
(2,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
4,817 |
|
|
Earnings per share: |
|
Basic as reported |
|
$ |
0.44 |
|
|
|
|
|
Basic pro forma |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.43 |
|
|
|
|
|
Diluted pro forma |
|
$ |
0.28 |
|
|
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,
2006, the Employee Plan authorized the issuance of options and stock appreciation rights (SARs)
for up to 9,200,000 shares of the Common Stock. Options are granted by a committee appointed by
the Companys Board of Directors (the Board) to key employees of the Company and generally become
exercisable in equal amounts over a three-year period. Option prices are equal to the fair market
value of the stock on the date of the grant. No SARs have been issued.
The Director Plan authorizes the issuance of options and SARs for up to 250,000 shares of the
Common Stock as of June 30, 2006. Options are granted by the Board or a committee appointed by the
Board and generally become exercisable in equal amounts over a three-year period. Option prices
are equal to the fair market value of the Common Stock on the date of the grant. No SARs have been
issued.
The following is a summary of the Companys stock option plans for the three-month period ended
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, 2006 |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Exercise Price |
|
|
Shares |
|
(per share) |
|
Outstanding at March 31, 2006 |
|
|
5,055 |
|
|
$ |
38.28 |
|
Granted |
|
|
35 |
|
|
|
38.84 |
|
Exercised |
|
|
(87 |
) |
|
|
40.46 |
|
Forfeited or expired |
|
|
(30 |
) |
|
|
38.56 |
|
|
Outstanding at June 30, 2006 |
|
|
4,973 |
|
|
$ |
38.25 |
|
|
Exercisable at June 30, 2006 |
|
|
4,227 |
|
|
$ |
38.93 |
|
|
Weighted average fair value of
options granted during the period
using Black-Scholes option
pricing model |
|
|
|
|
|
$ |
16.80 |
|
|
18
The following table summarizes information about the stock options outstanding at June 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
Average |
|
|
|
|
|
Weighted |
|
Average |
|
|
Shares |
|
Remaining |
|
Average |
|
Intrinsic |
|
Shares |
|
Average |
|
Intrinsic |
Range of |
|
Outstanding |
|
Contractual |
|
Exercise |
|
Value |
|
Exercisable |
|
Exercise |
|
Value |
Exercise Prices |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
(000s) |
|
Price |
|
(000s) |
|
|
|
|
|
$19.9500-$26.60 |
|
|
328 |
|
|
|
1.6 |
|
|
$ |
22.47 |
|
|
$ |
5,269 |
|
|
|
328 |
|
|
$ |
22.47 |
|
|
$ |
5,269 |
|
$26.6001-$33.25 |
|
|
357 |
|
|
|
2.9 |
|
|
|
30.06 |
|
|
|
3,020 |
|
|
|
357 |
|
|
|
30.06 |
|
|
|
3,020 |
|
$33.2501-$39.90 |
|
|
1,983 |
|
|
|
8.9 |
|
|
|
36.97 |
|
|
|
4,281 |
|
|
|
1,237 |
|
|
|
38.52 |
|
|
|
1,200 |
|
$39.9001-$46.55 |
|
|
2,147 |
|
|
|
5.5 |
|
|
|
42.37 |
|
|
|
|
|
|
|
2,147 |
|
|
|
42.37 |
|
|
|
|
|
$46.5501-$53.20 |
|
|
154 |
|
|
|
3.3 |
|
|
|
49.39 |
|
|
|
|
|
|
|
154 |
|
|
|
49.39 |
|
|
|
|
|
$53.2001-$59.85 |
|
|
2 |
|
|
|
3.5 |
|
|
|
55.88 |
|
|
|
|
|
|
|
2 |
|
|
|
55.88 |
|
|
|
|
|
$59.8501-$66.50 |
|
|
2 |
|
|
|
3.5 |
|
|
|
63.22 |
|
|
|
|
|
|
|
2 |
|
|
|
63.22 |
|
|
|
|
|
|
|
|
|
|
$19.95-$66.50 |
|
|
4,973 |
|
|
|
6.4 |
|
|
$ |
38.25 |
|
|
$ |
12,570 |
|
|
|
4,227 |
|
|
$ |
38.93 |
|
|
$ |
9,489 |
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys average stock price on June 30, 2006 of $38.52, which would have been
received by the option holders had all option holders exercised their options as of that date.
As of June 30, 2006, there was approximately $8,186 of total unrecognized pre-tax compensation
expense related to non-vested stock options granted under the plans which is expected to be
recognized over a weighted average period of 3.0 years.
Note 14: Segment Reporting
As required by SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
(SFAS 131) the Company reports the results of its operating segments on a geographic basis. This
is consistent with how the Company is organized and how the business is managed on a day-to-day
basis. The primary reportable segments are comprised of North America, Europe and All Other.
Consistent with SFAS 131, the Company aggregates similar operating segments into reportable
segments.
The accounting policies of the various segments are the same as those described in the Notes to the
Companys Consolidated Financial Statements for the year ended March 31, 2006 contained in the
Companys Annual Report on Form 10-K. The Company evaluates the performance of each segment based
on operating income. Inter-segment sales and segment interest income or expense and expenditures
for segment assets are not presented to or reviewed by management and, therefore, are not presented
below.
19
Summary information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
2006 |
|
2005 |
|
North America |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
192,572 |
|
|
$ |
136,861 |
|
Operating income |
|
|
11,026 |
|
|
|
11,859 |
|
Depreciation |
|
|
2,161 |
|
|
|
1,960 |
|
Amortization |
|
|
1,457 |
|
|
|
1,205 |
|
Segment assets |
|
|
1,015,889 |
|
|
|
720,124 |
|
|
Europe |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
29,345 |
|
|
$ |
33,750 |
|
Operating income |
|
|
3,143 |
|
|
|
(367 |
) |
Depreciation |
|
|
119 |
|
|
|
196 |
|
Amortization |
|
|
40 |
|
|
|
343 |
|
Segment assets |
|
|
124,252 |
|
|
|
122,606 |
|
|
All Other |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
8,478 |
|
|
$ |
8,671 |
|
Operating income |
|
|
1,596 |
|
|
|
1,680 |
|
Depreciation |
|
|
20 |
|
|
|
77 |
|
Amortization |
|
|
9 |
|
|
|
10 |
|
Segment assets |
|
|
15,636 |
|
|
|
14,269 |
|
|
Operating income for the first quarter of Fiscal 2006 for North America and Europe was reduced
by $1,548 and $3,742, respectively, for restructuring charges incurred during the period.
The sum of the segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
March 31, 2006 |
|
Assets for North America, Europe and
All Other segments |
|
$ |
1,155,777 |
|
|
$ |
878,879 |
|
Corporate eliminations |
|
|
(78,042 |
) |
|
|
(79,145 |
) |
|
Total consolidated assets |
|
$ |
1,077,735 |
|
|
$ |
799,734 |
|
|
Management is also presented with and reviews revenues by service type. The following
information is presented:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
Revenues |
|
2006 |
|
2005 |
|
Data Services |
|
$ |
44,531 |
|
|
$ |
52,901 |
|
Voice Services |
|
|
133,639 |
|
|
|
72,929 |
|
Hotline Services |
|
|
52,225 |
|
|
|
53,452 |
|
|
Total revenues |
|
$ |
230,395 |
|
|
$ |
179,282 |
|
|
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
The Company offers one-source network infrastructure services for: data networks (Data Services),
including structured cabling for wired and wireless systems; voice systems (Voice Services),
including new and upgraded telephony systems; and 24/7/365 hotline technical support (Hotline
Services) for more than 118,000 network infrastructure products that it sells through its catalog,
Internet Web site and on-site services offices.
The Company manages its business based on geographic segments: North America, Europe and All
Other. In addition, certain revenue and gross profit information by service type is also provided
herein for purposes of further analysis.
As of
April 1, 2006 the Company implemented SFAS 123(R) which requires share-based compensation to be
charged to expense. During the first quarter of Fiscal 2007, the Companys reconciling items
include pre-tax charges of $1.6 million for share-based compensation, $1.4 million in acquisition
related expenses and charges of $1.1 million in severance expenses. During the first quarter of
Fiscal 2006 and as previously disclosed, the Company recorded a pre-tax restructuring charge of
$5.3 million and incurred pre-tax non-cash charges of $2.8 million related to acquisitions.
On April 30, 2006, the Company acquired NextiraOne. The acquired operations service commercial and
various government agency clients and represent approximately $270 million to $280 million of
projected annualized Voice Services revenues.
On May 1, 2006, the Company acquired NUVT, a privately-held company, which provides 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
and is expected to provide annual revenues of approximately $55 million.
During the first quarter of Fiscal 2006 and fourth quarter of Fiscal 2005, the Company recorded
pre-tax restructuring charges of $5.3 million and $5.1 million, respectively, related to staffing
level adjustments and real estate consolidations in Europe and North America. These restructuring
charges completed the Companys previously announced restructuring plans that were initiated during
the fourth quarter of Fiscal 2005.
21
Dollars in Thousands, unless Otherwise Indicated
The tables below should be read in conjunction with the following discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
2006 |
|
2005 |
|
|
(1Q07) |
|
(1Q06) |
|
|
|
|
|
|
% of total |
|
|
|
|
|
% of total |
|
|
$ |
|
revenues |
|
$ |
|
revenues |
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
192,572 |
|
|
|
84 |
% |
|
$ |
136,861 |
|
|
|
76 |
% |
Europe |
|
|
29,345 |
|
|
|
13 |
% |
|
|
33,750 |
|
|
|
19 |
% |
All Other |
|
|
8,478 |
|
|
|
3 |
% |
|
|
8,671 |
|
|
|
5 |
% |
|
|
|
Total |
|
$ |
230,395 |
|
|
|
100 |
% |
|
$ |
179,282 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
11,026 |
|
|
|
|
|
|
$ |
11,859 |
|
|
|
|
|
% of North America revenues |
|
|
5.7 |
% |
|
|
|
|
|
|
8.7 |
% |
|
|
|
|
Europe |
|
|
3,143 |
|
|
|
|
|
|
|
(367 |
) |
|
|
|
|
% of Europe revenues |
|
|
10.7 |
% |
|
|
|
|
|
|
(1.1 |
)% |
|
|
|
|
All Other |
|
|
1,596 |
|
|
|
|
|
|
|
1,680 |
|
|
|
|
|
% of All Other revenues |
|
|
18.8 |
% |
|
|
|
|
|
|
19.4 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
15,765 |
|
|
|
|
|
|
$ |
13,172 |
|
|
|
|
|
% of Total revenues |
|
|
6.8 |
% |
|
|
|
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges and
other reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,168 |
|
|
|
|
|
|
$ |
4,379 |
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
3,742 |
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,168 |
|
|
|
|
|
|
$ |
8,121 |
|
|
|
|
|
% of Total revenues |
|
|
1.8 |
% |
|
|
|
|
|
|
4.5 |
% |
|
|
|
|
|
22
Information on revenues and gross profit for Data Services, Voice Services and Hotline
Services is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
2006 |
|
2005 |
|
|
(1Q07) |
|
(1Q06) |
|
|
|
|
|
|
% of total |
|
|
|
|
|
% of total |
|
|
$ |
|
revenues |
|
$ |
|
revenues |
|
By Service Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services (1) |
|
$ |
44,531 |
|
|
|
19 |
% |
|
$ |
52,901 |
|
|
|
30 |
% |
Voice Services (1) |
|
|
133,639 |
|
|
|
58 |
% |
|
|
72,929 |
|
|
|
40 |
% |
Hotline Services |
|
|
52,225 |
|
|
|
23 |
% |
|
|
53,452 |
|
|
|
30 |
% |
|
|
|
Total |
|
$ |
230,395 |
|
|
|
100 |
% |
|
$ |
179,282 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
13,317 |
|
|
|
|
|
|
$ |
15,524 |
|
|
|
|
|
% of Data Services revenues |
|
|
29.9 |
% |
|
|
|
|
|
|
29.3 |
% |
|
|
|
|
Voice Services |
|
|
45,763 |
|
|
|
|
|
|
|
27,838 |
|
|
|
|
|
% of Voice Services revenues |
|
|
34.2 |
% |
|
|
|
|
|
|
38.2 |
% |
|
|
|
|
Hotline Services |
|
|
26,764 |
|
|
|
|
|
|
|
27,578 |
|
|
|
|
|
% of Hotline Services revenues |
|
|
51.2 |
% |
|
|
|
|
|
|
51.6 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
85,844 |
|
|
|
|
|
|
$ |
70,940 |
|
|
|
|
|
% of Total revenues |
|
|
37.3 |
% |
|
|
|
|
|
|
39.6 |
% |
|
|
|
|
|
|
|
|
(1) |
|
Data Services and Voice Services may also be collectively referred to as
On-Site Services |
First Quarter Fiscal 2007 (1Q07) Compared to First Quarter Fiscal 2006 (1Q06)
Total Revenues
Total revenues for 1Q07 were $230,395, an increase of 29% compared to 1Q06 total revenues of
$179,282. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding
the effects of these acquisitions and the positive impact of exchange rates of $273 relative to the
U.S. dollar, revenues would have decreased 10% from $171,845 to $154,023 between periods.
Revenues by Geography
North America Revenues
Revenues in North America were $192,572 for 1Q07, an increase of 41% compared to 1Q06 revenues of
$136,861. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding
the effects of these acquisitions, revenues would have decreased 10% from $129,424 to $116,473
between periods. The Company believes the overall decrease is due to the completion of several
nonrecurring projects, offset in part by success in the Companys DVH (Data, Voice and Hotline)
Services cross-selling initiatives.
23
Europe Revenues
Revenues
in Europe were $29,345 for 1Q07, a decrease of 13% compared to 1Q06
revenues of $33,750. The Company believes the overall decline in Europe revenues was due to weak general
economic conditions that affected client demand.
All Other Revenues
Revenues for All Other were $8,478 for 1Q07, a decrease of 2% compared to $8,671 for 1Q06. If
exchange rates relative to the U.S. dollar had remained unchanged from 1Q06, All Other revenues
would have increased by $151 for an increase of less than 1%.
Revenue by Service Type
Data Services
Revenues from Data Services were $44,531 for 1Q07, a decrease of 16% compared to $52,901 for 1Q06.
The Company believes the overall decrease in Data Services revenue was due to the completion of
several nonrecurring projects and weak general economic conditions in its European market.
Voice Services
Revenues from Voice Services were $133,639 for 1Q07, an increase of 83% compared to $72,929 for
1Q06. The increase was primarily due to the incremental revenue from the Acquired Companies, which
added $76,099 and $7,437 of revenues to the 1Q07 and 1Q06 results, respectively. Excluding the
effects of these acquisitions, revenues would have decreased 12% from $65,492 to $57,540 between
periods. The Company believes that this overall decrease in Voice Services revenue is primarily
due to planned post-merger client attrition from its Norstan acquisition completed in 4Q05.
Hotline Services
Revenues from Hotline Services were $52,225 for 1Q07, a decrease of 2% compared to $53,452 for
1Q06. The Company believes the overall decline in Hotline Services revenues was driven by weak
economic conditions in the European market, offset in part by success in the Companys DVH (Data,
Voice and Hotline) Services cross-selling initiatives.
Gross Profit
Gross profit dollars for 1Q07 increased to $85,844 from $70,940 for 1Q06. The increase in gross
profit dollars over the prior year was due to the increase in revenues related to the Acquired
Companies. Gross profit as a percent of revenues for 1Q07 decreased to 37.3% of revenues from
39.6% of revenues for 1Q06. The decrease in gross profit percentage was due primarily to the
impact of lower gross profit in its Voice Services segment driven by the acquisition of NextiraOne.
Gross profit dollars for Data Services were $13,317, or 29.9% of revenues, for 1Q07 compared to
$15,524, or 29.3% of revenues, for 1Q06. Gross profit dollars for Voice Services were $45,763, or
34.2% of revenues, for 1Q07 compared to $27,838, or 38.2% of revenues, for 1Q06. Gross profit
dollars for Hotline Services were $26,764, or 51.2% of revenues, for 1Q07 compared to $27,578, or
51.6% of revenues, for 1Q06.
24
SG&A Expenses
Selling, general and administrative (SG&A) expenses for 1Q07 were $68,573, an increase of $17,653
over SG&A expenses of $50,920 for 1Q06. The increase in SG&A expense dollars over the prior year
was due primarily to the Acquired Companies. SG&A expenses as a percent of revenue for 1Q07 were
29.8% of revenues comparable to 28.4% of revenues for 1Q06. The increase in SG&A expense as a
percent of revenue was due primarily to $1,620 for share-based compensation and $1,115 in severance
expenses incurred in 1Q07.
Restructuring Charges
The company did not record any restructuring charges during the first quarter of Fiscal 2007. In
the first quarter of Fiscal 2006, the Company recorded a restructuring charge of $5,290. This
charge was comprised of $3,473 for staffing level adjustments and $1,817 for real estate
consolidations in Europe and North America. Of this charge, $3,742 and $1,548 related to Europe
and North America, respectively. See Notes to Consolidated Financial Statements for further
details related to the restructuring charges.
Intangibles Amortization
Intangibles amortization for 1Q07 decreased to $1,506 from $1,558 for 1Q06. The decrease was
primarily attributable to the completion of specific amortization expense related to the purchase
of Norstan, which ended in 4Q06, offset in part by the estimated amortization expense of $1,234
related to the intangible assets acquired through the purchase of the Acquired Companies. The
Company expects to finalize the valuations of these intangibles for the Acquired Companies in 2Q07.
See Notes to Consolidated Financial Statements for further details related to the acquisitions.
Operating Income
Operating income for 1Q07 was $15,765, or 6.8% of revenues, compared to $13,172, or 7.3% of
revenues, for 1Q06.
Interest Expense, Net
Net interest expense for 1Q07 increased to $3,640 from $1,959 for 1Q06 due to an increase in the
weighted average outstanding debt of approximately $221,584 for 1Q07 compared to approximately
$166,796 for 1Q06. The increase in debt relates primarily to the acquisitions of NextiraOne and
NUVT during the first quarter of Fiscal 2007. In addition, the weighted average interest rate
outstanding for 1Q07 was 6.06%, an increase of 2.01% compared to the 1Q06 rate of 4.05%.
Provision for Income Taxes
The tax provision for 1Q07 was $4,203, an effective tax rate of 35.0%. This compares to the tax
provision for 1Q06 of $3,894, an effective tax rate of 34.5%. The tax rate for 1Q07 was higher
than 1Q06 due to changes in the overall mix of taxable income among worldwide offices.
Net Income
Net income for 1Q07 was $7,807, or 3.4% of revenues, compared to $7,394, or 4.1% of revenues, for
1Q06.
25
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 1Q07 was $12,607. Significant factors
contributing to a source of cash were: net income of $7,807 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 $1,620, respectively. Changes in the above accounts are based on average Fiscal 2007
exchange rates.
Net cash provided by operating activities
during 1Q06 was $10,803. Significant factors contributing to a source of cash were: net income of
$7,394 and decrease in accounts receivable of $4,701. Significant factors contributing to a use of
cash were: increase in net inventory of $5,163 and increase in estimated earnings in excess of
billings on uncompleted contracts of $4,119. Non-cash items included amortization and depreciation
expense of $3,791. Changes in the above accounts are based on average Fiscal 2006 exchange rates.
As of the end of 1Q07 and 1Q06, the Company had cash and cash equivalents of $14,360 and $11,008, respectively,
and working capital of $104,260 and $106,950, respectively. The Companys current ratio was 1.43 and
1.83 as of the end of 1Q07 and 1Q06, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Investing Activities
Net cash
used by investing activities during 1Q07 and 1Q06 was $132,004 and $13,127, respectively.
The Companys primary use of cash during 1Q07 was related to the acquisition of businesses.
During
1Q07, gross capital expenditures were $1,523, while capital disposals were $30.
During 1Q07, the Company paid $129,161 to acquire NextiraOne and NUVT, net of cash acquired in the
transaction. During 1Q06, the Company paid $13,492 to acquire TSM, GTC and BCI, net of cash
acquired in the transaction. The cash impact of prior-merger related payments made during 1Q07 was
$1,350. The cash impact of prior merger-related recoveries made during 1Q06 was $44. See Note 9
of the Notes to Consolidated Financial Statements for additional detail on acquisitions made during
1Q07.
Financing Activities
Net cash
provided by/(used in) financing activities during 1Q07 and 1Q06 was
$123,207 and $1,774,
respectively. Cash provided by financing activities in 1Q07 and 1Q06 resulted primarily from the
$120,753 and $3,072 net increase in debt obligations and $3,530 and $136 cash received from the
exercise of stock options, partially offset by cash used of $1,055 and $1,011 for payment of
dividends, respectively. The increase in debt obligations was due to the funding of the 1Q07
acquisitions.
Total Debt
Borrowings under the Credit Agreement are permitted up to a maximum amount of $310,000, which
includes up to $15,000 of swingline loans and $25,000 of letters of credit. The Credit Agreement
may be increased by the Company up to an additional $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
26
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 expires on March 28, 2011.
The Companys total debt at the end of 1Q07 of $244,590 was comprised of $242,565 under the Credit
Agreement, $1,826 of obligations under capital leases and $199 of various other third-party,
non-employee loans. The weighted average interest rate on all indebtedness of the Company during
1Q07 and 1Q06 was approximately 6.06% and 4.05%, respectively. In addition, as of the end of 1Q07,
the Company had $3,065 of letters of credit outstanding and $64,370 available under the Credit
Agreement.
The Credit Agreement includes financial covenants requiring a minimum net worth, leverage and fixed
charge coverage ratio. At the end of 1Q07, the Company was in compliance with all required
covenants under the Credit Agreement.
Dividends
During 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.
Repurchase of Common Stock
There were no repurchases of the Common Stock during 1Q07. Since inception of the repurchase
program in April 1999 through June 30, 2006, the Company has repurchased in aggregate approximately
6,900,000 shares of the Common Stock for approximately $297,000. Funding for the stock repurchases
came primarily from existing cash flow from operations. Additional repurchases of stock may occur
from time to time depending upon factors such as the Companys cash flows and general market
conditions. While the Company expects to continue to repurchase shares of the Common Stock for the
foreseeable future, there can be no assurance as to the timing or amount of such repurchases.
Foreign Currency Exchange Impact
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company
generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany
sales to subsidiaries are generally denominated in the subsidiaries local currency, although
intercompany sales to the Companys subsidiaries in Brazil, Chile, Mexico and Singapore are
denominated in U.S. dollars.
The Company has entered and will continue in the future, on a selective basis, to enter into
foreign currency forward contracts to reduce the foreign currency exposure related to certain
intercompany transactions, primarily trade receivables and loans. All of the contracts have been
designated and qualify as cash flow hedges. The effective portion of any changes in the fair value
of the derivative instruments is recorded in OCI until the hedged forecasted transaction occurs or
the recognized currency transaction affects earnings. Once the forecasted transaction occurs or
the recognized currency transaction affects earnings, the effective portion of any related gains or
losses on the cash flow hedge is reclassified from OCI to earnings. In the event the hedged
forecasted transaction does not occur, or it becomes probable that it will not occur, the
ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from
OCI to earnings at that time.
27
At of the end of 1Q07, the open foreign exchange contracts were in Euro, Pound sterling, Canadian
dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner and Australian dollar.
The open contracts have contract rates of 0.7668 to 0.8262 Euro, 0.5312 to 0.5812 Pound sterling,
1.1141 to 1.1751 Canadian dollar, 1.1813 to 1.2899 Swiss franc, 105.47 to 110.10 Japanese yen,
7.0283 to 7.9878 Swedish krona, 5.7065 to 6.3120 Danish krone, 6.0294 to 6.8216 Norwegian kroner
and 1.2950 to 1.3689 Australian dollar, all per U.S. dollar.
The total open contracts, with a notional amount of approximately $63,129, have a fair value of
$62,777 and will expire within 33 months.
Critical Accounting Policies
The Companys critical accounting policies are described in the Notes to the Companys
Consolidated Financial Statements for the year ended March 31, 2006 contained in the Companys
Annual Report on Form 10-K. There have been no significant changes to these policies during the
subsequent quarter.
New Accounting Pronouncements
See Notes to Consolidated Financial Statements.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term
inflation rates are difficult to predict, the Company continues to strive to minimize the effects
of inflation through improved productivity and cost reduction programs as well as price adjustments
within the constraints of market competition.
Forward Looking Statements
When included in this Quarterly Report on Form 10-Q or in documents incorporated herein by
reference, the words expects, intends, anticipates, believes, estimates and analogous
expressions are intended to identify forward-looking statements. Such statements are inherently
subject to a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among others, general
economic and business conditions, competition, changes in foreign, political and economic
conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid changes in
technologies, client preferences, the ability of the Company to identify, acquire and operate
additional technical services companies and various other matters, many of which are beyond the
Companys control. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of
this Quarterly Report on Form 10-Q. The Company expressly disclaims any obligation or undertaking
to release publicly any updates or any changes in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any statement is based.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest rates and foreign currency exchange rates. Market risk is measured as the potential
negative impact on earnings, cash flows or fair values resulting from a hypothetical change in
interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. At June 30,
2006, the Company had total long-term obligations, including the current portion of those
obligations, of $244,590. Of that amount, $2,025 was in fixed rate obligations and $242,565 was in
variable rate obligations. For the amounts in variable rate debt at June 30, 2006, an
instantaneous 100 basis point increase in the interest rate would reduce the Companys expected net
income in the subsequent quarter by $394 assuming the Company employed no intervention strategies.
Subsequent to June 30, 2006, the Company entered into an interest rate swap agreement with a
notional value of $100,000, the effect of which will be to effectively convert a portion of the
variable rate interest based debt to a fixed rate portion.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company
generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany
sales to subsidiaries are generally denominated in the subsidiaries local currency. To mitigate
this risk, the Company has entered and will continue in the future, on a selective basis, to enter
into foreign currency forward contracts to reduce the foreign currency exposure related to certain
intercompany transactions. At June 30, 2006, the Company had total open contracts valued at
approximately $63,129 with a fair value of approximately $62,777.
The Company does not hold or issue any other financial derivative instruments nor does it engage in
speculative trading of financial derivatives.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q as of July 1, 2006, 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 Act)).
Based on that evaluation, management, including the CEO and CFO, has concluded that, as of the end
of the period covered by this Quarterly Report on Form 10-Q, the Companys disclosure controls and
procedures were effective in all material respects at the reasonable assurance level to ensure that
information required to be disclosed in reports that the Company files or submits under the Act is
recorded, processed, summarized and timely reported in accordance with the rules and forms of the
SEC.
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.
29
Changes in Internal Control Over Financial Reporting
In the first fiscal quarter ended July 1, 2006, there had been no change in the Companys internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
The scope of managements assessment of the effectiveness of internal control over financial
reporting includes all of the Companys material businesses except for NextiraOne, a material
business acquired on April 30, 2006. The NextiraOne portion of the business will be included in the current year assessment to be
completed as of March 31, 2007.
PART II OTHER INFORMATION
Item 6. Exhibits.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of Registrant (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) |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
BLACK BOX CORPORATION
|
Dated: August 10, 2006 |
|
|
|
By: |
/s/ Michael McAndrew
|
|
|
|
Michael McAndrew, Vice President, |
|
|
|
Chief Financial Officer, Treasurer, Secretary
and Principal Accounting Officer |
|
31
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of Registrant (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) |
32