Blackbox 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 September 30, 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
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95-3086563 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
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15055 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of
November 6, 2006, there were 17,357,753 shares of Common Stock,
par value $.001 (theCommon
Stock), outstanding.
BLACK BOX CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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(Unaudited) |
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In thousands, except par value |
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September 30, 2006 |
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March 31, 2006 |
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Assets |
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Cash and cash equivalents |
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$ |
15,758 |
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$ |
11,207 |
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Accounts receivable, net of allowance for doubtful accounts
of $14,783 and $9,517 |
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185,333 |
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116,713 |
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Inventories, net |
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71,877 |
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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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56,553 |
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23,803 |
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Deferred tax asset |
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9,489 |
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8,973 |
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Prepaid and other current assets |
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27,606 |
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16,502 |
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Total current assets |
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366,616 |
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231,124 |
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Property, plant and equipment, net |
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41,595 |
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35,124 |
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Goodwill, net |
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586,273 |
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468,724 |
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Intangibles: |
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Customer relationships, net |
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53,996 |
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24,657 |
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Other intangibles, net |
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34,799 |
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30,783 |
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Deferred tax asset |
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2,654 |
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4,231 |
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Other assets |
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4,343 |
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5,091 |
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Total assets |
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$ |
1,090,276 |
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$ |
799,734 |
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Liabilities |
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Accounts payable |
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$ |
87,127 |
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$ |
44,943 |
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Accrued compensation and benefits |
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20,656 |
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13,954 |
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Deferred revenue |
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51,120 |
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22,211 |
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Restructuring reserve |
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14,246 |
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3,292 |
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Billings in excess of costs and estimated earnings on
uncompleted contracts |
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20,571 |
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8,648 |
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Current maturities of long-term debt |
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608 |
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1,049 |
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Other liabilities |
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59,253 |
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33,771 |
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Total current liabilities |
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253,581 |
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127,868 |
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Long-term debt |
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251,945 |
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122,673 |
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Other liabilities |
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27,708 |
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8,293 |
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Total liabilities |
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533,234 |
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258,834 |
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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 $.001, 17,349 and
17,593 shares outstanding |
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25 |
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25 |
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Additional paid-in capital |
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373,045 |
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362,810 |
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Treasury stock, at cost 7,376 and 6,935 shares |
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(314,411 |
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(296,824 |
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Accumulated other comprehensive income |
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17,746 |
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13,036 |
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Retained earnings |
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480,637 |
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461,853 |
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Total stockholders equity |
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557,042 |
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540,900 |
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Total liabilities and stockholders equity |
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$ |
1,090,276 |
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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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Unaudited |
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Unaudited |
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Three months ended |
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Six months ended |
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In thousands, except per share |
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September 30, |
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October 1, |
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September 30, |
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October 1, |
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amounts |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Hotline products |
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$ |
55,063 |
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$ |
54,056 |
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$ |
107,288 |
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$ |
107,508 |
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On-Site services |
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216,262 |
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130,994 |
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394,432 |
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256,824 |
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Total |
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271,325 |
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185,050 |
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501,720 |
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364,332 |
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Cost of sales: |
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Hotline products |
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27,847 |
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26,829 |
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53,308 |
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52,703 |
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On-Site services |
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144,442 |
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84,339 |
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263,532 |
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166,807 |
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Total |
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172,289 |
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111,168 |
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316,840 |
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219,510 |
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Gross profit |
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99,036 |
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73,882 |
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184,880 |
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144,822 |
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Selling, general &
administrative expenses |
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72,784 |
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50,647 |
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141,357 |
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101,567 |
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Restructuring and other charges |
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5,290 |
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Intangibles amortization |
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1,931 |
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1,328 |
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3,437 |
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2,886 |
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Operating income |
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24,321 |
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21,907 |
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40,086 |
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35,079 |
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Interest expense (income), net |
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4,126 |
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2,330 |
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7,766 |
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4,289 |
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Other expenses (income), net |
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72 |
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40 |
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187 |
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(35 |
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Income before provision for
income taxes |
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20,123 |
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19,537 |
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32,133 |
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30,825 |
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Provision for income taxes |
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7,044 |
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6,740 |
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11,247 |
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10,634 |
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Net income |
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$ |
13,079 |
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$ |
12,797 |
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$ |
20,886 |
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$ |
20,191 |
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Earnings per common share: |
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Basic |
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$ |
0.75 |
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$ |
0.75 |
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$ |
1.20 |
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$ |
1.19 |
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Diluted |
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$ |
0.74 |
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$ |
0.74 |
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$ |
1.18 |
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$ |
1.17 |
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Weighted average common shares
outstanding |
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Basic |
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17,513 |
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17,022 |
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17,415 |
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16,933 |
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Diluted |
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17,743 |
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17,374 |
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17,766 |
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17,208 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.12 |
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$ |
0.12 |
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See Notes to Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited) |
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Six months ended |
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In thousands |
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September 30, 2006 |
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October 1, 2005 |
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Operating Activities |
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Net income |
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$ |
20,886 |
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$ |
20,191 |
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Adjustments to reconcile net income to net cash provided
by (used for) operating activities: |
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Intangibles amortization and depreciation |
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9,453 |
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7,380 |
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Deferred taxes |
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1,166 |
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(2,053 |
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Stock compensation expense |
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3,192 |
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Tax benefit from exercised stock options |
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(432 |
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(1,971 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(3,518 |
) |
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(8,913 |
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Inventories, net |
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(4,734 |
) |
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5,704 |
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All other current assets excluding deferred tax asset |
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(516 |
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1,586 |
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Liabilities exclusive of long term debt |
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(3,774 |
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550 |
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Net cash provided by (used for) operating activities |
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$ |
21,723 |
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$ |
22,474 |
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Investing Activities |
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Capital expenditures |
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$ |
(2,112 |
) |
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$ |
(1,600 |
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Capital disposals |
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403 |
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1,001 |
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Acquisition of businesses (payments)/recoveries |
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(127,402 |
) |
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(26,854 |
) |
Prior merger-related (payments)/recoveries |
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(1,389 |
) |
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(165 |
) |
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Net cash provided by (used for) investing activities |
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$ |
(130,500 |
) |
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$ |
(27,618 |
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Financing Activities |
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Proceeds from borrowings |
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$ |
258,519 |
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$ |
105,948 |
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Repayment of borrowings |
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(131,236 |
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(105,235 |
) |
Repayment on discounted lease rentals |
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(24 |
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(667 |
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Proceeds from exercise of options |
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6,611 |
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7,452 |
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Payment of dividends |
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(2,116 |
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(2,021 |
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Purchase of treasury stock |
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(17,587 |
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(10 |
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Net cash provided by (used for) financing activities |
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$ |
114,167 |
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$ |
5,467 |
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Foreign currency exchange impact on cash |
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$ |
(839 |
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$ |
10 |
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Increase / (decrease) in cash and cash equivalents |
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$ |
4,551 |
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$ |
333 |
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Cash and cash equivalents at beginning of period |
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$ |
11,207 |
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$ |
11,592 |
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Cash and cash equivalents at end of period |
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$ |
15,758 |
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$ |
11,925 |
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Supplemental Cash Flow: |
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Cash paid for interest |
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$ |
6,358 |
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$ |
4,285 |
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Cash paid for income taxes |
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|
7,391 |
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6,212 |
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Non-cash financing activities: |
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Dividends payable |
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1,041 |
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|
1,028 |
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Capital leases |
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127 |
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|
683 |
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See Notes to Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box Corporation (the
Company) have been prepared in accordance with accounting principles generally accepted in the
United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The Company believes
that these consolidated financial statements reflect all normal, recurring adjustments needed to
present fairly the Companys results for the interim periods presented. The results for interim
periods may not be indicative of the results of operations for any other interim period or for the
full year. These financial statements should be read in conjunction with the financial statements
and notes thereto included in the Companys most recent Annual Report on Form 10-K as filed with
the Securities and Exchange Commission (SEC) for the fiscal year ended March 31, 2006 (Form
10-K).
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes as of September 30, 2006 and 2005 were September 30, 2006 and October 1, 2005.
References to Fiscal Year or Fiscal mean the Companys fiscal year ended March 31 for the year
referenced. All references to dollar amounts herein are presented in thousands, except per share
amounts.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements include allowances for
doubtful accounts receivable, sales returns, net realizable value of inventories, loss
contingencies, warranty reserves and intangible assets. Actual results could differ from those
estimates. Management believes the estimates made are reasonable.
Reclassification
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three and six months ended September 30, 2006.
6
Note 2: Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys consolidated financial
statements are disclosed in Note 1 within Form 10-K. Additional significant accounting policies
adopted during Fiscal 2007 are disclosed below.
Stock-Based Compensation
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 companies to estimate the fair
value of share-based payment awards and recognize compensation expense over the requisite service
period for the portion of the award that is ultimately expected to vest. 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 Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) as allowed under SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense related to stock options had been recognized because the exercise price of the
Companys stock options granted to employees and directors equaled or exceeded the fair market
value of the underlying stock on the grant-date.
The Company adopted SFAS 123(R) using the modified prospective transition method which 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. 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, the
modified prospective transition method does require the Company to provide pro forma disclosure of
specific income statement line items for periods prior to the adoption of SFAS 123(R) as if the
fair-value-based method had been applied to all awards. See Note 13 of the Notes to Consolidated
Financial Statements.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
grant-date using an option-pricing model. Upon adoption of SFAS 123(R), the Company began using the
Black-Scholes option pricing model as the method of valuation for the Companys stock options. The
model requires the use of various assumptions. The key assumptions are summarized as follows:
Expected Volatility: The Company estimates the volatility of its Common Stock at the date of grant
based on the historical volatility of its Common Stock.
Dividend Yield: The Company estimates the dividend yield assumption based on the Companys
historical and projected dividend payouts.
Risk-free interest rate: The Company bases risk-free interest rate on the observed interest rates
appropriate for the term of the Companys employee stock options.
Annual forfeiture rate and expected holding period: The Company estimates the annual forfeiture
rate and expected holding period based on historical experience.
Amortization period: The Company recognizes the fair value of awards into expense over the
requisite service periods associated with the award.
7
Recent Accounting Pronouncements
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.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123 (R). SFAS (R) is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation (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 is
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). This Statement was effective for public
companies at the beginning of the first annual reporting period beginning after June 15, 2005.
As permitted by SFAS 123, the Company accounted for its stock-based compensation plans under APB
25s intrinsic value method and, as such, generally recognized no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)s fair value method has had a significant
impact on the Companys results of operations, although it has had no impact on the Companys
overall financial position or cash flows. Based on SFAS 123(R), the Company transitioned to the new
requirements by using the modified prospective transition method. This transition method requires
compensation cost to be recognized for all share-based payments granted after the date of adoption
and for all unvested awards existing on the date of adoption.
SFAS 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 periods after adoption when the benefits of tax deductions are in excess of recognized
compensation cost. 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, since there was no
compensation cost recognized under APB 25.
The Company adopted the provisions of SFAS 123(R) as of April 1, 2006. See Significant Accounting
Policies and Note 13 of the Notes to the Consolidated Financial Statements for further reference to
the disclosures required by SFAS 123(R).
8
Note 3: Inventories
The Companys inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
Raw materials |
|
$ |
1,681 |
|
|
$ |
1,426 |
|
Finished goods |
|
|
95,117 |
|
|
|
66,787 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
96,798 |
|
|
|
68,213 |
|
Excess and obsolete inventory reserves |
|
|
(24,921 |
) |
|
|
(14,287 |
) |
|
|
|
|
|
|
|
Inventory, net |
|
$ |
71,877 |
|
|
$ |
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. 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 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.
The following table summarizes changes to goodwill at the Companys reporting units during the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
All Other |
|
|
Total |
|
|
Balance as of March 31, 2006 |
|
$ |
400,998 |
|
|
$ |
65,684 |
|
|
$ |
2,042 |
|
|
$ |
468,724 |
|
Currency translation |
|
|
29 |
|
|
|
3,828 |
|
|
|
(3 |
) |
|
|
3,854 |
|
Current Period Acquisitions (Note 9) |
|
|
117,383 |
|
|
|
|
|
|
|
|
|
|
|
117,383 |
|
Prior Period Acquisitions |
|
|
(3,707 |
) |
|
|
|
|
|
|
|
|
|
|
(3,707 |
) |
Earn-out payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
514,722 |
|
|
$ |
69,512 |
|
|
$ |
2,039 |
|
|
$ |
586,273 |
|
|
At September 30, 2006, certain merger agreements provided for contingent payments (earn-out)
of up to $4,588. If future operating performance goals of the acquired companies are met, goodwill
will be adjusted for the amount of the contingent payments.
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by major intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Trademarks |
|
$ |
35,992 |
|
|
$ |
8,253 |
|
|
$ |
27,739 |
|
|
$ |
35,992 |
|
|
$ |
8,253 |
|
|
$ |
27,739 |
|
Non-compete agreements |
|
|
7,754 |
|
|
|
2,619 |
|
|
|
5,135 |
|
|
|
4,894 |
|
|
|
1,851 |
|
|
|
3,043 |
|
Customer relationships |
|
|
56,364 |
|
|
|
2,368 |
|
|
|
53,996 |
|
|
|
25,654 |
|
|
|
997 |
|
|
|
24,657 |
|
Acquired backlog |
|
|
7,231 |
|
|
|
5,306 |
|
|
|
1,925 |
|
|
|
3,935 |
|
|
|
3,934 |
|
|
|
1 |
|
|
|
|
|
|
Total |
|
$ |
107,341 |
|
|
$ |
18,546 |
|
|
$ |
88,795 |
|
|
$ |
70,475 |
|
|
$ |
15,035 |
|
|
$ |
55,440 |
|
|
The Companys indefinite lived intangible assets not subject to amortization consist solely of
the Companys trademark portfolio obtained through business acquisitions. The Companys
definite-lived intangible assets subject to amortization are comprised of employee non-compete
contracts, backlog and customer relationships also obtained through business acquisitions.
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.
9
The following table summarizes the changes to carrying amounts of intangible assets during the
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Competes |
|
|
Customer |
|
|
|
|
|
|
Trademarks |
|
|
and Backlog |
|
|
Relationships |
|
|
Total |
|
|
Balance at March 31, 2006 |
|
$ |
27,739 |
|
|
$ |
3,044 |
|
|
$ |
24,657 |
|
|
$ |
55,440 |
|
Amortization expense |
|
|
|
|
|
|
(2,066 |
) |
|
|
(1,371 |
) |
|
|
(3,437 |
) |
Currency translation |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
58 |
|
Current Period Acquisitions (Note 9) |
|
|
|
|
|
|
5,282 |
|
|
|
27,134 |
|
|
|
32,416 |
|
Prior Period Acquisitions |
|
|
|
|
|
|
742 |
|
|
|
3,576 |
|
|
|
4,318 |
|
|
|
|
Balance at September 30, 2006 |
|
$ |
27,739 |
|
|
$ |
7,060 |
|
|
$ |
53,996 |
|
|
$ |
88,795 |
|
|
Intangible asset amortization expense was $1,931 and $3,437 for the three and six months ended
September 30, 2006, respectively. Intangible asset amortization expense was $1,328 and $2,886 for
the three and six months ended September 30, 2005, respectively. The Company acquired
definite-lived intangibles from the completion of two acquisitions during the six month period
ended September 30, 2006 (see Note 9 of the Notes to the Consolidated Financial Statements). 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 third
quarter of Fiscal 2007. The Company recorded amortization expense of $1,266 and $2,110 for the
three and six month periods ended September 30, 2006 for these newly acquired definite-lived
assets.
The following table details the estimated intangible amortization expense for the next five years.
These estimates are based on the carrying amounts of intangible assets as of September 30, 2006
that are subject to change pending the outcome of purchase accounting related to our current
acquisitions:
|
|
|
|
|
Years Ending March 31, |
|
|
2007 |
|
$ |
7,242 |
|
2008 |
|
|
4,561 |
|
2009 |
|
|
4,139 |
|
2010 |
|
|
4,010 |
|
2011 |
|
|
3,438 |
|
Thereafter |
|
|
41,103 |
|
|
|
|
|
Total |
|
$ |
64,493 |
|
|
10
Note 5: Indebtedness
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
Revolving credit agreement |
|
$ |
249,400 |
|
|
$ |
121,303 |
|
Interest rate swap fair value (see Note 6) |
|
|
1,395 |
|
|
|
|
|
Capital lease obligations |
|
|
1,563 |
|
|
|
1,891 |
|
Other |
|
|
195 |
|
|
|
528 |
|
|
|
|
|
|
|
|
Total debt |
|
|
252,553 |
|
|
|
123,722 |
|
Less: current portion |
|
|
(608 |
) |
|
|
(1,049 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
251,945 |
|
|
$ |
122,673 |
|
|
|
|
|
|
|
|
Revolving credit agreement:
On March 28, 2006, the Company entered into a Second Amendment to the Second Amended and Restated
Credit Agreement dated January 24, 2005, as amended February 17, 2005 (collectively, the Credit
Agreement) with Citizens Bank of Pennsylvania, as agent, and a group of lenders. The Credit
Agreement expires on March 28, 2011. Borrowings under the Credit Agreement are permitted up to a
maximum amount of $310,000, which includes up to $15,000 of swing line loans and $25,000 of letters
of credit. The Credit Agreement may be increased by the Company up to an additional $90,000 with
the approval of the lenders and may be unilaterally and permanently reduced by the Company to not
less than the then outstanding amount of all borrowings. Interest on outstanding indebtedness
under the Credit Agreement accrues, at the Companys option, at a rate based on either: (a) the
greater of (i) the prime rate per annum of the agent then in effect and (ii) 0.50% plus the rate
per annum announced by the Federal Reserve Bank of New York as being the weighted average of the
rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous
trading day or (b) a rate per annum equal to the LIBOR rate plus 0.75% to 1.25% (determined by a
leverage ratio based on the Companys EBITDA). The Credit Agreement requires the Company to
maintain compliance with certain non-financial and financial covenants such as minimum net worth,
leverage and fixed charge coverage ratios. As of September 30, 2006, the Company was in compliance
with all required covenants under the Credit Agreement.
During the six month period ended September 30, 2006, the Company increased net borrowings under
the Credit Agreement by approximately $128,097. The Company utilized the proceeds from net
borrowings to fund the acquisitions of the USA Commercial and Government and Canadian operations of
NextiraOne, LLC (NextiraOne) and Nu-Vision Technologies, Inc. and Nu-Vision Technologies, LLC
(collectively referred to as NUVT) during the first quarter Fiscal 2007 (see Note 9 of the Notes
to the Consolidated Financial Statements) and to repurchase the Companys Common Stock during the
second quarter Fiscal 2007.
During the three month period ended September 30, 2006, the maximum amount and weighted average
balance outstanding under the Credit Agreement were $284,470 and $265,437, respectively. The
weighted average interest rate on all outstanding debt was approximately 6.26% and 5.04% for the
three month periods ended September 30, 2006 and 2005, respectively. During the six month period
ended September 30, 2006, the maximum amount and weighted average balance outstanding under the
Credit Agreement were $284,470 and $243,390, respectively. The weighted average interest rate on
all outstanding debt was approximately 6.17% and 4.53% for the six month periods ended September
30, 2006 and 2005, respectively.
Capital Lease Obligations:
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%.
11
Other:
Other debt is comprised of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one year to five years
with interest rates ranging from 0.0% to 7.1%.
Unused Available Borrowings:
As of September 30, 2006, the Company had $4,565 outstanding in letters of credit and $56,035
available under the Credit Agreement.
Note 6: Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts:
The Company enters into foreign currency forward contracts to hedge exposure to variability in
expected fluctuations in foreign currencies. As of September 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, which have been designated as cash flow hedges.
These contracts had a notional amount of approximately $53,518 and a fair value of $52,175 and
mature within the next thirty months.
As of September 30, 2006, an unrecognized gain of $1,203 on all open foreign currency forward
contracts is included in the Companys Consolidated Balance Sheets as a component of Other
Comprehensive Income (loss) (OCI). This unrecognized gain is expected to be credited to earnings
over the life of the maturing contracts as the hedged forecasted transaction occurs and it is
expected that the gain will be offset by currency losses on the items being hedged.
During the three and six month period ending September 30, 2006, the Company recognized $106 and
$292, respectively, into earnings on matured contracts. There was no hedge ineffectiveness during
the six month period ending September 30, 2006.
Interest Rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate long
term debt, the Company has implemented an interest-rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused
by interest rate volatility. The Companys goal is to manage interest-rate sensitivity by modifying
the re-pricing characteristics of certain balance sheet liabilities so that the net-interest margin
is not, on a material basis, adversely affected by the movements in interest rates.
During the three month period ending September 30, 2006, the Company entered into a five year
interest rate swap (interest rate swap) designated as a cash flow hedge which has been used to
effectively convert a portion of the Companys variable rate debt to fixed rate. The interest rate
swap has a notional value of $100,000 reducing to $50,000 after three years. During the three and
six month periods ending September 30, 2006, the Company recognized a gain of $9 related to the
interest rate swap which is recorded in Interest Expense (Income). As of September 30, 2006, an
unrecognized loss of $1,395 on this interest rate swap is included in the Companys Consolidated
Balance Sheets as a component of OCI and Long Term Debt. This unrecognized loss is expected to be
reclassified into earnings when the forecasted hedged transactions occur.
12
Note 7: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended |
|
|
Six month period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
Net income, as reported |
|
$ |
13,079 |
|
|
$ |
12,797 |
|
|
$ |
20,886 |
|
|
$ |
20,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
17,513 |
|
|
|
17,022 |
|
|
|
17,415 |
|
|
|
16,933 |
|
Effect of dilutive securities from employee stock options |
|
|
230 |
|
|
|
352 |
|
|
|
351 |
|
|
|
275 |
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
17,743 |
|
|
|
17,374 |
|
|
|
17,766 |
|
|
|
17,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.75 |
|
|
$ |
0.75 |
|
|
$ |
1.20 |
|
|
$ |
1.19 |
|
|
|
|
Dilutive earnings per common share |
|
$ |
0.74 |
|
|
$ |
0.74 |
|
|
$ |
1.18 |
|
|
$ |
1.17 |
|
|
|
|
The Weighted Average Common Shares Outstanding (diluted) computation is not impacted during
any period where the exercise price of a stock option is greater than the average market price.
There were 3,240,830 and 1,957,098 non-dilutive stock options outstanding during the three month
periods ended September 30, 2006 and 2005, respectively, that are not included in the corresponding
period Weighted Average Common Shares Outstanding (diluted) computation. There were 774,038 and
2,595,489 non-dilutive stock options outstanding during the six month-periods ended September 30,
2006 and 2005, respectively, that are not included in the corresponding period Weighted Average
Common Shares Outstanding (diluted) computation.
Note 8: Comprehensive Income and Stockholders Equity
The following table details the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended |
|
|
Six month period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
Net income |
|
$ |
13,079 |
|
|
$ |
12,797 |
|
|
$ |
20,886 |
|
|
$ |
20,191 |
|
|
Foreign currency translation adjustment |
|
|
(481 |
) |
|
|
718 |
|
|
|
6,044 |
|
|
|
(9,046 |
) |
|
Unrealized gains/(losses) on
derivatives designated and qualified
as cash flow hedges, net of
reclassification of unrealized
gains/(losses) on expired derivatives |
|
|
(1,102 |
) |
|
|
75 |
|
|
|
(1,334 |
) |
|
|
233 |
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
11,496 |
|
|
$ |
13,590 |
|
|
$ |
25,596 |
|
|
$ |
11,378 |
|
|
The components of Accumulated Other Comprehensive Income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
Foreign currency translation adjustment |
|
$ |
17,938 |
|
|
$ |
11,894 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized gains/(losses) on expired
derivatives |
|
|
(192 |
) |
|
|
1,142 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
17,746 |
|
|
$ |
13,036 |
|
|
During the six month period ended September 30, 2006, additional paid-in-capital increased
$10,235. The increase was comprised of $3,192 in stock compensation expense and $7,043 from stock
option exercises, net of tax.
13
Note 9: Acquisitions
During the first quarter Fiscal 2007, the Company acquired the USA Commercial and Government and
Canadian operations of NextiraOne. The following table summarizes the preliminary 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 |
|
$ |
87,864 |
|
Property, plant and equipment |
|
|
10,806 |
|
Other non-current assets |
|
|
1,386 |
|
Intangible assets |
|
|
19,743 |
|
Goodwill |
|
|
96,665 |
|
|
|
|
|
Total assets acquired |
|
$ |
216,464 |
|
|
|
|
|
|
Current liabilities, primarily consisting of deferred revenue,
restructuring reserve and accrued expenses |
|
$ |
106,801 |
|
Other non-current liabilities, primarily consisting of restructuring
reserve |
|
|
22,319 |
|
|
|
|
|
Total liabilities acquired |
|
$ |
129,120 |
|
|
|
|
|
|
Net assets acquired |
|
$ |
87,344 |
|
|
The following table details the amounts recorded to each major intangible asset class:
|
|
|
|
|
|
|
At April 30, 2006 |
|
|
Backlog |
|
$ |
3,300 |
|
Customer relationships and contracts |
|
|
16,443 |
|
|
|
|
|
Total intangible assets* |
|
$ |
19,743 |
|
|
|
|
|
* |
|
The estimated weighted average amortization period for these definite-lived assets is 16.8
years. |
The transaction resulted in $96,665 of goodwill. The Company paid this 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 the outstanding interests in NextiraOne which 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 during the third quarter, at which time the final purchase price will be
determined. As of September 30, 2006, the equity book value adjustment resulted in a $10,535
receivable from the seller. This receivable is recorded in Other Current Assets and is considered
fully collectible. The costs of the acquisitions were funded with borrowings under the Credit
Agreement described in Note 5 of the Notes to the Consolidated Financial Statements.
Included in the total cash paid at closing was $42,143 that was allocated to escrow accounts,
including a general escrow, and an escrow for certain specified items regarding litigation,
accounts receivable, deposits and credits, equipment leases, accounts payable, workers
compensation and real estate leases. The amounts in escrow have been and will continue to be
released to NextiraOnes seller or to the Company in accordance with the terms of the agreements.
After consummation of the acquisition, the Company began to integrate NextiraOne products,
employees and facilities with its own. In so doing, the Company incurred $15,726 of costs related
to facility consolidations and $8,857 of severance costs for the separation of approximately 250
employees. In accordance with SFAS 141, these costs were properly included in the purchase price
allocation for NextiraOne. The majority of the severance costs will be paid in Fiscal 2007 with
certain facility costs extending through Fiscal 2014.
14
In connection with the NextiraOne acquisition, the Company obtained various contractual obligations
in the form of operating leases for facilities and vehicles. The following table summarizes the
payments due by period related to those contractual obligations:
|
|
|
|
|
Payments Due by Period |
|
|
Less than 1 year |
|
$ |
15,872 |
|
1-3 years |
|
|
18,271 |
|
3-5 years |
|
|
977 |
|
More than 5 years |
|
|
|
|
|
|
|
|
Total |
|
$ |
35,120 |
|
|
Also, during first quarter Fiscal 2007, the Company acquired NUVT. In connection with the NUVT
acquisition, the Company has made a preliminary allocation of $20,718 and $12,673 to goodwill and
definite-lived intangible assets, 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 on preliminary estimates of the
fair values of certain assets acquired and liabilities assumed as of the date of the acquisition.
Management, with the assistance of independent valuation specialists, is currently assessing the
fair values of the tangible and intangible assets acquired and liabilities assumed. The preliminary
allocations of purchase price are dependant upon certain estimates and assumptions, which are
preliminary and may vary from the amounts reported herein.
NextiraOne and NUVT contributed on-site services revenues of $88,259 and $148,433 during the three
and six month periods ended September 30, 2006, respectively.
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 |
|
|
For the six months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Revenue (Pro forma) |
|
$ |
271,325 |
|
|
$ |
310,496 |
|
|
$ |
532,366 |
|
|
$ |
646,438 |
|
Net Income from continuing
operations (Pro forma), net of tax |
|
$ |
13,079 |
|
|
$ |
12,601 |
|
|
$ |
19,089 |
|
|
$ |
24,072 |
|
Earnings per common share (Pro forma) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.75 |
|
|
$ |
0.74 |
|
|
$ |
1.10 |
|
|
$ |
1.42 |
|
Diluted |
|
$ |
0.74 |
|
|
$ |
0.73 |
|
|
$ |
1.09 |
|
|
$ |
1.40 |
|
|
15
Purchase Price Allocation Update (prior year acquisitions):
During first quarter 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
$8,385 and $5,846 to goodwill and definite-lived intangible assets, 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 second quarter 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 $9,430
and $8,000 to goodwill and definite-lived intangible assets, 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 five to 20 years.
During third quarter 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 made a preliminary allocation of
$9,153 and $6,779 to goodwill and definite-lived intangible assets, 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 following acquired companies will collectively be referred to as Acquired Companies: TSM,
GTC, BCI, Universal, C=WIN, CSG, NextiraOne and NUVT.
16
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 or
a third party indemnification obligation, without merit or not probable that a material unfavorable
outcome will result.
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Companys best
estimate of probable liability under those warranties. As of September 30, 2006 and March 31, 2006,
the Company has recorded a warranty reserve of $5,059 and $1,383, respectively.
There has been no significant or unusual activity during the three and six month periods ended
September 30, 2006 other than the acquisitions as discussed in Note 9 of the Notes to the
Consolidated Financial Statements.
Note 11: Pension Plan Costs
On April 30, 2006, the Company acquired NextiraOne who is a 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 components of net periodic benefit cost for the three and six
month periods ended September 30, 2006. Six month results include the net periodic benefit cost
from May 1, 2006 (date following acquisition) through September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2006 |
|
|
2006 |
|
|
Service cost |
|
$ |
148 |
|
|
$ |
219 |
|
Interest cost |
|
|
465 |
|
|
|
581 |
|
Expected return on plan assets |
|
|
(514 |
) |
|
|
(622 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
Amortization of unrealized gains and losses |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
57 |
|
|
$ |
178 |
|
|
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 Other Liabilities within the
Consolidated Balance Sheets.
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 |
% |
|
17
Note 12: Restructuring and Other Charges
The Company incurred $15,726 of costs related to facility consolidations and $8,857 of severance
costs for the separation of approximately 250 employees. In accordance with SFAS 141, these costs
were properly included in the purchase price allocation for NextiraOne. The majority of the
severance costs will be paid in Fiscal 2007 with certain facility costs extending through Fiscal
2014. The Company paid $3,590 and $7,132 during the three and six month periods ended September
2006, respectively, relating to such obligations.
The following table summarizes the changes to the restructuring reserve during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Facility |
|
|
|
|
|
|
Severance |
|
|
Closures |
|
|
Total |
|
|
Balance at March 31, 2006 |
|
$ |
260 |
|
|
$ |
10,438 |
|
|
$ |
10,698 |
|
Acquisition adjustments (see Note 9) |
|
|
8,857 |
|
|
|
15,843 |
|
|
|
24,700 |
|
Cash expenditures |
|
|
(4,997 |
) |
|
|
(4,173 |
) |
|
|
(9,170 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
4,120 |
|
|
$ |
22,108 |
|
|
$ |
26,228 |
|
|
Note 13: Stock-based Compensation
Stock-based compensation expense recognized in the Companys Consolidated Statements of Income for
the three and six months ended September 30, 2006 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).
For the three and six month periods ended September 30, 2006, the Company recognized compensation
expense of $1,572 ($1,022 net of tax) or $0.06 per diluted share and $3,192 ($2,075 net of tax) or
$0.12 per diluted share, respectively. This compensation expense is recorded to Selling, General
and Administrative expense on the Companys Consolidated Statement of Income.
The following table summarizes certain information regarding the Companys outstanding stock
options as of and for the period ending September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Six month period ended September 30, 2006 |
|
|
|
|
|
|
|
Weighted-Average Exercise |
|
|
|
Shares |
|
Price (per share) |
|
Outstanding at March 31, 2006 |
|
|
5,055 |
|
|
$ |
38.28 |
|
Granted |
|
|
70 |
|
|
|
39.12 |
|
Exercised |
|
|
(197 |
) |
|
|
33.61 |
|
Forfeited or expired |
|
|
(58 |
) |
|
|
38.62 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
4,870 |
|
|
$ |
38.48 |
|
Exercisable at September 30, 2006 |
|
|
4,377 |
|
|
$ |
38.91 |
|
Weighted average fair value of
options granted during the period
using Black-Scholes option
pricing model |
|
|
|
|
|
$ |
17.68 |
|
|
18
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 September
30, 2006, the Employee Plan is authorized to issue stock options and stock appreciation rights
(SARs) for up to 9,200,000 shares of the Companys 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. As of September 30, 2006,
the Director Plan is authorized to issue stock options and SARs for up to 270,000 shares of the
Companys Common Stock. 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 under
either plan.
The weighted average fair value of stock options granted during the period was $17.68 based on the
Black-Scholes option pricing model using the following weighted average assumptions.
|
|
|
|
|
|
|
2Q07 |
|
Expected life (in years) |
|
|
5.7 |
|
Risk free interest rate |
|
|
4.18 |
% |
Annual forfeiture rate |
|
|
1.53 |
% |
Volatility |
|
|
44.75 |
% |
Dividend yield |
|
|
0.60 |
% |
|
The following table summarizes information about stock options outstanding at September 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) |
$19.95 $26.60
|
|
|
258 |
|
|
|
1.8 |
|
|
$ |
21.85 |
|
|
$ |
4,422 |
|
|
|
258 |
|
|
$ |
21.85 |
|
|
$ |
4,422 |
|
$26.60 $33.25
|
|
|
356 |
|
|
|
2.6 |
|
|
|
30.07 |
|
|
|
3,174 |
|
|
|
356 |
|
|
|
30.07 |
|
|
|
3,174 |
|
$33.25 $39.90
|
|
|
1,951 |
|
|
|
8.6 |
|
|
|
37.04 |
|
|
|
3,758 |
|
|
|
1,458 |
|
|
|
37.82 |
|
|
|
1,674 |
|
$39.90 $46.55
|
|
|
2,147 |
|
|
|
5.2 |
|
|
|
42.37 |
|
|
|
|
|
|
|
2,147 |
|
|
|
42.37 |
|
|
|
$46.55 $53.20
|
|
|
154 |
|
|
|
3.1 |
|
|
|
49.39 |
|
|
|
|
|
|
|
154 |
|
|
|
49.39 |
|
|
|
$53.20 $59.85
|
|
|
2 |
|
|
|
3.3 |
|
|
|
55.88 |
|
|
|
|
|
|
|
2 |
|
|
|
55.88 |
|
|
|
$59.85 $66.50
|
|
|
2 |
|
|
|
3.2 |
|
|
|
63.22 |
|
|
|
|
|
|
|
2 |
|
|
|
63.22 |
|
|
|
|
|
|
|
|
$19.95 $66.50
|
|
|
4,870 |
|
|
|
6.1 |
|
|
$ |
38.48 |
|
|
$ |
11,354 |
|
|
|
4,377 |
|
|
$ |
38.91 |
|
|
$ |
9,270 |
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys average stock price on September 30, 2006 of $38.97, which would have
been received by the option holders had all option holders exercised their options as of that date.
As of September 30, 2006, there was approximately $7,295 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.
19
Pro forma Information
The Company adopted SFAS 123(R) using the modified prospective transition method. The modified
prospective transition method requires the Company to provide pro forma disclosure of specific
income statement line items for periods prior to the adoption of SFAS 123(R) as if the
fair-value-based method had been applied to all awards. The following table illustrates the pro
forma effect on net income (loss) and net income (loss) per share prior to the adoption of SFAS
123(R). This table only shows pro forma amounts for the three and six month period ending September
30, 2005 since the Company adopted the fair value recognition provisions of SFAS 123(R) on April 1,
2006 and, therefore, compensation expenses are recognized in the consolidated income statement for
all share-based payments granted prior to, but not yet vested as of March 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
Net income (As reported) |
|
$ |
12,797 |
|
|
$ |
20,191 |
|
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 |
|
|
(2,645 |
) |
|
|
(5,222 |
) |
|
|
|
|
|
|
|
Net Income (Pro forma) |
|
$ |
10,152 |
|
|
$ |
14,969 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.75 |
|
|
$ |
1.19 |
|
Basic pro forma |
|
$ |
0.60 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.74 |
|
|
$ |
1.17 |
|
Diluted pro forma |
|
$ |
0.58 |
|
|
$ |
0.87 |
|
|
The pro forma impacts computed above were based on the Black-Scholes option pricing model
using the following weighted average assumptions.
|
|
|
|
|
|
|
2Q06 |
|
Expected life (in years) |
|
|
5.1 |
|
Risk free interest rate |
|
|
3.9 |
% |
Volatility |
|
|
59.0 |
% |
Dividend yield |
|
|
0.70 |
% |
|
20
Note 14: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on net revenues, operating income and assets by geographic region for the purpose of
making operational decisions and assessing financial performance. Additionally, Management is
presented with and reviews net revenues and gross profit by service type. The accounting policies
of the individual operating segments are the same as those of the Company.
The following table presents financial information about the Companys reportable segments by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
231,297 |
|
|
$ |
146,754 |
|
|
$ |
423,869 |
|
|
$ |
283,615 |
|
Operating income |
|
|
18,937 |
|
|
|
16,537 |
|
|
|
29,963 |
|
|
|
28,396 |
|
Depreciation |
|
|
3,580 |
|
|
|
2,057 |
|
|
|
5,741 |
|
|
|
4,017 |
|
Amortization |
|
|
1,911 |
|
|
|
1,270 |
|
|
|
3,368 |
|
|
|
2,475 |
|
Segment assets (as of September 30, 2006) |
|
|
1,022,370 |
|
|
|
748,322 |
|
|
|
1,022,370 |
|
|
|
748,322 |
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
30,844 |
|
|
$ |
29,199 |
|
|
$ |
60,189 |
|
|
$ |
62,949 |
|
Operating income |
|
|
3,489 |
|
|
|
3,427 |
|
|
|
6,632 |
|
|
|
3,060 |
|
Depreciation |
|
|
112 |
|
|
|
166 |
|
|
|
231 |
|
|
|
362 |
|
Amortization |
|
|
11 |
|
|
|
50 |
|
|
|
51 |
|
|
|
393 |
|
Segment assets (as of September 30, 2006) |
|
|
125,745 |
|
|
|
123,837 |
|
|
|
125,745 |
|
|
|
123,837 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,184 |
|
|
$ |
9,097 |
|
|
$ |
17,662 |
|
|
$ |
17,768 |
|
Operating income |
|
|
1,895 |
|
|
|
1,943 |
|
|
|
3,491 |
|
|
|
3,623 |
|
Depreciation |
|
|
24 |
|
|
|
38 |
|
|
|
44 |
|
|
|
115 |
|
Amortization |
|
|
9 |
|
|
|
8 |
|
|
|
18 |
|
|
|
18 |
|
Segment assets (as of September 30, 2006) |
|
|
15,888 |
|
|
|
14,955 |
|
|
|
15,888 |
|
|
|
14,955 |
|
|
The sum of segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
March 31, 2006 |
|
|
Segment assets for North America, Europe and All Other |
|
$ |
1,164,003 |
|
|
$ |
878,879 |
|
Corporate eliminations |
|
|
(73,727 |
) |
|
|
(79,145 |
) |
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
1,090,276 |
|
|
$ |
799,734 |
|
|
21
The following table presents financial information about the Company by service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Six months ended September 30 |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Data Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,447 |
|
|
$ |
52,584 |
|
|
$ |
90,978 |
|
|
$ |
105,485 |
|
Gross Profit |
|
|
13,907 |
|
|
|
15,482 |
|
|
|
27,224 |
|
|
|
31,006 |
|
Voice Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
169,815 |
|
|
$ |
78,410 |
|
|
$ |
303,454 |
|
|
$ |
151,339 |
|
Gross Profit |
|
|
57,913 |
|
|
|
31,173 |
|
|
|
103,676 |
|
|
|
59,011 |
|
Hotline Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
55,063 |
|
|
$ |
54,056 |
|
|
$ |
107,288 |
|
|
$ |
107,508 |
|
Gross Profit |
|
|
27,216 |
|
|
|
27,227 |
|
|
|
53,980 |
|
|
|
54,805 |
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross
profit.
Note 15: Subsequent Events
Acquisitions:
On October 31, 2006, the Company announced the acquisition of Nortech Telecommunications, Inc.
(NTI), a privately-held company based out of Chicago, IL. NTI has an active customer base which
includes commercial, education and various government agency accounts. Annual historical revenues
of NTI are approximately $8,000.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion should be read in conjunction with the response to Part I, Item 1 of
this report and the consolidated financial statements of the Company, including the related notes,
and Managements Discussion and Analysis of Financial Condition and Results of Operations
included in Form 10-K. All dollar amounts are presented in thousands unless otherwise noted.
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.
Management is presented with and reviews revenues and operating income by geographical segment. In
addition, revenues and gross profit information by service type are provided below for further
analysis.
The Company has completed several acquisitions previously defined as the Acquired Companies from
the first quarter of Fiscal 2006 through the second quarter of Fiscal 2007 that have a significant
impact on the Companys consolidated financial statements and, more specifically, North America
Voice Services for the periods under review. In connection with certain acquisitions, the Company
incurs expenses that it excludes when evaluating the continuing operations of the Company. The
following table is included to provide a schedule of the current and an estimate of future
acquisition related expenses based on the acquisition activity through September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY07 |
|
|
|
|
|
|
1Q07 |
|
|
2Q07 |
|
|
3Q07 |
|
|
4Q07 |
|
|
Total |
|
|
Thereafter |
|
|
SGA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up
depreciation
expense on
acquisitions |
|
$ |
|
|
|
$ |
1,197 |
|
|
$ |
713 |
|
|
$ |
652 |
|
|
$ |
2,562 |
|
|
$ |
3,560 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
intangible assets
on acquisitions |
|
|
1,439 |
|
|
|
1,892 |
|
|
|
1,849 |
|
|
|
1,863 |
|
|
|
7,043 |
|
|
|
56,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,439 |
|
|
$ |
3,089 |
|
|
$ |
2,562 |
|
|
$ |
2,515 |
|
|
$ |
9,605 |
|
|
$ |
60,332 |
|
|
23
Information on revenues and operating income by reportable geographic segment (North America,
Europe and All Other) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
231,297 |
|
|
|
85.2 |
% |
|
$ |
146,754 |
|
|
|
79.3 |
% |
|
$ |
423,869 |
|
|
|
84.5 |
% |
|
$ |
283,615 |
|
|
|
77.8 |
% |
Europe |
|
|
30,844 |
|
|
|
11.4 |
% |
|
|
29,199 |
|
|
|
15.8 |
% |
|
|
60,189 |
|
|
|
12.0 |
% |
|
|
62,949 |
|
|
|
17.3 |
% |
All Other |
|
|
9,184 |
|
|
|
3.4 |
% |
|
|
9,097 |
|
|
|
4.9 |
% |
|
|
17,662 |
|
|
|
3.5 |
% |
|
|
17,768 |
|
|
|
4.9 |
% |
|
|
|
Total |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
185,050 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
$ |
364,332 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
18,937 |
|
|
|
|
|
|
$ |
16,537 |
|
|
|
|
|
|
$ |
29,963 |
|
|
|
|
|
|
$ |
28,396 |
|
|
|
|
|
% of North America
revenues |
|
|
8.2 |
% |
|
|
|
|
|
|
11.3 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
|
|
|
|
10.0 |
% |
|
|
|
|
Europe |
|
$ |
3,489 |
|
|
|
|
|
|
$ |
3,427 |
|
|
|
|
|
|
$ |
6,632 |
|
|
|
|
|
|
$ |
3,060 |
|
|
|
|
|
% of Europe revenues |
|
|
11.3 |
% |
|
|
|
|
|
|
11.7 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
|
|
4.9 |
% |
|
|
|
|
All Other |
|
$ |
1,895 |
|
|
|
|
|
|
$ |
1,943 |
|
|
|
|
|
|
$ |
3,491 |
|
|
|
|
|
|
$ |
3,623 |
|
|
|
|
|
% of All Other
revenues |
|
|
20.6 |
% |
|
|
|
|
|
|
21.4 |
% |
|
|
|
|
|
|
19.8 |
% |
|
|
|
|
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,321 |
|
|
|
9.0 |
% |
|
$ |
21,907 |
|
|
|
11.8 |
% |
|
$ |
40,086 |
|
|
|
8.0 |
% |
|
$ |
35,079 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,657 |
|
|
|
|
|
|
$ |
1,274 |
|
|
|
|
|
|
$ |
8,825 |
|
|
|
|
|
|
$ |
5,653 |
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,742 |
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,657 |
|
|
|
1.7 |
% |
|
$ |
1,274 |
|
|
|
0.7 |
% |
|
$ |
8,825 |
|
|
|
1.8 |
% |
|
$ |
9,395 |
|
|
|
2.6 |
% |
|
24
Information on revenues and gross profit by service type (Data Services, Voice Services and
Hotline Services) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
|
|
|
total |
|
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
$ |
|
|
revenue |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services(1) |
|
$ |
46,447 |
|
|
|
17.1 |
% |
|
$ |
52,584 |
|
|
|
28.4 |
% |
|
$ |
90,978 |
|
|
|
18.1 |
% |
|
$ |
105,485 |
|
|
|
29.0 |
% |
Voice Services(1) |
|
|
169,815 |
|
|
|
62.6 |
% |
|
|
78,410 |
|
|
|
42.4 |
% |
|
|
303,454 |
|
|
|
60.5 |
% |
|
|
151,339 |
|
|
|
41.5 |
% |
Hotline Services |
|
|
55,063 |
|
|
|
20.3 |
% |
|
|
54,056 |
|
|
|
29.2 |
% |
|
|
107,288 |
|
|
|
21.4 |
% |
|
|
107,508 |
|
|
|
29.5 |
% |
|
|
|
Total |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
185,050 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
$ |
364,332 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
13,907 |
|
|
|
|
|
|
$ |
15,482 |
|
|
|
|
|
|
$ |
27,224 |
|
|
|
|
|
|
$ |
31,006 |
|
|
|
|
|
% of Data Services revenues |
|
|
29.9 |
% |
|
|
|
|
|
|
29.4 |
% |
|
|
|
|
|
|
29.9 |
% |
|
|
|
|
|
|
29.4 |
% |
|
|
|
|
Voice Services |
|
$ |
57,913 |
|
|
|
|
|
|
$ |
31,173 |
|
|
|
|
|
|
$ |
103,676 |
|
|
|
|
|
|
$ |
59,011 |
|
|
|
|
|
% of Voice Services revenues |
|
|
34.1 |
% |
|
|
|
|
|
|
39.8 |
% |
|
|
|
|
|
|
34.2 |
% |
|
|
|
|
|
|
39.0 |
% |
|
|
|
|
Hotline Services |
|
$ |
27,216 |
|
|
|
|
|
|
$ |
27,227 |
|
|
|
|
|
|
$ |
53,980 |
|
|
|
|
|
|
$ |
54,805 |
|
|
|
|
|
% of Hotline Services
revenues |
|
|
49.4 |
% |
|
|
|
|
|
|
50.4 |
% |
|
|
|
|
|
|
50.3 |
% |
|
|
|
|
|
|
51.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99,036 |
|
|
|
36.5 |
% |
|
$ |
73,882 |
|
|
|
39.9 |
% |
|
$ |
184,880 |
|
|
|
36.8 |
% |
|
$ |
144,822 |
|
|
|
39.8 |
% |
|
|
|
|
(1) |
|
Data Services and Voice Services may also be collectively referred to as
On-Site Services. |
Second Quarter Fiscal 2007 (2Q07) Compared to Second Quarter Fiscal 2006 (2Q06):
Total Revenues
Total revenues for 2Q07 were $271,325, an increase of 47% compared to 2Q06 total revenues of
$185,050. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding
the effects of the acquisitions and the positive impact of exchange rates of $1,610 relative to the
U.S. dollar, revenues would have decreased 6% from $179,988 to $169,940 between periods for the
reasons discussed below.
Revenues by Geography
North America Revenues
Revenues in North America were $231,297 for 2Q07, an increase of 58% compared to 2Q06 revenues of
$146,754. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding
the effects of these acquisitions, revenues would have decreased 7% from $141,692 to $131,522
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.
25
Europe Revenues
Revenues in Europe were $30,844 for 2Q07, an increase of 6% compared to 2Q06 revenues of $29,199.
Excluding the positive impact of exchange rates of $1,340 relative to the U.S. dollar, revenues
would have increased 1% to $29,504 for 2Q07. The Company believes the overall increase is due to
the success in the Companys DVH (Data, Voice and Hotline) Services cross-selling initiatives
partially offset by a decrease from nonrecurring projects.
All Other Revenues
Revenues for All Other were $9,184 for 2Q07, an increase of 1% compared to $9,097 for 2Q06.
Excluding the negative impact of exchange rates of $120 relative to the U.S. dollar, revenues would
have increased 2% to $9,304 for 2Q07.
Revenue by Service Type
Data Services
Revenues from Data Services were $46,447 for 2Q07, a decrease of 12% compared to $52,584 for 2Q06.
Excluding the positive impact of exchange rates of $834 relative to the U.S. dollar, revenues would
have decreased 13% to $45,613 for 2Q07. The Company believes the overall decrease in Data Services
revenue was due to the completion of several nonrecurring projects.
Voice Services
Revenues from Voice Services were $169,815 for 2Q07, an increase of 117% compared to $78,410 for
2Q06. The increase was primarily due to the incremental revenue from the Acquired Companies, which
added $99,775 and $5,062 of revenues to the 2Q07 and 2Q06 results, respectively. Excluding the
effects of these acquisitions, revenues would have decreased 5% from $73,348 to $70,040 between
periods. The Company believes that this overall decrease in Voice Services revenue is primarily
due to the completion of nonrecurring projects.
Hotline Services
Revenues from Hotline Services were $55,063 for 2Q07, an increase of 2% compared to $54,056 for
2Q06. Excluding the positive impact of exchange rates of $781 relative to the U.S. dollar, revenues
would have been $54,282 for 2Q07. The Company believes the overall increase in Hotline Services
revenues was driven by the success in the Companys DVH (Data, Voice and Hotline) Services
cross-selling initiatives.
Gross Profit
Gross profit dollars for 2Q07 increased to $99,036 from $73,882 for 2Q06. 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 2Q07 decreased to 36.5% of revenues from
39.9% of revenues for 2Q06. 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.
26
Gross profit dollars for Data Services were $13,907, or 29.9% of revenues, for 2Q07 compared to
$15,482, or 29.4% of revenues, for 2Q06. Gross profit dollars for Voice Services were $57,913, or
34.1% of revenues, for 2Q07 compared to $31,173, or 39.8% of revenues, for 2Q06. Gross profit
dollars for Hotline Services were $27,216, or 49.4% of revenues, for 2Q07 compared to $27,227, or
50.4% of revenues, for 2Q06.
SG&A Expenses
Selling, general and administrative (SG&A) expenses for 2Q07 were $72,784, an increase of $22,137
over SG&A expenses of $50,647 for 2Q06. The increase in SG&A expense dollars over the prior year
was due primarily to the Acquired Companies and $1,572 related to stock compensation expense. SG&A
expenses as a percent of revenue for 2Q07 were 26.8% of revenues comparable to 27.4% of revenues
for 2Q06.
Intangibles Amortization
Intangibles amortization for 2Q07 increased to $1,931 from $1,328 for 2Q06. The increase was
primarily attributable to the amortization of intangible assets acquired through the purchase of
the Acquired Companies. See Note 9 for further details related to the Acquired Companies.
Operating Income
Operating income for 2Q07 was $24,321, or 9.0% of revenues, compared to $21,907, or 11.8% of
revenues, for 2Q06.
Interest Expense, Net
Net interest expense for 2Q07 increased to $4,126 from $2,330 for 2Q06 due to an increase in the
weighted average outstanding debt from $265,437 for 2Q07 compared to approximately $161,735 for
2Q06. The increase in debt relates primarily to the acquisitions of NextiraOne and NUVT during the
first quarter Fiscal 2007. In addition, the weighted average interest rate outstanding for 2Q07
was 6.26%, an increase of 1.22% compared to the 2Q06 rate of 5.04%.
Provision for Income Taxes
The tax provision for 2Q07 was $7,044, an effective tax rate of 35.0%. This compares to the tax
provision for 2Q06 of $6,740, an effective tax rate of 34.5%. The tax rate for 2Q07 was higher
than 2Q06 due to changes in the overall mix of taxable income among worldwide offices.
Net Income
As a result of the foregoing, net income for 2Q07 was $13,079, or 4.8% of revenues, compared to
$12,797, or 6.9% of revenues, for 2Q06.
27
Six Months Fiscal 2007 (2QYTD07) Compared to Six Months Fiscal 2006 (2QYTD06):
Total Revenues
Total revenues for 2QYTD07 were $501,720, an increase of 38% compared to 2QYTD06 total revenues of
$364,332. The increase was primarily due to the incremental revenue from the Acquired Companies,
which added $182,166 and $19,393 of revenues to the 2QYTD07 and 2QYTD06 results, respectively.
Excluding the effects of the acquisitions and the positive impact of exchange rates of $1,883
relative to the U.S. dollar, revenues would have decreased 8% from $344,939 to $317,671 between
periods for the reasons discussed below.
Revenues by Geography
North America Revenues
Revenues in North America were $423,869 for 2QYTD07, an increase of 49% compared to 2QYTD06
revenues of $283,615. The increase was primarily due to the incremental revenue from the Acquired
Companies, which added $182,166 and $19,393 of revenues to the 2QYTD07 and 2QYTD06 results,
respectively. Excluding the effects of these acquisitions, revenues would have decreased 9% from
$264,222 to $241,703 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.
Europe Revenues
Revenues in Europe were $60,189 for 2QYTD07, a decrease of 4% compared to 2QYTD06 revenues of
$62,949. Excluding the positive impact of exchange rates of $1,246 relative to the U.S. dollar,
revenues would have decreased 6% to $58,943 for 2QYTD07. The Company believes the overall decrease
is due to the completion of non recurring projects offset in part by the success in the Companys
DVH (Data, Voice and Hotline) Services cross-selling initiatives.
All Other Revenues
Revenues for All Other were $17,662 for 2QYTD07, a decrease of 1% compared to $17,768 for 2QYTD06.
Excluding the negative impact of exchange rates of $271 relative to the U.S. dollar, revenues would
have increased 1% to $17,933 for 2QYTD07.
Revenue by Service Type
Data Services
Revenues from Data Services were $90,978 for 2QYTD07, a decrease of 14% compared to $105,485 for
2QYTD06. Excluding the positive impact of exchange rates of $1,144 relative to the U.S. dollar,
revenues would have decreased 15% to $89,834 for 2QYTD07. The Company believes the overall decrease
in Data Services revenue was due to the completion of several nonrecurring projects.
28
Voice Services
Revenues from Voice Services were $303,454 for 2QYTD07, an increase of 101% compared to $151,339
for 2QYTD06. The increase was primarily due to the incremental revenue from the Acquired
Companies, which added $182,166 and $19,393 of revenues to the 2QYTD07 and 2QYTD06 results,
respectively. Excluding the effects of these acquisitions, revenues would have decreased 8% from
$131,946 to $121,288 between periods. The Company believes that this overall decrease in Voice
Services revenue is primarily due to planned post-merger client attrition from the acquisition of
Norstan, Inc. in 4Q05 and nonrecurring projects.
Hotline Services
Revenues from Hotline Services were $107,288 for 2QYTD07 compared to $107,508 for 2QYTD06.
Excluding the positive impact of exchange rates of $739 relative to the U.S. dollar, revenues would
have decreased 1% to $106,549 for 2QYTD07. The Company believes the stabilization is due in part to
the success in the Companys DVH (Data, Voice and Hotline) Services cross-selling initiatives.
Gross Profit
Gross profit dollars for 2QYTD07 increased to $184,880 from $144,822 for 2QYTD06. 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 2QYTD07 decreased to 36.8% of
revenues from 39.8% of revenues for 2QYTD06. 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 $27,224, or 29.9% of revenues, for 2QYTD07 compared to
$31,006, or 29.4% of revenues, for 2QYTD06. Gross profit dollars for Voice Services were $103,676,
or 34.2% of revenues, for 2QYTD07 compared to $59,011, or 39.0% of revenues, for 2QYTD06. Gross
profit dollars for Hotline Services were $53,980, or 50.3% of revenues, for 2QYTD07 compared to
$54,805, or 51.0% of revenues, for 2QYTD06.
SG&A Expenses
SG&A expenses for 2QYTD07 were $141,357, an increase of $39,790 over SG&A expenses of $101,567 for
2QYTD06. The increase in SG&A expense dollars over the prior year was due primarily to the
Acquired Companies and $3,192 related to stock compensation expense. SG&A expenses as a percent of
revenue for 2QYTD07 were 28.2% of revenues comparable to 27.9% of revenues for 2QYTD06.
Restructuring Charges
The Company did not record any restructuring charges during 2QYTD07. 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.
Intangibles Amortization
Intangibles amortization for 2QYTD07 increased to $3,437 from $2,886 for 2QYTD06. The increase was
primarily attributable to the amortization of intangible assets acquired through the purchase of
the Acquired Companies. See Note 9 for further details related to the Acquired Companies.
29
Operating Income
Operating income for 2QYTD07 was $40,086, or 8.0% of revenues, compared to $35,079, or 9.6% of
revenues, for 2QYTD06.
Interest Expense, Net
Net interest expense for 2QYTD07 increased to $7,766 from $4,289 for 2QYTD06 due to an increase in
the weighted average outstanding debt from approximately $243,390 for 2QYTD07 compared to
approximately $164,294 for 2QYTD06. The increase in debt relates primarily to the acquisitions of
NextiraOne and NUVT during the first quarter Fiscal 2007. In addition, the weighted average
interest rate outstanding for 2QYTD07 was 6.17%, an increase of 1.64% compared to the 2QYTD06 rate
of 4.53%.
Provision for Income Taxes
The tax provision for 2QYTD07 was $11,247, an effective tax rate of 35.0%. This compares to the
tax provision for 2QYTD06 of $10,634, an effective tax rate of 34.5%. The tax rate for 2QYTD07 was
higher than 2QYTD06 due to changes in the overall mix of taxable income among worldwide offices.
Net Income
As a result of the foregoing, net income for 2QYTD07 was $20,886, or 4.2% of revenues, compared to
$20,191, or 5.5% of revenues, for 2QYTD06.
30
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 2QYTD07 was $21,723. Significant factors
contributing to the source of cash were: net income of $20,886 inclusive of non-cash charges of
$9,453 and $3,192 for amortization / depreciation expense and stock compensation expense,
respectively, an increase in accounts payable of $13,064 and an increase in billings in excess of
costs of $6,061. Significant factors contributing to a use of cash were: increase in net inventory
of $4,734, an increase in net accounts receivable of $3,518, an increase in costs in excess of
billings of $8,567, a decrease in the restructuring reserve of $9,218 and a decrease in accrued
compensation of $6,453. Changes in the above accounts are based on average Fiscal 2007 exchange
rates.
Net cash provided by operating activities during 2QYTD06 was $22,474. Significant factors
contributing to a source of cash were: net income of $20,191 inclusive of non-cash charges of
$7,380 for amortization / depreciation expense and a decrease in net inventory of $5,704. A
significant factor contributing to a use of cash was an increase in accounts receivable of $8,913.
Changes in the above accounts are based on average Fiscal 2006 exchange rates.
As of September 30, 2006 and 2005, the Company had cash and cash equivalents of $15,758 and
$11,925, respectively, working capital of $113,035 and $113,188, respectively, and a current ratio
of 1.45 and 1.82, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Cash Flows from Investing Activities
Net cash used by investing activities during 2QYTD07 was $130,500. Significant factors contributing
to a use of cash were: $2,112 for gross capital expenditures and $127,402 to acquire NextiraOne and
NUVT. See Note 9 of the Note 9 for additional details regarding the acquisitions of NextiraOne and
NUVT.
Net cash used by investing activities during 2QYTD06 was $27,618. Significant factors contributing
to a use of cash were: $1,600 for gross capital expenditures and $26,854 to acquire TSM, GTC and
BCI, net of cash acquired in the transactions.
Cash Flows from Financing Activities
Net cash provided by financing activities during 2QYTD07 was $114,167. Significant factors
contributing to the cash inflow were $127,283 of net borrowings on long term debt and $6,611 of
proceeds from the exercise of stock options. Significant uses of cash were $17,587 for the
repurchase of the Companys Common Stock and $2,116 for the payment of dividends.
Net cash provided by financing activities during 2QYTD06 was $5,467. Significant factors
contributing to the cash inflow were $7,452 of proceeds from the exercise of stock options.
Significant uses of cash were $2,021 for the payment of dividends.
31
Total Debt
On March 28, 2006, the Company entered into a Second Amendment to the Second Amended and Restated
Credit Agreement dated January 24, 2005, as amended February 17, 2005 (collectively, and previously
defined as the Credit Agreement) with Citizens Bank of Pennsylvania, as agent, and a group of
lenders. The Credit Agreement expires on March 28, 2011. Borrowings under the Credit Agreement
are permitted up to a maximum amount of $310,000, which includes up to $15,000 of swing line loans
and $25,000 of letters of credit. The Credit Agreement may be increased by the Company up to an
additional $90,000 with the approval of the lenders and may be unilaterally and permanently reduced
by the Company to not less than the then outstanding amount of all borrowings. Interest on
outstanding indebtedness under the Credit Agreement accrues, at the Companys option, at a rate
based on either: (a) the greater of (i) the prime rate per annum of the agent then in effect and
(ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as being the
weighted average of the rates on overnight Federal funds transactions arranged by Federal funds
brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus 0.75% to
1.25% (determined by a leverage ratio based on the Companys EBITDA). The Credit Agreement
requires the Company to maintain compliance with certain non-financial and financial covenants such
as minimum net worth, leverage and fixed charge coverage ratios. As of September 30, 2006, the
Company was in compliance with all required covenants under the Credit Agreement.
As of September 30, 2006, the Company had total debt outstanding of $252,553. Total debt was
comprised of $249,400 outstanding under the credit agreement, $1,395 for the fair value of the
interest rate swap, $1,563 of obligations under capital leases and $195 of various other
third-party, non-employee loans. The weighted average interest rate on all indebtedness of the
Company during 2Q07 and 2QYTD07 was approximately 6.26% and 5.04%, respectively. The weighted
average interest rate on all indebtedness of the Company during 2Q06 and 2QYTD06 was approximately
6.17% and 4.53%, respectively.
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. During 2Q07, the Board declared a cash dividend of $0.06
per share on all outstanding shares of the Common Stock. The dividend totaled $1,041 and was paid
on October 13, 2006 to stockholders of record at the close of business on September 29, 2006.
While the Company expects to continue to declare dividends for the foreseeable future, there can be
no assurance as to the timing or amount of such dividends.
Repurchase of Common Stock
During 2Q07, the Company repurchased approximately 441,000 shares of its Common Stock for $17,587.
Since inception of the repurchase program in April 1999 through September 30, 2006, the Company has
repurchased in aggregate approximately 7,376,027 shares of its Common Stock for approximately
$314,411. 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 its Common Stock for the foreseeable future, there can be no
assurance as to the timing or amount of such repurchases.
32
Significant Accounting Policies
The Companys significant accounting policies are described in Note 1 within the Notes to the
Consolidated Financial Statements for the year ended March 31, 2006 contained in the Form 10-K.
There have been no significant changes to those significant accounting policies during the
subsequent periods.
Recent Accounting Pronouncements
Tax Effects of Share-Based Payment Awards
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.
Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS 158) that would amend SFAS No. 87, Employers Accounting
for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions and SFAS No. 132 (Revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits. This standard requires, among other
things, companies to recognize on the balance sheet the funded or unfunded status of pension and
other postretirement benefit plans and to recognize the change in funded status in the period the
change occurs through comprehensive income. The provisions of FAS 158 are effective as of the
Companys fiscal year end March 31, 2007. The Company is currently evaluating the impact of
adopting FAS 158 on its consolidated financial statements.
Income Taxes
In July 2006, the FASB issued 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.
Stock-Based Compensation
The Company adopted the provisions of SFAS 123(R) as of April 1, 2006. See Note 2 of the Notes to
the Consolidated Financial Statements for reference.
33
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The Company is evaluating the impact of the adoption of
SFAS 157 on the Companys consolidated financial statements.
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.
Cautionary Forward Looking Statements
When included in this Quarterly Report on Form 10-Q or in documents incorporated herein by
reference, the words expects, intends, anticipates, believes, estimates and analogous
expressions are intended to identify forward-looking statements. Such statements are inherently
subject to a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among others, 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.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest rate volatility and foreign currency exchange rates volatility. Market risk is measured
as the potential negative impact on earnings, cash flows or fair values resulting from a
hypothetical change in interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
The Companys primary interest rate risk relates to its long-term debt obligations. As of
September 30, 2006, the Company had total long-term obligations of $252,553, including the current
portion of those obligations of $608. Of the outstanding debt, $1,758 was in fixed rate
obligations, $100,000 was in variable rate debt that was effectively converted to a fixed rate
through an interest rate swap agreement and $150,795 was in variable rate obligations. As of
September 30, 2006, an instantaneous 100 basis point increase in the interest rate of the variable
rate debt would reduce the Companys net income in the subsequent quarter by $245 assuming the
Company employed no intervention strategies.
To
mitigate the risk of interest-rate fluctuations associated with the Companys variable rate long-term debt, the Company has implemented an interest-rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused
by interest-rate volatility. The Companys goal is to manage interest-rate sensitivity by modifying
the re-pricing characteristics of certain balance sheet liabilities so that the net-interest margin
is not, on a material basis, adversely affected by the movements in interest rates.
During
2Q07, the Company entered into a five-year interest-rate swap (the swap) designated as a
cash flow hedge which has been used to convert a portion of the Companys variable rate debt to
fixed rate. The swap has a notional value of $100,000 reducing to $50,000 after three years. The
effective portion of any changes in the fair value of the interest rate swap is recorded in OCI
until the forecasted hedged transaction. Once the forecasted transaction occurs, the effective
portion of any related gains or losses on the cash flow hedge is reclassified from OCI to Interest
Expense in the Companys Consolidated Statement of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency forward contracts to reduce the foreign currency
exposure related to certain intercompany transactions, primarily trade receivables and loans. All
of the foreign currency forward contracts have been designated and qualify as cash flow hedges. The
effective portion of any changes in the fair value of the derivative instruments is recorded in 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 other income (expense) in the Companys Consolidated Statement of Income.
In the event it becomes probable that the hedged forecasted transaction will not occur, the
ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from
OCI to other income (expense).
35
As of September 30, 2006, the Company had open foreign exchange contracts in Australian and
Canadian dollars, Danish krone, Euro, Japanese yen, Norwegian kroner,
Pound sterling, Swedish krona and Swiss franc.
The open contracts have contract rates ranging from 1.2950 to 1.3407 Australian dollar, 1.1141 to
1.1167 Canadian dollar, 5.7065 to 5.8428 Danish krone, 0.7698 to 0.8222 Euro, 105.47 to 110.10
Japanese yen, 5.9442 to 6.5690 Norwegian kroner, 0.5244 to 0.5588 Pound sterling, 7.0283 to 7.2983
Swedish krona and 1.1813 to 1.2423 Swiss franc, all per U.S. dollar. The total open contracts had a
notional amount of approximately $53,518, have a fair value of $52,175 and will expire within
thirty months.
The Company does not hold or issue any other financial derivative instruments nor does it engage in
speculative trading of financial derivatives.
36
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 September 30, 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.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during the
fiscal period covered by this report that have materially affected, or are 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.
37
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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|
|
|
|
|
|
|
|
|
|
|
|
(c) Total |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
Shares (or |
|
Number (or |
|
|
|
|
|
|
|
|
|
|
Units) |
|
Approximate Dollar |
|
|
(a) Total |
|
|
|
|
|
Purchased as |
|
Value) of Shares (or |
|
|
Number of |
|
(b) Average |
|
Part of Publicly |
|
Units) that May Yet |
|
|
Shares (or |
|
Price Paid |
|
Announced |
|
Be Purchased Under |
|
|
Units) |
|
per Share |
|
Plans or |
|
the Plans or |
Period |
|
Purchased |
|
(or Unit) |
|
Programs |
|
Programs (1) |
|
July 2, 2006 to July 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564,601 |
|
|
July 31, 2006 to August 27, 2006 |
|
|
440,628 |
|
|
|
39.91 |
|
|
|
440,628 |
|
|
|
123,973 |
|
|
August 28, 2006 to September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,973 |
|
|
|
|
|
Total |
|
|
440,628 |
|
|
|
39.91 |
|
|
|
440,628 |
|
|
|
123,973 |
(2) |
|
|
|
|
(1) |
|
As of July 2, 2006, 564,601 shares were available for repurchase under
repurchase programs approved by the Board of Directors and announced on November 20, 2003 and
August 12, 2004. |
|
(2) |
|
The repurchase programs have no expiration date and no programs were terminated
prior to the full repurchase of the authorized amount. On November 7, 2006, the Board of
Directors approved an increase of 1,000,000 shares in the repurchase program. |
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.
Under the Companys Credit Agreement, the Company is permitted to pay dividends on its Common Stock
as long as no Event of Default or Potential Default (each as defined in the Credit Agreement)
occurs or is continuing.
38
Item 4. Submission of Matters to a Vote of Security Holders.
On August 8, 2006, the Companys stockholders voted on the following four matters at the
Companys annual meeting of the stockholders: (i) the election of directors; (ii) the amendment of
the Employee Plan to increase the number of shares authorized; (iii) the amendment of the Director
Plan to increase the number of shares authorized; and (iv) the ratification of the appointment of
BDO Seidman, LLP as the independent registered public accounting firm of the Company for Fiscal
2007. Out of the 17,676,970 shares of Common Stock outstanding as of the record date for the
annual meeting of June 9, 2006, 15,773,279 votes were cast.
(i) |
|
Each of the Companys nominees for director was elected at the annual meeting by the
following vote: |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Shares |
|
|
Voted For |
|
Withheld |
|
|
William F. Andrews |
|
|
13,757,447 |
|
|
|
2,015,832 |
|
Richard L. Crouch |
|
|
13,459,282 |
|
|
|
2,313,997 |
|
Thomas G. Golonski |
|
|
13,458,218 |
|
|
|
2,315,061 |
|
Thomas G. Greig |
|
|
13,455,189 |
|
|
|
2,318,090 |
|
Edward A. Nicholson, Ph.D. |
|
|
14,092,712 |
|
|
|
1,680,567 |
|
Fred C. Young |
|
|
14,084,137 |
|
|
|
1,689,142 |
|
|
(ii) |
|
The amendment to the Employee Plan to increase the number of shares authorized under the
plan was not approved by the following vote: |
|
|
|
|
|
|
|
Shares |
|
Shares Voted |
|
Shares |
|
Broker |
Voted For |
|
Against |
|
Abstaining |
|
Non-Votes |
|
7,361,616
|
|
7,493,917
|
|
10,824
|
|
906,922 |
|
(iii) |
|
The amendment to the Director Plan to increase the number of shares authorized under the
plan was approved by the following vote: |
|
|
|
|
|
|
|
Shares |
|
Shares Voted |
|
Shares |
|
Broker |
Voted For |
|
Against |
|
Abstaining |
|
Non-Votes |
|
8,185,364
|
|
6,668,761
|
|
12,231
|
|
906,923 |
|
(iv) |
|
Ratification of the appointment of BDO Seidman, LLP as the independent registered
public accounting firm of the Company for the fiscal year ending March 31, 2007: |
|
|
|
|
|
|
|
Shares |
|
Shares Voted |
|
Shares |
|
Broker |
Voted For |
|
Against |
|
Abstaining |
|
Non-Votes |
|
15,764,580
|
|
4,957
|
|
3,742
|
|
0 |
|
39
Item 6. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.1
|
|
1992 Director Stock Option Plan, as amended through August 8, 2006 (1) |
|
|
|
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) |
40
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: November 9, 2006 |
|
|
By: |
/s/ Michael McAndrew
|
|
|
|
Michael McAndrew, Vice President, |
|
|
|
Chief Financial Officer, Treasurer, Secretary
and Principal Accounting Officer |
|
41
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.1
|
|
1992 Director Stock Option Plan, as amended through August 8, 2006 (1) |
|
|
|
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) |
42