Black Box Corporation 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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95-3086563 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1000 Park Drive, Lawrence, Pennsylvania
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15055 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of November 1, 2007, there were 17,682,945 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
FOR THE QUARTER ENDED SEPTEMBER 29, 2007
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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(Unaudited) |
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In thousands, except par value |
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September 29, 2007 |
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March 31, 2007 |
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Assets |
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Cash and cash equivalents |
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$ |
18,220 |
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$ |
17,157 |
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Accounts receivable, net of allowance for doubtful accounts of $14,046
and $14,253 |
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188,243 |
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161,733 |
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Inventories, net |
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69,780 |
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72,807 |
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Costs/estimated earnings in excess of billings on uncompleted contracts |
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66,051 |
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61,001 |
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Prepaid and other current assets |
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33,444 |
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31,057 |
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Total current assets |
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375,738 |
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343,755 |
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Property, plant and equipment, net |
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35,753 |
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39,051 |
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Goodwill, net |
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572,821 |
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568,647 |
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Intangibles: |
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Customer relationships, net |
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66,048 |
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68,016 |
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Other intangibles, net |
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31,588 |
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33,258 |
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Other assets |
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32,273 |
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37,364 |
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Total assets |
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$ |
1,114,221 |
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$ |
1,090,091 |
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Liabilities |
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Accounts payable |
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$ |
83,347 |
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$ |
74,727 |
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Accrued compensation and benefits |
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20,359 |
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21,811 |
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Deferred revenue |
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35,441 |
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35,630 |
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Billings in excess of costs/estimated earnings on uncompleted contracts |
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24,147 |
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19,027 |
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Income taxes |
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17,555 |
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13,430 |
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Other liabilities |
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59,007 |
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62,071 |
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Total current liabilities |
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239,856 |
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226,696 |
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Long-term debt |
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230,324 |
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238,194 |
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Other liabilities |
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20,429 |
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25,505 |
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Total liabilities |
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490,609 |
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490,395 |
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Stockholders equity |
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Preferred stock authorized 5,000, par value $1.00, none issued |
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Common stock authorized 100,000, par value $.001, 17,683 and 17,527
shares issued and outstanding |
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25 |
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25 |
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Additional paid-in capital |
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444,938 |
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441,283 |
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Retained earnings |
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462,297 |
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450,022 |
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Accumulated other comprehensive income |
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33,386 |
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25,399 |
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Treasury stock, at cost 7,436 and 7,436 shares |
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(317,034 |
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(317,033 |
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Total stockholders equity |
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623,612 |
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599,696 |
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Total liabilities and stockholders equity |
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$ |
1,114,221 |
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$ |
1,090,091 |
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See Notes to the Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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(Unaudited) |
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(Unaudited) |
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Three month period ended |
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Six month period ended |
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September 29 and 30, |
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September 29 and 30, |
In thousands, except per share amounts |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues |
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Hotline products |
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$ |
59,619 |
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$ |
55,063 |
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$ |
115,758 |
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$ |
107,288 |
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On-Site services |
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201,011 |
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216,262 |
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397,163 |
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394,432 |
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Total |
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260,630 |
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271,325 |
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512,921 |
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501,720 |
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Cost of Sales |
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Hotline products |
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31,457 |
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27,847 |
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60,819 |
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53,308 |
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On-Site services |
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136,884 |
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144,442 |
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268,583 |
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263,532 |
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Total |
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168,341 |
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172,289 |
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329,402 |
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316,840 |
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Gross profit |
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92,289 |
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99,036 |
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183,519 |
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184,880 |
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Selling, general & administrative expenses |
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66,784 |
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73,599 |
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139,527 |
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143,801 |
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Intangibles amortization |
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1,344 |
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1,931 |
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3,662 |
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3,437 |
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Operating income |
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24,161 |
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23,506 |
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40,330 |
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37,642 |
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Interest expense (income), net |
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6,143 |
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5,521 |
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9,423 |
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9,161 |
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Other expenses (income), net |
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(73 |
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72 |
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(140 |
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187 |
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Income before provision for income taxes |
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18,091 |
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17,913 |
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31,047 |
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28,294 |
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Provision for income taxes |
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6,781 |
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6,238 |
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11,549 |
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9,806 |
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Net income |
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$ |
11,310 |
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$ |
11,675 |
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$ |
19,498 |
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$ |
18,488 |
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Earnings per common share |
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Basic |
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$ |
0.64 |
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$ |
0.67 |
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$ |
1.11 |
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$ |
1.06 |
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Diluted |
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$ |
0.64 |
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$ |
0.66 |
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$ |
1.10 |
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$ |
1.04 |
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Weighted average common shares outstanding |
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Basic |
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17,594 |
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17,513 |
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17,561 |
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17,415 |
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Diluted |
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17,752 |
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17,743 |
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17,670 |
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17,766 |
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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 the Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited) |
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Six month period ended September 29 and 30, |
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In thousands |
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2007 |
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2006 |
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Operating Activities |
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Net income |
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$ |
19,498 |
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$ |
18,488 |
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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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9,345 |
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9,453 |
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Loss on sale of property |
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472 |
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Deferred taxes |
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(9,738 |
) |
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318 |
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Stock compensation expense |
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2,871 |
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5,636 |
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Tax impact from stock options |
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4,386 |
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327 |
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Change in fair value of interest-rate swap |
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438 |
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1,395 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(23,989 |
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(3,518 |
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Inventories, net |
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3,798 |
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(4,734 |
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All other current assets excluding deferred tax asset |
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(2,903 |
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(1,380 |
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Liabilities exclusive of long-term debt |
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8,054 |
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(4,262 |
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Net cash provided by (used for) operating activities |
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$ |
12,232 |
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$ |
21,723 |
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Investing Activities |
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Capital expenditures |
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$ |
(1,926 |
) |
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$ |
(2,112 |
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Capital disposals |
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51 |
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403 |
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Acquisition of businesses (payments)/recoveries |
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(127,402 |
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Prior merger-related (payments)/recoveries |
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(3,215 |
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(1,389 |
) |
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Net cash provided by (used for) investing activities |
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$ |
(5,090 |
) |
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$ |
(130,500 |
) |
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Financing Activities |
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Proceeds from borrowings |
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$ |
99,450 |
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$ |
258,519 |
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Repayment of borrowings |
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(107,687 |
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(131,236 |
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Repayment on discounted lease rentals |
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(24 |
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Proceeds from exercise of options |
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5,170 |
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6,611 |
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Payment of dividends |
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(2,104 |
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(2,116 |
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Purchase of Treasury Stock |
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(1 |
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(17,587 |
) |
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Net cash provided by (used for) financing activities |
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$ |
(5,172 |
) |
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$ |
114,167 |
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Foreign currency exchange impact on cash |
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$ |
(907 |
) |
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$ |
(839 |
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Increase / (decrease) in cash and cash equivalents |
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$ |
1,063 |
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$ |
4,551 |
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Cash and cash equivalents at beginning of period |
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$ |
17,157 |
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$ |
11,207 |
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Cash and cash equivalents at end of period |
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$ |
18,220 |
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$ |
15,758 |
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Supplemental Cash Flow: |
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Cash paid for interest |
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$ |
9,265 |
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$ |
6,358 |
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Cash paid for income taxes |
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12,719 |
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7,391 |
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Non-cash financing activities: |
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Dividends payable |
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1,061 |
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|
1,041 |
|
Capital leases |
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|
472 |
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|
127 |
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|
See Notes to the Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box Corporation
(Black Box or the Company) have been prepared in accordance with accounting principles
generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements.
The Company believes that these consolidated financial statements reflect all normal, recurring
adjustments needed to present fairly the Companys results for the interim periods presented. The
results for interim periods may not be indicative of the results of operations for any other
interim period or for the full year. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Companys most recent Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (SEC) for the fiscal year ended
March 31, 2007 (the Form 10-K).
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday nearest each calendar quarter end. The actual ending dates for the periods presented in
these Notes to the Consolidated Financial Statements as of September 30, 2007 and 2006 were
September 29, 2007 and September 30, 2006. References to Fiscal Year or Fiscal mean the
Companys fiscal year ended March 31 for the year referenced. All references to dollar amounts
herein are presented in thousands, except per share amounts.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements include allowances for
doubtful accounts receivable, sales returns, net realizable value of inventories, loss
contingencies, warranty reserves, intangible assets and goodwill. Actual results could differ from
those estimates. Management believes the estimates made are reasonable.
Reclassification
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three (3) and six (6) month periods ended September 30, 2007.
Note 2: Significant Accounting Policies / Recent Accounting Pronouncements
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys Consolidated Financial
Statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Companys Form 10-K. Additional significant accounting policies adopted during Fiscal 2008 are
disclosed below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be more likely
than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount most
likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Companys Consolidated Statements of
Income.
Recent Accounting Pronouncements
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits an entity to elect to measure eligible items at
fair value (fair value option) including many financial instruments. The provisions of SFAS 159
are effective for
6
the Company as of April 1, 2008. If the fair value option is elected, the Company
will report unrealized gains and losses on items for which the fair value option has been elected
in earnings at each subsequent reporting date. Upfront costs and fees related to items for which
the fair value option is elected shall be recognized in earnings as incurred and not deferred. The
fair value option may be applied for a single eligible item without electing it for other identical
items, with certain exceptions, and must be applied to the entire eligible item and not to a
portion of the eligible item. The Company is currently evaluating the irrevocable election of the
fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The requirements of SFAS 157 will be applied
prospectively except for certain derivative instruments that would be adjusted through the opening
balance of retained earnings in the period of adoption. The Company is evaluating the impact of the
adoption of SFAS 157 on its consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 requires that realization of an uncertain income tax position must be
more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest and sets forth new
disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal year
beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as required. The
adoption of FIN 48 resulted in a decrease to beginning retained earnings of $5,110 representing the
cumulative effect adjustment. The adjustment to beginning retained earnings is summarized in the
following table. See Significant Accounting Policies within this Note 2 and Note 14 for further
reference.
|
|
|
|
|
|
|
Retained Earnings |
|
|
Balance as of April 1, 2007 |
|
$ |
450,022 |
|
Adjustment for adoption of FIN 48 |
|
|
(5,110 |
) |
|
|
|
|
Balance as currently reported |
|
$ |
444,912 |
|
|
Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on the Companys consolidated financial statements.
Note 3: Inventories
The Companys inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
Raw materials |
|
$ |
1,803 |
|
|
$ |
1,774 |
|
Finished goods |
|
|
89,702 |
|
|
|
93,794 |
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
91,505 |
|
|
$ |
95,568 |
|
Excess and obsolete inventory reserves |
|
|
(21,725 |
) |
|
|
(22,761 |
) |
|
|
|
|
|
|
|
Inventory, net |
|
$ |
69,780 |
|
|
$ |
72,807 |
|
|
Note 4: Goodwill
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, 2007 |
|
$ |
493,462 |
|
|
$ |
73,065 |
|
|
$ |
2,120 |
|
|
$ |
568,647 |
|
Currency translation |
|
|
(12 |
) |
|
|
4,354 |
|
|
|
37 |
|
|
|
4,379 |
|
Prior period acquisitions |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007 |
|
$ |
493,245 |
|
|
$ |
77,419 |
|
|
$ |
2,157 |
|
|
$ |
572,821 |
|
|
7
At September 30, 2007, certain merger agreements provided for contingent payments (earn-out) of up
to $2,294. If future operating performance goals of the acquired companies are met, goodwill will
be adjusted for the amount of the contingent payments.
Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
Carrying |
|
|
Accum. |
|
|
Carrying |
|
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Amount |
|
|
Amort. |
|
|
Amount |
|
|
Definite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
8,086 |
|
|
$ |
4,237 |
|
|
$ |
3,849 |
|
|
$ |
7,963 |
|
|
$ |
3,414 |
|
|
$ |
4,549 |
|
Customer relationships |
|
|
71,989 |
|
|
|
5,941 |
|
|
|
66,048 |
|
|
|
71,989 |
|
|
|
3,973 |
|
|
|
68,016 |
|
Acquired backlog |
|
|
10,783 |
|
|
|
10,783 |
|
|
|
|
|
|
|
10,783 |
|
|
|
9,813 |
|
|
|
970 |
|
|
|
|
|
|
Total |
|
$ |
90,858 |
|
|
$ |
20,961 |
|
|
$ |
69,897 |
|
|
$ |
90,735 |
|
|
$ |
17,200 |
|
|
$ |
73,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
35,992 |
|
|
|
8,253 |
|
|
|
27,739 |
|
|
|
|
|
|
Total |
|
$ |
126,850 |
|
|
$ |
29,214 |
|
|
$ |
97,636 |
|
|
$ |
126,727 |
|
|
$ |
25,453 |
|
|
$ |
101,274 |
|
|
The Companys indefinite-lived intangible assets consist solely of the Companys trademark
portfolio obtained through business acquisitions. The Companys definite-lived intangible assets
are comprised of employee non-compete contracts, backlog and customer relationships also obtained
through business acquisitions.
The following table summarizes the changes to carrying amounts of intangible assets during the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Competes |
|
|
Customer |
|
|
|
|
|
|
Trademarks |
|
|
and Backlog |
|
|
Relationships |
|
|
Total |
|
|
Balance at March 31, 2007 |
|
$ |
27,739 |
|
|
$ |
5,519 |
|
|
$ |
68,016 |
|
|
$ |
101,274 |
|
Amortization expense |
|
|
|
|
|
|
(1,694 |
) |
|
|
(1,968 |
) |
|
|
(3,662 |
) |
Currency translation |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
27,739 |
|
|
$ |
3,849 |
|
|
$ |
66,048 |
|
|
$ |
97,636 |
|
|
During the three (3) month periods ended September 30, 2007 and 2006, the Company recognized
intangible amortization expense of $1,344 and $1,931, respectively. During the six (6) month
periods ended September 30, 2007 and 2006, the Company recognized intangible amortization expense
of $3,662 and $3,437, respectively.
The following table details the estimated intangible amortization expense during the remainder of
Fiscal 2008, each of the succeeding five fiscal years and the periods thereafter. These estimates
are based on the carrying amounts of intangible assets as of September 30, 2007 that are subject to
change pending the outcome of purchase accounting related to certain acquisitions:
|
|
|
|
|
Fiscal years ending March 31, |
|
|
|
|
|
2008 |
|
$ |
2,676 |
|
2009 |
|
|
5,232 |
|
2010 |
|
|
5,094 |
|
2011 |
|
|
4,519 |
|
2012 |
|
|
4,150 |
|
2013 |
|
|
3,963 |
|
Thereafter |
|
|
44,263 |
|
|
|
|
|
Total |
|
$ |
69,897 |
|
|
8
Note 6: Indebtedness
The Companys long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
Revolving credit agreement |
|
$ |
228,830 |
|
|
$ |
236,715 |
|
Capital lease obligations |
|
|
2,252 |
|
|
|
2,123 |
|
Other |
|
|
33 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
231,115 |
|
|
$ |
238,880 |
|
Less: current portion (included in Other liabilities) |
|
|
(791 |
) |
|
|
(686 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
230,324 |
|
|
$ |
238,194 |
|
|
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, 2007, the Company
was in compliance with all financial covenants under the Credit Agreement.
The maximum amount of debt outstanding under the Credit Agreement, the weighted average balance
outstanding under the Credit Agreement and the weighted average interest-rate on all outstanding
debt for the three (3) month period ended September 30, 2007 was $270,825, $249,789 and 6.63%,
respectively, compared to $284,470, $265,437 and 6.26%, respectively, for the three (3) month
period ended September 30, 2006. The maximum amount of debt outstanding under the Credit Agreement,
the weighted average balance outstanding under the Credit Agreement and the weighted average
interest-rate on all outstanding debt for the six (6) month period ended September 30, 2007 was
$270,825, $250,949 and 6.61%, respectively, compared to $284,470, $243,390 and 6.17%, respectively,
for the six (6) month period ended September 30, 2006.
Capital lease obligations The capital lease obligations are primarily for equipment. The lease
agreements have remaining terms ranging from less than one year to five years with interest-rates
ranging from 3.83% to 11.73%.
Other - Other debt is comprised of various bank and third party loans secured by specific pieces of
equipment and real property. The loans have remaining terms of less than one to three years with
interest-rates ranging from 0.0% to 5.9%.
Unused available borrowings - As of September 30, 2007, the Company had $5,234 outstanding in
letters of credit and $75,936 available under the Credit Agreement.
Note 7: Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts:
The Company enters into foreign currency forward contracts to hedge exposure to variability in
expected fluctuations in foreign currencies. As of September 30, 2007, the Company had open
contracts in Australian and Canadian dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner,
Pounds sterling, Swedish krona, Swiss francs and Japanese yen which have been designated as cash
flow hedges. These contracts had a notional amount of approximately $67,117 and a fair value of
$68,635 and mature within the next eighteen months.
As of September 30, 2007, an unrecognized gain of $102 ($62 net of tax) on all open foreign
currency forward contracts is included within the Companys Consolidated Balance Sheets as a
component of Other comprehensive income (OCI). This unrecognized gain is expected to be credited
to earnings over the life of the maturing contracts as the hedged forecasted transaction occurs and
it is expected that the gain will be offset by currency losses on the items being hedged.
During the three (3) month periods ended September 30, 2007 and 2006, the Company recognized a loss
of $80 ($49 net of tax) and a gain of $106, respectively, on matured contracts. During the six (6)
month periods ended September 30, 2007 and 2006, the Company recognized a loss of $176 ($108 net of tax) and a gain of $292, respectively, on matured contracts.
There was no hedge ineffectiveness for the six (6) month periods ended September 30, 2007 and 2006.
9
Interest-rate Swap:
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest-rates.
On July 26, 2006, the Company entered into a five-year interest-rate swap (interest-rate swap)
which has been used to effectively convert a portion of the Companys variable rate debt to fixed
rate. The interest-rate swap has a notional value of $100,000 reducing to $50,000 after three
years and does not qualify for hedge accounting. The Company recognizes gains/losses related to the
change in fair value of the interest-rate swap which is included in Interest expense (income)
within the Companys Consolidated Statements of Income. During the three (3) month periods ended
September 30, 2007 and 2006, the Company recognized losses of $1,746 and $1,395, respectively,
related to the change in fair value of the interest-rate swap. During the six (6) month periods
ended September 30, 2007 and 2006, the Company recognized losses of $438 and $1,395, respectively,
related to the change in fair value of the interest-rate swap. As of September 30, 2007, the
Company has recorded a liability of $2,172 related to the cumulative change in fair value of the
interest-rate swap which is a long-term liability recorded in Other liabilities within the
Companys Consolidated Balance Sheets.
Note 8: Acquisitions
Current fiscal year acquisitions:
There have been no acquisitions during the six (6) month period ended September 30, 2007.
Fiscal 2007 acquisitions:
During the fourth quarter of Fiscal 2007, the Company acquired ADS Telecom, Inc. (ADS), a
privately-held company based out of Orlando, FL. ADS has an active customer base which includes
commercial, financial, healthcare and various government agency accounts. In connection with the
ADS acquisition, the Company has made a preliminary allocation to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the
estimated fair market value of customer relationships and non-compete agreements. The Company
estimates that the definite-lived intangibles are to be amortized over a period of five to 20
years.
During the third quarter of Fiscal 2007, the Company acquired Nortech Telecommunications Inc.
(NTI), a privately-held company based out of Chicago, IL. In connection with the NTI acquisition,
the Company has made a preliminary allocation to goodwill and definite-lived intangible assets,
respectively. The definite-lived intangible assets recorded represent the estimated fair market
value of customer relationships and non-compete agreements. The Company estimates that the
definite-lived intangibles are to be amortized over a period of five to 20 years.
The allocation of the purchase price for ADS and NTI is based on preliminary estimates of the fair
values of certain assets acquired and liabilities assumed as of the date of the acquisition.
Management is currently assessing the fair values of the tangible and intangible assets acquired
and liabilities assumed. The preliminary allocations of purchase price are dependant upon certain
estimates and assumptions, which are preliminary and may vary from the amounts reported herein.
The acquisitions of ADS and NTI, taken individually and in the aggregate, did not have a material
impact on the Companys consolidated financial statements.
During the first quarter of Fiscal 2007, the Company acquired the privately-held USA Commercial and
Government and Canadian operations of NextiraOne, LLC (NextiraOne). The acquired operations
service commercial and various government agency clients. In connection with the NextiraOne
acquisition, the Company has allocated $73,995 and $24,100 to goodwill and definite-lived
intangible assets, respectively. The definite-lived intangible assets recorded represent the fair
market value of customer relationships and non-compete agreements. These definite-lived intangibles
are to be amortized over a period of one to 20 years.
Also, during first quarter of Fiscal 2007, the Company acquired Nu-Vision Technologies, Inc. and
Nu-Vision Technologies, LLC (collectively referred to as NUVT). The acquired operations provide
planning, installation, monitoring and maintenance services for voice and data network systems.
NUVT has an active customer base, which includes commercial, education and various government
agency accounts. In connection with the NUVT acquisition, the Company has allocated $15,058 and
$18,601 to goodwill and definite-lived intangible assets, respectively. The definite-lived
intangible assets recorded represent the fair market value of acquired backlog, customer
relationships and non-compete agreements. These definite-lived intangibles are to be amortized over
a period of one to 20 years.
10
The results of operations of ADS, NTI, NextiraOne and NUVT are included within the Companys
Consolidated Statements of Income beginning on their respective acquisition dates.
Note 9: Restructuring
In connection with acquisitions during Fiscal 2007, the Company has incurred costs related to
facility consolidations, such as idle facility rent obligations and the write-off of leasehold
improvements, and employee severance in an attempt to right-size the organization and more
appropriately align the expense structure with anticipated revenues and changing market demand for
its solutions and services. The majority of Fiscal 2007 costs were incurred in connection with
acquisitions and as such were included in the purchase price allocation. Employee severance is
generally payable within the next twelve months with certain facility costs extending through
Fiscal 2014.
During the first quarter of Fiscal 2008, the Company incurred $3,591 of costs related to facility
consolidations and employee severance. These costs have been recorded in Selling, general &
administrative expenses in the Companys Consolidated Statements of Income. There were no
comparable costs during the second quarter of Fiscal 2008.
The following table summarizes the changes to the restructuring reserve during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance |
|
|
Facility Closures |
|
|
Total |
|
|
Balance at March 31, 2007 |
|
$ |
3,006 |
|
|
$ |
16,422 |
|
|
$ |
19,428 |
|
Restructuring charge |
|
|
2,371 |
|
|
|
1,220 |
|
|
|
3,591 |
|
Asset write-downs |
|
|
|
|
|
|
(411 |
) |
|
|
(411 |
) |
Cash expenditures |
|
|
(3,857 |
) |
|
|
(3,668 |
) |
|
|
(7,525 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
1,520 |
|
|
$ |
13,563 |
|
|
$ |
15,083 |
|
|
Of the $15,083 above, $7,780 is classified as a current liability under Other liabilities on the
Companys Consolidated Balance Sheets for the period ended September 30, 2007.
Note 10: Stock-based Compensation
Stock-Based Compensation
The Company has two stock option plans, the 1992 Stock Option Plan, as amended (the Employee
Plan) and the 1992 Director Stock Option Plan, as amended (the Director Plan). As of September
30, 2007, the Employee Plan is authorized to issue stock options and stock appreciation rights
(SARs) for up to 9,200,000 shares of common stock. The Employee Plan provides that options are
to be granted by a committee appointed by the Companys Board of Directors (the Board) to key
employees of the Company; such stock options generally become exercisable in equal amounts over a
three-year period. As of September 30, 2007, the Director Plan is authorized to issue stock options
and SARs for up to 270,000 shares of common stock. The Director Plan provides that options are to
be granted by the Board or a committee appointed by the Board; such options generally become
exercisable in equal amounts over a three-year period. No SARs have been issued under either plan.
During the three (3) month periods ended September 30, 2007 and 2006, the Company recognized
non-cash stock-based compensation expense of $1,155 ($722 net of tax) or $0.04 per diluted share
and $2,387 ($1,551 net of tax) or $0.09 per diluted share, respectively. During the six (6) month
periods ended September 30, 2007 and 2006, the Company recognized non-cash stock-based compensation
expense of $2,871 ($1,804 net of tax) or $0.10 per diluted share and $5,636 ($3,664 net of tax) or
$0.21 per diluted share, respectively. Non-cash stock-based compensation expense is recorded in
Selling, general & administrative expense within the Companys Consolidated Statements of Income.
The following table summarizes the Companys stock option activity for the six (6) month period
ended September 30, 2007.
11
|
|
|
|
|
|
|
|
|
|
|
Six month period ended September 30, 2007 |
|
|
|
|
|
|
|
Weighted-Average |
|
Shares in thousands |
|
Shares |
|
|
Exercise Price (per share) |
|
|
Outstanding at beginning of period |
|
|
4,621 |
|
|
$ |
38.66 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(156 |
) |
|
|
33.19 |
|
Forfeited or expired |
|
|
(1,661 |
) |
|
|
37.16 |
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,804 |
|
|
$ |
40.04 |
|
Exercisable at end of period |
|
|
2,692 |
|
|
$ |
40.23 |
|
Weighted average fair value of options granted during the period |
|
|
|
|
|
$ |
|
|
|
The Audit Committee of the Board (the Audit Committee) has
now completed its previously-disclosed independent review of the Companys historical stock option granting practices. See the Explanatory Note
preceding Part I, Item 1 of the Form 10-K for more information regarding the Audit Committees
review and related matters. In light of the findings of its review, the Audit Committee is
considering and will present to the Board recommendations regarding procedural enhancements and/or
additional remedial measures. The Board will then consider the Audit Committees recommendations
for adoption. In advance of action by the Audit Committee, the Board and/or the appropriate Board
committee, the Company has implemented additional procedures to its process for approving stock
option grants that are focused on formalized documentation of appropriate approvals and
determination of grant terms to employees.
The Audit Committees review included an evaluation of the role of current and former Company
personnel in identified problems during the period from 1992 to the present (the Review Period),
and the Audit Committees consideration of remedial actions will include a review of claims that
have been or may be asserted against such current or former Company personnel as well as other
remedial actions that may be appropriate under all circumstances. As previously reported, based on
the findings of the Audit Committee as to Fred C. Young, the Companys former Chief Executive
Officer who resigned on May 20, 2007, the Audit Committee concluded and recommended to the Board,
and the Board determined, that Mr. Young could have been terminated due to Cause for Termination
(as defined in his agreement dated May 11, 2004) at the time Mr. Young resigned as a director and
as an officer of the Company on May 20, 2007. In light of that determination and the terms of the
agreements with Mr. Young, all outstanding stock options held by Mr. Young (1,455,402 shares)
terminated as of the date of his resignation, which occurred during the first quarter of Fiscal
2008. Accordingly, the Company has determined that the consequences of these events should be
considered a first quarter of Fiscal 2008 event for accounting purposes. These events had the
following impacts on the Companys consolidated financial statements and related notes for the six
(6) month period ended September 30, 2007: (1) a decrease in outstanding stock options of
1,455,402, (2) immaterial impact on the Diluted earnings per common share computation, (3) a
decrease in deferred tax assets of $4,637 with the offsetting entry of $3,899 to Additional paid-in
capital and (4) additional tax expense impact of approximately $738.
The following table summarizes certain information regarding the Companys outstanding stock
options at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
Shares |
|
Average |
|
Weighted |
|
Average |
|
|
|
|
Out- |
|
Remaining |
|
Average |
|
Intrinsic |
|
Exer- |
|
Remaining |
|
Average |
|
Intrinsic |
Range of |
|
|
|
standing |
|
Contractual |
|
Exercise |
|
Value |
|
cisable |
|
Contractual |
|
Exercise |
|
Value |
Exercise Prices |
|
|
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
(000s) |
|
Life (Years) |
|
Price |
|
(000s) |
|
$19.95 $26.60
|
|
|
|
|
2 |
|
|
|
1.0 |
|
|
$ |
21.94 |
|
|
$ |
49 |
|
|
|
2 |
|
|
|
1.0 |
|
|
$ |
21.94 |
|
|
$ |
49 |
|
$26.60 $33.25
|
|
|
|
|
82 |
|
|
|
3.3 |
|
|
|
29.82 |
|
|
|
1,069 |
|
|
|
82 |
|
|
|
3.3 |
|
|
|
29.82 |
|
|
|
1,069 |
|
$33.25 $39.90
|
|
|
|
|
1,283 |
|
|
|
7.7 |
|
|
|
37.62 |
|
|
|
6,735 |
|
|
|
1,171 |
|
|
|
7.7 |
|
|
|
37.81 |
|
|
|
5,924 |
|
$39.90 $46.55
|
|
|
|
|
1,394 |
|
|
|
4.2 |
|
|
|
42.47 |
|
|
|
558 |
|
|
|
1,394 |
|
|
|
4.2 |
|
|
|
42.47 |
|
|
|
558 |
|
$46.55 $53.20
|
|
|
|
|
24 |
|
|
|
2.8 |
|
|
|
50.69 |
|
|
|
|
|
|
|
24 |
|
|
|
2.8 |
|
|
|
50.69 |
|
|
|
$53.20 $59.85
|
|
|
|
|
17 |
|
|
|
2.6 |
|
|
|
58.15 |
|
|
|
|
|
|
|
17 |
|
|
|
2.6 |
|
|
|
58.15 |
|
|
|
$59.85 $66.50
|
|
|
|
|
2 |
|
|
|
2.3 |
|
|
|
63.22 |
|
|
|
|
|
|
|
2 |
|
|
|
2.3 |
|
|
|
63.22 |
|
|
|
|
|
|
|
|
|
|
$19.95 $66.50
|
|
|
|
|
2,804 |
|
|
|
5.8 |
|
|
$ |
40.04 |
|
|
$ |
8,411 |
|
|
|
2,692 |
|
|
|
5.8 |
|
|
$ |
40.23 |
|
|
$ |
7,600 |
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on the Companys average stock price (i.e., the average of the open and close prices of the
common stock) on September 28, 2007 of $42.87, which would have been received by the option holders
had all option holders exercised their options as of that date. As of September 30, 2007, there was
approximately $1,313 of total unrecognized pre-tax stock-based compensation expense related to
non-vested stock options granted under the plans which is expected to be recognized over a weighted
average period of 2.0 years.
12
Note 11: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period |
|
|
Six month period |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
11,310 |
|
|
$ |
11,675 |
|
|
$ |
19,498 |
|
|
$ |
18,488 |
|
|
|
|
|
|
Weighted average common shares outstanding (basic) |
|
|
17,594 |
|
|
|
17,513 |
|
|
|
17,561 |
|
|
|
17,415 |
|
Effect of dilutive securities from employee stock options |
|
|
158 |
|
|
|
230 |
|
|
|
109 |
|
|
|
351 |
|
|
|
|
|
|
Weighted average common shares outstanding (diluted) |
|
|
17,752 |
|
|
|
17,743 |
|
|
|
17,670 |
|
|
|
17,766 |
|
|
Basic earnings per common share |
|
$ |
0.64 |
|
|
$ |
0.67 |
|
|
$ |
1.11 |
|
|
$ |
1.06 |
|
|
|
|
|
|
Dilutive earnings per common share |
|
$ |
0.64 |
|
|
$ |
0.66 |
|
|
$ |
1.10 |
|
|
$ |
1.04 |
|
|
|
|
|
|
|
|
The Weighted average common shares outstanding (diluted) computation is not impacted during any
period where the exercise price of a stock option is greater than the average market price. During
the three (3) month periods ended September 30, 2007 and 2006, there were 793,505 and 3,240,830
non-dilutive stock options outstanding, respectively, that are not included in the corresponding
period Weighted average common shares outstanding (diluted) computation. During the six (6) month
periods ended September 30, 2007 and 2006, there were 2,179,335 and 774,038 non-dilutive stock
options outstanding, respectively, that are not included in the corresponding period Weighted
average common shares outstanding (diluted) computation.
Note 12: Comprehensive income and Accumulated other comprehensive income (AOCI)
The following table details the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period |
|
|
Six month period |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
11,310 |
|
|
$ |
11,675 |
|
|
$ |
19,498 |
|
|
$ |
18,488 |
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
6,078 |
|
|
|
(481 |
) |
|
|
8,302 |
|
|
|
6,044 |
|
Net change in fair value of cash flow hedging instruments |
|
|
(574 |
) |
|
|
399 |
|
|
|
(423 |
) |
|
|
353 |
|
Amounts reclassified into results of operations |
|
|
49 |
|
|
|
(106 |
) |
|
|
108 |
|
|
|
(292 |
) |
|
|
|
|
|
|
Other comprehensive income |
|
$ |
5,553 |
|
|
$ |
(188 |
) |
|
$ |
7,987 |
|
|
$ |
6,105 |
|
|
|
|
|
|
Comprehensive income |
|
$ |
16,863 |
|
|
$ |
11,487 |
|
|
$ |
27,485 |
|
|
$ |
24,593 |
|
|
|
|
|
|
|
|
The components of AOCI consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
Foreign currency translation adjustment |
|
$ |
31,654 |
|
|
$ |
23,352 |
|
Unrealized gains/(losses) on derivatives
designated and qualified as cash flow
hedges |
|
|
62 |
|
|
|
377 |
|
Unrecognized gain on defined benefit pension |
|
|
1,670 |
|
|
|
1,670 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
33,386 |
|
|
$ |
25,399 |
|
|
Note 13: Commitments and Contingencies
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the SEC relating to the Companys stock option practices from
January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order of investigation in
connection with this matter, and, on May 29, 2007, the Company received a document subpoena from
the SEC acting pursuant to such order. The Company has cooperated with the SEC in this matter and
intends to continue to do so.
13
As previously disclosed, the Audit Committee, with the assistance of outside legal
counsel, conducted an independent review of the Companys historical stock option granting
practices and related accounting for stock option grants. See the Explanatory Note preceding
Part I, Item 1 of the Form 10-K for more information regarding the Audit Committees review and
related matters. The Audit Committee has concluded its review and is considering and will present
to the Board recommendations concerning procedural enhancements and/or additional remedial
measures.
On September 20, 2006, the Company received formal notice from the Internal Revenue Service (IRS)
regarding its intent to begin an audit of the Companys tax years 2004 and 2005. On August 3, 2007,
the Company received formal notice from the IRS regarding its intent to begin an audit of the
Companys 2006 tax year. In connection with these normal recurring audits, the IRS has requested
certain documentation with respect to stock options for the Companys 2004, 2005 and 2006 tax
years. The Company has produced various documents requested by the IRS and is currently in the
process of responding to additional documentation requests. In connection with the Audit
Committees review of the Companys historical stock option granting practices, the Company
determined that a number of officers may have exercised options for which the application of
Section 162(m) (Section 162(m)) of the Internal Revenue Code of 1986, as amended (the Code)
may apply. It is possible that these options will be treated as having been granted at less than
fair market value for federal income tax purposes because the Company incorrectly applied the
measurement date as defined in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). If such options are deemed to have been granted at less than fair
market value, pursuant to Section 162(m), any compensation to officers, including proceeds from
options exercised in any given tax year, in excess of $1,000 will be disallowed as a
deduction for tax purposes. The Company estimates that the potential tax-effected liability for
any such disallowed Section 162(m) deduction would approximate $3,587, which has been
recorded as a current liability within Income taxes within the Companys Consolidated Balance
Sheets. The Company may also incur interest and penalties if it were to incur any such tax
liability, which could be material.
With respect to the previously-disclosed matter regarding a United States General Services
Administration (GSA) Multiple Award Schedule contract, on October 2, 2007, the Company was
contacted by the United States Department of Justice which informed the Company that it was
reviewing allegations by the GSA that certain of the Companys pricing practices under the GSA
contract violated the Civil False Claims Act. The Company has executed an agreement with the
United States tolling the statute of limitations on any action by the United States through April
2, 2008 in order for the parties to discuss the merits of these allegations prior to the possible
commencement of any litigation by the United States.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines, penalties or other costs which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Code, produced
and disseminated false financial statements and SEC filings to the Companys stockholders and to
the market that improperly recorded and accounted for the backdated option grants, concealed the
alleged improper backdating of stock options and obtained substantial benefits from sales of
Company stock while in the possession of material inside information. The complaints seek damages
on behalf of the Company against certain current and former officers and directors and allege
breach of fiduciary duty, unjust enrichment, securities law violations and other claims. The two
lawsuits have been consolidated into a single action as In re Black Box Corporation Derivative
Litigation, Master File No. 2:06-CV-1531-TMH, and plaintiffs filed an amended consolidated
shareholder derivative complaint on August 31, 2007. The parties have stipulated that responses by
the defendants, including the Company, are due on or before February 15, 2008. The Company may have
indemnification obligations arising out of this matter to its current and former directors and
officers named in this litigation. The Company has made a claim for such costs under an insurance
policy.
The Company is, as a normal part of its business operations, a party to legal proceedings in
addition to those described in current and previous filings.
Based on the facts currently available to the Company, management believes the matters described
under this caption Litigation Matters are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
Product Warranties
Estimated future warranty costs related to certain products are charged to operations in the period
the related revenue is recognized. The product warranty liability reflects the Companys best
estimate of probable liability under those warranties. As of September 30, 2007 and March 31, 2007,
the Company has recorded a warranty reserve of $4,614 and $4,214, respectively.
14
There has been no other significant or unusual activity during Fiscal 2008.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007 and Fiscal 2008, and expects to continue to incur additional expenses through the end
of Fiscal 2008, in relation to (i) the Audit Committees review of the Companys historical stock
option granting practices and related accounting for stock option grants, (ii) the informal inquiry
and formal order of investigation by the SEC regarding the Companys past stock option practices,
(iii) the previously-disclosed derivative action relating to the Companys historical stock option
granting practices filed against the Company as a nominal defendant and certain of the Companys
current and former directors and officers, as to whom it may have indemnification obligations and
(iv) related matters. As of September 30, 2007, the total amount of such fees is approximately
$4,744, of which $542 was expensed in Fiscal 2007 and $1,018 was expensed in Fiscal 2008
through September 30, 2007. The Company and the insurance company for its directors and officers
indemnification insurance are currently in discussions with respect to which of these expenses in
excess of the deductible will be paid by the insurance company. Accordingly, there can be no
assurance that all expenses submitted or to be submitted to the insurance company for reimbursement
will be reimbursed under the Companys directors and officers indemnification insurance. The
amount of such expenses not reimbursed by the insurance company could be material.
Note 14: Uncertainty in Income Taxes
As discussed in Note 2, the Company adopted FIN 48 on April 1, 2007. As a result of the adoption of
FIN 48, the Company recorded a $5,110 reduction to the beginning balance of Retained earnings
representing the cumulative effect of a change in accounting principle, an increase to current
liabilities of $3,656 recorded within Income taxes and a decrease to non-current assets of $1,454
recorded within Other assets, each of which is reflected within the Companys Consolidated Balance
Sheets. At the adoption date of April 1, 2007, the gross liability for income taxes associated
with uncertain tax positions was $6,974. If the uncertain tax positions are recognized, they would
all favorably affect the Companys effective tax rate. The Company includes interest and penalties
related to uncertain tax positions within the Provision for income taxes within the Companys
Consolidated Statements of Income. As of April 1, 2007, the Company has recorded approximately
$806 of interest and penalties related to uncertain tax positions. During the six (6) month period
ended September 30, 2007, the Company recorded an additional increase to current liabilities within
Income taxes of $454 related to uncertain tax positions.
The IRS commenced an examination of the Companys U.S. federal income tax return for Fiscal 2004,
Fiscal 2005 and Fiscal 2006. The IRS has not yet proposed any adjustment to the Companys filing
positions in connection with this examination. Upon completion of this examination, it is
reasonably possible that the total amount of unrecognized benefits will change. Any adjustment to
the unrecognized tax benefits would impact the effective tax rate. The Company cannot make an
estimate of the impact on the effective rate for any potential adjustment at this time.
Fiscal 2007 remains open to examination by the IRS. Fiscal 2004 through Fiscal 2007 remain open to
examination by state and foreign taxing jurisdictions.
Note 15: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on net revenues, operating income and assets by geographic region for the purpose of
making operational decisions and assessing financial performance. Additionally, Management is
presented with and reviews net revenues and gross profit by service type. The accounting policies
of the individual operating segments are the same as those of the Company.
15
The following table presents financial information about the Companys reportable segments by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period |
|
|
Six month period |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
217,002 |
|
|
$ |
231,297 |
|
|
$ |
427,004 |
|
|
$ |
423,869 |
|
Operating income |
|
|
18,104 |
|
|
|
18,122 |
|
|
|
28,686 |
|
|
|
27,519 |
|
Depreciation |
|
|
2,582 |
|
|
|
3,580 |
|
|
|
5,406 |
|
|
|
5,741 |
|
Amortization |
|
|
1,319 |
|
|
|
1,911 |
|
|
|
3,609 |
|
|
|
3,368 |
|
Segment assets |
|
|
1,018,336 |
|
|
|
1,038,242 |
|
|
|
1,018,336 |
|
|
|
1,038,242 |
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
33,706 |
|
|
$ |
30,844 |
|
|
$ |
66,505 |
|
|
$ |
60,189 |
|
Operating income |
|
|
4,292 |
|
|
|
3,489 |
|
|
|
8,240 |
|
|
|
6,632 |
|
Depreciation |
|
|
117 |
|
|
|
112 |
|
|
|
220 |
|
|
|
231 |
|
Amortization |
|
|
15 |
|
|
|
11 |
|
|
|
32 |
|
|
|
51 |
|
Segment assets |
|
|
148,154 |
|
|
|
125,745 |
|
|
|
148,154 |
|
|
|
125,745 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,922 |
|
|
$ |
9,184 |
|
|
$ |
19,412 |
|
|
$ |
17,662 |
|
Operating income |
|
|
1,765 |
|
|
|
1,895 |
|
|
|
3,404 |
|
|
|
3,491 |
|
Depreciation |
|
|
29 |
|
|
|
24 |
|
|
|
57 |
|
|
|
44 |
|
Amortization |
|
|
10 |
|
|
|
9 |
|
|
|
21 |
|
|
|
18 |
|
Segment assets |
|
|
20,202 |
|
|
|
15,888 |
|
|
|
20,202 |
|
|
|
15,888 |
|
|
|
|
The sum of segment revenues, operating income, depreciation and amortization equals the
consolidated revenues, operating income, depreciation and amortization. The following reconciles
segment assets to total consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Segment assets for North America, Europe and All Other |
|
$ |
1,186,692 |
|
|
$ |
1,179,875 |
|
Corporate eliminations |
|
|
(72,471 |
) |
|
|
(73,727 |
) |
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
1,114,221 |
|
|
$ |
1,106,148 |
|
|
|
|
|
|
|
|
|
|
The following table presents financial information about the Company by service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period |
|
|
Six month period |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Data Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
50,200 |
|
|
$ |
46,447 |
|
|
$ |
96,365 |
|
|
$ |
90,978 |
|
Gross profit |
|
|
14,374 |
|
|
|
13,907 |
|
|
|
28,551 |
|
|
|
27,224 |
|
Voice Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
150,811 |
|
|
$ |
169,815 |
|
|
$ |
300,798 |
|
|
$ |
303,454 |
|
Gross profit |
|
|
49,753 |
|
|
|
57,913 |
|
|
|
100,029 |
|
|
|
103,676 |
|
Hotline Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
59,619 |
|
|
$ |
55,063 |
|
|
$ |
115,758 |
|
|
$ |
107,288 |
|
Gross profit |
|
|
28,162 |
|
|
|
27,216 |
|
|
|
54,939 |
|
|
|
53,980 |
|
|
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
Note 16: Subsequent Events
On October 16, 2007, the Company announced the acquisition of B & C Telephone, Inc. (B&C), a
privately-held company based out of Spokane, Washington. B&C has an active customer base which
includes commercial, financial, healthcare and various government agency accounts. Annual
historical revenues of B&C are approximately $18,000.
On October 26, 2007, the Company announced its intention to implement a plan regarding certain
stock options under the Employee Plan that have been granted with a below-fair market value
exercise price for tax purposes, and which vested or may vest after December 31, 2004.
16
With respect to outstanding stock options, the Company intends to conduct a tender offer to current
employees who hold such options to amend each affected option grant to increase the exercise price
to the lower of: (i) the fair market value of the common stock on the corrected measurement date
(as determined for tax purposes) or (ii) the fair market value of the common stock on the trading
day immediately following the expiration of the tender offer, provided that the new exercise price
will in no event be lower than the current exercise price of the stock option. Pursuant to the
tender offer, current employees subject to taxation in the United States will have the opportunity
to avoid unfavorable tax consequences under Section 409A of the Code (409A). The Company intends
to offer as part of the tender offer the right to receive a cash payment equal to the increase in
the exercise price of the affected stock option. The Company anticipates that the cash payment
will be made in January 2008.
For employees who exercised affected stock options in calendar 2006, the Company intends to submit
directly to the IRS any applicable 409A additional taxes as well as an amount to gross up such
amount for the additional income and payroll taxes owed on such payments. For employees who have
exercised or who do exercise affected stock options in calendar 2007, the value of these options at
exercise will be subject to additional taxes under 409A. The Company will pay a bonus to any such
employees to compensate them for the additional 409A taxes that they will be required to pay as
well as an amount to gross up such amount for the additional income and payroll taxes owed on
such payments.
With respect to the tender offer, the amount of cash to be paid out by the Company is dependent
upon the fair market value of the common stock on the trading day immediately following the
expiration of the tender offer. Such amount will be recorded in the fiscal quarter in which the
tender offer expires, which currently is expected to be the third quarter of Fiscal 2008. With
respect to the expense to be incurred for amounts to be paid to the IRS or to employees for
affected options exercised in 2006 and 2007, it is expected that the Company will record such
expense in the third quarter of Fiscal 2008. All cash payments to be made by the Company under
this plan (other than any payments directly to the IRS) are expected to be paid by January 31,
2008. Such amounts could be material.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The discussion and analysis for the three (3) and six (6) month periods ended September 30, 2007
and 2006 as set forth below in this Item 2 should be read in conjunction with the response to Part
1, Item 1 of this report and the consolidated financial statements of Black Box Corporation (Black
Box or the Company), including the related notes, and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2007 (the Form 10-K). The Companys fiscal year ends on
March 31. The fiscal quarters consist of 13 weeks and end on the Saturday nearest each calendar
quarter end. The actual ending dates for the periods presented as of September 30, 2007 and 2006
were September 29, 2007 and September 30, 2006. References to Fiscal Year or Fiscal mean the
Companys fiscal year ended March 31 for the year referenced. All dollar amounts are presented in
thousands unless otherwise noted.
The Company
Black Box is the worlds largest dedicated network infrastructure services provider. Black Box
offers one-source network infrastructure services for communication systems. The Companys service
offerings include design, installation, integration, monitoring and maintenance of voice, data and
integrated communication systems. The Companys primary service offering is voice solutions, while
providing premise cabling and other data-related services and products. The Company provides
24/7/365 technical support for all of its solutions which encompass all major voice and data
manufacturers as well as 118,000 network infrastructure products that it sells through its catalog
and Internet web site and its Voice and Data services (collectively referred to as On-Site
services) offices.
Management is presented with and reviews revenues and operating income by geographical segment. In
addition, revenues and gross profit information by service type are provided herein for purposes of
further analysis.
The Company has completed several acquisitions from April 1, 2006 through September 30, 2007 that
have a significant impact on the Companys consolidated financial statements and, more
specifically, North America Voice Services for the periods under review. Fiscal 2007 acquisitions
include (i) USA Commercial and Government and Canadian operations of NextiraOne, LLC
(NextiraOne), (ii) Nu-Vision Technologies, Inc. and Nu-Vision Technologies, LLC (collectively
referred to as NUVT), (iii) Nortech Telecommunications Inc. (NTI) and (iv) ADS Telecom, Inc.
(ADS). The acquisitions noted above are collectively referred to as the Acquired Companies.
The results of operations of the Acquired Companies are included in the Companys Consolidated
Statements of Income beginning on their respective acquisition dates.
17
In connection with certain acquisitions, the Company incurs expenses that it excludes when
evaluating the continuing operations of the Company. The following table is included to provide a
schedule of the past acquisition-related expenses during Fiscal 2007 (by quarter).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q07 |
|
|
2Q07 |
|
|
3Q07 |
|
|
4Q07 |
|
|
Fiscal 2007 |
|
|
Selling general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
|
|
|
$ |
1,191 |
|
|
$ |
713 |
|
|
$ |
742 |
|
|
$ |
2,646 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions |
|
|
1,433 |
|
|
|
1,894 |
|
|
|
2,621 |
|
|
|
4,127 |
|
|
|
10,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,433 |
|
|
$ |
3,085 |
|
|
$ |
3,334 |
|
|
$ |
4,869 |
|
|
$ |
12,721 |
|
|
The following table is included to provide a schedule of the current and an estimate of future
acquisition-related expenses for Fiscal 2008 (by quarter) based on the acquisition activity through
September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q08 |
|
|
2Q08 |
|
|
3Q08 |
|
|
4Q08 |
|
|
Fiscal 2008 |
|
|
Selling general & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions |
|
$ |
659 |
|
|
$ |
448 |
|
|
$ |
439 |
|
|
$ |
472 |
|
|
$ |
2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions |
|
|
2,269 |
|
|
|
1,298 |
|
|
|
1,307 |
|
|
|
1,287 |
|
|
|
6,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,928 |
|
|
$ |
1,746 |
|
|
$ |
1,746 |
|
|
$ |
1,759 |
|
|
$ |
8,179 |
|
|
The following table provides information on revenues and operating income by reportable geographic
segment (North America, Europe and All Other). The table below should be read in conjunction with
the following discussion. The Companys reconciling items of $4,792 and $5,472 for the three (3)
month periods ended September 30, 2007 and 2006, respectively and $13,466 and $11,269 for the six
(6) months ended September 30, 2007 and 2006, respectively, include restructuring charges,
severance costs, other acquisition integration costs, amortization of intangible assets on
acquisitions, stock-based compensation expense, asset write-up depreciation expense on acquisitions
and historical stock option granting practices investigation costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
Six month period ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
217,002 |
|
|
|
83.3 |
% |
|
$ |
231,297 |
|
|
|
85.2 |
% |
|
$ |
427,004 |
|
|
|
83.2 |
% |
|
$ |
423,869 |
|
|
|
84.5 |
% |
Europe |
|
|
33,706 |
|
|
|
12.9 |
% |
|
|
30,844 |
|
|
|
11.4 |
% |
|
|
66,505 |
|
|
|
13.0 |
% |
|
|
60,189 |
|
|
|
12.0 |
% |
All Other |
|
|
9,922 |
|
|
|
3.8 |
% |
|
|
9,184 |
|
|
|
3.4 |
% |
|
|
19,412 |
|
|
|
3.8 |
% |
|
|
17,662 |
|
|
|
3.5 |
% |
|
|
|
|
|
Total |
|
$ |
260,630 |
|
|
|
100 |
% |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
512,921 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
18,104 |
|
|
|
|
|
|
$ |
18,122 |
|
|
|
|
|
|
$ |
28,686 |
|
|
|
|
|
|
$ |
27,519 |
|
|
|
|
|
% of North America
revenues |
|
|
8.3 |
% |
|
|
|
|
|
|
7.8 |
% |
|
|
|
|
|
|
6.7 |
% |
|
|
|
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
4,292 |
|
|
|
|
|
|
$ |
3,489 |
|
|
|
|
|
|
$ |
8,240 |
|
|
|
|
|
|
$ |
6,632 |
|
|
|
|
|
% of Europe revenues |
|
|
12.7 |
% |
|
|
|
|
|
|
11.3 |
% |
|
|
|
|
|
|
12.4 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
$ |
1,765 |
|
|
|
|
|
|
$ |
1,895 |
|
|
|
|
|
|
$ |
3,404 |
|
|
|
|
|
|
$ |
3,491 |
|
|
|
|
|
% of All Other revenues |
|
|
17.8 |
% |
|
|
|
|
|
|
20.6 |
% |
|
|
|
|
|
|
17.5 |
% |
|
|
|
|
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,161 |
|
|
|
9.3 |
% |
|
$ |
23,506 |
|
|
|
8.7 |
% |
|
$ |
40,330 |
|
|
|
7.9 |
% |
|
$ |
37,642 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,792 |
|
|
|
|
|
|
$ |
5,472 |
|
|
|
|
|
|
$ |
13,466 |
|
|
|
|
|
|
$ |
11,269 |
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,792 |
|
|
|
1.8 |
% |
|
$ |
5,472 |
|
|
|
2.0 |
% |
|
$ |
13,466 |
|
|
|
2.6 |
% |
|
$ |
11,269 |
|
|
|
2.2 |
% |
|
18
The following table provides information on revenues and gross profit by service type (Data
Services, Voice Services and Hotline Services). The table below should be read in conjunction with
the following discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
Six month period ended September 30, |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
|
|
|
total |
|
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
$ |
|
|
revenue |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
50,200 |
|
|
|
19.3 |
% |
|
$ |
46,447 |
|
|
|
17.1 |
% |
|
$ |
96,365 |
|
|
|
18.8 |
% |
|
$ |
90,978 |
|
|
|
18.1 |
% |
Voice Services |
|
|
150,811 |
|
|
|
57.8 |
% |
|
|
169,815 |
|
|
|
62.6 |
% |
|
|
300,798 |
|
|
|
58.6 |
% |
|
|
303,454 |
|
|
|
60.5 |
% |
Hotline Services |
|
|
59,619 |
|
|
|
22.9 |
% |
|
|
55,063 |
|
|
|
20.3 |
% |
|
|
115,758 |
|
|
|
22.6 |
% |
|
|
107,288 |
|
|
|
21.4 |
% |
|
|
|
|
|
Total |
|
$ |
260,630 |
|
|
|
100 |
% |
|
$ |
271,325 |
|
|
|
100 |
% |
|
$ |
512,921 |
|
|
|
100 |
% |
|
$ |
501,720 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services |
|
$ |
14,374 |
|
|
|
|
|
|
$ |
13,907 |
|
|
|
|
|
|
$ |
28,551 |
|
|
|
|
|
|
$ |
27,224 |
|
|
|
|
|
% of Data Services
revenues |
|
|
28.6 |
% |
|
|
|
|
|
|
29.9 |
% |
|
|
|
|
|
|
29.6 |
% |
|
|
|
|
|
|
29.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services |
|
$ |
49,753 |
|
|
|
|
|
|
$ |
57,913 |
|
|
|
|
|
|
$ |
100,029 |
|
|
|
|
|
|
$ |
103,676 |
|
|
|
|
|
% of Voice
Services revenues |
|
|
33.0 |
% |
|
|
|
|
|
|
34.1 |
% |
|
|
|
|
|
|
33.3 |
% |
|
|
|
|
|
|
34.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services |
|
$ |
28,162 |
|
|
|
|
|
|
$ |
27,216 |
|
|
|
|
|
|
$ |
54,939 |
|
|
|
|
|
|
$ |
53,980 |
|
|
|
|
|
% of Hotline
Services revenues |
|
|
47.2 |
% |
|
|
|
|
|
|
49.4 |
% |
|
|
|
|
|
|
47.5 |
% |
|
|
|
|
|
|
50.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
92,289 |
|
|
|
35.4 |
% |
|
$ |
99,036 |
|
|
|
36.5 |
% |
|
$ |
183,519 |
|
|
|
35.8 |
% |
|
$ |
184,880 |
|
|
|
36.8 |
% |
|
The Companys distribution agreement with Avaya, Inc. terminated on September 8, 2007. The Company
evaluated the financial impact of this event including potential business strategies to minimize
such impact. The Company continues to anticipate that this event will not have a material impact
on its Fiscal 2008 operating results.
SECOND QUARTER FISCAL 2008 (2Q08) COMPARED TO SECOND QUARTER FISCAL 2007 (2Q07):
Total Revenues
Total revenues for 2Q08 were $260,630, a decrease of 4% compared to total revenues for 2Q07 of
$271,325. The Acquired Companies contributed incremental revenue of $68,189 and $88,259 for 2Q08
and 2Q07, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $3,016 in 2Q08 relative to the U.S. dollar, total revenues would have increased 3% from
$183,066 to $189,425 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 2Q08 were $217,002, a decrease of 6% compared to revenues for 2Q07 of
$231,297. The Acquired Companies contributed incremental revenue of $68,189 and $88,259 for 2Q08
and 2Q07, respectively. The decrease in Acquired Companies contributed revenue is primarily due to
expected post-merger client attrition from the NextiraOne acquisition. Excluding the effects of
the acquisitions and the positive exchange rate impact of $413 in 2Q08 relative to the U.S. dollar,
North American revenues would have increased 4% from $143,038 to $148,400. The Company believes
this increase is due to the success in the Companys Data, Voice and Hotline (DVH) cross-selling
initiatives.
Europe
Revenues in Europe for 2Q08 were $33,706, an increase of 9% compared to revenues for 2Q07 of
$30,844. Excluding the positive exchange rate impact of $2,392 in 2Q08 relative to the U.S. dollar,
Europe revenues would have increased 2% from $30,844 to $31,314.
The Company believes the increase is due to the success in the Companys DVH cross-selling
initiatives.
19
All Other
Revenues for All Other for 2Q08 were $9,922, an increase of 8% compared to revenues for 2Q07 of
$9,184. Excluding the positive exchange rate impact of $211 in 2Q08 relative to the U.S. dollar,
All Other revenues would have increased 6% from $9,184 to $9,711.
Revenue by Service Type
Data Services
Revenues from Data Services for 2Q08 were $50,200, an increase of 8% compared to revenues for 2Q07
of $46,447. Excluding the positive exchange rate impact of $1,230 in 2Q08 relative to the U.S.
dollar for its International Data Services, Data Services revenues would have increased 5% from
$46,447 to $48,970. The Company believes the increase in Data Services revenues is due to the
success in the Companys DVH cross-selling initiatives coupled with stable end-user markets.
Voice Services
Revenues from Voice Services for 2Q08 were $150,811, a decrease of 11% compared to revenues for
2Q07 of $169,815. The Acquired Companies contributed incremental revenue of $68,189 and $88,259
for 2Q08 and 2Q07, respectively. The decrease in Acquired Companies contributed revenue is
primarily due to expected post-merger client attrition from the NextiraOne acquisition. Excluding
the effects of the acquisitions, Voice Services revenues would have increased 1% from $81,556 to
$82,622. The Company believes that the increase in Voice Services revenues is primarily due to the
success in the Companys DVH cross-selling initiatives coupled with stable end-user markets. There
was no exchange rate impact on Voice Services revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 2Q08 were $59,619, an increase of 8% compared to revenues for
2Q07 of $55,063. Excluding the positive exchange rate impact of $1,786 in 2Q08 relative to the U.S.
dollar for its International Hotline Services, Hotline Services revenues would have increased 5%
from $55,063 to $57,833. The Company believes this increase in Hotline Services revenues is
primarily due to the success in the Companys DVH cross-selling initiatives and increases in
web-based sales coupled with stable end-user markets.
Gross profit
Gross profit dollars for 2Q08 were $92,289, a decrease of 7% compared to gross profit dollars for
2Q07 of $99,036. Gross profit as a percent of revenues for 2Q08 was 35.4%, a decrease of 1.1%
compared to gross profit as a percentage of revenues for 2Q07 of 36.5%. The Company believes the
percent decrease was due primarily to cost overruns on a domestic Data Service contract, the impact
of lower gross profit in its Hotline Services segment driven by increased product costs and product
mix and several strategic investments in the Voice Services segment.
Gross profit dollars for Data Services for 2Q08 were $14,374, or 28.6% of revenues, compared to
gross profit dollars for 2Q07 of $13,907, or 29.9% of revenues. Gross profit dollars for Voice
Services for 2Q08 were $49,753, or 33.0% of revenues, compared to gross profit dollars for 2Q07 of
$57,913, or 34.1% of revenues. Gross profit dollars for Hotline Services for 2Q08 were $28,162, or
47.2% of revenues, compared to gross profit dollars for 2Q07 of $27,216, or 49.4% of revenues.
Selling, general & administrative expenses
Selling, general & administrative expenses for 2Q08 were $66,784, a decrease of $6,815 compared to
Selling, general & administrative expenses for 2Q07 of $73,599. Selling, general & administrative
expenses as a percent of revenue for 2Q08 were 25.6% compared to 27.1% for 2Q07. The decrease in
Selling, general & administrative expense dollars and decrease in Selling, general & administrative
expenses as a percent of revenue over the prior year was primarily due to the Companys continued
effort to right-size the organization and more properly align the expense structure with
anticipated revenues and changing market demand for its solutions and services.
Intangibles amortization
Intangibles amortization for 2Q08 was $1,344, a decrease of $587 compared to Intangibles
amortization for 2Q07 of $1,931. The decrease was primarily attributable to the amortization
run-out for certain intangible assets partially offset by the finalization of purchase accounting
and the addition of intangible assets from acquisitions completed subsequent to 2Q07.
Operating income
Operating income for 2Q08 was $24,161, or 9.3% of revenues, an increase of $655 compared to
Operating income for 2Q07 of $23,506, or 8.7% of revenues.
20
Interest expense, net
Net interest expense for 2Q08 was $6,143, an increase of $622 compared to net interest expense for
2Q07 of $5,521. The Companys interest-rate swap contributed losses of $1,746 and $1,395 for 2Q08
and 2Q07, respectively. Excluding the effect of interest-rate swap, net interest expense would
have increased $271 from $4,126 to $4,397. This increase in net interest expense is due to an
increase in the weighted average interest-rate from 6.26% for 2Q07 to 6.63% for 2Q08 partially
offset by decreases in the weighted average outstanding debt from $265,437 for 2Q07 to $249,789 for
2Q08.
Provision for Income Taxes
The tax provision for 2Q08 was $6,781, an effective tax rate of 37.5%. This compares to the tax
provision for 2Q07 of $6,238, an effective tax rate of 34.8%. The tax rate for 2Q08 was higher
than 2Q07 due to the expected write-off of deferred tax assets related to book stock-based
compensation expense, changes in the overall mix of taxable income among worldwide offices and the
loss of the extraterritorial income deduction for federal income tax purposes.
Net Income
As a result of the foregoing, Net income for 2Q08 was $11,310, or 4.3% of revenues, compared to Net
income for 2Q07 of $11,675, or 4.3% of revenues.
SIX MONTHS FISCAL 2008 (2QYTD08) COMPARED TO SIX MONTHS FISCAL 2007 (2QYTD07):
Total Revenues
Total revenues for 2QYTD08 were $512,921, an increase of 2% compared to total revenues for 2QYTD07
of $501,720. The Acquired Companies contributed incremental revenue of $140,150 and $148,433 for
2QYTD08 and 2QYTD07, respectively. Excluding the effects of the acquisitions and the positive
exchange rate impact of $5,408 in 2QYTD08 relative to the U.S. dollar, total revenues would have
increased 4% from $353,287 to $367,363 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 2QYTD08 were $427,004, an increase of 1% compared to revenues for
2QYTD07 of $423,869. The Acquired Companies contributed incremental revenue of $140,150 and
$148,433 for 2QYTD08 and 2QYTD07, respectively. The decrease in Acquired Companies contributed
revenue is primarily due to expected post-merger client attrition from the NextiraOne acquisition.
Excluding the effects of the acquisitions and the positive exchange rate impact of $525 in 2QYTD08
relative to the U.S. dollar, North American revenues would have increased 4% from $275,436 to
$286,329. The Company believes this increase is due to the success in the Companys DVH
cross-selling initiatives.
Europe
Revenues in Europe for 2QYTD08 were $66,505, an increase of 10% compared to revenues for 2QYTD07 of
$60,189. Excluding the positive exchange rate impact of $4,599 in 2QYTD08 relative to the U.S.
dollar, Europe revenues would have increased 3% from $60,189 to $61,906. The Company believes the
increase is due to the success in the Companys DVH cross-selling initiatives.
All Other
Revenues for All Other for 2QYTD08 were $19,412, an increase of 10% compared to revenues for
2QYTD07 of $17,662. Excluding the positive exchange rate impact of $284 in 2QYTD08 relative to the
U.S. dollar, All Other revenues would have increased 8% from $17,662 to $19,128.
Revenue by Service Type
Data Services
Revenues from Data Services for 2QYTD08 were $96,365, an increase of 6% compared to revenues for
2QYTD07 of $90,978. Excluding the positive exchange rate impact of $2,164 in 2QYTD08 relative to
the U.S. dollar for its International Data Services, Data Services revenues would have increased 4%
from $90,978 to $94,201. The Company believes the increase in Data Services revenues is due to the
success in the Companys DVH cross-selling initiatives coupled with stable end-user markets.
21
Voice Services
Revenues from Voice Services for 2QYTD08 were $300,798, a decrease of 1% compared to revenues for
2QYTD07 of $303,454. The Acquired Companies contributed incremental revenue of $140,150 and
$148,433 for 2QYTD08 and 2QYTD07, respectively. The decrease in Acquired Companies contributed
revenue is primarily due to expected post-merger client attrition from the NextiraOne acquisition.
Excluding the effects of the acquisitions, Voice Services revenues would have increased 4% from
$155,021 to $160,648. The Company believes that the increase in Voice Services revenues is
primarily due to the success in the Companys DVH cross-selling initiatives coupled with stable
end-user markets. There was no exchange rate impact on Voice Services revenues as all of the
Companys Voice Services revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 2QYTD08 were $115,758, an increase of 8% compared to revenues
for 2QYTD07 of $107,288. Excluding the positive exchange rate impact of $3,244 in 2QYTD08 relative
to the U.S. dollar for its International Hotline Services, Hotline Services revenues would have
increased 5% from $107,288 to $112,514. The Company believes this increase in Hotline Services
revenues is primarily due to the success in the Companys DVH cross-selling initiatives and
increases in web-based sales coupled with stable end-user markets.
Gross profit
Gross profit dollars for 2QYTD08 were $183,519, a decrease of 1% compared to gross profit dollars
for 2QYTD07 of $184,880. Gross profit as a percent of revenues for 2QYTD08 was 35.8%, a decrease
of 1.0% compared to gross profit as a percentage of revenues for 2QYTD07 of 36.8%. The Company
believes the percent decrease was due primarily to the impact of lower gross profit in its Voice
Services segment driven by the acquisition of NextiraOne, several strategic investments in the
Voice Services segment and the impact of lower gross profit in its Hotline Services segment driven
by increased product costs and product mix.
Gross profit dollars for Data Services for 2QYTD08 were $28,551, or 29.6% of revenues, compared to
gross profit dollars for 2QYTD07 of $27,224, or 29.9% of revenues. Gross profit dollars for Voice
Services for 2QYTD08 were $100,029, or 33.3% of revenues, compared to gross profit dollars for
2QYTD07 of $103,676, or 34.2% of revenues. Gross profit dollars for Hotline Services for 2QYTD08
were $54,939, or 47.5% of revenues, compared to gross profit dollars for 2QYTD07 of $53,980, or
50.3% of revenues.
Selling, general & administrative expenses
Selling, general & administrative expenses for 2QYTD08 were $139,527, a decrease of $4,274 compared
to Selling, general & administrative expenses for 2QYTD07 of $143,801. Selling, general &
administrative expenses as a percent of revenue for 2QYTD08 were 27.2% compared to 28.7% for
2QYTD07. The decrease in Selling, general & administrative expense dollars and decrease in
Selling, general & administrative expenses as a percent of revenue over the prior year was
primarily due to the Companys continued effort to right-size the organization and more properly
align the expense structure with anticipated revenues, changing market demand for the Companys
solutions and services and a decrease in non-cash stock based compensation expense of $2,765
partially offset by increases in restructuring/integration costs of $3,788 and historical stock
option review costs of $1,018.
Intangibles amortization
Intangibles amortization for 2QYTD08 was $3,662, an increase of $225 compared to Intangibles
amortization for 2QYTD07 of $3,437. The increase was primarily attributable to the addition of
intangible assets from acquisitions completed subsequent to 2Q07 partially offset by the
amortization run-out for certain intangible assets.
Operating income
Operating income for 2QYTD08 was $40,330, or 7.9% of revenues, an increase of $2,688 compared to
Operating income for 2QYTD07 of $37,642, or 7.5% of revenues.
Interest expense, net
Net interest expense for 2QYTD08 was $9,423, an increase of $262 compared to net interest expense
for 2QYTD07 of $9,161. The Companys interest-rate swap contributed losses of $438 and $1,395 for
2QYTD08 and 2QYTD07, respectively. Excluding the effect of interest-rate swap, net interest
expense would have increased $1,219 from $7,766 to $8,985. This increase in net interest expense is
due to increases in the weighted average outstanding debt and weighted average interest-rate from
$243,390 and 6.17%, respectively, for 2QYTD07 to $250,949 and 6.61%, respectively, for 2QYTD08.
22
Provision for Income Taxes
The tax provision for 2QYTD08 was $11,549, an effective tax rate of 37.2%. This compares to the
tax provision for 2QYTD07 of $9,806, an effective tax rate of 34.7%. The tax rate for 2QYTD08 was
higher than 2QYTD07 due to the expected write-off of deferred tax assets related to book
stock-based compensation expense, changes in the overall mix of taxable income among worldwide
offices and the loss of the extraterritorial income deduction for federal income tax purposes.
Net Income
As a result of the foregoing, Net income for 2QYTD08 was $19,498, or 3.8% of revenues, compared to
Net income for 2QYTD07 of $18,488, or 3.7% of revenues.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash provided by operating activities during 2QYTD08 was $12,232. Significant factors
contributing to the source of cash were: net income of $19,498 inclusive of non-cash charges of
$9,345 and $2,871 for amortization / depreciation expense and stock compensation expense,
respectively, a decrease in net inventory of $3,798 and increases in accounts payable of $7,863 and
billings in excess of costs of $4,906. Significant factors contributing to a use of cash were: a
decrease in the deferred tax provision of $9,738 and increases in other assets of $2,903, accounts
receivable of $23,989 and cost in excess of billings of $4,839. Changes in the above accounts are
based on average Fiscal 2008 exchange rates.
Net cash provided by operating activities during 2QYTD07 was $21,723. Significant factors
contributing to the source of cash were: net income of $18,488 inclusive of non-cash charges of
$9,453 and $5,636 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.
As of September 30, 2007 and 2006, the Company had cash and cash equivalents of $18,220 and
$15,758, respectively, working capital of $135,882 and $109,936, respectively, and a current ratio
of 1.57 and 1.43, 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 2QYTD08 was $5,090. Significant factors contributing
to a use of cash were: $1,926 for gross capital expenditures and $3,215 for holdbacks and
contingent fee payments related to prior period acquisitions.
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 8 of the Notes to Consolidated Financial Statements for additional details regarding
the acquisitions of NextiraOne and NUVT.
Cash Flows from Financing Activities
Net cash used by financing activities during 2QYTD08 was $5,172. Significant factors contributing
to the cash outflow were $8,237 of net payments on long-term debt and $2,104 for the payment of
dividends. Significant factors contributing to the cash inflow were $5,170 of proceeds from the
exercise of stock options.
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 common stock and $2,116 for the payment of dividends.
Total Debt
Revolving Credit Agreement - On March 28, 2006, the Company entered into the Second Amendment to
the Second Amended and Restated Credit Agreement dated January 24, 2005, as amended February 17,
2005 (collectively, 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
23
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, 2007, the Company was in compliance with all financial covenants under the Credit Agreement.
As of September 30, 2007, the Company had total debt outstanding of $231,115. Total debt was
comprised of $228,830 outstanding under the credit agreement, $2,252 of obligations under capital
leases and $33 of various other third-party, non-employee loans. The maximum amount of debt
outstanding under the Credit Agreement, the weighted average balance outstanding under the Credit
Agreement and the weighted average interest-rate on all outstanding debt for the three (3) month
period ended September 30, 2007 was $270,825, $249,789 and 6.63%, respectively, compared to
$284,470, $265,437 and 6.26%, respectively, for the three (3) month period ended September 30,
2006. The maximum amount of debt outstanding under the Credit Agreement, the weighted average
balance outstanding under the Credit Agreement and the weighted average interest-rate on all
outstanding debt for the six (6) month period ended September 30, 2007 was $270,825, $250,949 and
6.61%, respectively, compared to $284,470, $243,390 and 6.17%, respectively, for the six (6) month
period ended September 30, 2006.
Dividends
Fiscal 2008
2Q08 The Companys Board of Directors (the Board) declared a cash dividend of $0.06 per share
on all outstanding shares of the common stock. The dividend totaled $1,061 and was paid on October
12, 2007 to stockholders of record at the close of business on September 28, 2007.
1Q08 The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on July 13, 2007 to stockholders of record
at the close of business on June 29, 2007.
Fiscal 2007
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.
1Q07 The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,061 and was paid on July 14, 2006 to stockholders of record
at the close of business on June 30, 2006.
While the Company expects to continue to declare dividends for the foreseeable future, there can be
no assurance as to the timing or amount of such dividends.
Repurchase of Common Stock
Fiscal 2008
2Q08 During the three (3) month period ended September 30, 2007, the Company repurchased 28
shares of its common stock for an aggregate purchase price of $1, or an average purchase price per
share of $43.00.
1Q08 There were no repurchases of common stock during the three (3) month period ended June 30,
2007.
Fiscal 2007
2Q07 During the three (3) month period ended September 30, 2006, the Company repurchased 440,628
shares of its common stock for an aggregate purchase price of $17,587, or an average purchase price
per share of $39.91.
1Q07 There were no repurchases of common stock during the three (3) month period ended June 30,
2006.
Since the inception of the repurchase program in April 1999 through September 2007, the Company has
repurchased 7,436,139 shares of its common stock for an aggregate purchase price of $317,034, or an
average purchase price per share of $42.63. Additional repurchases
of common stock may occur from time to time depending upon factors such as the Companys cash flows
and general market conditions.
24
While the Company expects to continue to repurchase shares of
common stock for the foreseeable future, there can be no assurance as to the timing or amount of
such repurchases.
Potential Tax Payments
In
connection with the independent review by the Audit Committee of the Board (the Audit Committee) of the
Companys historical stock option granting practices, the Company determined that a number of
officers may have exercised options for which the application of Section 162(m) (Section 162(m))
of the Internal Revenue Code of 1986, as amended (the Code) may apply. It is possible that
these options will be treated as having been granted at less than fair market value for federal
income tax purposes because the Company incorrectly applied the measurement date as defined in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).
If such options are deemed to have been granted at less than fair market value, pursuant to Section
162(m), any compensation to officers, including proceeds from options exercised in any given tax
year, in excess of $1,000 will be disallowed as a deduction for tax purposes. The Company
estimates that the potential tax-effected liability for any such disallowed Section 162(m)
deduction would approximate $3,587, which has been recorded as a current liability within
Income taxes within the Companys Consolidated Balance Sheets. The Company may also incur interest
and penalties if it were to incur any such tax liability, which could be material.
Potential 409A Payments
On October 26, 2007, the Company announced its intention to implement a plan regarding certain
stock options under the 1992 Stock Option Plan, as amended (the Employee Plan) that have been
granted with a below-fair market value exercise price for tax purposes, and which vested or may
vest after December 31, 2004.
With respect to outstanding stock options, the Company intends to conduct a tender offer to current
employees who hold such options to amend each affected option grant to increase the exercise price
to the lower of: (i) the fair market value of the common stock on the corrected measurement date
(as determined for tax purposes) or (ii) the fair market value of the common stock on the trading
day immediately following the expiration of the tender offer, provided that the new exercise price
will in no event be lower than the current exercise price of the stock option. Pursuant to the
tender offer, current employees subject to taxation in the United States will have the opportunity
to avoid unfavorable tax consequences under the Code Section 409A (409A). The Company intends to
offer as part of the tender offer the right to receive a cash payment equal to the increase in the
exercise price of the affected stock option. The Company anticipates that the cash payment will be
made in January 2008. Such payments could be material to the Companys cash flows for such period.
For employees who exercised affected stock options in calendar 2006, the Company intends to submit
directly to the Internal Revenue Service (IRS) any applicable 409A additional taxes as well as an
amount to gross up such amount for the additional income and payroll taxes owed on such payments.
For employees who have exercised or who do exercise affected stock options in calendar 2007, the
value of these options at exercise will be subject to additional taxes under 409A. The Company
will pay a bonus to any such employees to compensate them for the additional 409A tax(es) that they
will be required to pay as well as an amount to gross up such amount for the additional income
and payroll taxes owed on such payments.
With respect to the tender offer, the amount of cash to be paid out by the Company is dependent
upon the fair market value of the common stock on the trading day immediately following the
expiration of the tender offer. Such amount will be recorded in the fiscal quarter in which the
tender offer expires, which currently is expected to be the third quarter of Fiscal 2008. With
respect to the expense to be incurred for amounts to be paid to the IRS or to employees for
affected options exercised in 2006 and 2007, it is expected that the Company will record such
expense in the third quarter of Fiscal 2008. All cash payments to be made by the Company under
this plan (other than any payments directly to the IRS) are expected to be paid by January 31,
2008. Such amounts could be material.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500, in
Fiscal 2007 and Fiscal 2008, and expects to continue to incur additional expenses through the end
of Fiscal 2008, in relation to (i) the Audit Committees review of the Companys historical stock
option granting practices and related accounting for stock option grants, (ii) the informal inquiry
and formal order of investigation by the Securities and Exchange Commission (SEC) regarding the
Companys past stock option granting practices, (iii) the previously-disclosed derivative action relating to
the Companys historical stock option granting practices filed against the Company as a nominal
defendant and certain of the Companys current and former directors and officers, as to whom it may
have indemnification obligations and (iv) related matters. As of September 30, 2007, the total
amount of such fees is approximately $4,744, of which $542 was expensed in Fiscal 2007 and $1,018 was expensed in Fiscal 2008 through September 30, 2007. The
Company and the insurance company for its directors and officers indemnification insurance are
currently in discussions with respect to which of these expenses in excess of the deductible will
be paid by the insurance company. Accordingly, there can be no assurance that all expenses
submitted or to be submitted to the insurance company for reimbursement will be reimbursed under
the Companys directors and officers indemnification insurance. The amount of such expenses not
reimbursed by the insurance company could be material.
Legal Proceedings
Please
also see the matters discussed in Part II, Item 1, Legal Proceedings
of this Quarterly Report on Form 10-Q, which information is
incorporated herein by reference.
25
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys consolidated financial
statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the
Form 10-K. Additional significant accounting policies or amendments to previously-disclosed
policies adopted during Fiscal 2008 are disclosed below.
Uncertainty in Income Taxes:
The Company requires that the realization of an uncertain income tax position must be more likely
than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in
the financial statements. The benefit to be recorded in the financial statements is the amount
most likely to be realized assuming a review by tax authorities having all relevant information and
applying current conventions. The Company includes interest and penalties related to uncertain tax
positions within the Provision for income taxes within the Companys Consolidated Statements of
Income.
Impact of Recently Issued Accounting Pronouncements
Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No.115 (SFAS 159). SFAS 159 permits an entity to elect to measure eligible items at
fair value (fair value option), including many financial instruments. The provisions of SFAS 159
are effective for the Company as of April 1, 2008. If the fair value option is elected, the
Company will report unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for
which the fair value option is elected shall be recognized in earnings as incurred and not
deferred. The fair value option may be applied for a single eligible item without electing it for
other identical items, with certain exceptions, and must be applied to the entire eligible item and
not to a portion of the eligible item. The Company is currently evaluating the irrevocable
election of the fair value option pursuant to SFAS 159.
Fair Value Measurements
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company beginning on April 1, 2008. The Company is evaluating the impact of the adoption
of SFAS 157 on the Companys consolidated financial statements.
Uncertainty in Income Taxes
In July, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 requires that realization of an uncertain income tax position must be
more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in
the financial statements as the amount most likely to be realized assuming a review by tax
authorities having all relevant information and applying current conventions. FIN 48 also
clarifies the financial statement classification of tax-related penalties and interest and sets
forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective for the next fiscal
year beginning after December 15, 2006. The Company adopted FIN 48 as of April 1, 2007, as
required. The adoption of FIN 48 resulted in a decrease in accumulated deficit and a decrease in
tax liabilities through a cumulative effect adjustment of $5,110. The adjustment to accumulated
deficit is summarized in the following table. See Note 2 and Note 14 of the Notes to the
Consolidated Financial Statements for further reference.
|
|
|
|
|
|
|
Retained Earnings |
|
|
Balance as of April 1, 2007 |
|
$ |
450,022 |
|
Adjustment for adoption of FIN 48 |
|
|
(5,110 |
) |
|
|
|
|
Balance as currently reported |
|
$ |
444,912 |
|
|
26
Definition of Settlement in FIN 48
In May, 2007, the FASB issued staff position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1) which amended FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position could be
effectively settled on completion of an examination by a taxing authority. The Company adopted FSP
FIN 48-1 in conjunction with adoption of FIN 48 as of April 1, 2007. The adoption of FSP FIN 48-1
did not have a material impact on Companys consolidated financial statements.
Inflation
The overall effects of inflation on the Company have been nominal. Although long-term inflation
rates are difficult to predict, the Company continues to strive to minimize the effect of inflation
through improved productivity and cost reduction programs as well as price adjustments within the
constraints of market competition.
Cautionary Forward Looking Statements
When included in this Quarterly Report on Form 10-Q or in documents incorporated herein by
reference, the words expects, intends, anticipates, believes, estimates and analogous
expressions are intended to identify forward-looking statements. Such statements are inherently
subject to a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among others, the final
outcome of the review of the Companys stock option granting practices, including the related SEC
investigation, shareholder derivative lawsuit, tax matters and insurance/indemnification matters,
and the impact of any actions that may be required or taken as a result of such review, SEC
investigation, shareholder derivative lawsuit, tax matters or insurance/indemnification matters,
levels of business activity and operating expenses, expenses relating to corporate compliance
requirements, cash flows, global economic and business conditions, successful integration of
acquisitions, including the NextiraOne business, the timing and costs of restructuring programs,
successful marketing of DVH services, successful implementation of
the Companys M&A program, including
identifying appropriate targets, consummating transactions and successfully integrating the
businesses, competition, changes in foreign, political and economic conditions, fluctuating foreign
currencies compared to the U.S. dollar, rapid changes in technologies, client preferences, the
ability of the Company to identify, acquire and operate additional technical services companies,
the Companys arrangements with suppliers of voice equipment and technology and various other
matters, many of which are beyond the Companys control. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and
speak only as of the date of this Quarterly Report on Form 10-Q. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or any changes in the Companys
expectations with regard thereto or any change in events, conditions or circumstances on which any
statement is based.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest-rate volatility and foreign currency exchange rates volatility. Market risk is measured
as the potential negative impact on earnings, cash flows or fair values resulting from a
hypothetical change in interest-rates or foreign currency exchange rates over the next year. The
Company does not hold or issue any other financial derivative instruments (other than those
specifically noted below) nor does it engage in speculative trading of financial derivatives.
Interest-rate Risk
The Companys primary interest-rate risk relates to its long-term debt obligations. As of
September 30, 2007, the Company had total long-term obligations under the Credit Agreement of
$228,830, including the current portion of those obligations of $791. Of the outstanding debt,
$100,000 was in variable rate debt that was effectively converted to a fixed rate through an
interest-rate swap agreement during Fiscal 2007 and $128,830 was in variable rate obligations. As
of September 30, 2007, an instantaneous 100 basis point increase in the interest-rate of the
variable rate debt would reduce the Companys net income in the subsequent fiscal quarter by $318
($199 net of tax) assuming the Company employed no intervention strategies.
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest-rates.
27
On July 26, 2006, the Company entered into an interest-rate swap which has been used to effectively
convert a portion of the Companys variable rate debt to fixed rate. The interest-rate swap has a
notional value of $100,000 reducing to $50,000 after three years and does not qualify for hedge
accounting. Changes in the fair market value of the interest-rate swap are recorded as an asset or
liability in the Companys Consolidated Balance Sheets and Interest expense (income) in the
Companys Consolidated Statements of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency forward contracts to reduce the foreign currency
exposure related to certain intercompany transactions, primarily trade receivables and loans. All
of the foreign currency forward contracts have been designated and qualify as cash flow hedges.
The effective portion of any changes in the fair value of the derivative instruments is recorded in
Other comprehensive income (OCI) until the hedged forecasted transaction occurs or the recognized
currency transaction affects earnings. Once the forecasted transaction occurs or the recognized
currency transaction affects earnings, the effective portion of any related gains or losses on the
cash flow hedge is reclassified from OCI to the Companys Consolidated Statements of Income. In
the event it becomes probable that the hedged forecasted transaction will not occur, the
ineffective portion of any gain or loss on the related cash flow hedge would be reclassified from
OCI to the Companys Consolidated Statements of Income.
As of September 30, 2007, the Company had open foreign exchange contracts in Australian and
Canadian dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner, Pounds sterling, Swedish
krona, Swiss francs and Japanese yen. The open contracts have contract rates ranging from 1.1523 to
1.2338 Australian dollar, 1.0958 to 1.0972 Canadian dollar, 5.2640 to 5.5090 Danish krone, 0.7018
to 0.7531 Euro, 0.0916 to 0.0919 Mexican pesos, 5.5876 to 6.2023 Norwegian kroner, 0.4869 to 0.5099
Pounds sterling, 6.1960 to 6.9344 Swedish krona, 1.1754 to 1.2209 Swiss franc and 105.47 to 110.10
Japanese yen, all per U.S. dollar. The total open contracts had a notional amount of approximately
$67,117, have a fair value of $68,635 and will expire within eighteen months.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q (Form 10-Q), an
evaluation was performed, under the supervision and with the participation of Company management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of September 30, 2007. Based on that evaluation, management, including the CEO and the
CFO, has concluded that, as of the end of the period covered by this Form 10-Q, the Companys
disclosure controls and procedures were effective in all material respects at the reasonable
assurance level to ensure that information required to be disclosed in reports that the Company
files or submits under the Act is recorded, processed, summarized and timely reported in accordance
with the rules and forms of the SEC.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls, fraud, the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended September 30, 2007, there were no changes in the Companys internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
As previously noted in this Form 10-Q, the Audit Committee has concluded
its independent review of the Companys historical stock option granting practices and is considering and will present to the
Board recommendations concerning procedural enhancements and/or additional remedial measures.
Management has and will continue to adopt all recommendations from the Board, the Audit Committee
and any other Board committee related to this matter.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the Enforcement Division of the SEC relating to the Companys stock option practices from
January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order of investigation in
connection with this matter, and, on May 29, 2007, the Company received a document subpoena from
the SEC acting pursuant to such order. The Company has cooperated with the SEC in this matter and
intends to continue to do so.
As previously disclosed, the Audit Committee, with the assistance of outside legal
counsel, conducted an independent review of the Companys historical stock option granting
practices and related accounting for stock option grants. See the Explanatory Note preceding
Part I, Item 1 of the Form 10-K for more information regarding the Audit Committees review and
related matters. The Audit Committee has concluded its review and is considering and will present
to the Board recommendations concerning procedural enhancements and/or additional remedial
measures.
On September 20, 2006, the Company received formal notice from the IRS regarding its intent to
begin an audit of the Companys tax years 2004 and 2005. On August 3, 2007, the Company received
formal notice from the IRS regarding its intent to begin an audit of the Companys 2006 tax year.
In connection with these normal recurring audits, the IRS has requested certain documentation with
respect to stock options for the Companys 2004, 2005 and 2006 tax years. The Company has produced
various documents requested by the IRS and is currently in the process of responding to additional
documentation requests. In connection with the Audit Committees review of the Companys
historical stock option granting practices, the Company determined that a number of officers may
have exercised options for which the application of Section 162(m) may apply. It is possible that
these options will be treated as having been granted at less than fair market value for federal
income tax purposes because the Company incorrectly applied the measurement date as defined in
APB 25. If such options are deemed to have been granted at less than fair market value, pursuant
to Section 162(m), any compensation to officers, including proceeds from options exercised in any
given tax year, in excess of $1,000 will be disallowed as a deduction for tax purposes. The
Company estimates that the potential tax-effected liability for any such disallowed Section 162(m)
deduction would approximate $3,587, which has been recorded as a current liability within
Income taxes within the Companys Consolidated Balance Sheets. The Company may also incur interest
and penalties if it were to incur any such tax liability, which could be material.
With respect to the previously-disclosed matter regarding a United States General Services
Administration (GSA) Multiple Award Schedule contract, on October 2, 2007, the Company was
contacted by the United States Department of Justice which informed the Company that it was
reviewing allegations by the GSA that certain of the Companys pricing practices under the GSA
contract violated the Civil False Claims Act. The Company has executed an agreement with the
United States tolling the statute of limitations on any action by the United States through April
2, 2008 in order for the parties to discuss the merits of these allegations prior to the possible
commencement of any litigation by the United States.
At the conclusion of these regulatory matters, the Company could be subject to additional taxes,
fines or penalties which could be material.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
United States District Court for the Western District of Pennsylvania. The two substantially
identical stockholder derivative complaints allege that the individual defendants improperly
backdated grants of stock options to several officers and directors in violation of the Companys
stockholder-approved stock option plans during the period 1996-2002, improperly recorded and
accounted for backdated stock options in violation of generally accepted accounting principles,
improperly took tax deductions based on backdated stock options in violation of the Code, produced
and disseminated false financial statements and SEC filings to the Companys stockholders and to
the market that improperly recorded and accounted for the backdated option grants, concealed the
alleged improper backdating of stock options and obtained substantial benefits from sales of
Company stock while in the possession of material inside information. The complaints seek damages
on behalf of the Company against certain current and former officers and directors and allege
breach of fiduciary duty, unjust enrichment, securities law violations and other claims. The two
lawsuits have been consolidated into a single action as In re Black Box Corporation Derivative
Litigation, Master File No. 2:06-CV-1531-TMH, and plaintiffs filed an amended consolidated
shareholder derivative complaint on August 31, 2007. The parties have stipulated that responses by
the defendants, including the Company, are due on or before February 15, 2008. The Company may
have indemnification obligations arising out of this matter to its current and former directors and
officers named in this litigation. The Company has made a claim for such costs under an insurance
policy.
29
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints
arising out of the normal course of business.
Based on the facts currently available to the Company, management believes the matters described
under this caption Litigation Matters are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
Item 1A. RISK FACTORS.
The following updates a potential risk factor included in the Form 10-K. You should carefully
consider this risk factor, as well as the other risk factors contained in the Form 10-K along with
the other information contained in the Form 10-K and this Form 10-Q, when evaluating an investment
in our securities. Potential risk factors could cause our actual results to
differ materially from those projected in any forward-looking
statements. The
terms we and our are references to the Company.
Stock option matters As previously disclosed, on November 13, 2006, we received a letter
of informal inquiry from the Enforcement Division of the SEC relating to the Companys stock option
practices from January 1, 1997 to present. Our Audit Committee, with the assistance of outside
legal counsel, has conducted an independent review of the Companys historical stock option
granting practices and related accounting for stock option grants. On May 24, 2007, the SEC issued
a formal order of investigation in connection with this matter, and,
on May 29, 2007, we received a document subpoena from the SEC acting pursuant to such order.
We have cooperated with the SEC in this matter and intend to continue to do so. See the Explanatory
Note preceding Part I, Item 1 of the Form 10-K for more information regarding this and related
matters.
On
September 20, 2006, we received formal notice from the IRS regarding its intent to
begin an audit of the Companys tax years 2004 and 2005. On
August 3, 2007, we received
formal notice from the IRS regarding its intent to begin an audit of the Companys 2006 tax year.
In connection with these normal recurring audits, the IRS has requested certain documentation with
respect to stock options for the Companys 2004, 2005 and 2006
tax years. We have produced
various documents requested by the IRS and are currently in the process of responding to additional
documentation requests. In connection with our Audit Committees review of the Companys
historical stock option granting practices, we determined that a number of officers may
have exercised options for which the application of Section 162(m) may apply. It is possible that
these options will be treated as having been granted at less than fair market value for federal
income tax purposes because we incorrectly applied the measurement date as defined in
APB 25. If such options are deemed to have been granted at less than fair market value, pursuant
to Section 162(m), any compensation to officers, including proceeds from options exercised in any
given tax year, in excess of $1,000 will be disallowed as a deduction
for tax purposes. We estimate that the potential tax-effected liability for any such disallowed Section 162(m)
deduction would approximate $3,587, which has been recorded as a current liability within
Income taxes within our Consolidated Balance Sheets. We may also incur interest
and penalties if we were to incur any such tax liability, which could be material.
In addition, in November, 2006, two stockholder derivative lawsuits were filed against the Company,
as a nominal defendant, and several of the Companys current and former officers and directors in the United
States District Court for the Western District of Pennsylvania. The two substantially identical
stockholder derivative complaints allege that the individual defendants improperly backdated grants
of stock options to several officers and directors in violation of our stockholder-approved stock
option plans during the period 1996-2002, improperly recorded and accounted for backdated stock
options in violation of generally accepted accounting principles, improperly took tax deductions
based on backdated stock options in violation of the Code, produced and disseminated false
financial statements and SEC filings to our stockholders and to the market that improperly recorded
and accounted for the backdated option grants, concealed the alleged improper backdating of stock
options and obtained substantial benefits from sales of our common
stock while in the possession of
material inside information. The complaints seek damages on behalf of the Company against certain
current and former officers and directors and allege breach of fiduciary duty, unjust enrichment,
securities law violations and other claims. The two lawsuits have been consolidated into a single
action as In re Black Box Corporation Derivative Litigation, Master File No. 2:06-CV-1531-TMH, and
plaintiffs filed an amended consolidated shareholder derivative complaint on August 31, 2007. The
parties have stipulated that responses by the defendants, including the Company, are due on or
before February 15, 2008.
The stock option investigations and related litigation have imposed, and are likely to continue to
impose, significant costs on us, both monetarily and in requiring attention by our
management team. While we are unable to estimate the costs that we may incur in the
future, these are likely to include:
professional fees in connection with the conduct of the investigations, the restatement of our
financial statements and the defense of the litigation;
potential damages, fines, penalties or settlement costs; and
payments to, or on behalf of, our current and former officers and directors subject to the
investigation or named in the litigation pursuant to our indemnification obligations (in certain
circumstances advance indemnification payments are recoverable if it is determined under applicable
law that the officer or director in question was not entitled to be indemnified by the Company,
but there is no assurance that we will be able to recover such payments).
30
While we expect that certain of such costs will be reimbursed pursuant to an insurance policy, at
this point such costs (other than certain investigatory costs) have not been reimbursed.
On
October 26, 2007, we announced our intention to implement a plan regarding
certain stock options under the Employee Plan that have been granted with a below-fair market value
exercise price for tax purposes, and which vested or may vest after December 31, 2004.
With
respect to outstanding stock options, we intend to conduct a tender offer to current
employees who hold such options to amend each affected option grant to increase the exercise price
to the lower of: (i) the fair market value of the common stock on the corrected measurement date
(as determined for tax purposes) or (ii) the fair market value of the common stock on the trading
day immediately following the expiration of the tender offer, provided that the new exercise price
will in no event be lower than the current exercise price of the stock option. Pursuant to the
tender offer, our current employees subject to taxation in the United States will have the opportunity
to avoid unfavorable tax consequences under 409A. We intend to offer as part of the
tender offer the right to receive a cash payment equal to the increase in the exercise price of the
affected stock option. We anticipate that the cash payment will be made in January 2008.
Such payments could be material to our cash flows for such period.
For our
employees who exercised affected stock options in calendar 2006, we
intend to submit directly to the IRS any applicable 409A additional taxes as well as an amount to gross up such
amount for the additional income and payroll taxes owed on such
payments. For our employees who have
exercised or who do exercise affected options in calendar 2007, the value of these options at
exercise will be subject to additional taxes under 409A. We will pay a bonus to any such
employees to compensate them for the additional 409A taxes that they will be required to pay as
well as an amount to gross up such amount for the additional income and payroll taxes owed on
such payments.
With
respect to the tender offer, the amount of cash that we pay-out is dependent
upon the fair market value of the common stock on the trading day immediately following the
expiration of the tender offer. Such amount will be recorded in the fiscal quarter in which the
tender offer expires, which currently is expected to be the third quarter of Fiscal 2008. With
respect to the expense to be incurred for amounts to be paid to the
IRS or to our employees for
affected options exercised in 2006 and 2007, it is expected that we will record such
expense in the third quarter of Fiscal 2008. All cash payments to be
made by us under
this plan (other than any payments directly to the IRS) are expected to be paid by January 31,
2008. Such amounts could be material.
Adverse
developments in the legal proceedings or the investigation arising
out of the Companys historical
stock option granting practices or any other matter raised as a result thereof could have an
adverse impact on our business and our common stock price, including increased stock volatility.
31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that May |
|
|
|
|
|
|
|
|
|
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans |
|
|
Under the Plans |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
or Programs |
|
|
or Programs |
|
|
July 1, 2007
to July 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,063,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2007
to August 26, 2007 |
|
|
28 |
|
|
$ |
43.00 |
|
|
|
28 |
|
|
|
1,063,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2007
to September 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,063,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
28 |
|
|
$ |
43.00 |
|
|
|
28 |
|
|
|
1,063,861 |
|
|
As of July 1, 2007, 1,063,889 shares were available under repurchase programs approved by the Board
and announced on November 20, 2003, August 12, 2004 and November 7, 2006.
The repurchase programs have no expiration date and no programs were terminated prior to the full
repurchase of the authorized amount.
Additional repurchases of common stock may occur from time to time depending upon factors such as
the Companys cash flows and general market conditions. While the Company expects to continue to
repurchase shares of 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 repurchase its common stock as long as no Event of Default or Potential Default (each
as defined in the Credit Agreement) occurs or is continuing.
Item 6. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
Amended and Restated Agreement by and between Black Box Corporation and R. Terry Blakemore
dated October 16, 2007 (1) |
|
|
|
21.1
|
|
Subsidiaries of the Registrant (2) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) |
|
|
|
(1) |
|
Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K, file number
0-18706, dated October 13, 2007 and filed with the SEC on October 18, 2007, and incorporated
herein by reference. |
|
(2) |
|
Filed herewith. |
32
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 8, 2007 |
By: |
/s/ Michael McAndrew
|
|
|
|
Michael McAndrew, Vice President, |
|
|
|
Chief Financial Officer, Treasurer,
Secretary
and Principal Accounting Officer |
|
|
33
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
Amended and Restated Agreement by and between Black Box Corporation and R. Terry Blakemore
dated October 16, 2007 (1) |
|
|
|
21.1
|
|
Subsidiaries of the Registrant (2) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2) |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) |
|
|
|
(1) |
|
Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K, file number
0-18706, dated October 13, 2007 and filed with the SEC on October 18, 2007, and incorporated
herein by reference. |
|
(2) |
|
Filed herewith. |
34