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Fiscal 2003 First Quarter
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NO. 0-18706
BLACK BOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-3086563
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 Park Drive
Lawrence, Pennsylvania 15055
(Address of principal executive offices)
724-746-5500
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the Registrant's common stock, $.001 par
value, as of August 13, 2002 was 19,912,664 shares.
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
June 30, March 31,
ASSETS 2002 2002
--------- ---------
Current assets:
Cash and cash equivalents $ 15,440 $ 13,423
Accounts receivable, net of allowance for doubtful
accounts of $8,119 and $8,207, respectively 111,164 115,969
Inventories, net 45,982 46,081
Costs and estimated earnings in excess of billings
on uncompleted contracts 23,359 24,015
Other current assets 21,252 19,959
--------- ---------
Total current assets 217,197 219,447
Property, plant and equipment, net of accumulated depreciation
of $41,172 and $38,635, respectively 40,251 41,063
Intangibles, net of accumulated amortization of $48,795 and
$48,578, respectively 389,218 387,286
Other assets 3,379 2,991
--------- ---------
Total assets $ 650,045 $ 650,787
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 1,160 $ 3,189
Accounts payable 31,462 34,279
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,654 4,235
Other accrued expenses 29,847 31,125
Accrued income taxes 6,434 3,155
--------- ---------
Total current liabilities 72,557 75,983
Long-term debt 62,333 75,497
Other liabilities 9,074 9,209
Stockholders' equity:
Preferred stock authorized 5,000,000; par value $1.00;
none issued and outstanding
Common stock authorized 100,000,000; par value $.001;
issued 22,403,514 and 22,351,049, respectively 22 22
Additional paid-in capital 289,150 287,714
Retained earnings 326,953 312,288
Treasury stock, at cost, 2,194,300 and 2,105,000, respectively (104,049) (100,355)
Accumulated other comprehensive income/(loss) (5,995) (9,571)
--------- ---------
Total stockholders' equity 506,081 490,098
--------- ---------
Total liabilities and stockholders' equity $ 650,045 $ 650,787
========= =========
See Notes to Consolidated Financial Statements
2
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three month period ended
June 30,
2002 2001
-------- --------
Revenues $154,412 $207,116
Cost of sales 92,520 128,172
-------- --------
Gross profit 61,892 78,944
Selling, general and administrative expenses 37,704 52,654
Intangibles amortization 101 0
-------- --------
Operating income 24,087 26,290
Interest expense, net 772 2,109
Other expense/(income), net 37 248
-------- --------
Income before income taxes 23,278 23,933
Provision for income taxes 8,613 8,850
-------- --------
Net income $ 14,665 $ 15,083
======== ========
Basic earnings per common share $ 0.72 $ 0.77
======== ========
Diluted earnings per common share $ 0.70 $ 0.73
======== ========
Weighted average common shares 20,266 19,495
======== ========
Weighted average common and
common equivalent shares 21,023 20,616
======== ========
See Notes to Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands)
Change In
Common Stock Additional Other
----------------------- Treasury Paid-in Retained Comprehensive
Shares Amount Stock Capital Earnings Income (Loss) Total
---------- ---------- ---------- ---------- ---------- ------------- ----------
Balance at March 31, 2001 21,406,367 $21 ($100,355) $248,053 $250,246 ($9,014) $388,951
Net income - - - - 62,042 - 62,042
Issuance of common stock 654,562 1 - 28,070 - - 28,071
Exercise of options 290,120 - - 8,954 - - 8,954
Tax benefit from exercised options - - - 2,637 - - 2,637
Comprehensive loss - - - - - (557) (557)
---------- --- --------- -------- -------- ------- --------
Balance at March 31, 2002 22,351,049 22 (100,355) 287,714 312,288 (9,571) 490,098
Net income - - - - 14,665 - 14,665
Purchase of treasury stock - - (3,694) 0 - - (3,691)
Issuance of common stock 11,080 - - - - - -
Exercise of options 41,385 - - 905 - - 1,433
Tax benefit from exercised options - - - 531 - - -
Change in other comprehensive
income (loss) - - - - - 3,576 3,576
---------- --- --------- -------- -------- ------- --------
Balance at June 30, 2002 22,403,514 $22 ($104,049) $289,150 $326,953 ($5,995) $506,081
========== === ========= ======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three month period ended
June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 14,665 $ 15,083
Adjustments to reconcile net income to cash provided
by operating activities:
Intangibles amortization 101 -
Depreciation 1,942 2,018
Changes in working capital items:
Accounts receivable, net 5,720 14,007
Inventories, net 188 (1,263)
Other current assets (1,136) (3,996)
Accounts payable and accrued liabilities (2,066) (19,099)
-------- --------
Cash provided by operating activities 19,414 6,750
-------- --------
Cash flows from investing activities:
Capital expenditures, net of disposals (273) (804)
Mergers, net of cash acquired (2,749) (8,290)
-------- --------
Cash (used in) investing activities (3,022) (9,094)
-------- --------
Cash flows from financing activities:
Revolving credit borrowings, net (15,193) 4,512
Proceeds from exercise of options 1,436 3,270
Purchase of treasury stock (3,694) -
-------- --------
Cash (used in)/provided by financing activities (17,454) 7,782
-------- --------
Foreign currency exchange impact on cash flow 3,076 (1,134)
-------- --------
Increase/(decrease) in cash and cash equivalents 2,017 4,304
Cash and cash equivalents at beginning of period 13,423 6,209
-------- --------
Cash and cash equivalents at end of period $ 15,440 $ 10,513
======== ========
Cash paid for interest $ 796 $ 2,036
Cash paid for income taxes $ 6,044 $ 13,005
See Notes to Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 1: BASIS OF PRESENTATION
The Financial Statements presented herein and these notes are unaudited. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Although Black Box Corporation (the
"Company") believes that all adjustments necessary for a fair presentation have
been made, interim periods are not necessarily indicative of the results of
operations for a full year. As such, these financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's most recent Form 10-K as filed with the SEC for the fiscal year ended
March 31, 2002. The Consolidated Balance Sheet as of March 31, 2002 was derived
from the audited balance sheet in the most recent Form 10-K.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The net inventory balances are as follows:
JUNE 30, MARCH 31,
2002 2001
--------------------------------------------------------------------
Raw materials $ 2,148 $ 2,417
Work-in-process 11 5
Finished goods 47,487 47,017
Inventory reserve (3,664) (3,358)
--------------------------------------------------------------------
Inventory, net $ 45,982 $ 46,081
--------------------------------------------------------------------
NOTE 3: FINANCIAL DERIVATIVES
The Company has entered and will continue in the future, on a selective basis,
to enter into forward exchange contracts to reduce the foreign currency exposure
related to certain intercompany transactions. On a monthly basis, the open
contracts are revalued to fair market value, and the resulting gains and losses
are recorded in accumulated other comprehensive income. These gains and losses
offset the revaluation of the related foreign currency denominated receivables,
which are also included in accumulated other comprehensive income.
At June 30, 2002, the open foreign exchange contracts were in Euro, Canadian
dollars, Swiss francs, Japanese yen, and Australian dollars. These open
contracts, valued at approximately $7,564, have a fair value of $7,591 and will
expire in one to two months. The open contracts have contract rates of 1.01
Euro, 1.5512 Canadian dollars, 1.48 Swiss francs, 123.79 Japanese yen and 1.78
Australian dollars, all per U.S. dollar. There was no effect on net income for
the three months ended June 30, 2002 for these contracts.
6
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 4: COMPREHENSIVE INCOME
Comprehensive income consisted of the following:
THREE MONTHS ENDED
JUNE 30,
----------------------
2002 2001
-------------------------------------------------------------------------------
Net income $ 14,665 $ 15,083
Other comprehensive income:
Foreign currency translation adjustment 3,776 (344)
Unrealized gains on derivatives designated and
qualified as cash flow hedges
(200) 58
-------------------------------------------------------------------------------
Comprehensive income $ 18,241 $ 14,797
-------------------------------------------------------------------------------
The components of accumulated other comprehensive income/(loss) consisted of the
following:
JUNE 30, MARCH 31,
2002 2002
- ----------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $(5,627) $(9,403)
Unrealized gains on derivatives designated and qualified as cash flow hedges (368) (168)
- ----------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income/(loss) $(5,995) $(9,571)
- ----------------------------------------------------------------------------------------------------
NOTE 5: EARNINGS PER SHARE
Basic earnings per common share were computed based on the weighted average
number of common shares issued and outstanding during the relevant periods.
Diluted earnings per common share were computed under the treasury stock method
based on the weighted average number of common shares issued and outstanding.
The following table details this calculation:
THREE MONTHS ENDED
JUNE 30,
-------------------------
(Shares in thousands) 2002 2001
-------------------------------------------------------------------------
Net income for earnings per share computation $14,665 $15,083
Basic earnings per common share:
Weighted average common shares 20,266 19,495
Basic earnings per common share $ 0.72 $ 0.77
-------------------------------------------------------------------------
Diluted earnings per common share:
Weighted average common shares 20,266 19,495
Shares issuable from assumed conversion of
stock options and contingently issuable
shares from acquisitions (net of tax
savings) 757 1,121
Weighted average common and common equivalent
shares 21,023 20,616
Diluted earnings per common share $ 0.70 $ 0.73
-------------------------------------------------------------------------
7
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Excluded from the calculation above are 181 thousand shares and 10 thousand for
the three months ended June 30, 2002 and 2001, respectively as the exercise
price was greater than the average market price for those time periods.
NOTE 6: NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of and supersedes
FASB Statement No. 121. This statement retains the fundamental provisions of
SFAS No. 121 for recognition and measurement of the impairment of long-lived
assets to be held and used and measurement of long-lived assets to be disposed
of by sale. The provisions of this standard must be applied for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 in the first
quarter of Fiscal 2003. Its adoption did not have a material effect on the
Company's financial statements or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", was issued. The
Statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances, they may change accounting practice. The
provisions of this standard related to SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of this standard
must be applied for financial statements issued on or after May 15, 2002. The
application of SFAS No. 145 did not have a material effect on the Company's
financial statements or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,"
under which a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
NOTE 7 - CHANGES IN BUSINESS
During the three months ended June 30, 2002, the Company successfully completed
one business combination that has been accounted for using the purchase method
of accounting, Societe d'Installation de Reseaux Informatiques et Electriques.
In connection with this business combination, the Company used approximately
$3,000 in cash to acquire all of the outstanding shares of the company and
resulted in goodwill of $1,730 and other intangibles of approximately $420 in
accordance with SFAS No. 141, "Business Combinations," which the Company adopted
during the second quarter of Fiscal 2002. The other intangibles balance
consisted of non-compete agreements and backlog.
8
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
As of June 30, 2002, all non-compete agreements had an estimated gross value of
$2,343 and accumulated amortization of $155. As of June 30, 2002, the backlog
intangibles had a gross value of $203 and accumulated amortization of $129. See
Note 8, "Intangible Assets".
During Fiscal 2002, the Company successfully completed 18 business combinations
that have been accounted for using the purchase method of accounting: April 2001
- - Haddad Electronic Supply, Inc., FBS Communications, L.P. and Integrated
Cabling Systems, Inc.; May 2001 - Computer Cables and Accessories Ltd; June 2001
- - Vivid Communications, Inc. and DESIGNet, Inc; July 2001 - J.C. Informatica
Integral S.A. de C.V., Consultoria en Redes S.A. de C.V. and SIC Comunicaciones
S.A. de C.V. (together "Grupo Gresco"); August 2001 - LJL Telephone and
Communication, Inc., AB Lofamatic and Optech Fibres Ltd.; September 2001 - GCS
Network Services Ltd. and Di.el. Distribuzioni Elettroniche S.r.l.; October 2001
- - Lanetwork Sales Ltd; January 2002 - Trend Communications, TW Netzwerkservice
GmbH, TeleFuture Communications Ltd., and Netzwerke Kabelsystem GmbH; and March
2002 - TeleAce Communication PTE Ltd. In connection with the above 18 business
combinations, the Company issued an aggregate of 510 thousand shares of its
common stock and used approximately $21,000 in cash to acquire all of the
outstanding shares of the above 18 companies.
The aggregate purchase price of the above 18 companies including deal costs was
approximately $50,500 and resulted in goodwill of $43,900 and other intangibles
of approximately $2,100 in accordance with SFAS No. 141, "Business
Combinations," which the Company adopted during the second quarter of Fiscal
2002. The other intangibles balance consisted of non-compete agreements and
backlog. As of March 31, 2002, the non-compete agreements had an estimated gross
value of $1,900 and accumulated amortization of $92. As of March 31, 2002, the
backlog intangibles had a gross value of $203 and accumulated amortization of
$78.
As of June 30, 2002, certain merger agreements provide for contingent payments
of up to $9,706. Upon meeting future operating performance goals, goodwill will
be adjusted for the amount of the contingent payments.
The Company has consolidated the results of operations for each of the acquired
companies as of the respective merger date. The following table reports pro
forma information as if the acquired entities had been purchased at the
beginning of the stated periods:
9
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
2002 2001
--------------------------------------------------------------------------------------------
Revenue As reported $154,412 $207,116
Mergers-pre BBC 1,050 13,286
Pro forma 155,462 220,402
--------------------------------------------------------------------------------------------
Net income As reported $ 14,665 $ 15,083
% of revenues 9.5% 7.3%
Mergers-pre BBC 138 1,569
% of revenues 13.1% 11.8%
Pro forma 14,803 16,652
% of revenues 9.5% 7.6%
--------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 0.70 $ 0.73
Pro forma 0.70 0.81
--------------------------------------------------------------------------------------------
NOTE 8: INTANGIBLE ASSETS
On April 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," under which goodwill and other intangible assets with
indefinite lives are not amortized. Such intangibles were evaluated for
impairment as of April 1, 2001 by comparing the fair value of each reporting
unit to its carrying value, and no impairment existed. In addition, during the
third quarter of Fiscal 2002, the Company evaluated its intangible assets for
impairment and none existed. During the third quarter of each future fiscal
year, the Company will evaluate the intangible assets for impairment with any
resulting impairment reflected as an operating expense. The Company's only
intangibles as identified in SFAS No. 141 other than goodwill, are its
trademarks, non-compete agreements and acquired backlog.
As of June 30, 2002, the Company's trademarks had a gross carrying amount of
$35,992 and accumulated amortization of $8,253 and the Company believes this
intangible has an indefinite life.
The Company had the following other intangibles as of June 30, 2002:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-----------------------------------------------------------------------
Non-Compete Agreements $2,343 $ 155
Acquired Backlog 203 129
-----------------------------------------------------------------------
Total $2,546 $ 284
-----------------------------------------------------------------------
The non-compete agreements and acquired backlog are amortized over their
estimated useful lives of 10 years and 1 year, respectively. Amortization
expense for the non-compete agreements and acquired backlog intangibles during
the three months ended June 30, 2002 was $101. The estimated amortization
expense for each of the five fiscal years subsequent to March 31, 2002 for the
non-compete agreements and acquired backlog intangibles is as follows: remainder
of 2003-$250; 2004-$234; 2005-$234; 2006-$234; and 2007-$234.
The changes in the carrying amount of goodwill, by reporting segment, for the
three months ended June 30, 2002, are as follows:
10
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------
PHONE ON-SITE TOTAL
- ------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002 $ 60,540 $ 297,090 $ 357,630
Goodwill related to acquisitions and earnout
payments during the quarter -- 1,730 1,730
- ------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2002 $ 60,540 $ 298,820 $ 359,360
- ------------------------------------------------------------------------------------------------------------------
NOTE 9: TREASURY STOCK
The Company previously announced its intention to repurchase up to 2.5 million
shares of its Common Stock from April 1, 1999 through March 31, 2002. As of
March 31, 2002, the Company had repurchased 2.1 million shares at prevailing
market prices for an aggregate purchase price of $100,355. In May 2002, the
Company's Board of Directors authorized the repurchase of an additional one
million shares. The Company repurchased 89.3 thousand shares during the first
quarter of Fiscal 2003 for an aggregate purchase price of $3,694. Funding for
these stock repurchases came from existing cash flow and borrowings under
existing credit facilities.
NOTE 10: INDEBTEDNESS
Long-term debt is as follows:
JUNE 30, MARCH 31,
2002 2001
---------------------------------------------------------------------------------------------
Revolving credit agreement $ 61,800 $ 75,000
Other debt 1,693 3,686
---------------------------------------------------------------------------------------------
Total debt 63,493 78,686
Less: current portion (1,160) (3,189)
---------------------------------------------------------------------------------------------
Long-term debt $ 62,333 $ 75,497
---------------------------------------------------------------------------------------------
On April 4, 2000, Black Box Corporation of PA, a domestic subsidiary of the
Company, entered into a $120,000 Revolving Credit Agreement ("Long Term
Revolver") and a $60,000 Short Term Credit Agreement ("Short Term Revolver")
(together the "Syndicated Debt") with Mellon Bank, N.A. and a group of lenders.
The Long Term Revolver was scheduled to expire on April 4, 2003 and the Short
Term Revolver was scheduled to expire on April 4, 2002. In April 2002, the Long
Term Revolver was extended to April 4, 2005 and the Short Term Revolver was
extended to April 2, 2003. The interest on the borrowings is variable based on
the Company's option of selecting the banks prime rate plus an applicable margin
as defined in the agreement or the Euro-dollar rate plus an applicable margin as
defined in the agreement.
The weighted average interest rate on all indebtedness of the Company as of June
30, 2002 was approximately 2.8%.
11
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 11: RESTRUCTURING
In the fourth quarter of Fiscal 2002, the Company recorded a restructuring
charge of approximately $3,500 primarily related to adjusting staffing levels in
its European and Latin American Operations and facility closures in the U.S.
Also at March 31, 2002, the Company had an accrual of $584 related to continuing
costs of a previously closed facility done at the time of the merger. The
components of the restructuring accrual at June 30, 2002 are as follows:
ACCRUED CASH ACCRUED
MARCH 31, 2002 EXPENDITURES JUNE 30, 2002
--------------------------------------------------------------------------------------------------------
Employee Severance $ 1,443 $ 630 $ 813
Facility Closures 1,439 243 1,196
--------------------------------------------------------------------------------------------------------
Total $ 2,882 $ 873 $ 2,009
--------------------------------------------------------------------------------------------------------
NOTE 12: SEGMENT REPORTING
The Company manages the business primarily on a product and service line basis.
Its two primary reportable segments are comprised of On-Site Services and Phone
Services. The "Other" information presented herein includes expenses directly
related to the Company's on-going mergers and acquisitions program. The Company
reports its two segments separately because of differences in the ways the
product and service lines are operated. Consistent with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company aggregates similar operating segments into reportable segments.
The Company evaluates the performance of each segment based on "Worldwide
Operating Income." A segment's worldwide operating income is its operating
income before amortization. Revenues and the related profits on intercompany
transactions are reported by the segment providing the third-party revenues.
Intersegment sales, segment interest income or expense and expenditures for
segment assets are not presented to or reviewed by management, and therefore are
not presented below.
Summary information by reportable segment is as follows:
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
ON-SITE SERVICES 2002 2001
------------------------------------------------------------------------------------
Revenues $ 90,858 $ 121,051
Worldwide operating income 11,948 9,907
Depreciation 666 985
Amortization 97 --
Segment assets 544,304 494,966
------------------------------------------------------------------------------------
12
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
PHONE SERVICES 2002 2001
------------------------------------------------------------------------------------
Revenues $ 63,554 $ 86,065
Worldwide operating income 12,598 17,007
Depreciation 977 1,090
Amortization 4 --
Segment assets 484,625 519,784
------------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
OTHER 2002 2001
------------------------------------------------------------------------------------
Revenues $ -- $ --
Worldwide operating income (358) (624)
Depreciation (57) (57)
Amortization -- --
Segment assets 28,957 28,635
------------------------------------------------------------------------------------
The following is a reconciliation between certain reportable segment data and
the corresponding consolidated amounts:
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
REVENUE 2002 2001
------------------------------------------------------------------------------------
Total revenues for phone and on-site
segments $ 154,412 $ 207,116
Other revenues -- --
------------------------------------------------------------------------------------
Total consolidated revenues $ 154,412 $ 207,116
------------------------------------------------------------------------------------
THREE MONTHS ENDED
WORLDWIDE OPERATING JUNE 30,
--------------------------------------
INCOME/OPERATING INCOME 2002 2001
------------------------------------------------------------------------------------
Total worldwide operating income for phone
and on-site segments $ 24,546 $ 31,941
Other worldwide operating income (358) (5,651)
------------------------------------------------------------------------------------
Total consolidated worldwide operating
income 24,188 26,290
Amortization expense 101 --
------------------------------------------------------------------------------------
Total operating income $ 24,087 $ 26,290
------------------------------------------------------------------------------------
13
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
On-Site Services worldwide operating income for the three months ended June 30,
2001was reduced by a special operating expense of approximately $5,000 related
primarily to the reserve of two receivables from on-site customers who filed for
bankruptcy protection in that quarter.
JUNE 30, MARCH 31,
ASSETS 2002 2002
------------------------------------------------------------------------------------
Total assets for phone and on-site segments $ 1,028,929 $ 1,016,073
Other assets 28,957 28,874
Corporate eliminations (407,841) (394,160)
------------------------------------------------------------------------------------
Total consolidated assets $ 650,045 $ 650,787
------------------------------------------------------------------------------------
Management is also presented with and reviews information about its geographic
areas. The following is presented:
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
REVENUES 2002 2001
------------------------------------------------------------------------------------
North America $ 107,283 $ 154,120
Europe 36,018 39,070
Pacific Rim 6,503 8,701
Latin America 4,608 5,225
------------------------------------------------------------------------------------
Total revenues $ 154,412 $ 207,116
------------------------------------------------------------------------------------
JUNE 30, MARCH 31,
ASSETS 2002 2002
------------------------------------------------------------------------------------
North America $ 509,332 $ 513,008
Europe 116,151 111,584
Pacific Rim 10,705 11,653
Latin America 13,867 14,542
------------------------------------------------------------------------------------
Total consolidated assets $ 650,045 $ 650,787
------------------------------------------------------------------------------------
NOTE 13: SUBSEQUENT EVENTS
In July 2002, the Company acquired EDC Communications Limited and EDC
Communications (Ireland) Limited. Established in 1989, EDC provides technical
design, installation and maintenance services for premise cabling and related
products to customers in Belfast, Northern Ireland and Dublin, Republic of
Ireland. The results of operations and financial position of EDC are not
material to the Company's consolidated results of operations or financial
position.
14
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
GENERAL:
The table below should be read in conjunction with the following discussion.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------
2002 (1Q03) 2001 (1Q02)
---------------------------------------------------------------------------------------------
Total Revenues $154,412 $207,116
---------------------------------------------------------------------------------------------
Percentage of Total Revenues:
On-Site Services Revenues
North America 48% 53%
International 11 5
----------------------- ---------------------
Subtotal 59 58
----------------------- ---------------------
Phone Services Revenues
North America 22 22
International 19 20
----------------------- ---------------------
Subtotal 41 42
----------------------- ---------------------
Total Revenues 100% 100%
---------------------------------------------------------------------------------------------
FISCAL 2002 COMPARED TO FISCAL 2001:
TOTAL REVENUES
--------------
Total revenues for 1Q03 were $154,412, a decrease of 25% compared to 1Q02
total revenues of $207,116. If exchange rates had remained constant from the
first quarter last year, 1Q03 total revenues would have been $1,488 less.
ON-SITE SERVICES REVENUES
-------------------------
Revenues from on-site services were $90,858 for 1Q03 compared to $121,051
for 1Q02. Included in 1Q03 is approximately $6,000 of revenues from mergers
completed after 1Q02. Overall, the on-site services revenue decline was due
to general economic conditions that affected customer demand offset in part
by the Company's continued geographic expansion by merger of its on-site
technical services capabilities. 1Q03 revenues resulting from acquisitions
accounted for using the purchase method were $219.
North America on-site services revenues were $73,882 for 1Q03 compared to
$109,289 for 1Q02. The decrease in North America on-site services revenues
was due to the downturn in the economy described above.
15
International on-site services revenues increased 44% to $16,976 for 1Q03
from $11,762 for 1Q02. The growth of International on-site services revenues
was driven by the Company's continued geographic expansion of its technical
services capabilities and deeper penetration in existing markets.
PHONE SERVICES REVENUES
-----------------------
Revenues from the Company's phone services business for 1Q03 were $63,554
compared to $86,065 for 1Q02. Phone services revenues from North America
decreased to $33,401 for 1Q03 from $44,831 for 1Q02 while International
phone services revenues decreased to $30,153 for 1Q03 from $41,234 for 1Q02.
The decline in North America and International phone services revenues was
driven by the general economic downturn.
REVENUES BY GEOGRAPHY
---------------------
Reported revenue dollar and percentage changes by geographic region were as
follows: North America revenues decreased $46,837, or 30%, to $107,283;
Europe revenues decreased $3,052, or 8%, to $36,018; Pacific Rim revenues
decreased $2,198, or 25%, to $6,503; and Latin American revenues decreased
$617, or 12%, to $4,608. If the exchange rate relative to the U.S. dollar
had remained unchanged from 1Q02, the European, Pacific Rim and Latin
America revenues would have decreased 12%, 25% and 11%, respectively.
GROSS PROFIT
------------
Gross profit for 1Q03 decreased to $61,892, or 40.1% of revenues, from
$78,944, or 38.1% of revenues for 1Q02. The decrease in gross profit dollars
over prior year was due primarily to the decline in revenues while the
increase in gross profit percentage was due primarily to cost reduction
efforts in the Company's phone services business.
SG&A EXPENSES
-------------
Selling, general and administrative ("SG&A") expenses for 1Q03 were $37,704,
or 24.4% of revenues, a decrease of $14,950 over SG&A expenses of $52,654,
or 25.4% of revenues for 1Q02. Included in 1Q02 was a special expense of
$5,027 primarily attributable to the Company reserving for two accounts
receivable from customers who filed for Chapter 11 bankruptcy protection
during that quarter. The remaining dollar decrease from 1Q02 to 1Q03 related
to the Company's cost reduction efforts worldwide.
OPERATING TO NET INCOME
-----------------------
Operating income for 1Q03 was $24,188, or 15.7% of revenues, compared to
$26,290, or 12.7% of revenues in 1Q02.
16
If the Company had not incurred the special expense described above,
operating income for 1Q02 would have been $31,317, or 15.1% of revenues. The
increase in operating income percentage was due primarily to the gross
profit improvement in phone services mentioned above.
Intangibles amortization for 1Q03 was $101 compared to 1Q02 of $0.
Net interest expense for 1Q03 decreased to $772 from $2,109 for 1Q02 due to
reductions in both interest rates and the outstanding debt.
The tax provision for 1Q03 was $8,613, an effective tax rate of 37.0%,
compared to 1Q02 of $8,850, an effective tax rate of 37.0%. The annual
effective tax rates were higher than the U.S. statutory rate of 35.0%
primarily due to state income taxes, offset by foreign income tax credits.
Net income for 1Q03 was $14,665, or 9.5% of revenues, compared to $15,083,
or 7.3% of revenues for 1Q02. Excluding the special charge described above
in SG&A expenses, net income for 1Q02 would have been $18,250, or 8.8% of
revenues. The increase in net income as a percentage of revenue was
primarily due to the Company's cost reduction efforts.
LIQUIDITY AND CAPITAL RESOURCES:
During 1Q03, free cash flow (cash flow from operating activities less
capital expenditures and foreign currency translation adjustments, plus
proceeds from stock option exercises) was $23,653 compared to $8,082 for
1Q02. Cash flow from operating activities for 1Q03 and 1Q02 was $19,417 and
$6,750, respectively. Reflected as a source of cash flow from operating
activities in 1Q03 are decreases in accounts receivable and inventories,
offset in part by decreases in accounts payable and accrued liabilities, all
generally related to the decline in revenues. In 1Q02, decreases in accounts
receivables were a source of cash flow from operating activities, while
increases in inventories, other assets and various liabilities were a use of
cash flow.
The Company's debt decreased by $15,193 during 1Q03 as a result of first
quarter free cash flow being used to pay down debt. As of the end of 1Q03,
the Company had cash and cash equivalents of $15,440, working capital of
$144,640 and long-term debt of $62,333.
On April 4, 2000, Black Box Corporation of PA, a domestic subsidiary of the
Company, entered into a $120,000 Revolving Credit Agreement ("Long Term
Revolver") and a $60,000 Short Term Credit Agreement ("Short Term Revolver")
(together the "Syndicated Debt") with Mellon Bank, N.A. and a group of
lenders. The Long Term Revolver was scheduled to expire on April 4, 2003 and
the Short Term Revolver was scheduled to expire on April 3, 2002. In April
2002, the Long Term
17
Revolver was extended until April 4, 2005 and the Short Term Revolver was
extended until April 2, 2003.
The Company's total debt at the end of 1Q03 of $63,493 was comprised of
$61,800 under the Long Term Revolver and $1,693 of various other loans. The
weighted average interest rate on all indebtedness of the Company for 1Q03
and 1Q02 was approximately 2.8% and 6.0%, respectively. The weighted average
interest rate on all indebtedness of the Company as the end of 1Q03 was
2.8%. In addition, at the end of 1Q03, the Company had $2,735 of letters of
credit outstanding and $115,465 available under the Syndicated Debt.
Interest on the Syndicated Debt is variable based on the Company's option of
selecting the bank's Euro-dollar rate plus an applicable margin or the prime
rate plus an applicable margin. The majority of the Company's borrowings are
under the Euro-rate option. The applicable margin is adjusted each quarter
based on the consolidated leverage ratio as defined in the agreement. The
applicable margin varies from 0.75% to 1.75% (0.75% at the end of 1Q03) on
the Euro-dollar rate option and from zero to 0.75% (zero at the end of 1Q03)
on the prime rate option. The Syndicated Debt provides for the payment of
quarterly commitment fees on unborrowed funds, also based on the
consolidated leverage ratio. The commitment fee percentage ranges from 0.20%
to 0.375% (0.20% for the Short Term Revolver and 0.25% for the Long Term
Revolver at the end of 1Q03). The Syndicated Debt is unsecured; however, the
Company, as the ultimate parent, guarantees all borrowings and the debt
contains various restrictive covenants.
The net cash impact of mergers transactions during 1Q03 was $2,749 while
capital expenditures, net of disposals, were $273. Capital expenditures for
Fiscal 2003 are projected to be approximately $5,000 and will be focused
primarily on information systems and facility improvements.
The Company previously announced its intention to repurchase up to 2.5
million shares of its Common Stock from April 1, 1999 through March 31,
2002. As of March 31, 2002, the Company had repurchased 2.1 million shares
at prevailing market prices for an aggregate purchase price of $100,355. In
May 2002, the Company's Board of Directors approved the repurchase of an
additional 1 million shares of its Common Stock. During 1Q03, the Company
repurchased 89.3 thousand shares for an aggregate purchase price of $3,694.
Funding for these stock repurchases came from existing cash flow and
borrowings under credit facilities.
The Company has operations, customers and suppliers worldwide, thereby
exposing the Company's financial results to foreign currency fluctuations.
In an effort to reduce this risk, the Company generally sells and purchases
inventory based on prices denominated in U.S. dollars. Intercompany sales to
subsidiaries are generally denominated in the subsidiaries' local currency,
although intercompany sales to the Company's subsidiaries in Brazil, Chile,
Denmark, Mexico, Norway and Sweden are denominated in U.S. dollars. The
gains and losses resulting from the revaluation of
18
the intercompany balances denominated in foreign currencies are recorded to
accumulated other comprehensive income.
The Company has entered and will continue in the future, on a selective
basis, to enter into forward exchange contracts to reduce the foreign
currency exposure related to certain intercompany transactions. On a monthly
basis, the open contracts are revalued to fair market value, and the
resulting gains and losses are recorded in accumulated other comprehensive
income. These gains and losses offset the revaluation of the related foreign
currency denominated receivables, which are also included in accumulated
other comprehensive income. At the end of 1Q03, the open foreign exchange
contracts related to intercompany transactions were in Euro, Canadian
dollars, Swiss francs, Japanese yen and Australian dollars. These open
contracts are valued at approximately $7,564 and will expire in one to two
months. The open contracts have contract rates of 0.99 Euro, 1.512 Canadian
dollars, 1.48 Swiss francs, 123.79 Japanese yen and 0.56 Australian dollars,
all per U.S. dollar.
The Company believes that its cash flow from operations and its existing
credit facilities will be sufficient to satisfy its liquidity needs for the
foreseeable future.
CRITICAL ACCOUNTING POLICIES:
In preparing the Company's financial statements in conformity with
accounting principles generally accepted in the United States, judgments and
estimates are made about the amounts reflected in the financial statements.
As part of the financial reporting process, the Company's management
collaborates to determine the necessary information on which to base
judgments and develop estimates used to prepare the financial statements.
Historical experience and available information is used to make these
judgments and estimates. However, different amounts could be reported using
different assumptions and in light of different facts and circumstances.
Therefore, actual amounts could differ from the estimates reflected in the
financial statements.
In addition to the significant accounting policies described in Note 1 of
the Consolidated Financial Statements, the Company believes that the
following discussion addresses its critical accounting policies.
REVENUE RECOGNITION
-------------------
The Company recognizes revenue for phone services operations when title
transfers at the time of shipment and the price for the product has been
determined.
For its on-site services, the Company recognizes revenues on short-term
projects (generally projects with a duration of less than one month) as the
projects are completed and invoiced to the client. Revenues from long-term
projects are recognized according to the percentage of completion method.
Under the percentage of completion method, income is recognized based on a
ratio of estimated costs incurred to total estimated contract costs. Losses,
if any, on such contracts are
19
provided in full when they become known. Billing in excess of costs and
estimated earnings on uncompleted contracts are classified as current
liabilities and any costs and estimated earnings in excess of billings are
classified as current assets.
ACCOUNTING FOR JUDGMENT AND ESTIMATES
-------------------------------------
The Company establishes reserves when it is probable that a liability or
loss has been incurred and the amount can be reasonably estimated. Reserves
by their nature relate to uncertainties that require exercise of judgment
both in accessing whether or not a liability or loss has been incurred and
estimating any amount of potential loss. The most important areas of
judgment and estimates affecting the Company's financial statements include
accounts receivable collectibility, inventory valuation, pending litigation
and the realization of deferred tax assets.
LONG-LIVED ASSETS
-----------------
The Company evaluates the recoverability of property, plant and equipment
and intangible assets other than goodwill whenever events or changes in
circumstances indicate the carrying amount of any such assets may not be
fully recoverable. Changes in circumstances include technological advances,
changes in the Company's business model, capital strategy, economic
conditions or operating performance. The Company's evaluation is based upon,
among other things, assumptions about the estimated future undiscounted cash
flows these assets are expected to generate. When the sum of the
undiscounted cash flows is less than the carrying value, the Company would
recognize an impairment loss. The Company continually applies its best
judgment when performing these evaluations to determine the timing of the
testing, the undiscounted cash flows used to assess recoverability and the
fair value of the asset.
The Company evaluates the recoverability of the goodwill attributable to
each of its reporting units as required under SFAS No. 142, "Goodwill and
Other Intangible Assets," by comparing the fair value of each reporting unit
with its carrying value. The Company continually applies its best judgment
when performing these evaluations to determine the financial projections
used to assess the fair value of each reporting unit.
RESTRUCTURING
-------------
The Company accrues the cost of restructuring activities in accordance with
the appropriate accounting guidance depending upon the facts and
circumstances surrounding the situation. The Company exercises its judgment
in estimating the total costs of each of these activities. As these
activities are implemented, the actual costs may differ from the estimated
costs due to changes in the facts and circumstances that were not foreseen
at the time of the initial cost accrual.
20
CONVERSION TO THE EURO CURRENCY:
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. The Company conducts business in member
countries. The transition period for the introduction of the Euro was
between January 1, 1999 and June 30, 2002. The Company has converted to the
Euro, as required, and believes the conversion did not materially impact its
operations or financial results.
NEW ACCOUNTING PRONOUNCEMENTS:
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of
and supersedes FASB Statement No. 121. This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. The provisions of this standard
must be applied for fiscal years beginning after December 15, 2001. The
Company adopted the new standard in the first quarter of Fiscal 2003. Its
adoption did not have a material effect on the Company's financial
statements or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was
issued. The Statement updates, clarifies and simplifies existing accounting
pronouncements. While the technical corrections to existing pronouncements
are not substantive in nature, in some instances, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. All other
provisions of this standard must be applied for financial statements issued
on or after May 15, 2002, with early application encouraged. The Company is
currently evaluating the effects of SFAS No. 145.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity," under which a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized at fair value when the liability is incurred. The
provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002.
21
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.
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 ability of the Company to identify,
acquire and operate additional on-site technical service companies, general
economic and business conditions, competition, changes in foreign, political
and economic conditions, fluctuating foreign currencies compared to the U.S.
dollar, rapid changes in technologies, customer preferences and various
other matters, many of which are beyond the Company's 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 Company's expectations with regard thereto or any change
in events, conditions, or circumstances on which any statement is based.
22
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks in the ordinary course of
business that include foreign currency exchange rates. In an effort to mitigate
the risk, the Company, on a selective basis, will enter into forward exchange
contracts. At June 30, 2002, the Company had open contacts valued at
approximately $7,564 with a fair value of approximately $7,591.
In the ordinary course of business, the Company is also exposed to
risks that interest rate increases may adversely affect funding costs associated
with the $61,800 of variable rate debt. For the three month periods ended June
30, 2002 and June 30, 2001, an instantaneous 100 basis point increase in the
interest rate would reduce the Cmpany's expected earnings in the subsequent
three months by $97 and $179, respectively, assuming the Company employed no
intervention strategies.
23
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21.1 Subsidiaries of the Company
(b) Reports on Form 8-K
Current Report of Form 8-K for the event dated June 24, 2002, covering Item 4
thereof, relating to the appointment of Ernst & Young LLP and dismissal of
Arthur Andersen LLP as the Company's independent auditors.
24
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
By: /s/ Anna M. Baird
------------------------------------
August 14, 2002 Anna M. Baird, Vice President
Chief Financial Officer, Treasurer,
And Principal Accounting Officer
25
EXHIBIT INDEX
Exhibit
- -------
No.
- ---
21.1 Subsidiaries of the Company
26