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Fiscal 2004 Third Quarter
UNITED STATES
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 DECEMBER 28, 2003
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined In Rule 12b-2 of the Exchange Act).
YES X NO
----- -----
The number of shares outstanding of the Registrant's common stock, $0.001 par
value, as of February 6, 2003 was 18,022,056 shares.
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(UNAUDITED)
DECEMBER 28, MARCH 31,
2003 2003
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,924 $ 14,043
Accounts receivable, net of allowance for doubtful
accounts of $11,655 and $11,710, respectively 100,632 100,263
Inventories, net 40,047
42,169
Costs and estimated earnings in excess of billings
on uncompleted contracts 15,276 18,261
Other current assets 13,301 16,052
- --------------------------------------------------------------------------------------------------------------------
Total current assets 188,666
181,302
Property, plant and equipment, net 30,800 34,737
Goodwill, net 378,870 369,790
Other intangibles, net 29,495 29,509
Other assets 2,907 4,027
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 623,374 $ 626,729
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 759 $ 926
Accounts payable 30,217 30,508
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,599 3,295
Other accrued expenses 26,507 32,405
Accrued income taxes 2,080 2,940
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 63,162 70,074
Long-term debt 46,780 49,453
Other liabilities 10,894 12,780
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 22,865,351 and 22,594,034 shares, respectively 23 23
Additional paid-in capital 303,401 295,271
Retained earnings 392,040 359,037
Treasury stock, at cost, 4,987,817 and 3,822,500 shares, respectively (211,183) (163,547)
Accumulated other comprehensive income 18,257 3,638
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 502,538 494,422
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 623,374 $ 626,729
====================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
2004 2002 2003 2002
===============================================================================================
Revenues $133,067 $153,062 $390,682 $470,205
Cost of sales 78,426 92,423 228,719 284,294
- -----------------------------------------------------------------------------------------------
Gross profit 54,641 60,639 161,963 185,911
Selling, general and
administrative expenses 34,953 37,471 104,474 113,788
Intangibles amortization 64 96 198 305
- -----------------------------------------------------------------------------------------------
Operating income 19,624 23,072 57,291 71,818
Interest expense, net 498 671 1,358 2,209
Other expense, net 75 44 91 114
- -----------------------------------------------------------------------------------------------
Income before income taxes 19,051 22,357 55,842 69,495
Provision for income taxes 6,858 7,580 20,102 25,018
- -----------------------------------------------------------------------------------------------
Net income $ 12,193 $ 14,777 $ 35,740 $ 44,477
===============================================================================================
Basic earnings per common share $ 0.68 $ 0.75 $ 1.96 $ 2.23
Diluted earnings per common share $ 0.66 $ 0.73 $ 1.90 $ 2.17
- -----------------------------------------------------------------------------------------------
Weighted average common shares 17,954 19,596 18,258 19,937
Weighted average common and common
equivalent shares 18,571 20,225 18,792 20,513
- -----------------------------------------------------------------------------------------------
Dividend per share $ 0.05 $ 0.05 $ 0.15 $ 0.05
===============================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------- ---------------- PAID-IN RETAINED TREASURY COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002 0 $0 22,351,049 $22 $287,714 $312,288 $(100,355) $(9,571) $490,098
Comprehensive income:
Net income 48,685 48,685
Foreign currency
translation adjustment 12,808 12,808
Unrealized gains on
derivatives designated
and qualified as cash
flow hedges, net of tax 233 233
Reclassification of
unrealized losses on
expired derivatives 168 168
---------
Comprehensive income 61,894
Dividends declared (1,936) (1,936)
Purchase of treasury stock (63,192) (63,192)
Issuance of common stock 23,836 1 968 969
Exercise of options, net of tax 219,149 4,767 4,767
Tax benefit from exercised
options 1,822 1,822
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 0 0 22,594,034 23 295,271 359,037 (163,547) 3,638 494,422
Comprehensive income:
Net income 35,740 35,740
Foreign currency
translation adjustment 14,369 14,369
Unrealized gains on
derivatives designated
and qualified as cash
flow hedges, net of tax 483 483
Reclassification of
unrealized gains on
expired derivatives (233) (233)
---------
Comprehensive income 50,359
Dividends declared (2,737) (2,737)
Purchase of treasury stock (47,636) (47,636)
Exercise of options, net of tax 271,317 6,014 6,014
Tax benefit from exercised
options 2,116 2,116
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 2003
(unaudited) 0 $0 22,865,351 $23 $303,401 $392,040 $(211,183) $18,257 $502,538
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
NINE MONTHS ENDED
------------------------------------
DECEMBER 28, 2003 DECEMBER 29, 2002
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,740 $ 44,477
Adjustments to reconcile net income to cash
provided by operating activities:
Intangibles amortization 198 305
Depreciation 4,824 5,747
Net gain from sale of property (531) --
Changes in working capital items:
Accounts receivable, net 3,929 12,065
Inventories, net (960) 2,783
Other current assets 11,265 11,242
Accounts payable and accrued liabilities (8,103) (7,936)
- --------------------------------------------------------------------------------------------
Cash provided by operating activities 46,362 68,683
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,357) (1,454)
Capital asset disposals 1,615 748
Merger transactions, net of cash acquired and
prior merger-related payments (1,261) (7,561)
- --------------------------------------------------------------------------------------------
Cash used in investing activities (1,003) (8,267)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of borrowings (181,159) (110,354)
Proceeds from borrowings 178,200 84,500
Proceeds from the exercise of options 6,014 4,366
Payment of dividends (2,737) --
Purchase of treasury stock (52,354) (37,853)
- --------------------------------------------------------------------------------------------
Cash used in financing activities (52,036) (59,341)
- --------------------------------------------------------------------------------------------
Foreign currency exchange impact on cash 2,558 (1,051)
- --------------------------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents (4,119) 24
Cash and cash equivalents at beginning of year 14,043 13,423
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,924 $ 13,477
============================================================================================
SUPPLEMENTAL CASH FLOW:
Cash paid for interest $ 1,329 $ 2,212
Cash paid for income taxes 23,771 23,472
============================================================================================
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 consolidated 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"). Black Box Corporation (the
"Company") believes that these financial statements reflect all adjustments of a
normal, recurring nature necessary for a fair presentation of the results for
the interim periods presented. Interim periods are not necessarily indicative of
the results of operations for a full year. As such, these unaudited financial
statements should be read in conjunction with the audited 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, 2003. The consolidated Balance Sheet
as of March 31, 2003 was derived from the audited Balance Sheet included in the
most recent Form 10-K.
NOTE 2: FISCAL YEARS AND BASIS OF PRESENTATION
The Company's fiscal year ends on March 31. Its fiscal quarters consist of 13
weeks and, beginning in Fiscal 2003, end on the Sunday nearest each calendar
quarter end. The actual ending dates for the periods presented as December 31,
2003 and 2002 were December 28, 2003 and December 29, 2002, respectively. The
ending dates for all other periods are as presented.
NOTE 3: STOCK-BASED COMPENSATION
As permitted by SFAS No. 148 "Accounting for Stock-Based Compensation --
Transition and Disclosure," the Company continues to use the intrinsic value
method of Opinion No. 25 rather than the fair value method of SFAS No. 123 to
account for stock-based employee compensation. As required by the provisions of
SFAS No. 148, disclosure must be made in the financial notes of the effects on
reported net income and earnings per share of an entity's accounting policy for
stock-based employee compensation.
Had the Company elected to recognize compensation cost based on the fair value
basis under SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts as follows:
6
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -----------------------
2003 2002 2003 2002
=============================================================================================================
Net income As reported $ 12,193 $ 14,777 $ 35,740 $ 44,477
Plus: Compensation expense -- -- -- --
Less: Stock-based employee
compensation under fair-value
based method for all awards,
net of related tax effects 2,257 2,304 7,638 6,611
-------------------------------------------------
Pro forma $ 9,936 $ 12,473 $ 28,102 $ 37,866
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 0.68 $ 0.75 $ 1.96 $ 2.23
Pro forma $ 0.55 $ 0.64 $ 1.54 $ 1.90
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 0.66 $ 0.73 $ 1.90 $ 2.17
Pro forma $ 0.54 $ 0.62 $ 1.50 $ 1.85
=============================================================================================================
The incremental fair value of each option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
DECEMBER 31,
-----------------------
2003 2002
===================================================================
Expected life (in years) 4.8 4.6
Risk free interest rate 3.70% 4.11%
Expected volatility rate 55% 53%
Dividend yield 0.1% --
===================================================================
NOTE 4: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The net inventory balances are as follows:
DECEMBER 31, 2003 MARCH 31, 2003
===============================================================================
Raw materials $ 1,965 $ 1,909
Finished goods 44,600 42,119
- ------------------------------------------------------------------------------
Subtotal 46,565 44,028
Excess and obsolete inventory reserves (4,396) (3,981)
- ------------------------------------------------------------------------------
Inventory, net $ 42,169 $40,047
===============================================================================
7
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 5: 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
and payables, which are also included in accumulated other comprehensive income.
At December 31, 2003, the open foreign exchange contracts were in Euro, Pound
sterling, Canadian dollar, Swiss franc, Japanese yen, Swedish krona, Danish
krone, Norwegian kroner and Australian dollar. The total open contracts, with a
notional amount of approximately $14,679, have a fair value of $15,438 and will
expire within seven months. The open contracts have contract rates of 0.8042 to
0.9023 Euro, 0.5971 to 0.6119 Pound sterling, 1.3132 to 1.3669 Canadian dollar,
1.2529 to 1.3254 Swiss franc, 110.46 to 116.5 Japanese yen, 7.3542 to 7.9703
Swedish krona, 6.4057 to 6.4183 Danish krone, 7.0260 to 7.0749 Norwegian kroner
and 1.3643 to 1.4732 Australian dollar, all per U.S. dollar.
NOTE 6: COMPREHENSIVE INCOME
Comprehensive income consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ------------------
2003 2002 2003 2002
==========================================================================================================
Net income $ 12,193 $ 14,777 $35,740 $ 44,477
Other comprehensive income:
Foreign currency translation adjustment 8,356 6,538 14,369 10,467
Unrealized (losses)/gains on derivatives
designated and qualified as cash
flow hedges, net of reclassification of
unrealized (losses)/gains on expired
derivatives (200) (312) 250 (161)
- ---------------------------------------------------------------------------------------------------------
Comprehensive income $ 20,349 $ 21,003 $50,359 $ 54,783
==========================================================================================================
8
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
The components of accumulated other comprehensive income consisted of the
following:
DECEMBER 31, 2003 MARCH 31, 2003
===================================================================================================
Foreign currency translation adjustment $ 17,774 $ 3,405
Unrealized gains on derivatives designated and qualified as
cash flow hedges 483 233
- ---------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ 18,257 $ 3,638
===================================================================================================
NOTE 7: 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 based on the weighted average
number of common shares issued and outstanding, plus the dilutive effect of
options (using the treasury stock method) and contingently issuable shares. The
following table details this calculation:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
(Shares in thousands) 2003 2002 2003 2002
===============================================================================================
Net income for earnings per share computation $12,193 $14,777 $35,740 $44,477
Basic earnings per common share:
Weighted average common shares 17,954 19,596 18,258 19,937
Basic earnings per common share $ 0.68 $ 0.75 $ 1.96 $ 2.23
- -----------------------------------------------------------------------------------------------
Diluted earnings per common share:
Weighted average common shares 17,954 19,596 18,258 19,937
Shares issuable from assumed conversion of
stock options and contingently issuable
shares from acquisitions (net of tax
savings) 614 629 534 576
-------------------------------------------
Weighted average common and common equivalent
shares 18,571 20,225 18,792 20,513
Diluted earnings per common share $ 0.66 $ 0.73 $ 1.90 $ 2.17
===============================================================================================
The Company also has 921,469 shares and 814,064 shares issuable upon the
exercise of outstanding stock options for the three months ended December 31,
2003 and 2002, respectively, and 2,642,466 shares and 1,452,134 shares for the
nine months ended December 31, 2003 and 2002, respectively. The exercise price
of such options was greater than the average market price for those time periods
and as such do not impact the weighted average share calculations during the
periods presented above.
9
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 8: NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. The Company does not believe that this statement will
have a material impact on the Company's consolidated financial statements or
results of operations.
NOTE 9: MERGERS ACTIVITY
During the nine months ended December 31, 2003 and 2002, the Company paid $1,261
and $2,966, respectively, for obligations related to mergers completed in prior
periods.
During Fiscal 2003, the Company successfully completed three business
combinations that have been accounted for using the purchase method of
accounting, June 2002 - Societe d'Installation de Reseaux Informatiques et
Electriques; July 2002 - EDC Communications Limited and EDC Communications
(Ireland) Limited; and January 2003 - Rowe Structured Cabling Ltd. The aggregate
purchase price of these three business combinations was approximately $4,600 and
resulted in goodwill of $3,317 and other intangibles of $348 in accordance with
SFAS No. 141, "Business Combinations."
As of December 31, 2003, certain merger agreements provide for contingent
payments of up to $2,734. Upon payment, goodwill will be adjusted for the amount
of the contingency.
NOTE 10: 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. During the third quarter
of Fiscal 2002 and 2003, the Company conducted its annual impairment analysis
and no impairment existed. During the fourth quarter of Fiscal 2003, the Company
changed its reportable segments and in accordance with SFAS No. 142, evaluated
its intangibles for impairment and none existed. And, most recently, as of
October 1, 2003, the Company conducted its annual impairment analysis and no
impairment 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.
10
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
As of December 31, 2003, the Company's trademarks had a net carrying amount of
$27,739. The Company believes this intangible has an indefinite life.
The Company had the following other intangibles as of December 31, 2003:
GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION
==============================================================================
Non-Compete Agreements $ 2,242 $ 486
Acquired Backlog 332 332
- ------------------------------------------------------------------------------
Total $ 2,574 $ 818
==============================================================================
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 December 31, 2003 and 2002 was $64 and $96, respectively,
and for the nine months ended December 31, 2003 and 2002 was $198 and $305,
respectively.
The estimated amortization expense for each of the five fiscal years subsequent
to December 31, 2003 for the non-compete agreements and acquired backlog
intangibles is as follows: remainder of fiscal 2004 - $64; fiscal 2005 - $256;
fiscal 2006 - $256; fiscal 2007 - $256; and fiscal 2008 - $256.
The changes in the carrying amount of goodwill, net of amortization, by
reporting segment for the nine months ended December 31, 2003, are as follows:
NORTH
AMERICA EUROPE ALL OTHER TOTAL
=============================================================================================
Balance as of March 31, 2003 $309,214 $58,973 $1,603 $369,790
Goodwill during the period related to:
Currency translation 15 7,864 5 7,884
Actual earnout payments 295 168 70 533
Other 611 -- 52 663
- ---------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $310,135 $67,005 $1,730 $378,870
=============================================================================================
The changes in total intangible assets, net of accumulated amortization, from
March 31, 2003 to December 31, 2003 are as follows:
11
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NON-COMPETES
TRADEMARKS AND BACKLOG GOODWILL TOTAL
=========================================================================================================
Balance as of March 31, 2003 $27,739 $ 1,770 $369,790 $ 399,299
Change in net intangible assets during the
period related to:
Amortization expense -- (64) -- (64)
Currency translation -- 50 7,884 7,934
Actual earnout payments -- -- 533 533
Other -- -- 663 663
- ---------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $27,739 $ 1,756 $378,870 $ 408,365
=========================================================================================================
NOTE 11: TREASURY STOCK
The Company previously announced intentions to repurchase up to 6.5 million
shares of its Common Stock from April 1, 1999 through December 31, 2003. During
the third quarter of Fiscal 2004, the Company repurchased approximately 0.4
million shares for an aggregate purchase price of $15,675 and for the first nine
months of Fiscal 2004, repurchases totaled approximately 1.2 million shares for
$47,636. Since inception of the repurchase program in April 1999 through
December 2003, the Company has repurchased in aggregate approximately 5.0
million shares for $211,183. Funding for the stock repurchases came from
existing cash flow and cash on hand. During the first quarter of this fiscal
year, the Company used $4,719 of cash on hand to settle stock repurchases
initiated during the fourth quarter of the prior fiscal year.
Additional repurchases of stock may occur from time to time depending upon
factors such as the Company's cash flows and general market conditions. While
the Company expects to continue to repurchase shares for the foreseeable future,
there can be no assurance as to the timing or amount of such repurchases.
NOTE 12: INDEBTEDNESS
Long-term debt is as follows:
DECEMBER 31, 2003 MARCH 31, 2003
===========================================================================
Revolving credit agreement $ 46,700 $ 49,100
Other debt 839 1,279
- ---------------------------------------------------------------------------
Total debt 47,539 50,379
Less: current portion (759) (926)
- ---------------------------------------------------------------------------
Long-term debt $ 46,780 $ 49,453
===========================================================================
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,
12
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
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 when it expired. On April
4, 2003, the Company entered into an agreement whereby Citizens Bank of
Pennsylvania became successor agent to Mellon Bank, N.A. Mellon Bank continues
to be a Participant in the credit agreement.
The interest on the Syndicated Debt is variable based on the Company's option of
selecting the banks prime rate plus an applicable margin as defined in the
Syndicated Debt 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
December 31, 2003 was approximately 1.9%.
NOTE 13: RESTRUCTURING
In the fourth quarter of Fiscal 2003, the Company recorded a restructuring
charge of $6,536 primarily related to adjusting staffing levels and real estate
consolidations. Of this charge, $5,034 related to severance for 245 total team
members ($4,299 related to severance for 130 team members in Europe; $581
related to severance for 94 team members in North America; $154 related to
severance for 21 individuals in Latin America) and $1,502 related to real estate
consolidations.
In the fourth quarter of Fiscal 2002, the Company recorded a restructuring
charge of approximately $3,500 primarily related to adjusting staffing levels
and real estate consolidations. Of this charge, $2,168 related to severance for
105 total team members ($1,830 related to severance for 60 team members in
Europe; $230 related to severance for 19 team members in Latin America; $108
related to severance for 26 team members in North America) and $1,332 related to
real estate consolidations.
The components of the restructuring accruals at December 31, 2003 are as
follows:
ACCRUED CASH ACCRUED
MARCH 31, 2003 EXPENDITURES OTHER DECEMBER 31, 2003
==================================================================================================
Team Member Severance $4,375 $3,985 $ -- $390
Facility Closures 1,806 830 453 523
- --------------------------------------------------------------------------------------------------
Total $6,181 $4,815 $453 $913
==================================================================================================
The Company anticipates the majority of the restructuring accrual will be paid
by the end of Fiscal 2004.
13
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
NOTE 14: SEGMENT REPORTING
As required by SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company reports the results of operating segments.
During the fourth quarter of Fiscal 2003, the Company changed its primary
segments to be on a geographical basis as this is now the way it manages the
business to be more responsive to the organization's operating structure. The
primary reportable segments are comprised of North America, Europe and All
Other. Consistent with SFAS No. 131, the Company aggregates similar operating
segments into reportable segments.
The accounting policies of the various segments are the same as those described
in "Summary of Significant Accounting Principles" in Note 1 of the Company's
annual report on Form 10-K for the fiscal year ended March 31, 2003. The Company
evaluates the performance of each segment based on operating income.
Inter-segment sales and segment interest income or expense and expenditures for
segment assets are not presented to or reviewed by management, and therefore are
not presented below.
Summary information by reportable segment is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
NORTH AMERICA 2003 2002 2003 2002
===============================================================================
Revenues $ 84,665 $102,476 $259,555 $325,115
Operating income 10,900 14,784 34,595 48,024
Depreciation 1,091 1,288 3,325 4,036
Amortization 17 36 40 117
Segment assets 566,474 600,147 566,474 600,147
===============================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
EUROPE 2003 2002 2003 2002
==============================================================================
Revenues $ 38,309 $ 41,457 $103,944 $115,847
Operating income 6,325 6,532 16,278 17,613
Depreciation 429 442 1,232 1,333
Amortization 39 56 141 172
Segment assets 130,640 124,123 130,640 124,123
==============================================================================
14
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ---------------------
ALL OTHER 2003 2002 2003 2002
==============================================================================
Revenues $10,093 $ 9,129 $27,183 $29,243
Operating income 2,399 1,756 6,418 6,182
Depreciation 86 107 267 378
Amortization 8 4 17 16
Segment assets 17,427 17,057 17,427 17,057
==============================================================================
The sum of the segment revenues, operating income, depreciation and amortization
equals the total consolidated revenues, operating income, depreciation and
amortization. The following reconciles segment assets to total consolidated
assets:
ASSETS DECEMBER 31, 2003 MARCH 31, 2003
===========================================================================
Assets for North America, Europe and
All Other segments $ 714,541 $ 727,349
Corporate eliminations (91,167) (100,620)
- ---------------------------------------------------------------------------
Total consolidated assets $ 623,374 $ 626,729
===========================================================================
Management is also presented with and reviews revenues by service type. The
following information is presented:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
REVENUES 2003 2002 2003 2002
===============================================================================
Hotline Services $ 61,538 $ 62,897 $176,508 $190,775
Data Services 54,305 69,323 161,448 219,147
Voice Services 17,224 20,842 52,726 60,283
- -------------------------------------------------------------------------------
Total revenues $133,067 $153,062 $390,682 $470,205
===============================================================================
NOTE 15: COMMITMENTS AND CONTINGENCIES
As previously disclosed in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for
the quarter ended September 28, 2003, two arbitration awards (including interest
and costs through December 31, 2003) against the Company for approximately $1.6
million and approximately $1.5 million are being appealed. Regarding the case
involving the $1.5 million award, the parties verbally agreed to settle all
claims between them in exchange for a payment by the Company of $1.2 million.
The terms of this settlement will be set forth in a written settlement agreement
which is currently in the process of being negotiated by the parties. Based on
the facts currently available to the Company, management believes these matters
are adequately provided for, covered by insurance, without merit, or not
probable that an unfavorable outcome will result.
15
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
As previously disclosed in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for
the quarter ended September 28, 2003, the Company has been named as a defendant
in two substantially similar complaints alleging violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. These actions were consolidated in a lawsuit in the United States
District Court for the Western District of Pennsylvania in a case captioned In
Re Black Box Corporation Securities Litigation (Civil Action No. 03-CV-412). On
October 3, 2003, the plaintiffs in this action filed a Consolidated Class Action
Complaint in this matter. On November 17, 2003, the Company filed a Motion to
Dismiss the plaintiffs' complaint. Thereafter, the plaintiffs filed a brief in
opposition to the Company's Motion to Dismiss. The Company filed its response to
plaintiffs' opposition on February 9, 2004. The Company believes that the claims
are without merit and intends to defend itself vigorously.
As previously disclosed in its Current Report on Form 8-K filed on October 28,
2003 and in its quarterly report on Form 10-Q for the quarter ended September
28, 2003, the Company received a formal order of investigation issued by the
Securities and Exchange Commission (the "SEC"). In connection therewith, during
the quarter ended December 28, 2003, the Company and several of its officers,
directors, team members and independent auditors provided information to the
Staff of the SEC. In late January 2004, the SEC requested information relating
to fiscal 2002 from the Company's independent auditors pursuant to an additional
subpoena. The Company intends to continue to cooperate fully with the inquiry.
16
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company manages its business based on geographic segments: North America,
Europe and All Other. In addition, certain revenue and gross profit information
by service type is also provided herein for purposes of further analysis.
Dollars in Thousands
The tables below should be read in conjunction with the following discussion.
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
---------------------------------------- ---------------------------------------
2003 2002 2003 2002
(3Q04) (3Q03) (3Q04YTD) (3Q03YTD)
==================================================================================================================
% of % of % of % of
total total total total
revenues revenues revenues revenues
-------- -------- -------- --------
BY GEOGRAPHY
Revenues:
North America $ 84,665 64% $102,476 67% $259,555 66% $325,115 69%
Europe 38,309 29% 41,457 27% 103,944 27% 115,847 25%
All Other 10,093 7% 9,129 6% 27,183 4% 29,243 6%
----------------------------------------------------------------------------------
Total $133,067 100% $153,062 100% $390,682 100% $470,205 100%
----------------------------------------------------------------------------------
Operating Income:
North America $ 10,900 $ 14,784 $ 34,595 $ 48,024
% of North America 12.9% 14.4% 13.3% 14.8%
revenues
Europe $ 6,325 $ 6,532 $ 16,278 $ 17,613
% of Europe revenues 16.5% 15.8% 15.7% 15.2%
All Other $ 2,399 $ 1,756 $ 6,418 $ 6,182
% of All Otherrevenues 23.8% 19.2% 23.6% 21.1%
----------------------------------------------------------------------------------
Total $ 19,624 $ 23,072 $ 57,291 $ 71,818
% of Total revenues 14.7% 15.1% 14.7% 15.3%
==================================================================================================================
17
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
---------------------------------------- -----------------------------------------
2003 2002 2003 2002
(3Q04) (3Q03) (3Q04YTD) (3Q03YTD)
====================================================================================================================
% of % of % of % of
total total total total
revenues revenues revenues revenues
-------- -------- -------- --------
BY SERVICE TYPE
Revenues:
Hotline Services $ 61,538 46% $ 62,897 41% $176,508 45% $190,775 40%
Data Services 54,305 41% 69,323 45% 161,448 41% 219,147 47%
Voice Services 17,224 13% 20,842 14% 52,726 14% 60,283 13%
------------------------------------------------------------------------------------
Total $133,067 100% $153,062 100% $390,682 100% $470,205 100%
------------------------------------------------------------------------------------
Gross Profit:
Hotline Services $ 32,241 $ 32,308 $ 92,212 $ 96,906
% of Hotline Services 52.4% 51.4% 52.2% 50.8%
revenues
Data Services $ 16,267 $ 21,439 $ 51,404 $ 70,117
% of Data Services 30.0% 30.9% 31.8% 32.0%
revenues
Voice Services $6,133 $6,892 $ 18,347 $ 18,888
% of Voice Services 35.6% 33.1% 34.8% 31.3%
revenues
------------------------------------------------------------------------------------
Total $ 54,641 $ 60,639 $161,963 $185,911
% of Total revenues 41.1% 39.6% 41.5% 39.5%
====================================================================================================================
I. THIRD QUARTER FISCAL 2004 (3Q04) COMPARED TO THIRD QUARTER FISCAL 2003
(3Q03):
TOTAL REVENUES
Total revenues for 3Q04 were $133,067, a decrease of 13% compared to 3Q03 total
revenues of $153,062. If exchange rates had remained constant from the third
quarter last year, 3Q04 total revenues would have been lower by $6,041, or 4%.
REVENUES BY GEOGRAPHY
NORTH AMERICA REVENUES
Revenues in North America were $84,665 for 3Q04, a decrease of 17% compared to
$102,476 for 3Q03. The North America revenue decline was generally due to weak
general economic conditions that affected client demand.
EUROPE REVENUES
Revenues in Europe were $38,309 for 3Q04, a decrease of 8% compared to $41,457
for 3Q03. The Europe revenue decline was due to weak general economic conditions
that affected client demand, offset in part by the positive impact of exchange
rates relative to the U.S. dollar. If
18
exchange rates relative to the U.S. dollar had remained unchanged from 3Q03,
Europe revenues would have decreased 20%.
ALL OTHER REVENUES
Revenues for All Other were $10,093 for 3Q04, an increase of 11% compared to
$9,129 for 3Q03. The revenue increase in these regions was due to the positive
impact of exchange rates relative to the U.S. dollar. If exchange rates relative
to the U.S. dollar had remained unchanged from 3Q03, All Other revenues would
have been comparable to last year's third quarter.
REVENUES BY SERVICE TYPE
HOTLINE SERVICES
Revenues from hotline services for 3Q04 were $61,538, a decrease of 2% compared
to $62,897 for 3Q03. The Company believes the overall decline in hotline
services revenues was driven by weak general economic conditions, offset in part
by $4,109 positive impact of exchange rates relative to the U.S. dollar for its
international hotline services.
DATA SERVICES
Revenues from data services (previously designated as structured cabling
services) were $54,305 for 3Q04, a decrease of 22% compared to $69,323 for 3Q03.
The Company believes the overall decline in data services revenue was driven by
weak general economic conditions, offset in part by $1,932 positive impact of
exchange rates relative to the U.S. dollar for its international data services.
VOICE SERVICES
Revenues from voice services (previously designated as telephony services) were
$17,224 for 3Q04, a decrease of 17% compared to $20,842 for 3Q03. The Company
believes the overall decline in voice services revenue was driven by weak
general economic conditions.
GROSS PROFIT
Gross profit dollars for 3Q04 decreased to $54,641 from $60,639 for 3Q03. The
decrease in gross profit dollars over prior year was due to the decline in
revenues. Gross profit as a percent of revenues for 3Q04 increased to 41.1% of
revenues from 39.6% of revenues for 3Q03. The increase in gross profit
percentage was due primarily to cost reduction efforts.
Gross profit dollars for hotline services for 3Q04 was $32,241, or 52.4% of
revenues, compared to $32,308, or 51.4% of revenues for 3Q03. Gross profit
dollars for data services for 3Q04 was $16,267, or 30.0% of revenues, compared
to $21,439, or 30.9% of revenues for 3Q03. Gross profit dollars for voice
services for 3Q04 was $6,133, or 35.6% of revenues, compared to $6,892, or 33.1%
of revenues for 3Q03.
SG&A EXPENSES
Selling, general and administrative ("SG&A") expenses for 3Q04 were $34,953 a
decrease of $2,518 over SG&A expenses of $37,471 for 3Q03. The dollar decrease
from 3Q04 to 3Q03 related to the Company's cost reduction efforts worldwide.
SG&A expenses as a percent of
19
revenues for 3Q04 increased to 26.3% of revenues from 24.5% of revenues for
3Q03. The percentage increase is due to the percentage change in revenues being
greater than the percentage change in the overall cost structure.
INTANGIBLES AMORTIZATION
Intangibles amortization for 3Q04 decreased to $64 from $96 for 3Q03 due to the
full amortization of acquired backlog.
OPERATING INCOME
Operating income for 3Q04 was $19,624, or 14.7% of revenues, compared to $23,072
or 15.1% of revenues for 3Q03.
The decrease in operating income dollars is primarily due to the decrease in
revenues while the decline in the operating income as a percentage of revenues
was due primarily to the additional SG&A expenses as a percentage of revenues as
described above.
NET INTEREST EXPENSE
Net interest expense for 3Q04 decreased to $498 from $671 for 3Q03 due to
reductions in the outstanding debt from $53,230 at the end of 3Q03 to $47,539 at
the end of 3Q04 and the interest rate reduction of approximately 0.3% during the
period from 3Q03 to 3Q04.
PROVISION FOR INCOME TAXES
The tax provision for 3Q04 was $6,858, an effective tax rate of 36.0%, compared
to 3Q03 of $7,580, an effective tax rate of 33.9%. The tax rate for 3Q03
reflected the implementation of a state tax planning strategy that reduced the
FY03 expected rate from 37.0% to 36.0%. 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
Net income for 3Q04 was $12,193, or 9.2% of revenues, compared to $14,777, or
9.7% of revenues for 3Q03.
20
II. NINE MONTHS FISCAL 2004 (3Q04YTD) COMPARED TO NINE MONTHS FISCAL 2003
(3Q03YTD):
TOTAL REVENUES
Total revenues for 3Q04YTD were $390,682, a decrease of 17% compared to 3Q03YTD
total revenues of $470,205. If exchange rates had remained constant from the
same periods last year, 3Q04YTD total revenues would have been lower by $15,230,
or 3%.
REVENUES BY GEOGRAPHY
NORTH AMERICA REVENUES
Revenues in North America were $259,555 for 3Q04YTD, a decrease of 20% compared
to $325,115 for 3Q03YTD. The North America revenue decline was generally due to
weak general economic conditions that affected client demand.
EUROPE REVENUES
Revenues in Europe were $103,944 for 3Q04YTD, a decrease of 10% compared to
$115,847 for 3Q03YTD. The Europe revenue decline was due to weak general
economic conditions that affected client demand, offset in part by the positive
impact of exchange rates relative to the U.S. dollar. If exchange rates relative
to the U.S. dollar had remained unchanged from the same periods last year,
Europe revenues would have decreased 22%.
ALL OTHER REVENUES
Revenues for All Other were $27,183 for 3Q04YTD, a decrease of 7% compared to
$29,243 for 3Q03YTD. The revenue decline in these regions was due to weak
general economic conditions that affected client demand, offset by the positive
impact of exchange rates relative to the U.S. dollar. If exchange rates relative
to the U.S. dollar had remained unchanged from the same periods last year, All
Other revenues would have decreased 13%.
REVENUES BY SERVICE TYPE
HOTLINE SERVICES
Revenues from hotline services for 3Q04YTD were $176,508, a decrease of 7%
compared to $190,775 for 3Q03YTD. The Company believes the overall decline in
hotline services revenues was driven by weak general economic conditions, offset
in part by $10,018 positive impact of exchange rates relative to the U.S. dollar
for its international hotline services.
DATA SERVICES
Revenues from data services were $161,448 for 3Q04YTD, a decrease of 26%
compared to $219,147 for 3Q03YTD. The Company believes the overall decline in
data services revenue was driven by weak general economic conditions, offset in
part by $5,213 positive impact of exchange rates relative to the U.S. dollar for
its international data services.
21
VOICE SERVICES
Revenues from voice services were $52,726 for 3Q04YTD, a decrease of 13%
compared to $60,283 for 3Q03YTD. The Company believes the overall decline in
voice services revenue was driven by weak general economic conditions.
GROSS PROFIT
Gross profit dollars for 3Q04YTD decreased to $161,963 from $185,911 for
3Q03YTD. The decrease in gross profit dollars over prior year was due to the
decline in revenues. Gross profit as a percent of revenues for 3Q04YTD increased
to 41.5% of revenues from 39.5% or revenues for 3Q03YTD. The increase in gross
profit percentage was due primarily to cost reduction efforts.
Gross profit dollars for hotline services for 3Q04YTD was $92,212, or 52.2% of
revenues, compared to $96,906, or 50.8% of revenues for 3Q03YTD. Gross profit
dollars for data services for 3Q04YTD was $51,404, or 31.8% of revenues,
compared to $70,117, or 32.0% of revenues for 3Q03YTD. Gross profit dollars for
voice services for 3Q04YTD was $18,347, or 34.8% of revenues, compared to
$18,888, or 31.3% or revenues.
SG&A EXPENSES
Selling, general and administrative ("SG&A") expenses for 3Q04YTD were $104,474,
a decrease of $9,314 over SG&A expenses of $113,788 for 3Q03YTD. The dollar
decrease from 3Q04YTD to 3Q03YTD related to the Company's cost reduction efforts
worldwide. SG&A expenses as a percent of revenues for 3Q04YTD were 26.7% of
revenues compared to 24.2% of revenues for 3Q03YTD. The percentage increase is
due to the percentage change in revenues being greater than the percentage
change in the overall cost structure.
INTANGIBLES AMORTIZATION
Intangibles amortization for 3Q04YTD decreased to $198 from $305 for 3Q03YTD due
to the full amortization of acquired backlog.
OPERATING INCOME
Operating income for 3Q04YTD was $57,291, or 14.7% of revenues, compared to
$71,818 or 15.3% of revenues for 3Q03YTD.
The decrease in operating income dollars is primarily due to the decrease in
revenues while the decline in the operating income as a percentage of revenues
was due primarily to the additional SG&A expenses as a percentage of revenues as
described above.
NET INTEREST EXPENSE
Net interest expense for 3Q04YTD decreased to $1,358 from $2,209 for 3Q03YTD due
to reductions in the outstanding debt from $53,230 at the end of 3Q03 to $47,539
at the end of 3Q04 and the interest rate reduction of approximately 0.3% during
the period from 3Q03YTD to 3Q04YTD.
22
PROVISION FOR INCOME TAXES
The tax provision for 3Q04YTD was $20,102, an effective tax rate of 36.0%,
compared to 3Q03YTD of $25,018, an effective tax rate of 36.0%. 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
Net income for 3Q04YTD was $35,740, or 9.1% of revenues, compared to $44,477, or
9.5% of revenues for 3Q03YTD.
III. LIQUIDITY AND CAPITAL RESOURCES:
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Provided by Operating Activities for 3Q04YTD and 3Q03YTD was $46,362 and
$68,683, respectively. Reflected as a source of cash from operating activities
in 3Q04YTD are decreases in accounts receivables and unbilled accounts and other
current assets offset in part by an increase in inventories and a decrease in
accounts payable and accrued liabilities. In 3Q03YTD, decreases in accounts
receivables and unbilled accounts, inventories and other current assets were a
source of cash flow from operating activities, while a decrease in accounts
payable and accrued liabilities were a use of cash flow.
In addition to Cash Provided by Operating Activities of $46,362 in 3Q04YTD, the
Company had additional cash flow of $8,830. This was generated from $6,014 of
stock option exercises, $2,558 of positive foreign currency exchange impact on
cash, and $258 from disposals (net of additions) of capital assets. The
Company's 3Q04YTD cash flow and $4,119 of cash on hand was used for repurchases
of Company stock of $52,354, debt reduction of $2,959, dividend payments of
$2,737 and merger activity of $1,261.
As of the end of 3Q04, the Company had cash and cash equivalents of $9,924,
working capital of $118,140 and long-term debt of $46,780.
The Company believes that its cash provided by operating activities will be
sufficient to satisfy its liquidity needs for the foreseeable future.
INVESTING ACTIVITIES
The net cash impact of merger transactions and prior merger-related payments
during 3Q04YTD was $1,261. During 3Q04YTD, capital expenditures were $1,357,
while capital disposals were $1,615. Capital expenditures for Fiscal 2004 are
projected to be $2,000 and will be spent primarily on information systems,
general equipment and facility improvements.
23
FINANCING ACTIVITIES
TOTAL DEBT
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 Revolver was extended until April 4, 2005 and the Short Term Revolver was
extended until April 2, 2003 when it expired.
The Company's total debt at the end of 3Q04 of $47,539 was comprised of $46,700
under the Long Term Revolver and $839 of various other third-party, non-employee
loans. The weighted average interest rate on all indebtedness of the Company at
the end of 3Q04 and 3Q03 was approximately 1.9% and 2.2%, respectively. In
addition, at the end of 3Q04, the Company had $6,250 of letters of credit
outstanding and $67,050 available under the Long Term Revolver.
Interest on the Long Term Revolver 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 3Q04) on the Euro-dollar
rate option and from zero to 0.75% (zero at the end of 3Q04) on the prime rate
option. The Long Term Revolver provides for the payment of quarterly commitment
fees on unborrowed funds, also based on the consolidated leverage ratio. The
commitment fee percentage ranges from 0.25% to 0.375% (0.25% at the end of
3Q04). The Long Term Revolver is unsecured; however, the Company, as the
ultimate parent, guarantees all borrowings and the debt contains various
restrictive covenants.
DIVIDENDS
Beginning in the third quarter of Fiscal 2003 and in all subsequent quarters,
the Company's Board of Directors has declared quarterly cash dividends of $0.05
per share on all outstanding shares of Black Box's common stock.
The dividend declared in 3Q04 totaled $894 and was paid on January 15, 2004 to
stockholders of record at the close of business on December 31, 2003. 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.
TREASURY STOCK
The Company previously announced intentions to repurchase up to 6.5 million
shares of its Common Stock from April 1, 1999 through December 31, 2003. During
3Q04, the Company repurchased approximately 0.4 million shares for an aggregate
purchase price of $15,675 and for 3Q04YTD, repurchases totaled approximately 1.2
million shares for $47,635. Since inception of the repurchase program in April
1999 through 3Q04, the Company has repurchased in aggregate approximately 5.0
million shares for $211,183. Funding for the stock repurchases came primarily
from existing cash flow from operations. Additional repurchases of stock may
occur
24
from time to time depending upon factors such as the Company's cash flows and
general market conditions. While the Company expects to continue to repurchase
shares for the foreseeable future, there can be no assurance as to the timing or
amount of such repurchases.
FOREIGN CURRENCY EXCHANGE IMPACT
The Company has operations, clients and suppliers worldwide, thereby exposing
the 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, Mexico and Singapore are
denominated in U.S. dollars.
The Company has entered and will continue in the future, on a selective basis,
to enter into 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
and payables, which are also included in accumulated other comprehensive income
in stockholders' equity on the Consolidated Balance Sheet. At December 31, 2003,
the open foreign exchange contracts were in Euro, Pound sterling, Canadian
dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner
and Australian dollar. The total open contracts, with a notional amount of
approximately $14,679, have a fair value of $15,438 and will expire within seven
months. The open contracts have contract rates of 0.8042 to 0.9023 Euro, 0.5971
to 0.6119 Pound sterling, 1.3132 to 1.3669 Canadian dollar, 1.2529 to 1.3254
Swiss franc, 110.46 to 116.50 Japanese yen, 7.3542 to 7.9703 Swedish krona,
6.4057 to 6.4183 Danish krone, 7.0260 to 7.0749 Norwegian kroner and 1.3643 to
1.4732 Australian dollar, all per U.S. dollar.
IV. CRITICAL ACCOUNTING POLICIES:
INTRODUCTION
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.
The Company's critical accounting policies for revenue recognition, accounting
for judgments and estimates, long-lived assets and restructuring are described
in the Form 10-K for the year
25
ended March 31, 2003. There have been no significant changes to these policies
during the three subsequent quarters. In addition to those policies previously
disclosed in Form 10-K, the Company is disclosing the following policy regarding
loss contingencies.
LOSS CONTINGENCIES
The Company accrues for loss contingencies when it is determined that an
unfavorable outcome is probable and estimable.
V. NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. The Company does not believe that this statement will
have a material impact on the Company's consolidated financial statements or
results of operations.
VI. 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.
VII. 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 and other risk factors are discussed in greater detail in the
Company's most recent Annual Report on Form 10-K on file with the United States
Securities and Exchange Commission. 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. Investors should also be aware that the Company does not
provide forecasts regarding its future financial results. In addition, while the
Company does, from time to time, communicate
26
with securities analysts and stockholders, it is against the Company's practice
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, stockholders should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the Company has a
practice against issuing or confirming financial forecasts or projections issued
by others. Thus, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
27
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 will enter into forward exchange contracts on a selective basis. At
December 31, 2003, the Company had open contracts, with a notional amount of
approximately $14,679 and a fair value of approximately $15,438.
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
variable rate debt. For the three-month periods ended December 31, 2003 and
2002, an instantaneous 100 basis point increase in the interest rate would
reduce the Company's expected net income in the subsequent three months by $76
and $85, respectively, assuming the Company employed no intervention strategies.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed as of December 28, 2003, 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 our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Act"). Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports that we file or submit
under the Act is recorded, processed, summarized and reported in accordance with
the rules and forms of the Securities and Exchange Commission. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no absolute
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. However, the controls
have been designed to provide reasonable assurance of achieving the controls'
stated goals. There have been no changes in our internal control over financial
reporting during the last fiscal quarter that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting or in other factors that could significantly affect internal controls
subsequent to their evaluation.
28
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
As previously disclosed in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for
the quarter ended September 28, 2003, two arbitration awards (including interest
and costs through December 31, 2003) against the Company for approximately $1.6
million and approximately $1.5 million are being appealed. Regarding the case
involving the $1.5 million award, the parties verbally agreed to settle all
claims between them in exchange for a payment by the Company of $1.2 million.
The terms of this settlement will be set forth in a written settlement agreement
which is currently in the process of being negotiated by the parties. Based on
the facts currently available to the Company, management believes these matters
are adequately provided for, covered by insurance, without merit, or not
probable that an unfavorable outcome will result.
As previously disclosed in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for
the quarter ended September 28, 2003, the Company has been named as a defendant
in two substantially similar complaints alleging violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. These actions were consolidated in a lawsuit in the United States
District Court for the Western District of Pennsylvania in a case captioned In
Re Black Box Corporation Securities Litigation (Civil Action No. 03-CV-412). On
October 3, 2003, the plaintiffs in this action filed a Consolidated Class Action
Complaint in this matter. On November 17, 2003, the Company filed a Motion to
Dismiss the plaintiffs' complaint. Thereafter, the plaintiffs filed a brief in
opposition to the Company's Motion to Dismiss. The Company filed its response to
plaintiffs' opposition on February 9, 2004. The Company believes that the claims
are without merit and intends to defend itself vigorously.
As previously disclosed in its Current Report on Form 8-K filed on October 28,
2003 and in its quarterly report on Form 10-Q for the quarter ended September
28, 2003, the Company received a formal order of investigation issued by the
United States Securities and Exchange Commission (the "SEC"). In connection
therewith, during the quarter ended December 28, 2003, the Company and several
of its officers, directors, team members and independent auditors provided
information to the Staff of the SEC. In late January 2004, the SEC requested
information relating to fiscal 2002 from the Company's independent auditors
pursuant to an additional subpoena. The Company intends to continue to cooperate
fully with the inquiry.
29
ITEM 2(E) - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
(c) TOTAL NUMBER OF (d) MAXIMUM NUMBER (OR
(a) TOTAL SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF
NUMBER OF (b) AVERAGE PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY
SHARES (OR PRICE PAID PER PUBLICLY ANNOUNCED YET BE PURCHASED UNDER THE
UNITS) SHARE (OR UNIT) PLANS OR PROGRAMS PLANS OR PROGRAMS
PERIOD PURCHASED
===============================================================================================================
September 29, 2003 to
October 26, 2003 41,100 $43.05 41,100 826,083(1)
October 27, 2003 to
November 23, 2003 315,608 $44.06 315,608 1,510,475(2)
November 24, 2003 to
December 28, 2003 -- -- -- 1,510,475
- ---------------------------------------------------------------------------------------------------------------
Total 356,708 $43.94 356,708 1,510,475
===============================================================================================================
(1) Reflects amounts remaining from an increase of 1,000,000 shares to the
Company's existing common stock repurchase program announced on May 7, 2003.
(2) Includes an increase of 1,000,000 shares to the Company's existing common
stock repurchase program announced on November 20, 2003.
Additional repurchases of stock may occur from time to time depending upon
factors such as the Company's cash flows and general market conditions. While
the Company expects to continue to repurchase shares for the foreseeable future,
there can be no assurance as to the timing or amount of such repurchases.
30
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities and Exchange Act
of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities and Exchange Act
of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(b) of
the Securities and Exchange Act of 1934, as amended,
and 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K furnished during the quarter ended December 28,
2003
Current Report on Form 8-K for the event dated October 21, 2003
covering Item 5 thereof disclosing and filing the Company's press
release related to second quarter Fiscal 2004 financial results.
Current Report on Form 8-K for the event dated October 28, 2003
covering Item 5 thereof disclosing the formal order of investigation
by the United States Securities and Exchange Commission in connection
with an inquiry pursuant to which additional information was requested
from the Company and several of its officers, directors and team
members.
31
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
February 11, 2004 By: /s/ Michael McAndrew
------------------------------------
Michael McAndrew
Chief Financial Officer, Treasurer
and Principal Accounting Officer
32
EXHIBIT INDEX
Exhibit
No.
- -------
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities and Exchange Act of 1934, as
amended, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities and Exchange Act of 1934, as
amended, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) of the Securities
and Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
33