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Fiscal 2005 First 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 JULY 3, 2004
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
incorporation or organization) Identification No.)
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 August 10, 2004 was 17,550,253 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(UNAUDITED)
JULY 3, MARCH 31,
2004 2004
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 9,313 $ 9,306
Accounts receivable, net of allowance for doubtful accounts of $10,293 and $10,426,
respectively 93,527 97,203
Inventories, net of allowance for reserves of $4,661 and $4,840, respectively 41,491 40,162
Costs and estimated earnings in excess of billings on uncompleted contracts 19,571 13,763
Deferred tax asset 4,086 4,131
Other current assets 11,169 9,610
--------- ---------
Total current assets 179,157 174,175
Property, plant and equipment, net 28,102 29,269
Goodwill, net 380,922 380,769
Intangibles, net 29,501 29,546
Other assets 2,484 2,530
--------- ---------
Total assets $ 620,166 $ 616,289
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 307 $ 1,061
Accounts payable 30,951 30,709
Billings in excess of costs and estimated earnings on uncompleted contracts 7,155 5,665
Accrued compensation and benefits 6,654 6,836
Other accrued expenses 14,602 16,778
Accrued income taxes 2,116 3,695
--------- ---------
Total current liabilities 61,785 64,744
Long-term debt 48,089 35,177
Deferred taxes 12,469 11,050
Other liabilities 77 414
Stockholders' equity:
Preferred stock authorized 5,000,000; par value $1.00; none issued
and outstanding -- --
Common stock authorized 100,000,000; par value $0.001; issued 23,696,731 and 23,393,678 shares,
respectively 24 23
Additional paid-in capital 333,004 324,219
Retained earnings 411,806 402,675
Treasury stock, at cost, 6,086,498 and 5,534,348 shares, respectively (264,741) (239,885)
Accumulated other comprehensive income 17,653 17,872
--------- ---------
Total stockholders' equity 497,746 504,904
--------- ---------
Total liabilities and stockholders' equity $ 620,166 $ 616,289
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
-----------------------------
JULY 3, 2004 JUNE 29, 2003
------------ -------------
Revenues $ 124,355 $ 128,347
Cost of sales 72,475 74,900
--------- ---------
Gross profit 51,880 53,447
Selling, general and administrative expenses 35,897 34,985
Intangibles amortization 59 89
--------- ---------
Operating income 15,924 18,373
Interest expense, net 409 420
Other expense/(income), net 7 (9)
--------- ---------
Income before income taxes 15,508 17,962
Provision for income taxes 5,505 6,466
--------- ---------
Net income $ 10,003 $ 11,496
========= =========
Basic earnings per common share $ 0.56 $ 0.62
Diluted earnings per common share $ 0.54 $ 0.60
--------- ---------
Weighted average common shares 17,771 18,617
Weighted average common and common equivalent shares 18,476 19,062
--------- ---------
Dividends declared per common share $ 0.05 $ 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, 2003 0 $ 0 22,594,034 $ 23 $ 295,271 $359,037 $(163,547) $ 3,638 $ 494,422
Comprehensive income:
Net income 47,243 47,243
Foreign currency translation
adjustment 14,013 14,013
Unrealized gains on derivatives
designated and qualified as
cash flow hedges, net of tax 454 454
Reclassification of
unrealized gains on expired
derivatives (233) (233)
---------
Comprehensive income 61,477
Dividends declared (3,605) (3,605)
Purchase of treasury stock (76,338) (76,338)
Exercise of options, net of tax 799,644 22,159 22,159
Tax benefit from exercised options 6,789 6,789
- ------- ---------- ------ ---------- -------- --------- ------------- ---------
BALANCE AT MARCH 31, 2004 0 $ 0 23,393,678 $ 23 $ 324,219 $402,675 $(239,885) $ 17,872 $ 504,904
Comprehensive income:
Net income 10,003 10,003
Foreign currency translation
adjustment (54) (54)
Unrealized gains on derivatives
designated and qualified as
cash flow hedges, net of tax 289 289
Reclassification of
unrealized gains on expired
derivatives (454) (454)
---------
Comprehensive income 9,784
Dividends declared (872) (872)
Purchase of treasury stock (24,856) (24,856)
Exercise of options, net of tax 303,053 1 5,640 5,641
Tax benefit from exercised options 3,145 3,145
- ------- ---------- ------ ---------- -------- --------- ------------- ---------
BALANCE AT JULY 3, 2004
(UNAUDITED) 0 $ 0 23,696,731 $ 24 $ 333,004 $411,806 $(264,741) $ 17,653 $ 497,746
= ======= ========== ====== ========== ======== ========= ============= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
THREE MONTHS ENDED
---------------------------
JULY 3, 2004 JUNE 29, 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,003 $ 11,496
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,486 1,764
Deferred tax provision/(benefit) 1,464
Changes in working capital items:
Accounts receivable, net 3,463 3,901
Inventories, net (1,399) (389)
Other current assets (4,169) 4,780
Accounts payable and accrued liabilities (1,614) (7,366)
-------- --------
Cash provided by operating activities 9,234 14,186
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (741) (285)
Capital asset disposals 444 310
Merger transactions and prior merger-related payments, net of
cash acquired of $0 and $0, respectively (263) (784)
-------- --------
Cash used in investing activities (560) (759)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of borrowings (28,759) (91,763)
Proceeds from borrowings 40,550 91,850
Proceeds from the exercise of options 5,640 203
Payment of dividends (903) (904)
Purchase of treasury stock (24,856) (19,278)
-------- --------
Cash used in financing activities (8,328) (19,892)
-------- --------
Foreign currency exchange impact on cash (339) 1,649
-------- --------
Increase/(decrease) in cash and cash equivalents 7 (4,816)
Cash and cash equivalents at the beginning of the year 9,306 14,043
-------- --------
Cash and cash equivalents at end of period $ 9,313 $ 9,227
======== ========
SUPPLEMENTAL CASH FLOW:
Cash paid for interest $ 403 $ 362
Cash paid for income taxes 5,620 5,083
======== ========
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, 2004. The consolidated Balance Sheet
as of March 31, 2004 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 2005, end on the Saturday nearest each calendar
quarter end. In Fiscal 2004, the fiscal quarters ended on the Sunday nearest
each calendar quarter end. The actual ending dates for the periods presented in
these Notes as June 30, 2004 and 2003 were July 3, 2004 and June 29, 2003,
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 JUNE 30,
---------------------------
2004 2003
-------- ---------
Net income As reported $ 10,003 $ 11,496
Plus: Compensation expense -- --
Less: Stock-based employee compensation under
fair-value based method for all awards, net
of related tax effects (2,329) (3,038)
-------- ---------
Pro forma $ 7,674 $ 8,458
-------- ---------
Basic earnings per As reported $ 0.56 $ 0.62
share Pro forma $ 0.43 $ 0.45
-------- ---------
Diluted earnings per As reported $ 0.54 $ 0.60
share Pro forma $ 0.42 $ 0.44
======== =========
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:
JUNE 30,
-------------
2004 2003
---- ----
Expected life in years 4.9 4.7
Risk free interest rate 3.26% 3.92%
Expected volatility rate 53% 53%
Dividend yield 0.2% 0.0%
NOTE 4: INVENTORIES
Inventories are stated at the lower of cost or market. The first-in first-out
average cost method is used to value the majority of the inventory. However,
some locations of the Company use other methods, including first-in first-out
and actual current costs. The net inventory balances are as follows:
JUNE 30, 2004 MARCH 31, 2004
------------- --------------
Raw materials $ 647 $ 649
Finished goods 45,505 44,353
-------- --------
Subtotal 46,152 45,002
Excess and obsolete inventory reserves (4,661) (4,840)
-------- --------
Inventory, net $ 41,491 $ 40,162
======== ========
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, primarily trade receivables and
loans. The Company has adopted SFAS No. 133, as amended by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities," effective April
1, 2001. All of the contracts have been designated as cash flow hedges, which
seek to hedge anticipated cash flows from cross-border intercompany sales of
products and services and intercompany loan activity. 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. The Company recognized approximately $1,100 in gains on
matured contracts during the quarter ended June 30, 2004. While, during the
quarter ended June 30, 2004, the Company did not terminate any contracts or
encounter any transactions that became unlikely to occur, any gains or losses in
these instances would be recorded as a component of operating income. Although
the Company determined that no hedge ineffectiveness occurred during the
quarter, such gains or losses would also be recorded as a component of operating
income.
The Company's policy regarding risk management of financial derivative
instruments is to seek to match cash remittances for its foreign
currency-denominated trade receivables and loans with a forward exchange
contract, with no resulting gain or loss.
At June 30, 2004, the open foreign exchange contracts were in Australian dollar,
Canadian dollar, Danish krone, Euro, Japanese yen, Norwegian kroner, Pound
sterling, Swedish krona and Swiss franc. The total open contracts, with a
notional amount of approximately $35,843, have a fair value of $36,310 and will
expire within nine months. The open contracts have contract rates of 1.443 to
1.466 Australian dollar, 1.3299 to 1.369 Canadian dollar, 5.9275 to 6.1435
Danish krone, 0.8119 to 0.8333 Euro, 105.5 to 114.55 Japanese yen, 6.7377 to
6.9207 Norwegian kroner, 0.5484 to 0.5585 Pound sterling, 7.4913 to 7.5933
Swedish krona and 1.2292 to 1.2663 Swiss franc, all per U.S. dollar.
NOTE 6: COMPREHENSIVE INCOME
Comprehensive income consisted of the following:
8
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
-------- --------
Net income $ 10,003 $ 11,496
Other comprehensive income:
Foreign currency translation adjustment (54) 4,476
Unrealized (losses)/gains on derivatives designated and qualified as
cash flow hedges, net of reclassification of unrealized gains on
expired derivatives (165) 600
-------- --------
Comprehensive income $ 9,784 $ 16,572
======== ========
The components of accumulated other comprehensive income consisted of the
following:
JUNE 30, 2004 MARCH 31, 2004
------------- --------------
Foreign currency translation adjustment $17,364 $17,418
Unrealized gains on derivatives designated and qualified as cash flow hedges,
net of reclassifications of unrealized gains on expired derivatives, net of
$159 and $255 of tax, respectively 289 454
------- -------
Total accumulated other comprehensive income $17,653 $17,872
======= =======
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 under the treasury stock method
based on the weighted average number of common shares issued and outstanding.
The following table details this calculation:
9
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
(Shares in thousands) 2004 2003
------- -------
Net income for earnings per share computation $10,003 $11,496
------- -------
Basic earnings per common share:
Weighted average common shares 17,771 18,617
Basic earnings per common share $ 0.56 $ 0.62
------- -------
Diluted earnings per common share:
Weighted average common shares 17,771 18,617
Shares issuable from assumed conversion of stock options and
contingently issuable shares from acquisitions (net of tax
savings) 705 445
------- -------
Weighted average common and common equivalent shares 18,476 19,062
Diluted earnings per common share $ 0.54 $ 0.60
There is no impact to the weighted average share calculations during any period
where the exercise price of a stock option is greater than the average market
price during such time period. Accordingly, there are, in addition to the
weighted average shares presented above, 19,863 shares and 2,496,000 shares
issuable upon the exercise of outstanding stock options for the three months
ended June 30, 2004 and 2003, respectively.
NOTE 8: PROVISION FOR WARRANTIES
The Company provides for various product warranties. In accordance with FASB
Interpretation No. 45, the changes in the provision for warranties are as
follows:
2004
-----
Balance as of March 31, 2004 $ 184
Additions to provision 40
Charges against provision (40)
-----
Balance as of June 30, 2004 $ 184
=====
NOTE 9: 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, on October 1
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. Most recently, as of October 1,
2003, the Company conducted its annual impairment analysis and
10
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
no impairment existed. During the third quarter of each future fiscal year, the
Company will evaluate its non-amortizable 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, 2004, 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 June 30, 2004 and 2003:
GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION
--------------------- ------------------------
2004 2003 2004 2003
------ ------ ------ ------
Non-Compete Agreements $2,250 $2,117 $ 488 $ 344
Acquired Backlog 333 314 333 314
------ ------ ------ ------
Total $2,583 $2,431 $ 821 $ 658
====== ====== ====== ======
The non-compete agreements and acquired backlog are amortized over their
estimated useful lives of 10 years and 1 year, respectively. As of March 31,
2004, the acquired backlog intangibles were fully amortized. Amortization
expense for the non-compete agreements intangibles for the three months ended
June 30, 2004 was $59. Amortization expense for the non-compete agreements and
acquired backlog intangibles for the three months ended June 30, 2003 was $55
and $34, respectively.
The estimated amortization expense for each of the five fiscal years subsequent
to June 30, 2004 for the non-compete agreements intangibles is 2005 - $177; 2006
- - $236; 2007 - $236; 2008 - $236; 2009 - $236.
The changes in the carrying amount of goodwill, net of amortization, by
reporting segment for the three months ended June 30, 2004, are as follows:
NORTH
AMERICA EUROPE ALL OTHER TOTAL
--------- --------- --------- ---------
Balance as of March 31, 2004 $ 311,440 $ 67,358 $ 1,971 $ 380,769
Goodwill during the period related to:
Currency translation 95 96 (111) 80
Actual earnout payments and other related
payments 81 -- 82 163
Other -- (90) -- (90)
--------- --------- --------- ---------
Balance as of June 30, 2004 $ 311,616 $ 67,367 $ 1,942 $ 380,922
========= ========= ========= =========
The changes in total intangible assets, net of accumulated amortization, from
March 31, 2004 to June 30, 2004 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, 2004 $ 27,739 $ 1,807 $ 380,769 $ 410,315
Change in net intangible assets during the period
related to:
Amortization expense -- (59) -- (59)
Currency translation -- 14 80 94
Actual earnout payments -- -- 163 163
Other -- -- (90) (90)
--------- --------- --------- ---------
Balance as of June 30, 2004 $ 27,739 $ 1,762 $ 380,922 $ 410,423
========= ========= ========= =========
As of June 30, 2004, certain merger agreements provide for contingent payments
of up to $1,416. Upon meeting future operating performance goals, goodwill will
be adjusted for the amount of the contingent payments.
NOTE 10: TREASURY STOCK
The Company, from April 1, 1999 through June 30, 2004, announced intentions to
repurchase up to 6.5 million shares of its Common Stock. During the first
quarter of Fiscal 2005, the Company repurchased approximately 552,000 shares for
an aggregate purchase price of approximately $24,856. Since inception of the
repurchase program in April 1999 through June 2004, the Company has repurchased
in aggregate approximately 6.1 million shares for approximately $265,000.
Funding for the stock repurchases came primarily from cash flow from operations.
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 11: INDEBTEDNESS
Long-term debt is as follows:
12
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
JUNE 30, 2004 MARCH 31, 2004
------------- --------------
Revolving credit agreement $ 47,950 $ 35,000
Other debt 446 1,238
-------- --------
Total debt 48,396 36,238
Less: current portion (307) (1,061)
-------- --------
Long-term debt $ 48,089 $ 35,177
======== ========
On April 4, 2000, Black Box Corporation of Pennsylvania, a domestic subsidiary
of the Company, entered into a $120,000 Revolving 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.
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 continued
to be a Participant in the credit agreement. On June 20, 2003, the credit
agreement was amended to allow Citizens Bank to provide to the Company a swing
line facility under the agreement. The swing line facility enables Citizens Bank
to lend up to $5,000 at the bank's LIBOR rate plus 1.00% rather than an interest
rate based upon the prime rate. On June 30, 2004, the Company entered into a
$120,000 Amended and Restated Credit Agreement with Citizens Bank of
Pennsylvania, as agent, (the "Credit Agreement") thereby terminating the
previous Long Term Revolver. The terms of the Credit Agreement are substantially
similar to the previously-existing Long Term Revolver. The Credit Agreement will
expire on August 31, 2008.
During the quarter ended June 30, 2004, the maximum amount and weighted average
balance outstanding under the Long Term Revolver and, subsequently, the Credit
Agreement was $58,600 and $42,511, respectively. At June 30, 2004, the Company
had $8,909 of letters of credit outstanding and $63,141 available under the Long
Term Revolver and, subsequently, the Credit Agreement. At June 30, 2004, the
Company is in compliance with its debt covenants.
Interest on the Syndicated Debt or borrowings under the Credit Agreement is
variable based on the Company's option of selecting the bank's LIBOR rate plus
an applicable margin or the prime rate plus an applicable margin. The applicable
margin is adjusted each quarter based on the Company's consolidated leverage
ratio as defined in the agreement. The weighted average interest rate on all
indebtedness of the Company at June 30, 2004 was approximately 1.8%.
NOTE 12: 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
costs.
13
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
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 costs.
The components of the restructuring accruals at June 30, 2004 are as follows:
ACCRUED CASH ACCRUED
MARCH 31, 2004 EXPENDITURES JUNE 30, 2004
-------------- ------------ -------------
Team Member Severance $352 $ 58 $294
Facility Closures 241 59 182
---- ---- ----
Total $593 $117 $476
==== ==== ====
NOTE 13: 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. This is consistent with how the way the
Company is organized and how the business is managed on a day-to-day basis. The
primary reportable segments are comprised of North America, Europe and All
Other. Consistent with SFAS 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, 2004. 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:
14
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------
NORTH AMERICA 2004 2003
- ---------------- ------- --------
Revenues $ 79,532 $ 86,417
Operating income 7,910 11,889
Depreciation 1,016 1,179
Amortization 21 12
Segment assets 560,372 576,098
THREE MONTHS ENDED JUNE 30,
---------------------------
EUROPE 2004 2003
- ---------------- ------- --------
Revenues $ 35,560 $ 33,598
Operating income 5,652 4,602
Depreciation 339 418
Amortization 36 75
Segment assets 131,609 122,206
THREE MONTHS ENDED JUNE 30,
---------------------------
ALL OTHER 2004 2003
- ---------------- ------- -------
Revenues $ 9,263 $ 8,332
Operating income 2,362 1,882
Depreciation 72 78
Amortization 2 2
Segment assets 15,821 15,851
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 JUNE 30, 2004 MARCH 31, 2004
- ------------------------------------ ------------- --------------
Assets for North America, Europe and
All Other segments $ 707,802 $ 704,522
Corporate eliminations (87,636) (88,233)
--------- ---------
Total consolidated assets $ 620,166 $ 616,289
========= =========
15
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Management is also presented with and reviews revenues by service type. The
following information is presented:
THREE MONTHS ENDED JUNE 30,
---------------------------
REVENUES 2004 2003
- ---------------- -------- ---------
Hotline Services $ 57,852 $ 55,976
Data Services 48,189 54,600
Voice Services 18,314 17,771
-------- --------
Total revenues $124,355 $128,347
======== ========
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company is involved in, or has pending, various legal proceedings, claims,
suits and complaints arising out of the normal course of business.
In addition, as previously disclosed in the Company's annual report on Form 10-K
for the fiscal year ended March 31, 2004, the Company had 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. The Company subsequently
filed a Motion to Dismiss plaintiffs' consolidated complaint. During the
pendency of this motion, the parties entered into a Stipulation and Agreement of
Settlement. The preliminary settlement provides for the payment of $2 million
into a settlement fund, an amount within the limits of the Company's directors'
and officers' policy, most of which will be covered under such policy. This
payment is in exchange for a full and complete release of any and all claims
against defendants. The settlement is subject to (1) plaintiffs' counsel
determining, through limited confirmatory discovery, that the settlement is
fair, reasonable and adequate, (2) the notice and hearing procedures that
pertain to federal court class actions and (3) final approval of the court.
Based on the facts currently available to the Company, management believes its
legal matters are adequately provided for, covered by insurance, without merit,
or not probable that an unfavorable outcome will result.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in Thousands, unless otherwise indicated)
Black Box offers one-source network infrastructure services for: data networks
(Data Services), including structured cabling for wired and wireless systems;
voice systems (Voice Services), including new and upgraded telephony systems;
and 24/7/365 hotline technical support (Hotline Services) for more than 90,000
network infrastructure products that it sells through its catalog, Internet Web
site and on site service offices.
The Company manages its business based on geographic segments: North America,
Europe and All Other. In addition to geographic segment information, certain
revenue and gross profit information by service type is also provided herein for
purposes of further analysis.
The tables below should be read in conjunction with the following discussion.
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
2004 2003
(1Q05) (1Q04)
--------------------------------------------
% of total % of total
revenues revenues
---------- ----------
BY GEOGRAPHY
Revenues:
North America $ 79,532 64% $ 86,417 67%
Europe 35,560 29% 33,598 26%
All Other 9,263 7% 8,332 7%
-------- --- -------- ---
Total $124,355 100% $128,347 100%
-------- --- -------- ---
Operating Income:
North America $ 7,910 $ 11,889
% of North America revenues 9.9% 13.8%
Europe $ 5,652 $ 4,602
% of Europe revenues 15.9% 13.7%
All Other $ 2,362 $ 1,882
% of All Other revenues 25.5% 22.6%
-------- --------
Total 15,924 $ 18,373
% of Total revenues 12.8% 14.3%
======== ========
17
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
2004 2003
(1Q05) (1Q04)
--------------------------------------------
% of total % of total
revenues revenues
---------- ----------
BY SERVICE TYPE
Revenues:
Hotline Services $ 57,852 46% $ 55,976 44%
Data Services 48,189 39% 54,600 43%
Voice Services 18,314 15% 17,771 13%
-------- --- -------- ---
Total $124,355 100% $128,347 100%
-------- --- -------- ---
Gross Profit:
Hotline Services $ 30,978 $ 29,109
% of Hotline Services
revenues 53.5% 52.0%
Data Services $ 14,496 $ 18,134
% of Data Services revenues 30.1% 33.2%
Voice Services $ 6,406 $ 6,204
% of Voice Services revenues 35.0% 34.9%
-------- --------
Total $ 51,880 $ 53,447
% of Total revenues 41.7% 41.6%
======== ========
I. FIRST QUARTER FISCAL 2005 (1Q05) COMPARED TO FIRST QUARTER FISCAL 2004
(1Q04):
TOTAL REVENUES
Total revenues for 1Q05 were $124,355, a decrease of 3% compared to 1Q04 total
revenues of $128,347. If exchange rates relative to the U.S. dollar had remained
constant from the first quarter last year, 1Q05 total revenues would have been
lower by an additional $3,028, for a total decrease of 5%.
REVENUES BY GEOGRAPHY
NORTH AMERICA REVENUES
Revenues in North America were $79,532 for 1Q05, a decrease of 8% compared to
$86,417 for 1Q04. The North America revenue decline was generally due to weak
general economic conditions that affected client demand and the impact of one
specific large client delaying for 90 days previously-scheduled IT projects of
approximately $3,000. If exchange rates relative to the U.S. dollar had remained
unchanged from 1Q04, revenues would have been lower by an additional $32, for a
total decrease of 8%.
EUROPE REVENUES
Revenues in Europe were $35,560 for 1Q05, an increase of 6% compared to $33,598
for 1Q04. The Europe revenue increase was primarily due to $2,460 of positive
impact of exchange rates
18
relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had
remained unchanged from 1Q04, Europe revenues would have decreased 1%.
ALL OTHER REVENUES
Revenues for All Other were $9,263 for 1Q05, an increase of 11% compared to
$8,332 for 1Q04. The revenue increase in these regions was due to $537 of
positive impact of exchange rates relative to the U.S. dollar and an increase in
customer demand for services. If exchange rates relative to the U.S. dollar had
remained unchanged from 1Q04, All Other revenues would have increased 5%.
REVENUES BY SERVICE TYPE
HOTLINE SERVICES
Revenues from hotline services for 1Q05 were $57,852, an increase of 3% compared
to $55,976 for 1Q04. The Company believes the increase in hotline services
revenues was due to $1,872 of positive impact of exchange rates relative to the
U.S. dollar for its international hotline services. If exchange rates relative
to the U.S. dollar had remained unchanged from 1Q04, hotline services revenue
would have been comparable to 1Q04.
DATA SERVICES
Revenues from data services were $48,189 for 1Q05, a decrease of 12% compared to
$54,600 for 1Q04. The Company believes the overall decline in data services
revenue was driven by weak general economic conditions and the impact of one
specific large client delaying for 90 days previously scheduled IT projects of
approximately $3,000, offset in part by $1,156 of positive impact of exchange
rates relative to the U.S. dollar for its international data services. If
exchange rates relative to the U.S. dollar had remained unchanged from 1Q04,
data services revenue would have decreased 14%.
VOICE SERVICES
Revenues from voice services were $18,314 for 1Q05, an increase of 3% compared
to $17,771 for 1Q04. The Company believes the overall increase in voice services
revenue was driven by client demand. There was no exchange rate impact on voice
services revenue as all of the Company's voice services revenue is denominated
in U.S. dollars.
GROSS PROFIT
Gross profit dollars for 1Q05 decreased to $51,880 from $53,447 for 1Q04. The
decrease in gross profit dollars over prior year was due to the decline in
revenues. Gross profit as a percent of revenues for 1Q05 were 41.7% of revenues,
comparable to 41.6% of revenues for 1Q04.
Gross profit dollars for hotline services were $30,978, or 53.5% of revenues,
for 1Q05 compared to $29,109, or 52.0% of revenues for 1Q04. Gross profit
dollars for data services were $14,496, or 30.1% of revenues, for 1Q05 compared
to $18,134, or 33.2 % of revenues for 1Q04. Gross profit dollars for voice
services were $6,406, or 35.0% of revenues, for 1Q05 compared to $6,204, or
34.9% of revenues for 1Q04.
19
SG&A EXPENSES
Selling, general and administrative ("SG&A") expenses for 1Q05 were $35,897, an
increase of $912 over SG&A expenses of $34,985 for 1Q04. SG&A expenses as a
percent of revenues for 1Q05 were 28.9% of revenues compared to 27.3% of
revenues for 1Q04 primarily due to additional professional services incurred
relating to accounting and auditing activities.
INTANGIBLES AMORTIZATION
Intangibles amortization for 1Q05 decreased to $59 from $89 for 1Q04 due to the
acquired backlog becoming fully amortized in 1Q04.
OPERATING INCOME
Operating income for 1Q05 was $15,924, or 12.8% of revenues, compared to
$18,373, or 14.3% of revenues, for 1Q04.
The decrease in operating income dollars is primarily due to the decrease in
revenues and the increase in SG&A expenses while the decline in operating income
as a percent of revenues was due primarily to increase in SG&A expenses.
NET INTEREST EXPENSE
Net interest expense for 1Q05 decreased to $409 from $420 for 1Q04 due to the
reduction in the weighted average outstanding debt from approximately $52,900
during 1Q04 to approximately $42,500 during 1Q05 and the weighted average
interest rate reduction of approximately 0.4% during the period from 1Q04 to
1Q05, offset in part by an increase in related bank fees.
PROVISION FOR INCOME TAXES
The tax provision for 1Q05 was $5,505, an effective tax rate of 35.5%, compared
to 1Q04 of $6,466, an effective tax rate of 36.0%. The tax rate for 1Q05 was
lower than 1Q04 due to the Company's reassessment during the fourth quarter of
Fiscal 2004 of the annual effective rate to reflect changes in the overall mix
of taxable income among worldwide offices with differing tax rates.
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. The
Company anticipates that its deferred tax asset benefit is realizable.
NET INCOME
Net income for 1Q05 was $10,003, or 8.0% of revenues, compared to $11,496, or
9.0% of revenues, for 1Q04. The decrease in net income dollars is primarily due
to the year over year decline in revenues and the increase in SG&A expenses. The
decrease in net income percentage was due primarily to the increase in SG&A
costs as a percent of revenues.
20
II. LIQUIDITY AND CAPITAL RESOURCES:
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Provided by Operating Activities for 1Q05 and 1Q04 was $9,234 and $14,186,
respectively. Reflected as a use of cash from operating activities in 1Q05 are
increases in unbilled accounts, inventories and other current assets and a
decrease in accounts payable and accrued liabilities offset in part by decreases
in accounts receivables. In 1Q04, decreases in accounts receivables, unbilled
accounts and other current assets were a source of cash flow from operating
activities, while an increase in inventories and decreases in accounts payable
and accrued liabilities were a use of cash flow.
As of the end of 1Q05, the Company had cash and cash equivalents of $9,313,
working capital of $117,372 and long-term debt of $48,089.
The Company anticipates that approximately $2,000 to $3,000 will be incurred
during Fiscal 2005 for costs related to the implementation, documentation and
testing requirements of Section 404, "Management Assessment of Internal
Controls," of the Sarbanes-Oxley Act of 2002.
The Company believes that its cash provided by operating activities and
availability under its credit facility will be sufficient to fund the Company's
working capital requirements, capital expenditures, dividend program, potential
stock repurchases, potential future acquisitions or strategic investments and
other cash needs for the next 12 months.
INVESTING ACTIVITIES
The net cash impact of merger transactions and prior merger-related payments
during 1Q05 and 1Q04 were $263 and $784, respectively. 1Q05 capital expenditures
were $741 while capital disposals were $444 and 1Q04 capital expenditures were
$285 while capital disposals were $310. Capital expenditures for Fiscal 2005 are
projected to be $5,000 to $7,000 and will be spent primarily on information
systems, general equipment and facility improvements.
FINANCING ACTIVITIES
TOTAL DEBT
On April 4, 2000, Black Box Corporation of Pennsylvania, 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.
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. 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 continued
to be a Participant in the credit agreement. On June 20, 2003, the credit
agreement was amended to allow Citizens Bank to provide to the Company a swing
line facility under the agreement. The swing line facility enables Citizens Bank
to lend up to $5,000 at the bank's LIBOR rate plus 1.00% rather than an interest
rate based upon the prime rate. On June 30, 2004, the Company entered into a
$120,000 Amended and Restated Credit Agreement with Citizens Bank of
Pennsylvania, as agent, (the "Credit Agreement") thereby terminating the
previous Long Term
21
Revolver. The terms of the Credit Agreement are substantially similar to the
previously-existing Long Term Revolver. The Credit Agreement will expire on
August 31, 2008.
The Company's total debt at the end of 1Q05 of $48,396 was comprised of $47,950
under the Long Term Revolver and, subsequently, the Credit Agreement and $446 of
various other third party loans. The weighted average interest rate on all
indebtedness of the Company at the end of 1Q05 and 1Q04 was approximately 1.8%
and 2.2%, respectively. In addition, at the end of 1Q05, the Company had $8,909
of letters of credit outstanding and $63,141 available under the Long Term
Revolver and, subsequently, the Credit Agreement.
Interest on the Long Term Revolver and, subsequently, the Credit Agreement is
variable based on the Company's option of selecting the bank's LIBOR rate plus
an applicable margin or the prime rate plus an applicable margin. The majority
of the Company's borrowings are under the LIBOR 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
1Q05) on the LIBOR rate option and from zero to 0.75% (zero at the end of 1Q05)
on the prime rate option. The Long Term Revolver and, subsequently, the Credit
Agreement provide 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 1Q05). The Long Term
Revolver and, subsequently, the Credit Agreement are unsecured 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 declared quarterly cash dividends of $0.05 per
share on all outstanding shares of Common Stock. Beginning with its August 2004
dividend declaration, the Company declared an increase to its current annual
dividend payment rate from $0.20 to $0.24 so as to provide an additional return
on investment to its stockholders.
The dividend declared in 1Q05 totaled $872 and was paid on July 15, 2004 to
stockholders of record at the close of business on June 30, 2004. The dividend
declared in 2Q05 will be paid on October 15, 2004 to stockholders of record at
the close of business on September 30, 2004. 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, from April 1, 1999 through June 30, 2004, announced intentions to
repurchase up to 6.5 million shares of its Common Stock. During 1Q05, the
Company repurchased approximately 552,000 shares for an aggregate purchase price
of approximately $24,856. Since inception of the repurchase program in April
1999 through 1Q05, the Company has repurchased in aggregate approximately 6.1
million shares for approximately $265 million. Funding for the stock repurchases
came primarily from existing cash flow from operations. Additional repurchases
of stock may occur from time to time depending upon factors such as the
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.
22
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, 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,
which are also included in accumulated other comprehensive income in
stockholders' equity on the Consolidated Balance Sheet. Gains and losses
realized on contracts at maturity and any gain or loss on the satisfaction of
intercompany amounts is recorded as a component of operating income.
At June 30, 2004, the open foreign exchange contracts were in Australian dollar,
Canadian dollar, Danish krone, Euro, Japanese yen, Norwegian kroner, Pound
sterling, Swedish krona and Swiss franc. The total open contracts, with a
notional amount of approximately $35,843, have a fair value of $36,310 and will
expire within nine months. The open contracts have contract rates of 1.443 to
1.466 Australian dollar, 1.3299 to 1.369 Canadian dollar, 5.9275 to 6.1435
Danish krone, 0.8119 to 0.8333 Euro, 105.5 to 114.55 Japanese yen, 6.7377 to
6.9207 Norwegian kroner, 0.5484 to 0.5585 Pound sterling, 7.4913 to 7.5933
Swedish krona and 1.2292 to 1.2663 Swiss franc, all per U.S. dollar.
III. 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.
The Company's critical accounting policies are described in the Form 10-K for
the year ended March 31, 2004. There have been no significant changes to these
policies during the subsequent quarter.
23
IV. 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.
V. FORWARD LOOKING STATEMENTS:
When included in this Quarterly Report on Form 10-Q or in documents incorporated
herein by reference, the words "expects," "intends," "anticipates," "believes,"
"estimates," and analogous expressions are intended to identify forward-looking
statements. Such statements are inherently subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, competition, changes in foreign, political and economic
conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid
changes in technologies, client preferences, the ability of the Company to
identify, acquire and operate additional technical service companies, 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.
In addition, while the Company does, from time to time, communicate 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.
24
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 June
30, 2004, the Company had open contracts, with a notional amount of
approximately $35,843 and a fair value of approximately $36,310. A discussion of
accounting for financial derivatives is included in Note 5 to the consolidated
financial statements.
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 June 30, 2004 and 2003, an
instantaneous 100 basis point increase in the interest rate would reduce the
Company's expected net income in the subsequent three months by $78 and $81,
respectively, assuming the Company employed no intervention strategies.
The Company does not hold or issue any other financial derivative instruments
nor does it engage in speculative trading of financial derivatives.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed, under the supervision and with the participation of
Company management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's 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, the Company's management, including the CEO and CFO, has
concluded that, as of July 3, 2004, except for the matters reported by Ernst &
Young LLP ("E&Y"), the Company's independent accountants, to management and the
audit committee of the Company's board of directors as discussed in the next
paragraph, the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports that the Company
files or submits under the Act is recorded, processed, summarized and reported
in accordance with the rules and forms of the Securities and Exchange
Commission. In the first fiscal quarter ending July 3, 2004, there has been no
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting, except for certain matters set forth in the
next to last paragraph of this Item 4.
As set forth in Item 8 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2004, E&Y issued an unqualified opinion with respect
to the financial statements for the fiscal year ended March 31, 2004. However,
in connection with its fiscal year end audit procedures, E&Y reported to
management and to the audit committee that the combination of identified
reportable conditions under standards
25
established by the American Institute of Certified Public Accountants, internal
control deficiencies at the Company relating primarily to the internal control
environment, the risk assessment process and the monitoring process that
assesses the quality of the Company's internal control performance, which have
been separately reported to the audit committee, and year-end audit adjustments
constitute a material weakness in the Company's internal control over financial
reporting. E&Y has advised the Company, however, that none of these conditions
or concerns individually constitutes a material weakness.
Management and the audit committee believe that neither the matters reflected in
the reportable conditions nor the other deficiencies involving internal control,
individually or in the aggregate, had a material effect on the financial
statements of the Company for the fiscal quarter ended July 3, 2004.
The matters involving reportable conditions and other internal control
deficiencies have been discussed in detail among management, the audit committee
and E&Y. Management is evaluating the specific reportable conditions and other
internal control deficiencies identified by E&Y and is developing, under the
direction of the audit committee, measures to enhance internal control systems
and procedures. The Company is taking actions to permit it to comply timely with
Section 404 of the Sarbanes-Oxley Act ("SOX") in respect of its internal control
over financial reporting for fiscal year 2005, including the engagement of
another independent accounting firm and a Section 404 compliance consulting firm
to assist it with respect to Section 404 compliance measures, has added and
plans to add additional accounting resources, has established the position of
Corporate Controller and has filled that position with an internal promotion of
a qualified candidate, in the process of establishing an internal audit function
reporting to the audit committee and will take such other remedial measures that
may be recommended by the audit committee. In addition to increased oversight by
the audit committee, the board of directors has appointed a non-executive
chairman of the board, as previously disclosed, and an individual who has
significant public accounting experience has been elected as a director of the
Company.
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
Company's disclosure controls have been designed to provide reasonable assurance
of achieving the controls' stated goals.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in, or has pending, various legal proceedings, claims,
suits and complaints arising out of the normal course of business.
In addition, as previously disclosed in the Company's annual report on Form 10-K
for the fiscal year ended March 31, 2004, the Company had 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. The Company subsequently
filed a Motion to Dismiss plaintiffs' consolidated complaint. During the
pendency of this motion, the parties entered into a Stipulation and Agreement of
Settlement. The preliminary settlement provides for the payment of $2 million
into a settlement fund, an amount within the limits of the Company's directors'
and officers' policy, most of which will be covered under such policy. This
payment is in exchange for a full and complete release of any and all claims
against defendants. The settlement is subject to (1) plaintiffs' counsel
determining, through limited confirmatory discovery, that the settlement is
fair, reasonable and adequate, (2) the notice and hearing procedures that
pertain to federal court class actions and (3) final approval of the court.
Based on the facts currently available to the Company, management believes its
legal matters are adequately provided for, covered by insurance, without merit,
or not probable that an unfavorable outcome will result.
27
ITEM 2(e). PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
(c) TOTAL NUMBER (d) MAXIMUM
OF SHARES NUMBER OF SHARES
(a) TOTAL PURCHASED AS PART THAT MAY YET BE
NUMBER OF (b) AVERAGE OF PUBLICLY PURCHASED UNDER
SHARES PRICE PAID ANNOUNCED PLANS THE PLANS OR
PERIOD PURCHASED PER SHARE OR PROGRAMS PROGRAMS (1)
- ----------------------- --------- ----------- ----------------- ----------------
April 1, 2004 to April
25, 2004 -- -- -- --
April 26, 2004 to May
23, 2004 352,150 $ 44.79 352,150 613,502
May 24, 2004 to July 3,
2004 200,000 $ 45.41 200,000 413,502
------- ----------- ------- -------
Total 552,150 $ 45.02 552,150 413,502 (2)
======= =========== ======= =======
(1) At March 31, 2004, 965,652 shares were available for repurchase under a
repurchase program approved by the Board of Directors and announced on November
20, 2003 for 1,000,000 shares.
(2) The repurchase program has no expiration date and no program was terminated
prior to full repurchase of the authorized amount.
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.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Amended and Restated Credit Agreement, dated as of June 30,
2004, by and among Black Box Corporation of Pennsylvania, the
Guarantors, the Lenders and Citizens Bank of Pennsylvania (1)
10.2 Guaranty and Suretyship Agreement, dated as of June 30, 2004,
by and among Black Box Corporation, the Lenders and Citizens
Bank of Pennsylvania (1)
10.3 Guaranty and Suretyship Agreement, dated as of June 30, 2004,
by and among the Guarantors, the Lenders and Citizens Bank of
Pennsylvania (1)
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
and Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
and Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (1)
(1) Filed herewith.
(b) Reports on Form 8-K furnished during the quarter ended July 3, 2004:
29
Current Report on Form 8-K for the event dated May 19, 2004
covering Item 5 thereof disclosing and filing the Company's
press release related to fourth quarter and total year Fiscal
2004 financial results.
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
August 12, 2004 By: /s/ Michael McAndrew
----------------------------------
Michael McAndrew
Chief Financial Officer, Treasurer
and Principal Accounting Officer
30
EXHIBIT INDEX
Exhibit
No.
10.1 Amended and Restated Credit Agreement, dated as of June 30, 2004, by
and among Black Box Corporation of Pennsylvania, the Guarantors, the
Lenders and Citizens Bank of Pennsylvania
10.2 Guaranty and Suretyship Agreement, dated as of June 30, 2004, by and
among Black Box Corporation, the Lenders and Citizens Bank of
Pennsylvania
10.3 Guaranty and Suretyship Agreement, dated as of June 30, 2004, by and
among the Guarantors, the Lenders and Citizens Bank of Pennsylvania
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of
1934, as amended, and 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
31