UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 26, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number: 0-18706
Black Box Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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95-3086563
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1000 Park Drive, Lawrence, Pennsylvania
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15055
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
724-746-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
As of January 29, 2010, there were 17,548,305 shares of common stock, par value $.001 (the common
stock), outstanding.
BLACK BOX CORPORATION
FOR THE QUARTER ENDED DECEMBER 26, 2009
INDEX
2
PART
I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACK BOX CORPORATION
CONSOLIDATED BALANCE SHEETS
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December 26, 2009
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In thousands, except par value
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(Unaudited)
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March 31, 2009*
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Assets
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Cash and cash equivalents
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$
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29,056
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$
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23,720
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Accounts receivable, net of allowance for doubtful accounts
of $10,007 and $9,934
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152,396
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163,975
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Inventories, net
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53,755
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55,898
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Costs/estimated earnings in excess of billings on uncompleted
contracts
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94,961
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66,066
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Prepaid and other current assets
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26,332
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30,809
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Total current assets
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356,500
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340,468
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Property, plant and equipment, net
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24,670
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28,419
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Goodwill
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649,600
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621,948
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Intangibles
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Customer relationships, net
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91,357
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105,111
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Other intangibles, net
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31,667
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37,684
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Other assets
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10,759
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2,858
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Total assets
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$
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1,164,553
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$
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1,136,488
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Liabilities
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Accounts payable
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$
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79,663
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$
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79,021
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Accrued compensation and benefits
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31,087
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30,446
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Deferred revenue
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37,431
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35,520
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Billings in excess of costs/estimated earnings on uncompleted
contracts
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15,817
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18,217
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Income taxes
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8,287
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5,164
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Other liabilities
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42,837
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41,891
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Total current liabilities
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215,122
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210,259
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Long-term debt
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235,306
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249,260
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Other liabilities
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25,370
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29,670
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Total liabilities
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$
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475,798
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$
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489,189
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Stockholders equity
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Preferred stock authorized 5,000, par value $1.00, none issued
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$
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--
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$
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--
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Common stock authorized 100,000, par value $.001, 17,548 and
17,533 shares outstanding
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25
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25
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Additional paid-in capital
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450,030
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445,774
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Retained earnings
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544,872
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521,023
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Accumulated other comprehensive income
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16,923
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3,572
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Treasury stock, at cost 7,626 and 7,626 shares
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(323,095)
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(323,095)
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Total stockholders equity
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$
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688,755
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$
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647,299
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Total liabilities and stockholders equity
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$
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1,164,553
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$
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1,136,488
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* Derived from audited financial statements
See
Notes to the Consolidated Financial Statements
3
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three (3) months ended
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Nine (9) months ended
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December 26 and 27,
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December 26 and 27,
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In thousands, except per share amounts
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2009
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2008
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2009
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2008
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Revenues
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Hotline products
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$
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47,012
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$
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51,550
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$
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134,805
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$
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164,008
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On-Site services
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206,373
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210,303
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585,705
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594,208
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Total
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253,385
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261,853
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720,510
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758,216
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Cost of sales
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Hotline products
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24,406
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27,380
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70,267
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84,279
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On-Site services
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142,150
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143,555
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398,727
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401,820
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Total
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166,556
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170,935
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468,994
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486,099
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Gross profit
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86,829
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90,918
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251,516
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272,117
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Selling, general & administrative expenses
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64,198
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66,085
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192,596
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198,282
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Intangibles amortization
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3,108
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3,261
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9,303
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6,987
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Operating income
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19,523
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21,572
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49,617
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66,848
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Interest expense (income), net
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1,852
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5,722
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6,592
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8,105
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Other expenses (income), net
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40
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376
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(187)
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543
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Income before provision for income taxes
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17,631
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15,474
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43,212
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58,200
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Provision for income taxes
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6,612
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5,647
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16,205
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21,241
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Net income
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$
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11,019
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$
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9,827
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$
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27,007
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$
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36,959
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Earnings per common share
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Basic
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$
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0.63
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$
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0.56
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$
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1.54
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$
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2.11
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Diluted
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$
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0.63
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$
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0.56
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$
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1.54
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$
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2.11
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Weighted-average common shares outstanding
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Basic
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17,548
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17,533
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17,545
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17,525
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Diluted
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17,561
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17,533
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17,545
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17,525
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Dividends per share
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$
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0.06
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$
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0.06
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$
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0.18
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$
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0.18
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See
Notes to the Consolidated Financial Statements
4
BLACK BOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine (9) months ended December 26 and 27,
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In thousands
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2009
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2008
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Operating Activities
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Net income
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$
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27,007
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$
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36,959
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Adjustments to reconcile net income to net cash provided by (used
for)
operating activities
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Intangibles amortization and depreciation
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15,097
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14,433
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Loss (gain) on sale of property
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10
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(84)
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Deferred taxes
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1,197
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(90)
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Tax impact from equity awards
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766
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1,135
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Stock compensation expense
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5,022
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2,237
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Change in fair value of interest-rate swap(s)
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(126)
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(441)
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Changes in operating assets and liabilities (net of acquisitions):
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Accounts receivable, net
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11,568
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14,484
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Inventories, net
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3,617
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5,185
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All other current assets excluding deferred tax asset
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(16,586)
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(11,626)
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Liabilities exclusive of long-term debt
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(5,439)
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(10,429)
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Net cash provided by (used for) operating activities
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$
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42,133
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$
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51,763
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Investing Activities
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Capital expenditures
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$
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(1,573)
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$
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(1,853)
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Capital disposals
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132
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168
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Acquisition of businesses (payments)/recoveries
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(10,687)
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(96,534)
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Prior merger-related (payments)/recoveries
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(7,738)
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(262)
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Net cash provided by (used for) investing activities
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$
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(19,866)
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$
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(98,481)
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Financing Activities
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Proceeds from borrowings
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$
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130,890
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$
|
237,662
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Repayment of borrowings
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(145,298)
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(190,379)
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Deferred financing costs
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--
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(125)
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Proceeds from the exercise of stock options
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--
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|
545
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Payment of dividends
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(3,157)
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(3,154)
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Net cash provided by (used for) financing activities
|
|
$
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(17,565)
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$
|
44,549
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|
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Foreign currency exchange impact on cash
|
|
$
|
634
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|
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$
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(1,926)
|
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Increase / (decrease) in cash and cash equivalents
|
|
$
|
5,336
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|
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$
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(4,095)
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Cash and cash equivalents at beginning of period
|
|
$
|
23,720
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|
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$
|
26,652
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|
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Cash and cash equivalents at end of period
|
|
$
|
29,056
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|
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$
|
22,557
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|
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Supplemental Cash Flow:
|
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|
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Cash paid for interest
|
|
$
|
7,198
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|
|
$
|
8,665
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|
Cash paid for income taxes
|
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|
11,618
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20,474
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Non-cash financing activities:
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Dividends payable
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|
1,053
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1,052
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|
Capital leases
|
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|
4
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|
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|
799
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|
|
See
Notes to the Consolidated Financial Statements
5
BLACK BOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Business and Basis of Presentation
Business
Black Box Corporation (Black Box or the Company) is the worlds leading dedicated network
infrastructure services provider. Black Box offers one-source network infrastructure services for
communications systems. The Companys services offerings include design, installation,
integration, monitoring and maintenance of voice, data and integrated communications systems. The
Companys primary services offering is voice solutions (Voice Services); the Company also offers
premise cabling and other data-related services (Data Services) and products. The Company
provides 24/7/365 technical support for all of its solutions which encompass all major voice and
data product manufacturers as well as 118,000 network infrastructure products (Hotline products)
that it sells through its catalog and Internet Web site (such catalog and Internet Web site
business, together with technical support for such business, being referred to as Hotline
Services) and its Voice Services and Data Services (collectively referred to as On-Site
services) offices. As of December 26, 2009, the Company had more than 3,000 professional
technical experts in 194 offices serving more than 175,000 clients in 141 countries throughout the
world. Founded in 1976, Black Box, a Delaware corporation, operates subsidiaries on five
continents and is headquartered near Pittsburgh in Lawrence, Pennsylvania.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Black Box have been
prepared in accordance with accounting principles generally accepted in the United States (GAAP)
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements.
The Company believes that these consolidated financial statements reflect all normal, recurring
adjustments needed to present fairly the Companys results for the interim periods presented. The
results as of and for interim periods may not be indicative of the results of operations for any
other interim period or for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the Companys most recent
Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) for the
fiscal year ended March 31, 2009 (the Form 10-K).
The Companys fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and end on the
Saturday generally nearest each calendar quarter end, adjusted to provide relatively equivalent
business days for each fiscal quarter. The actual ending dates for the periods presented in these
Notes to the Consolidated Financial Statements as of December 31, 2009 and 2008 were December 26,
2009 and December 27, 2008. References herein to Fiscal Year or Fiscal mean the Companys
fiscal year ended March 31 for the year referenced. All references to dollar amounts herein are
presented in thousands, except per share amounts, unless otherwise noted.
The consolidated financial statements include the accounts of the Company, which is the parent
company, and its subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires Company management
(Management) to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates in these financial statements include project progress towards completion to
estimated budget allowances for doubtful accounts receivable, sales returns, net realizable value
of inventories, loss contingencies, warranty reserves, intangible assets and goodwill. Actual
results could differ from those estimates. Management believes the estimates made are reasonable.
Certain reclassifications have been made to the financial statements for prior periods in order to
conform to the presentation for the three (3) and nine (9) months ended December 31, 2009. The
Company evaluated subsequent events through the date the accompanying financial statements were
issued, which was February 4, 2010.
6
Note 2: Significant Accounting Policies / Recent Accounting Pronouncements
Significant Accounting Policies
The significant accounting policies used in the preparation of the Companys consolidated financial
statements are disclosed in
Note 2 of the Notes to the Consolidated Financial Statements within the Form 10-K. Additional
significant accounting policies adopted during Fiscal 2010 are disclosed below.
Stock-Based Compensation
Restricted stock units: The Company records expense for those stock awards, vesting during the
period, for which the requisite service period is expected to be rendered. The Company uses
historical data in order to project the future employee turnover rates used to estimate the number
of restricted stock units for which the requisite service period will not be rendered. The fair
value of restricted stock units is determined based on the number of restricted stock units granted
and the closing market price of the Companys common stock, par value $.001 (the common stock) on
the date of grant. The Company recognizes the fair value of awards into expense ratably over the
requisite service periods associated with the award.
Performance share awards: The Company records expense for those stock awards, vesting during the
period, for which the requisite service period is expected to be rendered. The Company uses
historical data in order to project the future employee turnover rates used to estimate the number
of performance shares for which the requisite service period will not be rendered. The fair value
of performance share awards subject to a cumulative Adjusted EBITDA target (as defined in the
performance share award agreement) is determined based on the number of performance shares granted
and the closing market price of the common stock on the date of grant. The Company recognizes the
fair value of awards into expense ratably over the requisite service periods associated with the
award. The probability of vesting of the award and the applicable number of shares of common stock
to be issued are reassessed at each period end. The fair value of performance share awards subject
to the Companys total shareholder return ranking relative to the total shareholder return of the
common stock (or its equivalent) of the companies in a peer group (the Companys Relative TSR
Ranking) is determined on the grant date using a Monte-Carlo simulation valuation method which
includes several subjective assumptions. The Company recognizes the fair value of these awards into
expense ratably over the requisite service periods associated with the award. The assumptions are
summarized as follows:
Expected Volatility.
The Company estimates the volatility of its common stock at the date of grant
based on the historical volatility of its common stock.
Risk-Free Rate.
The Company derives its risk-free interest rate on the observed interest rates
with an equivalent remaining term equal to the expected life of the award.
Dividend yield.
The Company estimates the dividend yield assumption based on the Companys
historical and projected dividend payouts.
Recent Accounting Pronouncements
Fair Value Measurements
In September, 2006, the Financial Accounting Standards Board (FASB) issued guidance on Fair
Value Measurements, which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value measurements. On
April 1, 2008, the Company adopted this guidance, with the exception of a one-year deferral of
implementation for non-financial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually), which was adopted
on April 1, 2009. The significant categories of assets and liabilities included in the Companys
deferred implementation are non-financial assets and liabilities initially measured at fair value
in a business combination and impairment assessments of long-lived assets, goodwill and intangible
assets. The requirements of this guidance were applied prospectively. The adoption of the
portions of this guidance which were permitted to be initially deferred did not have a material
impact on the Companys consolidated financial statements. See Note 14.
Non-controlling Interests
In December, 2007, the FASB issued guidance on Noncontrolling Interests in Consolidated Financial
Statements. This guidance establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance clarifies that
a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. This guidance requires
consolidated net income to be reported at amounts that include the amounts attributable to both the
parent and the non-controlling interest. The adoption of this guidance did not have a material
impact on the Companys consolidated financial statements.
7
Business Combinations
In December, 2007, the FASB issued guidance on Business Combinations. This guidance defines the
acquirer as the entity
that obtains control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the acquirer to
recognize the assets acquired, liabilities assumed and any non-controlling interest at their fair
values as of the acquisition date. This guidance requires, among other things, that
acquisition-related costs be recognized separately from the acquisition. In April, 2009, the FASB
issued guidance on the Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies, which amends the provisions related to the initial
recognition and measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination. For the Company, this guidance applies
prospectively to business combinations for which the acquisition date is on or after April 1, 2009.
This guidance may have a material impact on business combinations after adoption, but the impact
will depend on the facts and circumstances of those specific business combinations.
Useful lives of Intangible Assets
In April, 2008, the FASB issued guidance on Determination of the Useful Life of Intangible
Assets. This guidance provides the factors that should be considered in developing assumptions
about renewal or extension used in estimating the useful life of a recognized intangible asset and
expands the disclosure requirements. The provisions of this guidance for determining the useful
life of a recognized intangible asset will be applied prospectively to intangible assets acquired
after adoption. The disclosure requirements shall be applied prospectively to all intangible
assets recognized as of, and subsequent to, adoption. The adoption of this guidance did not have a
material impact on the Companys consolidated financial statements.
Postretirement Benefit Plan Assets
In December, 2008, the FASB issued guidance on Employers Disclosures about Postretirement Benefit
Plan Assets regarding disclosures about plan assets of defined benefit pension or other
postretirement plans. This guidance is effective for financial statements issued for fiscal years
ending after December 15, 2009. The Company is evaluating the impact of the adoption of this
guidance on its consolidated financial statements.
Interim Disclosures about Fair Value of Financial Instruments
In April, 2009, the FASB issued guidance on Interim Disclosures about Fair Value of Financial
Instruments, which require disclosures about fair value of financial instruments for interim
reporting periods in addition to the existing requirement for annual financial statements. The
adoption of this guidance did not have a material impact on the Companys consolidated financial
statements.
Subsequent Events
In May, 2009, the FASB issued guidance on Subsequent Events. This guidance establishes standards
for the accounting and disclosure of subsequent events (events which occur after the balance sheet
date but before financial statements are issued or are available to be issued). This guidance
requires an entity to disclose the date subsequent events were evaluated and whether that
evaluation took place on the date financial statements were issued or were available to be issued.
The adoption of this guidance did not have a material impact on the Companys consolidated
financial statements.
FASB Accounting Standards Codification
In June, 2009, the FASB issued Accounting Standards Codification (ASC) Update 2009-01, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a
replacement of FASB Statement No. 162 (ASC Update 2009-01). ASC Update 2009-01 is intended to
be the source of authoritative generally accepted accounting principles and reporting standards.
Its primary purpose is to improve clarity and use of existing standards by grouping authoritative
literature under common topics. ASC Update 2009-01 is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. ASC Update 2009-01 does not change
or alter existing GAAP. The adoption of ASC Update 2009-01 did not have a material impact on the
Companys consolidated financial statements.
Revenue Arrangements with Multiple Deliverables
In October, 2009, the FASB issued ASC Update 2009-13, Multiple-Deliverable Revenue Arrangements
(ASC Update 2009-13). ASC Update 2009-13 provides amendments to the criteria in Subtopic 605-24
for separating consideration in multiple-deliverable revenue arrangements. It establishes a
hierarchy of selling prices to determine the selling price of each specific deliverable which
includes vendor-specific objective evidence (if available), third-party evidence (if
vendor-specific evidence is not available) or estimated selling price if neither of the first two
are available. ASC Update 2009-13 also eliminates the residual method for allocating revenue
between the elements of an arrangement and requires that arrangement consideration be allocated at
the inception of the arrangement. Finally, ASC Update 2009-13 expands the disclosure requirements
regarding a vendors multiple-deliverable revenue arrangements. ASC Update 2009-13 should be
applied on a prospective basis for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company is evaluating the impact of the
adoption of ASC Update 2009-13 on its consolidated financial statements.
8
Certain Revenue Arrangements That Include Software Elements
In October, 2009, the FASB issued ASC Update 2009-14, Certain Revenue Arrangements That Include
Software Elements (ASC Update 2009-14). ASC Update 2009-14 amends existing guidance to exclude
tangible products that include software and non-software components that function together to
deliver the products essential functionality. ASC Update 2009-14 shall be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Earlier application is permitted as of the beginning of a companys fiscal
year provided the company has not previously issued financial statements for any period within that
year. An entity shall not elect early application of Update No. 2009-14 unless it also elects
early application of Update No. 2009-13. The Company is evaluating the impact of the adoption of
ASC Update 2009-14 on its consolidated financial statements.
Note 3: Inventories
The Companys inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
March 31, 2009
|
|
|
Raw materials
|
|
$
|
1,614
|
|
|
$
|
1,624
|
|
Finished goods
|
|
|
72,656
|
|
|
|
74,564
|
|
|
|
|
|
|
Subtotal
|
|
$
|
74,270
|
|
|
$
|
76,188
|
|
Excess and obsolete inventory reserves
|
|
|
(20,515)
|
|
|
|
(20,290)
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
53,755
|
|
|
$
|
55,898
|
|
|
Note 4: Goodwill
The following table summarizes changes to Goodwill at the Companys reportable segments for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
All Other
|
|
|
Total
|
|
|
Balance as of March 31, 2009
|
|
$
|
555,270
|
|
|
$
|
64,672
|
|
|
$
|
2,006
|
|
|
$
|
621,948
|
|
Currency translation
|
|
|
(18)
|
|
|
|
6,489
|
|
|
|
148
|
|
|
|
6,619
|
|
Current period acquisitions (see Note 8)
|
|
|
5,459
|
|
|
|
--
|
|
|
|
--
|
|
|
|
5,459
|
|
Prior period acquisitions (see Note 8)
|
|
|
15,574
|
|
|
|
--
|
|
|
|
--
|
|
|
|
15,574
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
576,285
|
|
|
$
|
71,161
|
|
|
$
|
2,154
|
|
|
$
|
649,600
|
|
|
The Company conducts its annual goodwill impairment assessment during the third quarter of its
fiscal year (September 26, 2009 for Fiscal 2010). The following table reconciles the carrying
value of goodwill, as of September 26, 2009, for the Companys reportable segments as reported in
its consolidated financial statements, to the carrying value of goodwill by reporting unit which is
used for the annual goodwill impairment assessment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
America
|
|
|
|
Europe
|
|
|
|
Other
|
|
|
|
Total
|
|
|
Goodwill (as reported in financial statements)
|
|
$
|
572,277
|
|
|
$
|
72,233
|
|
|
$
|
2,093
|
|
|
$
|
646,603
|
|
Adjustment
|
|
|
(30,370)
|
|
|
|
27,333
|
|
|
|
3,037
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Goodwill (for annual impairment assessment)
1
|
|
$
|
541,907
|
|
|
$
|
99,566
|
|
|
$
|
5,130
|
|
|
$
|
646,603
|
|
|
1
Goodwill (for annual impairment assessment) represents the amount of goodwill that is
at risk by reporting unit for Companys goodwill impairment analysis.
Goodwill is tested using a two-step process. The first step of the goodwill impairment assessment,
used to identify potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill (net book value). If the fair value of a reporting unit
exceeds its net book value, goodwill of the reporting unit is considered not impaired, thus the
second step of the impairment test is unnecessary. If net book value of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test will be performed to measure the
amount of impairment loss, if any. The second step of the goodwill impairment assessment, used to
measure the amount of impairment loss, if any, compares the implied fair value of reporting unit
goodwill, which is determined in the same manner as the amount of goodwill recognized in a business
combination, with the carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in
an amount equal to that excess.
9
In the first step of the goodwill impairment assessment, the Company uses an income approach to
derive a present value of the reporting units projected future annual cash flows and the present
residual value of the reporting unit. The Company uses the income approach because it believes
that the discounted future cash flows provide greater detail and opportunity to reflect
facts, circumstances and economic conditions for each reporting unit. In addition, the Company
believes that this valuation approach is a proven valuation technique and methodology for its
industry and is widely accepted by investors. The Company uses a variety of underlying assumptions
to estimate these future cash flows, which vary for each of the reporting units and include
(i) future revenue growth rates, (ii) future operating profitability, (iii) the weighted-average
cost of capital and (iv) a terminal growth rate. If the Companys estimates and assumptions used
in the discounted future cash flows should change at some future date, the Company could incur an
impairment charge which could have a material adverse effect on the results of operations for the period in
which the impairment occurs.
In addition to estimating fair value of the Companys reporting units using the income approach,
the Company also estimates fair value using a market-based approach which relies on values based on
market multiples derived from comparable public companies. The Company uses the estimated fair
value of the reporting units under the market approach to validate the estimated fair value of the
reporting units under the income approach.
The results of the Companys annual goodwill impairment assessment conducted during the third
quarter of Fiscal 2010 indicate that goodwill is not impaired in any of the Companys reporting
units. The following table summarizes the estimated fair value of the reporting unit, the net book
value of the reporting unit and the surplus of the estimated fair value of the reporting unit over
the net book value of the reporting unit as of September 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
America
|
|
|
|
Europe
|
|
|
|
Other
|
|
|
|
Total
|
|
|
Estimated fair value of the reporting unit
|
|
$
|
588,992
|
|
|
$
|
129,949
|
|
|
$
|
33,606
|
|
|
$
|
752,547
|
|
Net book value of the reporting unit
|
|
|
541,949
|
|
|
|
121,920
|
|
|
|
14,866
|
|
|
|
678,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus
|
|
$
|
47,043
|
|
|
$
|
8,029
|
|
|
$
|
18,740
|
|
|
$
|
73,812
|
|
|
To illustrate the sensitivity of the discounted future cash flows, an instantaneous 100 basis point
increase in the weighted-average cost of capital, which, holding all other assumptions constant,
would be material to the estimated fair value of the reporting unit, would produce a decrease in
the fair value of the reporting units by $87,345, $11,325 and $2,603 for North America, Europe and
All Other, respectively.
Since March 31, 2009, the Companys stock market capitalization has been lower than its net book
value. Each of the Companys reporting units continues to operate profitably and generate
significant cash flow from operations, and the Company expects that each will continue to do so in
Fiscal 2011 and beyond. The Company also believes that a reasonable potential buyer would offer a
control premium for the business that would adequately cover the difference between the recent
stock trading prices and the book value.
Future events that could result in an interim assessment of goodwill impairment and/or an
impairment loss include, but are not limited to, (i) significant underperformance relative to
historical or projected future operating results, (ii) significant changes in the manner of or use
of the assets or the strategy for the Companys overall business, (iii) significant negative
industry or economic trends, (iv) a further decline in market capitalization below book value and
(v) a modification to the Companys reporting segments. Management is currently considering
alternative reporting segments for the purpose of making operational decisions and assessing
financial performance. This contemplated change in reporting segments would affect the reporting
units currently being used in the Companys annual goodwill impairment analysis. Any such change
could result in an impairment charge which could have a material adverse effect on the results of
operations for the period in which the impairment occurs.
10
Note 5: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying
amount by intangible asset class for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
March 31, 2009
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accum.
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amort.
|
|
|
Amount
|
|
|
Amount
|
|
|
Amort.
|
|
|
Amount
|
|
|
Definite-lived
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
11,342
|
|
|
$
|
8,070
|
|
|
$
|
3,272
|
|
|
$
|
15,115
|
|
|
$
|
6,517
|
|
|
$
|
8,598
|
|
Customer relationships
|
|
|
113,412
|
|
|
|
22,055
|
|
|
|
91,357
|
|
|
|
120,077
|
|
|
|
14,966
|
|
|
|
105,111
|
|
Acquired backlog
|
|
|
14,375
|
|
|
|
13,719
|
|
|
|
656
|
|
|
|
14,230
|
|
|
|
12,883
|
|
|
|
1,347
|
|
|
|
|
|
|
Total
|
|
$
|
139,129
|
|
|
$
|
43,844
|
|
|
$
|
95,285
|
|
|
$
|
149,422
|
|
|
$
|
34,366
|
|
|
$
|
115,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
35,992
|
|
|
|
8,253
|
|
|
|
27,739
|
|
|
|
35,992
|
|
|
|
8,253
|
|
|
|
27,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
175,121
|
|
|
$
|
52,097
|
|
|
$
|
123,024
|
|
|
$
|
185,414
|
|
|
$
|
42,619
|
|
|
$
|
142,795
|
|
|
The Companys indefinite-lived intangible assets consist solely of the Companys trademark
portfolio. The Companys definite-lived intangible assets are comprised of employee non-compete
agreements, customer relationships and backlog obtained through business acquisitions.
The following table summarizes the changes to carrying amounts of intangible assets for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Competes
|
|
|
Customer
|
|
|
|
|
|
|
Trademarks
|
|
|
and Backlog
|
|
|
Relationships
|
|
|
Total
|
|
|
Balance at March 31, 2009
|
|
$
|
27,739
|
|
|
$
|
9,945
|
|
|
$
|
105,111
|
|
|
$
|
142,795
|
|
Amortization expense
|
|
|
--
|
|
|
|
(2,214)
|
|
|
|
(7,089)
|
|
|
|
(9,303)
|
|
Current period acquisitions (see Note 8)
|
|
|
--
|
|
|
|
1,318
|
|
|
|
4,927
|
|
|
|
6,245
|
|
Prior period acquisitions (see Note 8)
|
|
|
--
|
|
|
|
(5,143)
|
|
|
|
(11,592)
|
|
|
|
(16,735)
|
|
Currency translation
|
|
|
--
|
|
|
|
22
|
|
|
|
--
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
27,739
|
|
|
$
|
3,928
|
|
|
$
|
91,357
|
|
|
$
|
123,024
|
|
|
Intangibles amortization was $3,108 and $3,261 for the three (3) months ended December 31, 2009 and
2008, respectively, and $9,303 and $6,987 for the nine (9) months ended December 31, 2009 and 2008,
respectively. The Company acquired definite-lived intangibles from the completion of several
acquisitions during Fiscal 2010 and Fiscal 2009. Intangibles amortization for certain Fiscal 2010
and Fiscal 2009 acquisitions are based on provisional measurements of fair value and are subject to
change.
The following table details the estimated intangibles amortization expense for the remainder of
Fiscal 2010, each of the succeeding four fiscal years and the periods thereafter. These estimates
are based on the carrying amounts of intangible assets as of December 31, 2009 that are provisional
measurements of fair value and are subject to change pending the outcome of purchase accounting
related to certain acquisitions:
|
|
|
|
|
Fiscal
|
|
|
|
|
|
2010
|
|
$
|
3,196
|
|
2011
|
|
|
11,777
|
|
2012
|
|
|
10,987
|
|
2013
|
|
|
9,702
|
|
2014
|
|
|
8,529
|
|
Thereafter
|
|
|
51,094
|
|
|
|
|
|
Total
|
|
$
|
95,285
|
|
|
11
Note 6: Indebtedness
The Companys long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
March 31, 2009
|
|
|
Revolving credit agreement
|
|
$
|
234,210
|
|
|
$
|
247,650
|
|
Capital lease obligations
|
|
|
2,146
|
|
|
|
2,908
|
|
Other
|
|
|
15
|
|
|
|
99
|
|
|
|
|
|
|
Total debt
|
|
$
|
236,371
|
|
|
$
|
250,657
|
|
Less: current portion (included in Other liabilities)
|
|
|
(1,065)
|
|
|
|
(1,397)
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
235,306
|
|
|
$
|
249,260
|
|
|
Revolving Credit Agreement
On January 30, 2008, the Company entered into a Third Amended and Restated Credit Agreement dated
as of January 30, 2008 (the Credit Agreement) with Citizens Bank of Pennsylvania, as agent, and a
group of lenders. The Credit Agreement expires on January 30, 2013. Borrowings under the Credit
Agreement are permitted up to a maximum amount of $350,000, which includes up to $20,000 of
swing-line loans and $25,000 of letters of credit. The Credit Agreement may be increased by the
Company up to an additional $100,000 with the approval of the lenders and may be unilaterally and
permanently reduced by the Company to not less than the then outstanding amount of all borrowings.
Interest on outstanding indebtedness under the Credit Agreement accrues, at the Companys option,
at a rate based on either: (a) the greater of (i) the prime rate per annum of the agent then in
effect and (ii) 0.50% plus the rate per annum announced by the Federal Reserve Bank of New York as
being the weighted-average of the rates on overnight Federal funds transactions arranged by Federal
funds brokers on the previous trading day or (b) a rate per annum equal to the LIBOR rate plus
0.50% to 1.125% (determined by a leverage ratio based on the Companys consolidated EBITDA). The
Credit Agreement requires the Company to maintain compliance with certain non-financial and
financial covenants such as leverage and fixed-charge coverage ratios. As of December 31, 2009,
the Company was in compliance with all financial covenants under the Credit Agreement.
The
maximum amount of debt outstanding under the Credit Agreement, the weighted-average balance
outstanding under the Credit Agreement and the weighted-average interest rate on all outstanding
debt for the three (3) months ended December 31, 2009 was $255,725, $244,475 and 1.2%,
respectively, compared to $277,735, $259,060 and 3.8%, respectively, for the three (3) months ended
December 31, 2008. The maximum amount of debt outstanding under
the Credit Agreement, the weighted-average balance outstanding
under the Credit Agreement and the weighted-average interest rate on
all outstanding debt for the nine (9) months ended December 31, 2009 was $261,750, $247,550 and
1.4%, respectively, compared to $277,735, $230,719 and 3.7%, respectively, for the nine (9) months
ended December 31, 2008.
Capital lease obligations
The capital lease obligations are primarily for equipment. The lease agreements have remaining
terms ranging from less than one year to four years with interest rates ranging from 3.3% to 12.2%.
Other
Other debt is comprised of other third-party, non-employee loans.
Unused available borrowings
As of December 31, 2009, the Company had $4,208 outstanding in letters of credit and $111,582 in
unused commitments under the Credit Agreement.
Note 7: Derivative Instruments and Hedging Activities
The Company is exposed to certain market risks, including the effect of changes in foreign currency
exchange rates and interest rates. The Company uses derivative instruments to manage financial
exposures that occur in the normal course of business. It does not hold or issue derivatives for
speculative trading purposes. The Company is exposed to non-performance risk from the
counterparties in its derivative instruments. This risk would be limited to any unrealized gains
on current positions. To help mitigate this risk, the Company transacts only with counterparties
that are rated as investment grade or higher and all counterparties are monitored on a continuous
basis. The fair value of the Companys derivatives reflects this credit risk.
12
Foreign Currency Contracts:
The Company enters into foreign currency contracts to hedge exposure to variability in expected
fluctuations in foreign currencies. As of December 31, 2009, the Company had open contracts
in Australian and Canadian dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner,
British pounds sterling, Swedish krona, Swiss francs and Japanese yen which have been
designated as cash flow hedges. These contracts had a notional amount
of $69,847 and will expire within eleven (11) months. There was no hedge ineffectiveness
for the three (3) and nine (9) months ended December 31, 2009 and 2008, respectively.
Interest-rate Swaps:
On July 26, 2006, the Company entered into a five-year floating-to-fixed interest-rate swap that is
based on a 3-month LIBOR rate versus a 5.44% fixed rate, has a notional value of $100,000 (which
reduced to $50,000 as of June 26, 2009) and does not qualify for hedge accounting. On June 15,
2009, the Company entered into a three-year floating-to-fixed interest-rate swap that is based on a
3-month LIBOR rate versus a 2.28% fixed rate, has a notional value of $100,000 reducing to $50,000
after two years and does not qualify for hedge accounting. Each interest-rate swap discussed above
is collectively hereinafter referred to as the interest-rate swaps.
The following tables detail the effect of derivative instruments on the Companys Consolidated
Balance Sheets and Consolidated Statements of Income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair Value
|
|
Value at
|
|
Fair Value
|
|
Value at
|
|
|
|
|
|
at December
|
|
March 31,
|
|
at December
|
|
March 31,
|
|
|
|
Classification
|
|
31, 2009
|
|
2009
|
|
31, 2009
|
|
2009
|
|
|
Derivatives
designated as
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other liabilities (short-term)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
1,445
|
|
|
$
|
1,872
|
|
Foreign currency contracts
|
|
Prepaid and other current assets
|
|
$
|
1,209
|
|
|
$
|
923
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
designated as
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate swaps
|
|
Other liabilities (short-term)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
5,210
|
|
|
$
|
5,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Classification
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Derivatives
designated as
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in
Comprehensive income on
(effective portion) net of taxes
|
|
Other comprehensive income
|
|
$
|
(41
|
)
|
|
$
|
(403
|
)
|
|
$
|
(619
|
)
|
|
$
|
(99
|
)
|
(Gain) loss reclassified
from
AOCI into income
(effective portion) net of taxes
|
|
Selling, general
& administrative
expenses
|
|
$
|
92
|
|
|
$
|
(33
|
)
|
|
$
|
282
|
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Classification
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income
|
|
Interest expense
(income), net
|
|
$
|
303
|
|
|
$
|
(2,436
|
)
|
|
$
|
126
|
|
|
$
|
441
|
|
|
13
Note 8: Acquisitions
Fiscal 2010 acquisitions:
During the third quarter of Fiscal 2010, the Company acquired Quanta Systems, LLC (Quanta), a
privately-held company headquartered in Gaithersburg, MD. Quanta has an active customer base which
includes various United States Department of Defense and government agency accounts.
Also, during the third quarter of Fiscal 2010, the Company acquired CBS Technologies Corp. (CBS),
a privately-held company headquartered in Islandia, NY. CBS has an active customer base which
includes commercial, education and various government agency accounts.
The acquisitions of Quanta and CBS, both individually and in the aggregate, will not have a
material impact on the Companys consolidated financial statements.
The fair values of assets acquired and liabilities assumed for Quanta and CBS are provisional and
are based on the information that was available as of their respective acquisition dates to
estimate the fair value of assets acquired and liabilities assumed. The Company believes that the
information available provides a reasonable basis for estimating the fair values of assets acquired
and liabilities assumed but additional information not yet available is necessary to finalize those
fair values. Thus, the provisional measurements of fair value are subject to change. The Company
expects to finalize the valuation and complete the purchase price allocation as soon as practicable
but no later than one-year from their respective acquisition dates.
The results of operations of Quanta and CBS are included within the Companys Consolidated
Statements of Income beginning on their respective acquisition dates.
Fiscal 2009 acquisitions:
During the fourth quarter of Fiscal 2009, the Company acquired Scottel Voice & Data, Inc.
(Scottel), a privately-held company headquartered in Culver City, CA. Scottel has an active
customer base which includes commercial, education and various government agency accounts. In
connection with the Scottel acquisition, the Company has made a preliminary allocation to goodwill
and definite-lived intangible assets, respectively. The definite-lived intangible assets recorded
represent the estimated fair market value of customer relationships and non-compete agreements
which the Company estimates are to be amortized over a period of three to 10 years.
During the third quarter of Fiscal 2009, the Company acquired Network Communications Technologies,
Inc. (NCT), a privately-held company headquartered in Charlotte, NC. NCT has an active customer
base which includes commercial, education and various government agency accounts. In connection
with the NCT acquisition, the Company made allocations to goodwill and definite-lived intangible
assets, respectively. The definite-lived intangible assets recorded represent the fair market
value of customer relationships and non-compete agreements which will be amortized over a period of
two to five years.
Also, during the third quarter of Fiscal 2009, the Company acquired ACS Communications, Inc.
(ACS), a privately-held company headquartered in Austin, TX. ACS has an active customer base
which includes commercial, education and various government agency accounts. In connection with
the ACS acquisition, the Company made allocations to goodwill and definite-lived intangible assets,
respectively. The definite-lived intangible assets recorded represent the fair market value of
customer relationships and non-compete agreements which will be amortized over a period of five to
nine years.
During the second quarter of Fiscal 2009, the Company acquired Mutual Telecom Services Inc.
(MTS), a privately-held company headquartered in Needham, MA. MTS is a global telecommunications
services and solutions provider primarily servicing clients in the Department of Defense and other
federal agencies. In connection with the MTS acquisition, the Company made allocations to goodwill
and definite-lived intangible assets, respectively. The definite-lived intangible assets recorded
represent the fair market value of customer relationships, non-compete agreements and backlog which
will be amortized over a period of one to 13 years.
During the first quarter of Fiscal 2009, the Company acquired UCI Communications LLC (UCI), a
privately-held company headquartered in Mobile, AL. UCI has an active customer base which includes
commercial, education and various government agency accounts. In connection with the UCI
acquisition, the Company made allocations to goodwill and definite-lived intangible assets,
respectively. The definite-lived intangible assets recorded represent the fair market value of
customer relationships and non-compete agreements which will be amortized over a period of five to
nine years.
14
The acquisitions of Scottel, NCT, ACS, MTS and UCI, both individually and in the aggregate, did not
have a material impact on the Companys consolidated financial statements.
As disclosed above, the allocation of the purchase price for Scottel is based on preliminary
estimates of the fair values of certain assets acquired and liabilities assumed as of the date of
the acquisition. Management is currently assessing the fair values of the tangible and intangible
assets acquired and liabilities assumed. The preliminary allocations of purchase price are
dependant upon certain estimates and assumptions, which are preliminary and may vary from the
amounts reported herein.
The results of operations of Scottel, NCT, ACS, MTS and UCI are included within the Companys
Consolidated Statements of Income beginning on their respective acquisition dates.
Note 9: Restructuring
The Company has incurred and continues to incur costs related to facility consolidations, such as
idle facility rent obligations and the write-off of leasehold improvements, and employee severance
(collectively referred to as restructuring charges) in an attempt to right-size the organization
and more appropriately align the expense structure with anticipated revenues and changing market
demand for its solutions and services. Employee severance is generally payable within the next six
(6) months with certain facility costs extending through Fiscal 2014.
The Company incurred restructuring charges of $860 and $1,697 for the three (3) months ended
December 31, 2009 and 2008, respectively, and $2,623 and $2,720 for the nine (9) months ended
December 31, 2009 and 2008, respectively. These costs have been recorded in Selling, general &
administrative expenses in the Companys Consolidated Statements of Income.
The following table summarizes the changes to the restructuring reserve for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Total
|
|
|
Balance at March 31, 2009
|
|
$
|
4,165
|
|
|
$
|
6,349
|
|
|
$
|
10,514
|
|
Restructuring charge
|
|
|
2,522
|
|
|
|
101
|
|
|
|
2,623
|
|
Acquisition adjustments
|
|
26
|
|
|
|
129
|
|
|
|
155
|
|
Asset write-downs
|
|
|
--
|
|
|
|
(158)
|
|
|
|
(158)
|
|
Cash expenditures
|
|
|
(5,283)
|
|
|
|
(2,344)
|
|
|
|
(7,627)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,430
|
|
|
$
|
4,077
|
|
|
$
|
5,507
|
|
|
Of the $5,507 above, $3,712 is classified as a current liability under Other liabilities on the
Companys Consolidated Balance Sheets for the period ended December 31, 2009.
Note 10: Income Taxes
The Company recorded income tax expense of $6,612, an effective tax rate of 37.5%, and $5,647, an
effective tax rate of 36.5%, for the three (3) months ended December 31, 2009 and 2008,
respectively, and $16,205, an effective tax rate of 37.5%, and $21,241, an effective tax rate of
36.5%, for the nine (9) months ended December 31, 2009 and 2008, respectively. The effective rate
for the nine (9) months ended December 31, 2009 of 37.5% differs from the federal statutory rate
primarily due to state income taxes, foreign currency exchange effects on previously-taxed income
and interest and penalties related to uncertain income tax positions partially offset by foreign
earnings taxed at a lower statutory rate.
The Company provides for income taxes at the end of each interim period based on the estimated
effective tax rate for the full fiscal year. Cumulative adjustments to the Companys estimate are
recorded in the interim period in which a change in the estimated annual effective rate is
determined.
During Fiscal 2008, the Internal Revenue Service (IRS) commenced an examination of the Companys
U.S. federal income tax return for Fiscal 2006 and continued its examination of the Companys U.S.
federal income tax return for Fiscal 2004 and Fiscal 2005. During Fiscal 2009, the IRS proposed
and the Company accepted certain tax adjustments for Fiscal 2004, Fiscal 2005 and Fiscal 2006.
During the first quarter of Fiscal 2010, the IRS concluded its audits of tax years 2004, 2005 and
2006 with no further adjustments.
Fiscal 2008 and Fiscal 2007 remain open to examination by the IRS. Fiscal 2004 through Fiscal 2008
remain open to examination by state and foreign taxing jurisdictions.
15
Note 11: Stock-based Compensation
On August 12, 2008 (the Effective Date), the Companys stockholders approved the 2008 Long-Term
Incentive Plan (the Incentive Plan) which is designed to advance the Companys interests and the
interests of the Companys stockholders by providing incentives to certain employees, directors,
consultants, independent contractors and persons to whom an offer of employment has been extended
by the Company (hereinafter referred to as Eligible Persons). The Incentive Plan replaced the
1992 Stock Option Plan, as amended (the Employee Plan), and the 1992 Director Stock Option Plan,
as amended (the Director Plan), on the Effective Date. Stock option grants under the Employee
Plan and the Director Plan, prior to the effective date of the Incentive Plan, remain outstanding
and will continue to be administered in accordance with the terms of their respective plans and
plan agreements.
Awards (as defined below) under the Incentive Plan may include, but need not be limited to, one or
more of the following types, either alone or in any combination thereof: (i) stock options,
(ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units,
(v) performance grants, (vi) other share-based awards and (vii) any other type of award deemed by
the Compensation Committee of the Board of Directors of the Company (the Board) or any successor
thereto, or such other committee of the Board as is appointed by the Board to administer the
Incentive Plan, in its sole discretion, to be consistent with the purposes of the Incentive Plan
(hereinafter referred to as Awards).
The maximum aggregate number of shares of common stock available for issuance under Awards granted
under the Incentive Plan shall be 900,000 plus the number of shares that remain available for the
grant of stock options under the Employee Plan and the Director Plan on the Effective Date, plus
the number of shares subject to stock options outstanding under the Employee Plan and the Director
Plan on the Effective Date that are forfeited or cancelled prior to exercise. The following table
details the shares of common stock available for grant under the Incentive Plan as of December 31,
2009.
|
|
|
|
|
Shares (in
|
|
|
thousands)
|
|
Shares initially authorized under the Incentive Plan
|
|
900
|
|
|
|
Number of shares that were available for the grant of stock options under the Employee
Plan and the Director Plan on August 12, 2008, the Effective Date
|
|
888
|
|
|
|
Number of shares subject to stock options outstanding under the Employee Plan and the
Director Plan on August 12, 2008, the Effective Date, that were forfeited or cancelled,
prior to exercise, through December 31, 2009
|
|
585
|
|
|
|
|
|
|
Shares authorized for grant under the Incentive Plan as of December 31, 2009
|
|
2,373
|
|
|
|
Shares available for grant under the Incentive Plan as of December 31, 2009
1
|
|
1,698
|
|
1
The aggregate number of shares available for issuance is reduced by 1.87 shares for
each issuance of a full value award (
e.g.,
restricted stock units and performance shares).
The Company recognized stock-based compensation expense of $1,743 ($1,089 net of tax) or $0.06 per
diluted share and $855 ($543 net of tax) or $0.03 per diluted share for the three (3) months ended
December 31, 2009 and 2008, respectively, and $5,022 ($3,139 net of tax) or $0.18 per diluted share
and $2,237 ($1,421 net of tax) or $0.08 per diluted share for the nine (9) months ended December
31, 2009 and 2008, respectively. Stock-based compensation expense is recorded in Selling, general
& administrative expense within the Companys Consolidated Statements of Income.
Stock options
Stock option awards are granted with an exercise price equal to the closing market price of the
common stock on the date of grant; such stock options generally become exercisable in equal amounts
over a three-year period and have a contractual life of ten (10) years from the grant date. The
fair value of stock options is estimated on the grant date using the Black-Scholes option pricing
model which includes the following weighted-average assumptions.
16
|
|
|
|
|
|
|
|
|
|
|
Nine (9) months ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
4.8
|
|
Risk free interest rate
|
|
|
2.6%
|
|
|
|
3.4%
|
|
Annual forfeiture rate
|
|
|
2.2%
|
|
|
|
2.4%
|
|
Volatility
|
|
|
45.6%
|
|
|
|
30.5%
|
|
Dividend yield
|
|
|
0.9%
|
|
|
|
0.7%
|
|
|
The following table summarizes the Companys stock option activity for the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Life
|
|
|
Value
|
|
|
|
(in 000s)
|
|
|
Price
|
|
|
(Years)
|
|
|
(000s)
|
|
|
Outstanding at March 31, 2009
|
|
|
3,309
|
|
|
$
|
36.45
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
167
|
|
|
|
33.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(278)
|
|
|
|
43.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
3,198
|
|
|
$
|
35.67
|
|
|
|
5.9
|
|
|
$
|
529
|
|
Exercisable at December 31, 2009
|
|
|
2,331
|
|
|
$
|
37.90
|
|
|
|
4.9
|
|
|
$
|
184
|
|
|
The weighted-average grant-date fair value of options granted during the nine (9) months ended
December 31, 2009 and 2008 was $12.54 and $8.68, respectively. The aggregate intrinsic value in
the preceding table represents the total pre-tax intrinsic value, based on the Companys average
stock price (i.e., the average of the open and close prices of the common stock) on December 24,
2009 of $29.34, which would have been received by the optionholders had all optionholders exercised
their options as of that date.
The following table summarizes certain information regarding the Companys non-vested stock options
for the period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
Average Grant-
|
|
|
|
(in 000s)
|
|
|
Date Fair Value
|
|
|
Non-vested as of March 31, 2009
|
|
|
1,089
|
|
$
|
|
8.85
|
|
Granted
|
|
|
167
|
|
|
|
12.54
|
|
Forfeited
|
|
|
(14)
|
|
|
|
8.56
|
|
Vested
|
|
|
(375)
|
|
|
|
9.17
|
|
|
|
|
|
Non-vested as of December 31, 2009
|
|
|
867
|
|
$
|
|
9.42
|
|
|
As of December 31, 2009, there was $5,650 of total unrecognized pre-tax stock-based compensation
expense related to non-vested stock options which is expected to be recognized over a
weighted-average period of 1.6 years.
Restricted stock units
Restricted stock unit awards are subject to a service condition and typically vest in equal amounts
over a three-year period from the grant date. The fair value of restricted stock units is
determined based on the number of restricted stock units granted and the closing market price of
the common stock on the date of grant.
The following table summarizes the Companys restricted stock unit activity for the period
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
Average Grant-
|
|
|
|
(in 000s)
|
|
|
Date Fair Value
|
|
|
Outstanding at March 31, 2009
|
|
|
--
|
|
|
$
|
--
|
|
Granted
|
|
|
168
|
|
|
|
29.12
|
|
Vested
|
|
|
(16)
|
|
|
|
32.86
|
|
Forfeited
|
|
|
(1)
|
|
|
|
27.78
|
|
|
|
Outstanding at December 31, 2009
|
|
|
151
|
|
|
$
|
28.74
|
|
|
The total fair value of shares vested during the nine (9) months ended December 31, 2009 and 2008
was $517 and $0, respectively.
17
As of December 31, 2009, there was $3,494 of total unrecognized pre-tax stock-based compensation
expense related to non-vested restricted stock units which is expected to be recognized over a
weighted-average period of 2.4 years.
Performance share awards
Performance share awards are subject to certain performance goals including the Companys Relative
TSR Ranking and cumulative Adjusted EBITDA over a two-year period. The Companys Relative TSR
Ranking metric is based on the two-year cumulative return to shareholders from the change in stock
price and dividends paid between the starting and ending dates. The fair value of performance
share awards (subject to cumulative Adjusted EBITDA) is determined based on the number of
performance shares granted and the closing market price of the common stock on the date of grant.
The fair value of performance share awards (subject to the Companys Relative TSR Ranking) is
estimated on the grant date using the Monte-Carlo simulation which includes the following
weighted-average assumptions.
|
|
|
|
|
|
|
|
|
|
|
Nine (9) months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
|
Expected Volatility
|
|
|
59.1
|
%
|
|
|
--
|
|
Risk free interest rate
|
|
|
1.1
|
%
|
|
|
--
|
|
Dividend yield
|
|
|
0.8
|
%
|
|
|
--
|
|
|
The following table summarizes the Companys performance share award activity for the period
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Shares
|
|
|
Average Grant-
|
|
|
(in 000s)
|
|
|
Date Fair Value
|
|
|
Outstanding at March 31, 2009
|
|
|
--
|
|
$
|
|
--
|
|
Granted
|
|
|
100
|
|
|
|
33.05
|
|
Vested
|
|
|
--
|
|
|
|
--
|
|
Forfeited
|
|
|
--
|
|
|
|
--
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
100
|
|
$
|
|
33.05
|
|
|
No shares vested during the nine (9) months ended December 31, 2009.
As of December 31, 2009, there was $2,397 of total unrecognized pre-tax stock-based compensation
expense related to non-vested performance share awards which is expected to be recognized over a
weighted-average period of 1.4 years.
Note 12: Earnings Per Share
The following table details the computation of basic and diluted earnings per common share from
continuing operations for the periods presented (share numbers in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
9,827
|
|
|
$
|
27,007
|
|
|
$
|
36,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
(basic)
|
|
|
17,548
|
|
|
|
17,533
|
|
|
|
17,545
|
|
|
|
17,525
|
|
Effect of dilutive securities from equity awards
|
|
|
13
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
Weighted-average common shares outstanding
(diluted)
|
|
|
17,561
|
|
|
|
17,533
|
|
|
|
17,545
|
|
|
|
17,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.63
|
|
|
$
|
0.56
|
|
|
$
|
1.54
|
|
|
$
|
2.11
|
|
|
|
|
|
|
Dilutive earnings per common share
|
|
$
|
0.63
|
|
|
$
|
0.56
|
|
|
$
|
1.54
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
The Weighted-average common shares outstanding (diluted) computation is not impacted during any
period where the exercise price of a stock option is greater than the average market price. There
were 3,325,772 and 3,332,957 non-dilutive equity awards outstanding for the three (3) months ended
December 31, 2009 and 2008, respectively, and 3,428,447 and 2,250,587 non-dilutive equity awards
outstanding for the nine (9) months ended December 31, 2009 and 2008, respectively, that are not
included in the corresponding period Weighted-average common shares outstanding (diluted)
computation.
18
Note 13: Comprehensive income and AOCI
The following table details the computation of comprehensive income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
11,019
|
|
|
$
|
9,827
|
|
|
$
|
27,007
|
|
|
$
|
36,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(1,749)
|
|
|
|
(15,815)
|
|
|
|
13,721
|
|
|
|
(28,696)
|
|
Derivative Instruments (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of cash flow hedging
instruments (net of tax)
|
|
|
(41)
|
|
|
|
(403)
|
|
|
|
(619)
|
|
|
|
(99)
|
|
Amounts reclassified into results of operations
|
|
|
92
|
|
|
|
(33)
|
|
|
|
282
|
|
|
|
(39)
|
|
Pension (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss)
|
|
|
1
|
|
|
|
--
|
|
|
|
(138)
|
|
|
|
--
|
|
Amounts reclassified into results of operations
|
|
|
35
|
|
|
|
--
|
|
|
|
105
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(1,662)
|
|
|
$
|
(16,251)
|
|
|
$
|
13,351
|
|
|
$
|
(28,834)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
9,357
|
|
|
$
|
(6,424)
|
|
|
$
|
40,358
|
|
|
$
|
8,125
|
|
|
|
|
|
|
|
|
The components of AOCI consisted of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
March 31, 2009
|
|
|
Foreign currency translation adjustment
|
|
$
|
20,096
|
|
|
$
|
6,375
|
|
Unrealized gains (losses) on derivatives designated
and qualified as cash flow hedges
|
|
|
(272)
|
|
|
|
65
|
|
Unrecognized gain (losses) on defined benefit pension
|
|
|
(2,901)
|
|
|
|
(2,868)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
16,923
|
|
|
$
|
3,572
|
|
|
Note 14: Fair Value Disclosures
Recurring fair value measurements:
The following table presents information about the
Companys assets and liabilities measured at fair value on a recurring basis as of December 31,
2009, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Foreign currency contracts
|
|
$
|
--
|
|
|
$
|
1,209
|
|
|
$
|
--
|
|
|
$
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value as of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Foreign currency contracts
|
|
$
|
--
|
|
|
$
|
1,445
|
|
|
$
|
--
|
|
|
$
|
1,445
|
|
Interest-rate swaps
|
|
|
--
|
|
|
|
5,211
|
|
|
|
--
|
|
|
|
5,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
--
|
|
|
$
|
6,656
|
|
|
$
|
--
|
|
|
$
|
6,656
|
|
|
|
Non-recurring fair value measurements:
As disclosed in Note 2, the Company adopted
guidance on April 1, 2009 that established a framework for measuring fair value and expanded
disclosures about fair value measurements for non-financial assets and liabilities that are
measured at fair value on a non-recurring basis. The Companys assets and liabilities that are
measured at fair value on a non-recurring basis include non-financial assets and liabilities
initially measured at fair value in a business combination. As disclosed in Note 8, the Company
completed two acquisitions during the three months ended December 31, 2009 which included operating
assets, liabilities and certain intangible assets. The Company utilized level 2 and level 3 inputs
to measure the fair value of these items.
19
Note 15: Segment Reporting
Management reviews financial information for the consolidated Company accompanied by disaggregated
information on revenues, operating income and assets by geographic region for the purpose of making
operational decisions and assessing financial performance. Additionally, Management is presented
with and reviews revenues and gross profit by service type. The accounting policies of the
individual operating segments are the same as those of the Company.
The following table presents financial information about the Companys reportable segments by
geographic region for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
217,124
|
|
|
$
|
223,820
|
|
|
$
|
621,635
|
|
|
$
|
631,623
|
|
Operating income
|
|
|
14,890
|
|
|
|
17,267
|
|
|
|
38,278
|
|
|
|
51,914
|
|
Depreciation
|
|
|
1,767
|
|
|
|
2,445
|
|
|
|
5,447
|
|
|
|
7,014
|
|
Intangibles amortization
|
|
|
3,098
|
|
|
|
3,244
|
|
|
|
9,270
|
|
|
|
6,924
|
|
Assets (as of December 31)
|
|
|
1,064,527
|
|
|
|
1,054,408
|
|
|
|
1,064,527
|
|
|
|
1,054,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
27,190
|
|
|
$
|
28,591
|
|
|
$
|
75,248
|
|
|
$
|
96,112
|
|
Operating income
|
|
|
3,111
|
|
|
|
2,882
|
|
|
|
7,755
|
|
|
|
10,151
|
|
Depreciation
|
|
|
76
|
|
|
|
95
|
|
|
|
253
|
|
|
|
337
|
|
Intangibles amortization
|
|
|
9
|
|
|
|
13
|
|
|
|
30
|
|
|
|
50
|
|
Assets (as of December 31)
|
|
|
138,081
|
|
|
|
131,653
|
|
|
|
138,081
|
|
|
|
131,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,071
|
|
|
$
|
9,442
|
|
|
$
|
23,627
|
|
|
$
|
30,481
|
|
Operating income
|
|
|
1,522
|
|
|
|
1,423
|
|
|
|
3,584
|
|
|
|
4,783
|
|
Depreciation
|
|
|
34
|
|
|
|
33
|
|
|
|
94
|
|
|
|
95
|
|
Intangibles amortization
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
13
|
|
Assets (as of December 31)
|
|
|
24,567
|
|
|
|
20,761
|
|
|
|
24,567
|
|
|
|
20,761
|
|
|
The sum of the segment revenues, operating income, depreciation and intangibles amortization equals
the consolidated revenues, operating income, depreciation and intangibles amortization. The
following reconciles segment assets to total consolidated assets as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Segment assets for North America, Europe and All Other
|
|
$
|
1,227,175
|
|
|
$
|
1,206,822
|
|
Corporate eliminations
|
|
|
(62,622)
|
|
|
|
(70,150)
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
1,164,553
|
|
|
$
|
1,136,672
|
|
|
20
The following table presents financial information about the Company by service type for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended
|
|
|
Nine (9) months ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Data Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
45,342
|
|
|
$
|
52,238
|
|
|
$
|
140,680
|
|
|
$
|
141,836
|
|
Gross profit
|
|
|
12,078
|
|
|
|
15,247
|
|
|
|
38,167
|
|
|
|
41,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
161,031
|
|
|
$
|
158,065
|
|
|
$
|
445,025
|
|
|
$
|
452,372
|
|
Gross profit
|
|
|
52,145
|
|
|
|
51,501
|
|
|
|
148,811
|
|
|
|
150,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
47,012
|
|
|
$
|
51,550
|
|
|
$
|
134,805
|
|
|
$
|
164,008
|
|
Gross profit
|
|
|
22,606
|
|
|
|
24,170
|
|
|
|
64,538
|
|
|
|
79,729
|
|
|
The sum of service type revenues and gross profit equals consolidated revenues and gross profit.
Note 16: Commitments and Contingencies
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the staff of the SECs Division of Enforcement (the Staff) relating to the Companys stock
option practices from January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order
of investigation in connection with this matter, and, on May 29, 2007, the Company received a
document subpoena from the SEC acting pursuant to such order. On January 26, 2009, the Company
received a Wells Notice from the SEC. During the third quarter of Fiscal 2010, without admitting
or denying the allegations in a complaint filed by the SEC in the United States District Court for
the Western District of Pennsylvania (the District Court) relating to the Companys stock option
practices, the Company consented to the entry of a judgment permanently enjoining the Company from
violating, in the future, the federal securities laws that require reporting companies to make
periodic filings with the SEC, to make and keep accurate books and records and to devise and
maintain an adequate system of internal accounting controls, and the District Court entered a final
judgment dated December 8, 2009 incorporating the consented-to judgment. The final judgment did
not require the Company to pay a civil penalty or other money damages.
As previously disclosed, the Company received a subpoena, dated December 8, 2004, from the United
States General Services Administration (GSA), Office of Inspector General. The subpoena requires
production of documents and information. The Company understands that the materials are being
sought in connection with an investigation regarding potential violations of the terms of a GSA
Multiple Award Schedule contract. On October 2, 2007, the Company was contacted by the United
States Department of Justice which informed the Company that it was reviewing allegations by the
GSA that certain of the Companys pricing practices under a GSA Multiple Award Schedule contract
violated the Civil False Claims Act. The Company has executed an agreement with the United States
tolling the statute of limitations on any action by the United States through March 1, 2010 in
order for the parties to discuss the merits of these allegations prior to the possible commencement
of any litigation by the United States.
See Note 10 regarding the status of certain IRS matters.
21
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
District Court. The two substantially identical stockholder derivative complaints allege that the
individual defendants improperly backdated and/or benefited from grants of stock options in
violation of the Companys stockholder-approved stock option plans during the period 1996-2002,
improperly recorded and accounted for backdated stock options in violation of generally accepted
accounting principles, improperly took tax deductions based on backdated stock options in violation
of the Internal Revenue Code of 1986, as amended, produced and disseminated false financial
statements and SEC filings to the Companys stockholders and to the market that improperly recorded
and accounted for the backdated option grants, concealed the alleged improper backdating of stock
options and obtained substantial benefits from sales of Company stock while in the possession of
material inside information. The complaints sought damages on behalf of the Company against
certain current and former officers and directors and allege breach of fiduciary duty, unjust
enrichment, securities law violations and other claims. The two lawsuits were consolidated into a
single action as
In re Black Box Corporation Derivative Litigation
, Master File No. 2:06-CV-1531
JFC, and plaintiffs
filed an amended consolidated stockholder derivative complaint on August 31, 2007. During the second
quarter of Fiscal 2010, the Company recorded expense of $3,992 in connection with an agreement in
principle for settlement of this action and related matters arising out of the Companys review of
its historical stock option practices. During the third quarter of Fiscal 2010, certain of the
parties to this action and certain insurers entered into a Memorandum of Understanding regarding
this settlement. On January 22, 2010, the parties to this action and certain insurers executed a
Stipulation of Compromise and Settlement (the Stipulation) and the parties to the action executed
a Joint Motion for Preliminary and Final Approval of Proposed Settlement (the Joint Motion), and
such documents were filed with the District Court. On January 27, 2010, the District Court entered
an order preliminarily approving the proposed settlement and setting forth a process and scheduling
a hearing for consideration of final approval of the proposed settlement (the Preliminary Order).
Pursuant to the Preliminary Order, on February 1, 2010, the Company filed with the SEC a Current
Report on Form 8-K regarding the proposed settlement and filed, as exhibits to such Form 8-K, the
Joint Motion, the Stipulation, the Preliminary Order, a Notice of Proposed Settlement of Derivative
Action and of Settlement Hearing (the Notice) and a proposed Order of Dismissal and Judgment.
Also on February 1, 2010, the Company issued a press release including the Notice. The proposed
settlement remains subject to final approval of the District Court. The Company may incur
additional costs or expenses in relation to this matter that could be material.
The Company is involved in, or has pending, various legal proceedings, claims, suits and complaints
arising out of the normal course of business.
Based on the facts currently available to the Company, Management believes the matters described
under this caption Litigation Matters are adequately provided for, covered by insurance, without
merit or not probable that an unfavorable outcome will result.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500,
during prior fiscal periods, and continued to incur additional expenses through December 31, 2009,
in relation to the following previously-disclosed items (i) the review by the Audit Committee of
the Board of the Companys historical stock option granting practices and related accounting for
stock option grants, (ii) the informal inquiry and formal order of investigation by the SEC
regarding the Companys past stock option granting practices, (iii) the derivative action relating
to the Companys historical stock option granting practices filed against the Company as a nominal
defendant and certain of the Companys current and former directors and officers, as to whom it may
have indemnification obligations and (iv) related matters. As of December 31, 2009, the total
amount of such expenses, inclusive of the $3,992 referred to above, is $12,565 of which $5,000, the
insurance policy limit, has been paid by the insurance company. The Company recorded expense of
$318 and $88 during the three (3) months ended December 31, 2009 and 2008, respectively, and $1,094
and $420 during the nine (9) months ended December 31, 2009 and 2008, respectively. These expenses
are recorded in Selling, general & administrative expense within the Companys Consolidated
Statements of Income. The amount of expenses that the Company could incur in the future with
respect to these matters could be material.
There has been no other significant or unusual activity during Fiscal 2010.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis for the three (3) and nine (9) months ended December 31, 2009 and
2008 as set forth below in this Item 2 should be read in conjunction with the response to Part 1,
Item 1 of this report and the consolidated financial statements of Black Box Corporation (Black
Box, the Company, we or our), including the related notes, and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the Companys most recent
Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) for the
fiscal year ended March 31, 2009 (the Form 10-K). The Companys fiscal year ends on March 31.
The fiscal quarters consist of 13 weeks and generally end on the Saturday nearest each calendar
quarter end, adjusted to provide relatively equivalent business days for each fiscal quarter. The
actual ending dates for the periods presented as of December 31, 2009 and 2008 were December 26,
2009 and December 27, 2008. References to Fiscal Year or Fiscal mean the Companys fiscal year
ended March 31 for the year referenced. All dollar amounts are presented in thousands unless
otherwise noted.
The Company
Black Box is the worlds leading dedicated network infrastructure services provider. Black Box
offers one-source network infrastructure services for communications systems. The Companys
services offerings include design, installation, integration, monitoring and maintenance of voice,
data and integrated communications systems. The Companys primary services offering is voice
solutions (Voice Services); the Company also offers premise cabling and other data-related
services (Data Services) and products. The Company provides 24/7/365 technical support for all
of its solutions which encompass all major voice and data product manufacturers as well as 118,000
network infrastructure products (Hotline products) that it sells through its catalog and Internet
Web site (such catalog and Internet Web site business, together with technical support for such
business, being referred to as Hotline Services) and its Voice Services and Data Services
(collectively referred to as On-Site services) offices. As of December 31, 2009, the Company had
more than 3,000 professional technical experts in 194 offices serving more than 175,000 clients in
141 countries throughout the world. Founded in 1976, Black Box, a Delaware corporation, operates
subsidiaries on five continents and is headquartered near Pittsburgh in Lawrence, Pennsylvania.
Company management (Management) is presented with and reviews revenues and operating income by
geographical segment. In addition, revenues and gross profit information by service type are
provided herein for purposes of further analysis.
The Company has completed several acquisitions from April 1, 2008 through December 31, 2009 that
have had an impact on the Companys consolidated financial statements and, more specifically, North
America Voice Services and North America Data Services for the periods under review. Fiscal 2010
acquisitions include (i) Quanta Systems, LLC (Quanta) and (ii) CBS Technologies Corp. (CBS).
Fiscal 2009 acquisitions include (i) Scottel Voice & Data, Inc. (Scottel), (ii) Network
Communications Technologies, Inc. (NCT), (iii) ACS Communications, Inc. (ACS), (iv) Mutual
Telecom Services Inc. (MTS) and (v) UCI Communications LLC (UCI). The acquisitions noted above
are collectively referred to as the Acquired Companies. The results of operations of the
Acquired Companies are included within the Companys Consolidated Statements of Income beginning on
their respective acquisition dates.
The Company incurs certain expenses (
i.e.,
expenses incurred as a result of certain acquisitions)
that it excludes when evaluating the continuing operations of the Company. The following table is
included to provide a schedule of the current and an estimate of these future expenses for Fiscal
2010 (by quarter) based on information available to the Company as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q10
|
|
|
2Q10
|
|
|
3Q10
|
|
|
4Q10
|
|
|
Fiscal 2010
|
|
|
Selling, general & administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
128
|
|
|
$
|
125
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions
|
|
$
|
4,031
|
|
|
$
|
2,134
|
|
|
$
|
3,099
|
|
|
$
|
3,182
|
|
|
$
|
12,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,031
|
|
|
$
|
2,134
|
|
|
$
|
3,227
|
|
|
$
|
3,307
|
|
|
$
|
12,699
|
|
|
23
The following table is included to provide a schedule of these expenses during Fiscal 2009 (by
quarter).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q09
|
|
|
2Q09
|
|
|
3Q09
|
|
|
4Q09
|
|
|
Fiscal 2009
|
|
|
Selling, general & administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-up depreciation expense on
acquisitions
|
|
$
|
448
|
|
|
$
|
448
|
|
|
$
|
485
|
|
|
$
|
507
|
|
|
$
|
1,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets on
acquisitions
|
|
$
|
1,791
|
|
|
$
|
1,864
|
|
|
$
|
3,231
|
|
|
$
|
3,785
|
|
|
$
|
10,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,239
|
|
|
$
|
2,312
|
|
|
$
|
3,716
|
|
|
$
|
4,292
|
|
|
$
|
12,559
|
|
|
The following table provides information on Revenues and Operating income by reportable geographic
segment (North America, Europe and All Other). The table below should be read in conjunction with
the following discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended December 31,
|
|
Nine (9) months ended December 31,
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
total
|
|
|
|
$
|
|
|
|
revenue
|
|
|
$
|
|
|
|
revenue
|
|
|
$
|
|
|
|
revenue
|
|
|
$
|
|
|
|
revenue
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
217,124
|
|
|
|
85.7%
|
|
|
$
|
223,820
|
|
|
|
85.5%
|
|
|
$
|
621,635
|
|
|
|
86.3%
|
|
|
$
|
631,623
|
|
|
|
83.3%
|
|
Europe
|
|
|
27,190
|
|
|
|
10.7%
|
|
|
|
28,591
|
|
|
|
10.9%
|
|
|
|
75,248
|
|
|
|
10.4%
|
|
|
|
96,112
|
|
|
|
12.7%
|
|
All Other
|
|
|
9,071
|
|
|
|
3.6%
|
|
|
|
9,442
|
|
|
|
3.6%
|
|
|
|
23,627
|
|
|
|
3.3%
|
|
|
|
30,481
|
|
|
|
4.0%
|
|
|
|
|
|
|
Total
|
|
$
|
253,385
|
|
|
|
100%
|
|
|
$
|
261,853
|
|
|
|
100%
|
|
|
$
|
720,510
|
|
|
|
100%
|
|
|
$
|
758,216
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
14,890
|
|
|
|
|
|
|
$
|
17,267
|
|
|
|
|
|
|
$
|
38,278
|
|
|
|
|
|
|
$
|
51,914
|
|
|
|
|
|
% of North America
revenues
|
|
|
6.9%
|
|
|
|
|
|
|
|
7.7%
|
|
|
|
|
|
|
|
6.2%
|
|
|
|
|
|
|
|
8.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
3,111
|
|
|
|
|
|
|
$
|
2,882
|
|
|
|
|
|
|
$
|
7,755
|
|
|
|
|
|
|
$
|
10,151
|
|
|
|
|
|
% of Europe revenues
|
|
|
11.4%
|
|
|
|
|
|
|
|
10.1%
|
|
|
|
|
|
|
|
10.3%
|
|
|
|
|
|
|
|
10.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
$
|
1,522
|
|
|
|
|
|
|
$
|
1,423
|
|
|
|
|
|
|
$
|
3,584
|
|
|
|
|
|
|
$
|
4,783
|
|
|
|
|
|
% of All Other
revenues
|
|
|
16.8%
|
|
|
|
|
|
|
|
15.1%
|
|
|
|
|
|
|
|
15.2%
|
|
|
|
|
|
|
|
15.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,523
|
|
|
|
7.7%
|
|
|
$
|
21,572
|
|
|
|
8.2%
|
|
|
$
|
49,617
|
|
|
|
6.9%
|
|
|
$
|
66,848
|
|
|
|
8.8%
|
|
|
24
The following table provides information on Revenues and Gross profit by service type (Data
Services, Voice Services and Hotline Services). The table below should be read in conjunction with
the following discussions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three (3) months ended December 31,
|
|
|
Nine (9) months ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
|
total
|
|
|
|
|
|
|
|
total
|
|
|
|
|
$
|
|
|
|
revenue
|
|
|
|
$
|
|
|
|
revenue
|
|
|
|
$
|
|
|
|
revenue
|
|
|
|
$
|
|
|
|
revenue
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services
|
|
$
|
45,342
|
|
|
|
17.9%
|
|
|
$
|
52,238
|
|
|
|
19.9%
|
|
|
$
|
140,680
|
|
|
|
19.5%
|
|
|
$
|
141,836
|
|
|
|
18.7%
|
|
Voice Services
|
|
|
161,031
|
|
|
|
63.6%
|
|
|
|
158,065
|
|
|
|
60.4%
|
|
|
|
445,025
|
|
|
|
61.8%
|
|
|
|
452,372
|
|
|
|
59.7%
|
|
Hotline Services
|
|
|
47,012
|
|
|
|
18.5%
|
|
|
|
51,550
|
|
|
|
19.7%
|
|
|
|
134,805
|
|
|
|
18.7%
|
|
|
|
164,008
|
|
|
|
21.6%
|
|
|
|
|
|
|
Total
|
|
$
|
253,385
|
|
|
|
100%
|
|
|
$
|
261,853
|
|
|
|
100%
|
|
|
$
|
720,510
|
|
|
|
100%
|
|
|
$
|
758,216
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Services
|
|
$
|
12,078
|
|
|
|
|
|
|
$
|
15,247
|
|
|
|
|
|
|
$
|
38,167
|
|
|
|
|
|
|
$
|
41,413
|
|
|
|
|
|
% of Data
Services revenues
|
|
|
26.6%
|
|
|
|
|
|
|
|
29.2%
|
|
|
|
|
|
|
|
27.1%
|
|
|
|
|
|
|
|
29.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice Services
|
|
$
|
52,145
|
|
|
|
|
|
|
$
|
51,501
|
|
|
|
|
|
|
$
|
148,811
|
|
|
|
|
|
|
$
|
150,975
|
|
|
|
|
|
% of Voice
Services revenues
|
|
|
32.4%
|
|
|
|
|
|
|
|
32.6%
|
|
|
|
|
|
|
|
33.4%
|
|
|
|
|
|
|
|
33.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotline Services
|
|
$
|
22,606
|
|
|
|
|
|
|
$
|
24,170
|
|
|
|
|
|
|
$
|
64,538
|
|
|
|
|
|
|
$
|
79,729
|
|
|
|
|
|
% of Hotline
Services revenues
|
|
|
48.1%
|
|
|
|
|
|
|
|
46.9%
|
|
|
|
|
|
|
|
47.9%
|
|
|
|
|
|
|
|
48.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,829
|
|
|
|
34.3%
|
|
|
$
|
90,918
|
|
|
|
34.7%
|
|
|
$
|
251,516
|
|
|
|
34.9%
|
|
|
$
|
272,117
|
|
|
|
35.9%
|
|
|
Third quarter of Fiscal 2010 (3Q10) compared to third quarter of Fiscal 2009 (3Q09):
Total Revenues
Total revenues for 3Q10 were $253,385, a decrease of 3% compared to total revenues for 3Q09 of
$261,853. The Acquired Companies contributed incremental revenue of $42,913 and $27,362 for 3Q10
and 3Q09, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $3,732 in 3Q10 relative to the U.S. dollar, total revenues would have decreased 12% from
$234,491 to $206,740 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 3Q10 were $217,124, a decrease of 3% compared to revenues for 3Q09 of
$223,820. The Acquired Companies contributed incremental revenue of $42,913 and $27,362 for 3Q10
and 3Q09, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $726 in 3Q10 relative to the U.S. dollar, North American revenues would have decreased
12% from $196,458 to $173,485. The Company believes that this decrease is primarily due to weaker
general economic conditions that affected client demand across all services segments.
25
Europe
Revenues in Europe for 3Q10 were $27,190, a decrease of 5% compared to revenues for 3Q09 of
$28,591. Excluding the positive exchange rate impact of $2,302 in 3Q10 relative to the U.S.
dollar, Europe revenues would have decreased 13% from $28,591 to $24,888. The Company believes the
decrease is primarily due to weaker general economic conditions that affected client demand for its
Data Services and Hotline Services.
All Other
Revenues for All Other for 3Q10 were $9,071, a decrease of 4% compared to revenues for 3Q09 of
$9,442. Excluding the positive exchange rate impact of $704 in 3Q10 relative to the U.S. dollar,
All Other revenues would have decreased 11% from $9,442 to $8,367.
Revenue by Service Type
Data Services
Revenues from Data Services for 3Q10 were $45,342, a decrease of 13% compared to revenues for 3Q09
of $52,238. The Acquired Companies contributed incremental revenue of $13,722 and $12,626 for 3Q10
and 3Q09, respectively. Excluding the effects of the acquisitions and the positive exchange rate
impact of $1,191 in 3Q10 relative to the U.S. dollar for its international Data Services, Data
Services revenues would have decreased 23% from $39,612 to $30,429. The Company believes this
decrease is primarily due to weaker general economic conditions that affected client demand for
these services.
Voice Services
Revenues from Voice Services for 3Q10 were $161,031, an increase of 2% compared to revenues for
3Q09 of $158,065. The Acquired Companies contributed incremental revenue of $29,191 and $14,736
for 3Q10 and 3Q09, respectively. Excluding the effects of the acquisitions, Voice Services
revenues would have decreased 8% from $143,329 to $131,840. The Company believes this decrease is
primarily due to weaker general economic conditions that affected client demand for its commercial
clients partially offset by an increase in client demand from its federal government clients.
There was no exchange rate impact on Voice Services revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 3Q10 were $47,012, a decrease of 9% compared to revenues for
3Q09 of $51,550. Excluding the positive exchange rate impact of $2,541 in 3Q10 relative to the
U.S. dollar for its international Hotline Services, Hotline Services revenues would have decreased
14% from $51,550 to $44,471. The Company believes this decrease is primarily due to weaker general
economic conditions that affected client demand for these products and services.
Gross profit
Gross profit dollars for 3Q10 were $86,829, a decrease of 4% compared to gross profit dollars for
3Q09 of $90,918. Gross profit as a percent of revenues for 3Q10 was 34.3%, a decrease of 0.4%
compared to gross profit as a percentage of revenues for 3Q09 of 34.7%. The Company believes the
percent decrease was due primarily to the impact of lower margin projects primarily due to
continued pricing pressures in its Data Services segment offset in part by product mix in its
Hotline Services segment. The dollar decrease is primarily due to the decrease in revenues which
is discussed above.
Gross profit dollars for Data Services for 3Q10 were $12,078, or 26.6% of revenues, compared to
gross profit dollars for 3Q09 of $15,247, or 29.2% of revenues. Gross profit dollars for Voice
Services for 3Q10 were $52,145, or 32.4% of revenues, compared to gross profit dollars for 3Q09 of
$51,501, or 32.6% of revenues. Gross profit dollars for Hotline Services for 3Q10 were $22,606, or
48.1% of revenues, compared to gross profit dollars for 3Q09 of $24,170, or 46.9% of revenues.
Please see the preceding paragraph for the analysis of gross profit variances by segment.
Selling, general & administrative expenses
Selling, general & administrative expenses for 3Q10 were $64,198, a decrease of $1,887 compared to
Selling, general & administrative expenses for 3Q09 of $66,085. Selling, general & administrative
expenses as a percent of revenue for 3Q10 were 25.3% compared to 25.2% for 3Q09. The decrease in
Selling, general & administrative expense dollars over the prior year was primarily due to the
Companys continued effort to right-size the organization and more properly align the expense
structure with anticipated revenues and changing market demand for its solutions and services.
Intangibles amortization
Intangibles amortization for 3Q10 was $3,108, a decrease of $153 compared to Intangibles
amortization for 3Q09 of $3,261. The decrease was primarily attributable to the amortization
run-out for certain intangible assets partially offset by addition of intangible assets from
acquisitions completed subsequent to the third quarter of Fiscal 2009.
26
Operating income
As a result of the foregoing, Operating income for 3Q10 was $19,523, or 7.7% of revenues, a
decrease of $2,049 compared to Operating income for 3Q09 of $21,572, or 8.2% of revenues.
Interest expense (income), net
Net interest expense for 3Q10 was $1,852, or 0.7% of revenues, compared to net interest expense for
3Q09 of $5,722, or 2.2% of revenues. The Companys interest-rate swaps contributed a gain of $303
and a loss of $2,436 for 3Q10 and 3Q09, respectively, due to the change in fair value. Excluding
the effect of the interest-rate swaps, net interest expense would have decreased $1,131 from
$3,286, or 1.3% of revenues, to $2,155, or 0.8% of revenues. This decrease in net interest expense
is due to decreases in the weighted-average interest rate from 3.8% for 3Q09 to 1.2% for 3Q10 and
in the weighted-average outstanding debt from $259,060 for 3Q09 to $244,475 for 3Q10.
Provision for income taxes
The tax provision for 3Q10 was $6,612, an effective tax rate of 37.5%. This compares to the tax
provision for 3Q09 of $5,647, an effective tax rate of 36.5%. The tax rate for 3Q10 was higher
than 3Q09 due to changes in the overall mix of taxable income among worldwide offices and foreign
valuation allowances. The Company anticipates that its deferred tax asset is realizable in the
foreseeable future.
Net income
As a result of the foregoing, Net income for 3Q10 was $11,019, or 4.3% of revenues, compared to Net
income for 3Q09 of $9,827, or 3.8% of revenues.
Nine months Fiscal 2010 (3QYTD10) compared to nine months of Fiscal 2009 (3QYTD09):
Total Revenues
Total revenues for 3QYTD10 were $720,510, a decrease of 5% compared to total revenues for 3QYTD09
of $758,216. The Acquired Companies contributed incremental revenue of $119,391 and $44,532 for
3QYTD10 and 3QYTD09, respectively. Excluding the effects of the acquisitions and the negative
exchange rate impact of $4,327 in 3QYTD10 relative to the U.S. dollar, total revenues would have
decreased 15% from $713,684 to $605,446 for the reasons discussed below.
Revenues by Geography
North America
Revenues in North America for 3QYTD10 were $621,635, a decrease of 2% compared to revenues for
3QYTD09 of $631,623. The Acquired Companies contributed incremental revenue of $119,391 and
$44,532 for 3QYTD10 and 3QYTD09, respectively. Excluding the effects of the acquisitions and the
negative exchange rate impact of $292 in 3QYTD10 relative to the U.S. dollar, North American
revenues would have decreased 14% from $587,091 to $502,536. The Company believes that this
decrease is primarily due to weaker general economic conditions that affected client demand across
all services segments.
Europe
Revenues in Europe for 3QYTD10 were $75,248, a decrease of 22% compared to revenues for 3QYTD09 of
$96,112. Excluding the negative exchange rate impact of $4,753 in 3QYTD10 relative to the U.S.
dollar, Europe revenues would have decreased 17% from $96,112 to $80,001. The Company believes the
decrease is primarily due to weaker general economic conditions that affected client demand for its
Data Services and Hotline Services.
All Other
Revenues for All Other for 3QYTD10 were $23,627, a decrease of 22% compared to revenues for 3QYTD09
of $30,481. Excluding the positive exchange rate impact of $718 in 3QYTD10 relative to the U.S.
dollar, All Other revenues would have decreased 25% from $30,481 to $22,909.
27
Revenue by Service Type
Data Services
Revenues from Data Services for 3QYTD10 were $140,680, a decrease of 1% compared to revenues for
3QYTD09 of $141,836. The Acquired Companies contributed incremental revenue of $39,730 and $12,626
for 3QYTD10 and 3QYTD09, respectively. Excluding the effects of the acquisitions and the negative
exchange rate impact of $2,675 in 3QYTD10 relative to the U.S. dollar for its international Data
Services, Data Services revenues would have decreased 20% from $129,210 to $103,625. The Company
believes this decrease is primarily due to weaker general economic conditions that affected client
demand for these services.
Voice Services
Revenues from Voice Services for 3QYTD10 were $445,025, a decrease of 2% compared to revenues for
3QYTD09 of $452,372. The Acquired Companies contributed incremental revenue of $79,661 and $31,906
for 3QYTD10 and 3QYTD09, respectively. Excluding the effects of the acquisitions, Voice Services
revenues would have decreased 13% from $420,466 to $365,364. The Company believes this decrease is
primarily due to weaker general economic conditions that affected client demand for its commercial
clients partially offset by an increase in client demand from its federal government clients.
There was no exchange rate impact on Voice Services revenues as all of the Companys Voice Services
revenues are denominated in U.S. dollars.
Hotline Services
Revenues from Hotline Services for 3QYTD10 were $134,805, a decrease of 18% compared to revenues
for 3QYTD09 of $164,008. Excluding the negative exchange rate impact of $1,652 in 3QYTD10 relative
to the U.S. dollar for its international Hotline Services, Hotline Services revenues would have
decreased 17% from $164,008 to $136,457. The Company believes this decrease is primarily due to
weaker general economic conditions that affected client demand for these products and services.
Gross profit
Gross profit dollars for 3QYTD10 were $251,516, a decrease of 8% compared to gross profit dollars
for 3QYTD09 of $272,117. Gross profit as a percent of revenues for 3QYTD10 was 34.9%, a decrease
of 1.0% compared to gross profit as a percentage of revenues for 3QYTD09 of 35.9%. The Company
believes the percent decrease was due primarily to the impact of lower margin projects primarily
due to continued pricing pressures in its Data Services segment and product mix in its Hotline
Services segment. The dollar decrease is primarily due to the decrease in revenues which is
discussed above.
Gross profit dollars for Data Services for 3QYTD10 were $38,167, or 27.1% of revenues, compared to
gross profit dollars for 3QYTD09 of $41,413, or 29.2% of revenues. Gross profit dollars for Voice
Services for 3QYTD10 were $148,811, or 33.4% of revenues, compared to gross profit dollars for
3QYTD09 of $150,975, or 33.4% of revenues. Gross profit dollars for Hotline Services for 3QYTD10
were $64,538, or 47.9% of revenues, compared to gross profit dollars for 3QYTD09 of $79,729, or
48.6% of revenues. Please see the preceding paragraph for the analysis of gross profit variances
by segment.
Selling, general & administrative expenses
Selling, general & administrative expenses for 3QYTD10 were $192,596, a decrease of $5,686 compared
to Selling, general & administrative expenses for 3QYTD09 of $198,282. Selling, general &
administrative expenses as a percent of revenue for 3QYTD10 were 26.7% compared to 26.2% for
3QYTD09. The decrease in Selling, general & administrative expense dollars was primarily due to
the Companys continued effort to right-size the organization and more properly align the expense
structure with anticipated revenues and changing market demand for its solutions and services
partially offset by increases in historical stock option review costs of $4,154 (including $3,992
in 2Q10 in connection with an agreement in principle for settlement of the pending shareholder
derivative lawsuit and matters related to the Companys review of its historical stock option
practices) and non-cash stock-based compensation expense of $2,785.
Intangibles amortization
Intangibles amortization for 3QYTD10 was $9,303, an increase of $2,316 compared to Intangibles
amortization for 3QYTD09 of $6,987. The increase was primarily attributable to the addition of
intangible assets from acquisitions completed subsequent to the third quarter of Fiscal 2009
partially offset by the amortization run-out for certain intangible assets.
28
Operating income
As a result of the foregoing, Operating income for 3QYTD10 was $49,617, or 6.9% of revenues, a
decrease of $17,231 compared to Operating income for 3QYTD09 of $66,848, or 8.8% of revenues.
Interest expense (income), net
Net interest expense for 3QYTD10 was $6,592, or 0.9% of revenues, compared to net interest expense
for 3QYTD09 of $8,105, or 1.1% of revenues. The Companys interest-rate swaps contributed gains of
$126 and $441 for 3QYTD10 and 3QYTD09, respectively, due to the change in fair value. Excluding
the effect of the interest-rate swaps, net interest expense would have decreased $1,828 from
$8,546, or 1.1% of revenues, to $6,718, or 0.9% of revenues. This decrease in net interest expense
is due to a decrease in the weighted-average interest rate from 3.7% for 3QYTD09 to 1.4% for
3QYTD10 partially offset by an increase in the weighted-average outstanding debt from $230,719 for
3QYTD09 to $247,550 for 3QYTD10.
Provision for income taxes
The tax provision for 3QYTD10 was $16,205, an effective tax rate of 37.5%. This compares to the
tax provision for 3QYTD09 of $21,241, an effective tax rate of 36.5%. The tax rate for 3QYTD10 was
higher than 3QYTD09 due to changes in the overall mix of taxable income among worldwide offices and
foreign valuation allowances. The Company anticipates that its deferred tax asset is realizable in
the foreseeable future.
Net income
As a result of the foregoing, Net income for 3QYTD10 was $27,007, or 3.7% of revenues, compared to
Net income for 3QYTD09 of $36,959, or 4.9% of revenues.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities during 3QYTD10 was $42,133. Significant factors
contributing to the source of cash were: net income of $27,007 inclusive of non-cash charges of
$15,097 and $5,022 for amortization / depreciation expense and stock compensation expense,
respectively, as well as, decreases in net inventory of $3,617 and net trade accounts receivable of
$11,568 and an increase in accrued expenses and accrued taxes of $3,069 and $2,814, respectively.
Significant factors contributing to a use of cash include decreases in billings in excess of costs
and restructuring reserves of $3,704 and $5,178, respectively and an increase in costs in excess of
billings of $22,623. The increase in costs in excess of billings is primarily related to billing
terms associated with certain government-related contracts. Amounts are expected to be billed and
collected over the next two fiscal quarters. Changes in the above accounts are based on average
Fiscal 2010 exchange rates.
Net cash provided by operating activities during 3QYTD09 was $51,763. Significant factors
contributing to the source of cash were: net income of $36,959 inclusive of non-cash charges of
$14,433 and $2,237 for amortization / depreciation expense and stock compensation expense,
respectively, as well as decreases in net inventory of $5,185, net trade accounts receivable of
$14,484 and the deferred tax provision of $1,045, and increases in accrued compensation and
benefits of $6,190. Significant factors contributing to a use of cash include decreases in trade
accounts payable, restructuring reserves, billings in excess of costs and deferred revenue of
$4,597, $4,837, $4,125 and $2,075, respectively, and an increase in costs in excess of billings of
$3,254. Changes in the above accounts are based on average Fiscal 2009 exchange rates.
As of December 31, 2009 and 2008, the Company had cash and cash equivalents of $29,056 and $22,557,
respectively, working capital of $141,378 and $125,633, respectively, and a current ratio of 1.7
and 1.6, respectively.
The Company believes that its cash provided by operating activities and availability under its
credit facility will be sufficient to fund the Companys working capital requirements, capital
expenditures, dividend program, potential stock repurchases, potential future acquisitions or
strategic investments and other cash needs for the next 12 months.
Investing Activities
Net cash used by investing activities during 3QYTD10 was $19,866. Significant factors contributing
to the cash outflow were: $10,687 to acquire Quanta and CBS, $7,738 for holdbacks and contingent
fee payments related to prior period acquisitions and $1,573 for gross capital expenditures.
29
Net cash used by investing activities during 3QYTD09 was $98,481. Significant factors contributing
to the cash outflow were: $96,534 to acquire NCT, ACS, MTS and UCI and $1,853 for gross capital
expenditures.
Financing Activities
Net cash used by financing activities during 3QYTD10 was $17,565. Significant factors contributing
to the cash outflow were $14,408 of net payments on long-term debt and $3,157 for the payment of
dividends.
Net cash provided by financing activities during 3QYTD09 was $44,549. Significant factors
contributing to the cash inflow were $47,283 of net borrowings on long-term debt and $545 of
proceeds from the exercise of stock options. Significant factors contributing to the cash outflow
were $3,154 for the payment of dividends.
Total Debt
Revolving Credit Agreement
On January 30, 2008, the Company entered into a Third Amended and
Restated Credit Agreement dated as of January 30, 2008 (the Credit Agreement) with Citizens Bank
of Pennsylvania, as agent, and a group of lenders. The Credit Agreement expires on January 30,
2013. Borrowings under the Credit Agreement are permitted up to a maximum amount of $350,000,
which includes up to $20,000 of swing-line loans and $25,000 of letters of credit. The Credit
Agreement may be increased by the Company up to an additional $100,000 with the approval of the
lenders and may be unilaterally and permanently reduced by the Company to not less than the then
outstanding amount of all borrowings. Interest on outstanding indebtedness under the Credit
Agreement accrues, at the Companys option, at a rate based on either: (a) the greater of (i) the
prime rate per annum of the agent then in effect and (ii) 0.50% plus the rate per annum announced
by the Federal Reserve Bank of New York as being the weighted-average of the rates on overnight
Federal funds transactions arranged by Federal funds brokers on the previous trading day or (b) a
rate per annum equal to the LIBOR rate plus 0.50% to 1.125% (determined by a leverage ratio based
on the Companys consolidated EBITDA). The Credit Agreement requires the Company to maintain
compliance with certain non-financial and financial covenants such as leverage and fixed-charge
coverage ratios. As of December 31, 2009, the Company was in compliance with all financial
covenants under the Credit Agreement.
As of December 31, 2009, the Company had total debt outstanding of $236,371. Total debt was
comprised of $234,210 outstanding under the Credit Agreement, $2,146 of obligations under capital
leases and $15 of various other third-party, non-employee loans. The maximum amount of debt
outstanding under the Credit Agreement, the weighted-average balance outstanding under the Credit
Agreement and the weighted-average interest rate on all outstanding debt for the three (3) months
ended December 31, 2009 was $255,725, $244,475 and 1.2%, respectively, compared to $277,735,
$259,060 and 3.8%, respectively, for the three (3) months ended December 31, 2008. The maximum
amount of debt outstanding under the Credit Agreement, the weighted-average balance outstanding
under the Credit Agreement and the weighted-average interest rate on all outstanding debt for the
nine (9) months ended December 31, 2009 was $261,750, $247,550 and 1.4%, respectively, compared to
$277,735, $230,719 and 3.7%, respectively, for the nine (9) months ended December 31, 2008.
Dividends
Fiscal 2010
3Q10
- The Companys Board of Directors (the Board) declared a cash dividend of $0.06 per share
on all outstanding shares of the common stock. The dividend totaled $1,053 and was paid on January
8, 2010 to stockholders of record at the close of business on December 24, 2009.
2Q10
- The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,053 and was paid on October 9, 2009 to stockholders of
record at the close of business on September 25, 2009.
1Q10
- The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on July 10, 2009 to stockholders of record
at the close of business on June 26, 2009.
Fiscal 2009
3Q09
- The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on January 9, 2009 to stockholders of
record at the close of business on December 26, 2008.
2Q09
- The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,052 and was paid on October 14, 2008 to stockholders of
record at the close of business on September 26, 2008.
30
1Q09
- The Board declared a cash dividend of $0.06 per share on all outstanding shares of the
common stock. The dividend totaled $1,051 and was paid on July 14, 2008 to stockholders of record
at the close of business on June 30, 2008.
While the Company expects to continue to declare quarterly dividends, the payment of future
dividends is at the discretion of the Board and the timing and amount of any future dividends will
depend upon earnings, cash requirements and financial condition of the Company. Under the Credit
Agreement, the Company is permitted to make any distribution or dividend as long as no Event of
Default or Potential Default (each as defined in the Credit Agreement) occurs or is continuing.
Repurchase of Common Stock
Fiscal 2010
There were no purchases of common stock during Fiscal 2010.
Fiscal 2009
There were no purchases of common stock during Fiscal 2009.
Since the inception of the repurchase program in April 1999 through December 31, 2009, the Company
has repurchased 7,626,195 shares of common stock for an aggregate purchase price of $323,095, or an
average purchase price per share of $42.37. As of December 31, 2009, 873,805 shares were available
under repurchase programs approved by the Board. Additional repurchases of common stock may occur
from time to time depending upon factors such as the Companys cash flows and general market
conditions. While the Company expects to continue to repurchase shares of common stock for the
foreseeable future, there can be no assurance as to the timing or amount of such repurchases.
Under the Credit Agreement, the Company is permitted to repurchase its common stock as long as no
Event of Default or Potential Default (each as defined in the Credit Agreement) occurs or is
continuing, the leverage ratio (after taking into consideration the payment made to repurchase such
common stock) would not exceed 2.75 to 1.0 and the availability to borrow under the Credit Facility
would not be less than $20 million.
Expenses Incurred by the Company
The Company has incurred significant expenses, in excess of its insurance deductible of $500,
during prior fiscal periods, and continued to incur additional expenses through December 31, 2009,
in relation to the following previously-disclosed items (i) the review by the Audit Committee of
the Board of the Companys historical stock option granting practices and related accounting for
stock option grants, (ii) the informal inquiry and formal order of investigation by the SEC
regarding the Companys past stock option granting practices, (iii) the derivative action relating
to the Companys historical stock option granting practices filed against the Company as a nominal
defendant and certain of the Companys current and former directors and officers, as to whom it may
have indemnification obligations and (iv) related matters. As of December 31, 2009, the total
amount of such expenses is $12,565, of which $5,000, the insurance policy limit, has been paid by
the insurance company. The Company recorded expense of $318 and $88 during the three (3) months
ended December 31, 2009 and 2008, respectively, and $1,094 and $420 during the nine (9) months
ended December 31, 2009 and 2008, respectively. The amount of expenses that the Company could
incur in the future with respect to these matters could be material.
Legal Proceedings
See
the matters discussed in Part II, Item 1, Legal Proceedings of this Quarterly Report on Form
10-Q (this Form 10-Q), which information is incorporated herein by reference.
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.
31
Valuation of Goodwill
The Company conducts its annual goodwill impairment assessment during the third quarter of its
fiscal year (September 26, 2009 for Fiscal 2010). The following table reconciles the carrying
value of goodwill, as of September 26, 2009, for the Companys reportable segments as reported in
its consolidated financial statements, to the carrying value of goodwill by reporting unit which is
used for the annual goodwill impairment assessment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
Goodwill (as reported in financial statements)
|
|
$
|
572,277
|
|
|
$
|
72,233
|
|
|
$
|
2,093
|
|
|
$
|
646,603
|
|
Adjustment
|
|
|
(30,370)
|
|
|
|
27,333
|
|
|
|
3,037
|
|
|
|
--
|
|
|
|
|
Goodwill (for annual impairment assessment)
1
|
|
$
|
541,907
|
|
|
$
|
99,566
|
|
|
$
|
5,130
|
|
|
$
|
646,603
|
|
|
1
Goodwill (for annual impairment assessment) represents the amount of goodwill
that is at risk by reporting unit for Companys goodwill impairment analysis.
Goodwill is tested using a two-step process. The first step of the goodwill impairment assessment,
used to identify potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill (net book value). If the fair value of a reporting unit
exceeds its net book value, goodwill of the reporting unit is considered not impaired, thus the
second step of the impairment test is unnecessary. If net book value of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test will be performed to measure the
amount of impairment loss, if any. The second step of the goodwill impairment assessment, used to
measure the amount of impairment loss, if any, compares the implied fair value of reporting unit
goodwill, which is determined in the same manner as the amount of goodwill recognized in a business
combination, with the carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in
an amount equal to that excess.
In the first step of the goodwill impairment assessment, the Company uses an income approach to
derive a present value of the reporting units projected future annual cash flows and the present
residual value of the reporting unit. The Company uses the income approach because it believes
that the discounted future cash flows provide greater detail and opportunity to reflect facts,
circumstances and economic conditions for each reporting unit. In addition, the Company believes
that this valuation approach is a proven valuation technique and methodology for its industry and
is widely accepted by investors. The Company uses a variety of underlying assumptions to estimate
these future cash flows, which vary for each of the reporting units and include (i) future revenue
growth rates, (ii) future operating profitability, (iii) the weighted-average cost of capital and
(iv) a terminal growth rate. If the Companys estimates and assumptions used in the discounted
future cash flows should change at some future date, the Company could incur an impairment charge
which could have a material adverse effect on the results of operations for the period in which the
impairment occurs.
In addition to estimating fair value of the Companys reporting units using the income approach,
the Company also estimates fair value using a market-based approach which relies on values based on
market multiples derived from comparable public companies. The Company uses the estimated fair
value of the reporting units under the market approach to validate the estimated fair value of the
reporting units under the income approach.
The results of the Companys annual goodwill impairment assessment conducted during the third
quarter of Fiscal 2010 indicate that goodwill is not impaired in any of the Companys reporting
units. The following table summarizes the estimated fair value of the reporting unit, the net book
value of the reporting unit and the surplus of the estimated fair value of the reporting unit over
the net book value of the reporting unit as of September 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
Estimated fair value of the reporting unit
|
|
$
|
588,992
|
|
|
$
|
129,949
|
|
|
$
|
33,606
|
|
|
$
|
752,547
|
|
Net book value of the reporting unit
|
|
|
541,949
|
|
|
|
121,920
|
|
|
|
14,866
|
|
|
|
678,735
|
|
|
|
|
Surplus
|
|
$
|
47,043
|
|
|
$
|
8,029
|
|
|
$
|
18,740
|
|
|
$
|
73,812
|
|
|
To illustrate the sensitivity of the discounted future cash flows, an instantaneous 100 basis
point increase in the weighted-average cost of capital, which, holding all other assumptions
constant, would be material to the estimated fair value of the reporting unit, would produce a
decrease in the fair value of the reporting units by $87,345, $11,325 and $2,603 for North America,
Europe and All Other, respectively.
Since March 31, 2009, the Companys stock market capitalization has been lower than its net book
value. Each of the Companys reporting units continues to operate profitably and generate
significant cash flow from operations, and the Company expects that each will continue to do so in
Fiscal 2011 and beyond. The Company also believes that a reasonable potential buyer would offer a
control premium for the business that would adequately cover the difference between the recent
stock trading prices and the book value.
32
Future events that could result in an interim assessment of goodwill impairment and/or an
impairment loss include, but are not limited to, (i) significant underperformance relative to
historical or projected future operating results, (ii) significant changes in the manner of or use
of the assets or the strategy for the Companys overall business, (iii) significant negative
industry or economic trends, (iv) a further decline in market capitalization below book value and
(v) a modification to the Companys reporting segments. Management is currently considering
alternative reporting segments for the purpose of making operational decisions and assessing
financial performance. This contemplated change in reporting segments would affect the reporting
units currently being used in the Companys annual goodwill impairment analysis. Any such change
could result in an impairment charge which could have a material adverse effect on the results of
operations for the period in which the impairment occurs.
Critical Accounting Policies/ Impact of Recently Issued Accounting Pronouncements
Critical Accounting Policies
The Companys critical accounting policies require the most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and are the most important to the portrayal of the Companys consolidated
financial statements. The Companys critical accounting policies are disclosed in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations of the Form
10-K. There have been no changes to the Companys critical accounting policies during the three
(3) months ended December 31, 2009.
Impact of Recently Issued Accounting Pronouncements
See
Note 2 of the Notes to the Consolidated Financial Statements for further discussion of
recently-issued accounting standards and the related impact on the Companys consolidated financial
statements.
Cautionary Forward Looking Statements
When included in this Form 10-Q or in documents incorporated herein by reference, the words
should, expects, intends, anticipates, believes, estimates, approximates, targets,
plans and analogous expressions are intended to identify forward-looking statements. One can
also identify forward-looking statements by the fact that they do not relate strictly to historical
or current facts. Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those projected. Although it is not
possible to predict or identify all risk factors, such risks and uncertainties may include, among
others, the final outcome of the review of the Companys stock option granting practices, including
the related shareholder derivative lawsuit, tax matters and insurance/indemnification matters, and
the impact of any actions that may be required or taken as a result of such review, shareholder
derivative lawsuit, tax matters or insurance/indemnification matters, levels of business activity
and operating expenses, expenses relating to corporate compliance requirements, cash flows, global
economic and business conditions, successful integration of acquisitions, the timing and costs of
restructuring programs, successful marketing of DVH services, successful implementation of the
Companys M&A program, including identifying appropriate targets, consummating transactions and
successfully integrating the businesses, successful implementation of the Companys government
contracting programs, competition, changes in foreign, political and economic conditions,
fluctuating foreign currencies compared to the U.S. dollar, rapid changes in technologies, client
preferences, the Companys arrangements with suppliers of voice equipment and technology and
various other matters, many of which are beyond the Companys control. Additional risk factors are
included in the Form 10-K and in this Form 10-Q. 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 Form 10-Q. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or any changes in the Companys expectations with
regard thereto or any change in events, conditions or circumstances on which any statement is
based.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks in the ordinary course of business that include
interest-rate volatility and foreign currency exchange rates volatility. Market risk is measured
as the potential negative impact on earnings, cash flows or fair values resulting from a
hypothetical change in interest rates or foreign currency exchange rates over the next year. The
Company does not hold or issue any other financial derivative instruments (other than those
specifically noted below) nor does it engage in speculative trading of financial derivatives.
Interest-rate Risk
The Companys primary interest-rate risk relates to its long-term debt obligations. As of December
31, 2009, the Company had total long-term obligations of $234,210 under the Credit Agreement. Of
the outstanding debt, $150,000 was in variable rate debt that was effectively converted to a fixed
rate through multiple interest-rate swap agreements (discussed in more detail below) and $84,210
was in variable rate obligations. As of December 31, 2009, an instantaneous 100 basis point
increase in the interest rate of the variable rate debt would reduce the Companys net income in
the subsequent fiscal quarter by $208 ($130 net of tax) assuming the Company employed no
intervention strategies.
To mitigate the risk of interest-rate fluctuations associated with the Companys variable rate
long-term debt, the Company has implemented an interest-rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest-rate volatility. The Companys goal is to manage interest-rate
sensitivity by modifying the re-pricing characteristics of certain balance sheet liabilities so
that the net-interest margin is not, on a material basis, adversely affected by the movements in
interest rates.
On July 26, 2006, the Company entered into a five-year floating-to-fixed interest-rate swap that is
based on a 3-month LIBOR rate versus a 5.44% fixed rate, has a notional value of $100,000 (which
reduced to $50,000 as of June 26, 2009) and does not qualify for hedge accounting. On June 15,
2009, the Company entered into a three-year floating-to-fixed interest-rate swap that is based on a
3-month LIBOR rate versus a 2.28% fixed rate, has a notional value of $100,000 reducing to $50,000
after two years and does not qualify for hedge accounting. Changes in the fair market value of the
interest-rate swap are recorded as an asset or liability within the Companys Consolidated Balance
Sheets and Interest expense (income) within the Companys Consolidated Statements of Income.
Foreign Exchange Rate Risk
The Company has operations, clients and suppliers worldwide, thereby exposing the Companys
financial results to foreign currency fluctuations. In an effort to reduce this risk of foreign
currency fluctuations, the Company generally sells and purchases inventory based on prices
denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the
subsidiaries local currency. The Company has entered and will continue in the future, on a
selective basis, to enter into foreign currency contracts to reduce the foreign currency exposure
related to certain intercompany transactions, primarily trade receivables and loans. All of the
foreign currency contracts have been designated and qualify as cash flow hedges. The effective
portion of any changes in the fair value of the derivative instruments is recorded in Accumulated
Other Comprehensive Income (AOCI) until the hedged forecasted transaction occurs or the
recognized currency transaction affects earnings. Once the forecasted transaction occurs or the
recognized currency transaction affects earnings, the effective portion of any related gains or
losses on the cash flow hedge is reclassified from AOCI to the Companys Consolidated Statements of
Income. In the event it becomes probable that the hedged forecasted transaction will not occur,
the ineffective portion of any gain or loss on the related cash flow hedge would be reclassified
from AOCI to the Companys Consolidated Statements of Income.
As of December 31, 2009, the Company had open foreign currency contracts in Australian and Canadian
dollars, Danish krone, Euros, Mexican pesos, Norwegian kroner, British pounds sterling, Swedish
krona, Swiss francs and Japanese yen. The open contracts have contract rates ranging from 1.11 to
1.18 Australian dollar, 1.08 to 1.21 Canadian dollar, 4.98 to 5.24 Danish krone, 0.67 to 0.78 Euro,
13.79 to 13.79 Mexican peso, 5.69 to 6.62 Norwegian kroner, 0.59 to 0.68 British pound sterling,
6.97 to 7.49 Swedish krona, 1.01 to 1.08 Swiss franc and 90.13 to 90.13 Japanese yen, all per U.S.
dollar. The total open contracts had a notional amount of $69,847 and will expire within eleven
(11) months.
34
Item 4. Controls and Procedures.
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
Management, including the Companys Chief Executive Officer and Chief Financial Officer, is
responsible for establishing and maintaining adequate disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) for the Company. Management assessed the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2009. Based upon this assessment, Management
has concluded that the Companys disclosure controls and procedures were effective as of December
31, 2009 to provide reasonable assurance that information required to be disclosed by the Company
in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in such reports is
accumulated and communicated to Management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure.
The SECs general guidance permits the exclusion of an assessment of the effectiveness of a
registrants disclosure controls and procedures as they relate to its internal control over
financial reporting for an acquired business during the first year following such acquisition if,
among other circumstances and factors, there is not adequate time between the acquisition date and
the date of assessment. As previously noted in this Form 10-Q, Black Box completed the acquisition
of Quanta and CBS during Fiscal 2010 and Scottel during Fiscal 2009. Quanta, CBS and Scottel
represent approximately 0.8%, 0.6% and 4%, respectively, of the Companys total assets as of
December 31, 2009. Managements assessment and conclusion on the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2009 excludes an assessment of the internal
control over financial reporting of Quanta, CBS and Scottel.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal
quarter that have materially affected or are reasonably likely to materially affect the Companys
internal control over financial reporting.
Limitations on the Effectiveness of Controls
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of its inherent limitations, the
Companys internal control over financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
35
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Except as noted below, there have been no material developments in legal proceedings during the
three (3) months ended December 31, 2009.
See
Part I, Item 3, Legal Proceedings of the Form 10-K
for more information regarding legal proceedings as of March 31, 2009.
Regulatory Matters
As previously disclosed, on November 13, 2006, the Company received a letter of informal inquiry
from the staff of the SECs Division of Enforcement (the Staff) relating to the Companys stock
option practices from January 1, 1997 to present. On May 24, 2007, the SEC issued a formal order
of investigation in connection with this matter, and, on May 29, 2007, the Company received a
document subpoena from the SEC acting pursuant to such order. On January 26, 2009, the Company
received a Wells Notice from the SEC. During the third quarter of Fiscal 2010, without admitting
or denying the allegations in a complaint filed by the SEC in the United States District Court for
the Western District of Pennsylvania (the District Court) relating to the Companys stock option
practices, the Company consented to the entry of a judgment permanently enjoining the Company from
violating, in the future, the federal securities laws that require reporting companies to make
periodic filings with the SEC, to make and keep accurate books and records and to devise and
maintain an adequate system of internal accounting controls, and the District Court entered a final
judgment dated December 8, 2009 incorporating the consented-to judgment. The final judgment did
not require the Company to pay a civil penalty or other money damages.
As previously disclosed, the Company received a subpoena, dated December 8, 2004, from the United
States General Services Administration (GSA), Office of Inspector General. The subpoena requires
production of documents and information. The Company understands that the materials are being
sought in connection with an investigation regarding potential violations of the terms of a GSA
Multiple Award Schedule contract. On October 2, 2007, the Company was contacted by the United
States Department of Justice which informed the Company that it was reviewing allegations by the
GSA that certain of the Companys pricing practices under a GSA Multiple Award Schedule contract
violated the Civil False Claims Act. The Company has executed an agreement with the United States
tolling the statute of limitations on any action by the United States through March 1, 2010 in
order for the parties to discuss the merits of these allegations prior to the possible commencement
of any litigation by the United States.
Litigation Matters
In November 2006, two stockholder derivative lawsuits were filed against the Company itself, as a
nominal defendant, and several of the Companys current and former officers and directors in the
District Court. The two substantially identical stockholder derivative complaints allege that the
individual defendants improperly backdated and/or benefited from grants of stock options in
violation of the Companys stockholder-approved stock option plans during the period 1996-2002,
improperly recorded and accounted for backdated stock options in violation of generally accepted
accounting principles, improperly took tax deductions based on backdated stock options in violation
of the Internal Revenue Code of 1986, as amended, produced and disseminated false financial
statements and SEC filings to the Companys stockholders and to the market that improperly recorded
and accounted for the backdated option grants, concealed the alleged improper backdating of stock
options and obtained substantial benefits from sales of Company stock while in the possession of
material inside information. The complaints sought damages on behalf of the Company against
certain current and former officers and directors and allege breach of fiduciary duty, unjust
enrichment, securities law violations and other claims. The two lawsuits were consolidated into a
single action as
In re Black Box Corporation Derivative Litigation
, Master File No. 2:06-CV-1531
JFC, and plaintiffs filed an amended consolidated stockholder derivative complaint on August 31,
2007. During the second quarter of Fiscal 2010, the Company recorded expense of $3,992 in
connection with an agreement in principle for settlement of this action and related matters arising
out of the Companys review of its historical stock option practices. During the third quarter of
Fiscal 2010, certain of the parties to this action and certain insurers entered into a Memorandum
of Understanding regarding this settlement. On January 22, 2010, the parties to this action and
certain insurers executed a Stipulation of Compromise and Settlement (the Stipulation) and the
parties to the action executed a Joint Motion for Preliminary and Final Approval of Proposed
Settlement (the Joint Motion), and such documents were filed with the District Court. On January
27, 2010, the District Court entered an order preliminarily approving the proposed settlement and
setting forth a process and scheduling a hearing for consideration of final approval of the
proposed settlement (the Preliminary Order). Pursuant to the Preliminary Order, on February 1,
2010, the Company filed with the SEC a Current Report on Form 8-K regarding the proposed settlement
and filed, as exhibits to such Form 8-K, the Joint Motion, the Stipulation, the Preliminary Order,
a Notice of Proposed Settlement of Derivative Action and of Settlement Hearing (the Notice) and a
proposed Order of Dismissal and Judgment. Also on February 1, 2010, the Company issued a press
release including the Notice. The proposed settlement remains subject to final approval of the
District Court. The Company may incur additional costs or expenses in relation to this matter that
could be material.
36
Item 1A. Risk Factors.
The following is provided to update the following risk factor previously disclosed in Part I,
Item 1A, Risk Factors of the Form 10-K.
We are dependent upon certain key supply chain and distribution agreements
.
We have
significant arrangements with a small number of suppliers of voice technology. If we experience
disruptions in our supply chain with these manufacturers for any reason or lose our distribution
rights, we may not be able to fulfill customer commitments with an acceptable alternative or we may
not be able to obtain alternative solutions at similar costs. On January 14, 2009, Nortel Networks
Corporation (Nortel) had announced that Nortel and certain other subsidiaries of Nortel were
seeking relief from their creditors in proceedings commenced in Canada, the United States and other
jurisdictions (the Nortel Bankruptcy). Nortel further had announced that certain of its
affiliates, including the Nortel Government Solutions business, would continue to operate in the
ordinary course and were not included in those proceedings. On July 20, 2009, Nortel had announced
that it had entered into a stalking horse asset and share sale agreement with Avaya, Inc.
(Avaya) for its Enterprise Solutions business for a purchase price of US$475 million, which
included a bidding process where other qualified bidders could submit higher or otherwise better
offers for a specified period of time. This agreement included the planned sale of substantially
all of the assets of the Enterprise Solutions business globally as well as the shares of Nortel
Government Solutions Incorporated and DiamondWare, Ltd. (the Nortel Enterprise Solutions
Business). On September 14, 2009, Nortel announced that it had chosen Avaya as the successful
bidder for its enterprise solutions business for a purchase price of US$900 million. As previously
disclosed, the Companys prior distribution agreement with Avaya had terminated on September 8,
2007. On November 20, 2009, however, the Company announced that it was awarded a new distribution
agreement with Avaya which enables it to design, install and maintain Avayas state-of-the-art
business communications systems. On December 18, 2009, Avaya announced that it had completed the
acquisition of the Nortel Enterprise Solutions Business. There can be no assurance that the sale
of the Nortel Enterprise Solutions Business to Avaya will not impact the Companys business with
the Nortel Enterprise Solutions Business. As a result, the Company cannot determine whether these
events will have a material adverse effect on the Company in the future.
The information set forth under the captions
Litigation Matters
and
Expenses
Incurred by the Company
in Note 16: Commitments and Contingencies of the Notes to the
Consolidated Financial Statements in this Form 10-Q is incorporated herein by reference in order to
update the information previously disclosed in the risk factor entitled
We have significant
matters resulting from our stock option investigation and related matters
included in Part I,
Item 1A, Risk Factors of the Form 10-K.
The information set forth under the caption
Valuation of Goodwill
in Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q is
incorporated herein by reference in order to supplement the information previously disclosed in the
risk factor entitled
We have a significant amount of goodwill that could be subject to
impairment
included in Part I, Item 1A, Risk Factors of the Form 10-K
.
37
Item 6. Exhibits.
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
Subsidiaries of the Registrant
(1)
|
|
|
|
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2)
|
|
|
|
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2)
|
|
|
|
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2)
|
|
|
|
(1)
|
|
Filed as Exhibit 21.1 to the Quarterly Report on Form 10-Q of the Company, file number
0-18706, filed with the SEC on November 5, 2009 and incorporated herein by reference.
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|
(2)
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Filed herewith.
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38
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.
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BLACK BOX CORPORATION
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Dated: February 4, 2010
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/s/ Michael McAndrew
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Michael McAndrew, Vice President, Chief
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Financial Officer, Treasurer, Secretary and
Principal Accounting Officer
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39
EXHIBIT INDEX
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Exhibit
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Number
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Description
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Subsidiaries of the Registrant
(1)
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2)
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|
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|
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
(2)
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|
|
|
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Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2)
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|
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(1)
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Filed as Exhibit 21.1 to the Quarterly Report on Form 10-Q of the Company, file number
0-18706, filed with the SEC on November 5, 2009 and incorporated herein by reference.
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(2)
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Filed herewith.
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40
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