NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Business and Basis of Presentation
Business
Black Box Corporation ("Black Box," or "the Company”) is a leading digital solutions provider dedicated to helping customers design, build, manage, and secure their IT infrastructure. The Company offers Services and Products that it distributes through two platforms it has built over its 41-year history. The Services platform is comprised of engineering and design, network operations centers, technical certifications, national and international sales teams, remote monitoring, on-site service teams and technology partner centers of excellence which includes dedicated sales and engineering resources. The primary services offered through this platform include: (i) communications lifecycle services, (ii) unified communications, (iii) structured cabling, (iv) video/AV services (v) in-building wireless and (vi) data center services. The Products platform provides networking solutions through the sale of products including: (i) IT infrastructure, (ii) specialty networking, (iii) multimedia and (iv) keyboard/video/mouse ("KVM") switching. Founded in 1976, Black Box, a Delaware corporation, 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 Company’s results for the interim periods presented. The results as of and for interim periods presented 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 Company’s most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") for the fiscal year ended
March 31, 2017
(the "Form 10-K").
The Company’s 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
September 30, 2017
and
2016
were
September 30, 2017
and
October 1, 2016
, respectively. References herein to "Fiscal Year" or "Fiscal" mean the Company’s 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 parent company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on reported net income (loss), comprehensive income (loss), cash flows, total assets or total stockholders' equity.
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, property, plant and equipment, intangible assets and goodwill. Actual results could differ from those estimates. Management believes the estimates made are reasonable.
In the second quarter of Fiscal 2018, Management completed a plan to sell the Company's current headquarters' building and adjacent vacant land and move to another local facility that better aligns to the needs of the business. Management believes it is probable that the sale will occur in the next twelve months. Assets associated with the sale, all of which are Property, plant and equipment, are presented as "Assets held for sale" on the Consolidated Balance Sheet as of September 30, 2017. There was
no
asset impairment charge, as these assets were already valued at the lower of net book value and fair value less estimated costs to sell. These assets are reported under the North America Products operating segment.
Note 2: Significant Accounting Policies
Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s consolidated financial statements are disclosed in Note 2 of the Notes to the Consolidated Financial Statements within the Form 10-K. No additional significant accounting policies have been adopted during Fiscal
2018
.
Recent Accounting Pronouncements
There have been no accounting pronouncements adopted during Fiscal 2018 that have had a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASC Update No. 2014-09, "Revenue from Contracts with Customers" ("ASC 2014-09"), with subsequent amendments, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of ASC 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be entitled in exchange for those goods or services. ASC 2014-09 is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2017 for public companies with early adoption permitted for annual reporting periods (including interim periods therein) beginning after December 15, 2016. Entities can use either of two methods: (i) retrospective to each prior period presented with the option to elect certain practical expedients as defined within ASC 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASC 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASC 2014-09.
Given the work required to implement the recognition and disclosure requirements under the new standard, the Company has made progress through the second quarter of Fiscal 2018, including the application of the new standard in our new US-based ERP. The Company has not yet selected which transition method we will apply. We will continue to assess all potential impacts of the standard, and any preliminary conclusions are subject to change.
Note 3: Inventories
The Company’s Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
March 31, 2017
|
|
|
Raw materials
|
$
|
1,910
|
|
$
|
1,708
|
|
|
Finished goods
|
35,307
|
|
35,036
|
|
|
Inventory, gross
|
$
|
37,217
|
|
$
|
36,744
|
|
|
Excess and obsolete inventory reserves
|
(10,378
|
)
|
(11,362
|
)
|
|
Inventories, net
|
$
|
26,839
|
|
$
|
25,382
|
|
Note 4: Intangible Assets
The following table summarizes the gross carrying amount, accumulated amortization and net carrying amount by intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
March 31, 2017
|
|
|
Gross Carrying Amount
|
|
Accum. Amort.
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accum. Amort.
|
|
Net Carrying Amount
|
|
|
Definite-lived
|
|
|
|
|
|
|
|
Non-compete agreements
|
$
|
842
|
|
$
|
842
|
|
$
|
—
|
|
$
|
833
|
|
$
|
833
|
|
$
|
—
|
|
|
Customer relationships
|
122,396
|
|
85,083
|
|
37,313
|
|
122,301
|
|
80,678
|
|
41,623
|
|
|
Total
|
$
|
123,238
|
|
$
|
85,925
|
|
$
|
37,313
|
|
$
|
123,134
|
|
$
|
81,511
|
|
$
|
41,623
|
|
|
Indefinite-lived
|
|
|
|
|
|
|
|
Trademarks
|
34,024
|
|
8,253
|
|
25,771
|
|
35,450
|
|
8,253
|
|
27,197
|
|
|
Total
|
$
|
157,262
|
|
$
|
94,178
|
|
$
|
63,084
|
|
$
|
158,584
|
|
$
|
89,764
|
|
$
|
68,820
|
|
The Company’s indefinite-lived intangible assets consist solely of the Company’s trademark portfolio. The Company’s definite-lived intangible assets consist solely of customer relationships.
During the second quarter of Fiscal 2018, the Company lowered its projections of revenue and profitability outlook for the foreseeable future. As a result, the Company conducted an interim assessment of both our definite-lived and indefinite lived intangible assets and determined such assets, with the exception of Trademarks, were recoverable as of July 1, 2017. For Trademarks, the Company recorded an Intangible asset impairment loss of
$1,426
to reduce book value to fair value which is recorded in Asset impairment loss within the Company’s Consolidated Statements of Operations. The fair value of Trademarks was determined using an income approach that included level 3 inputs.
The following table summarizes the changes to the net carrying amounts by intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
Customer relationships
|
|
Total
|
|
|
March 31, 2017
|
$
|
27,197
|
|
$
|
41,623
|
|
$
|
68,820
|
|
|
Intangibles amortization
|
—
|
|
(4,339
|
)
|
(4,339
|
)
|
|
Foreign currency translation adjustment
|
—
|
|
29
|
|
29
|
|
|
Intangible asset impairment loss
|
(1,426
|
)
|
—
|
|
(1,426
|
)
|
|
September 30, 2017
|
$
|
25,771
|
|
$
|
37,313
|
|
$
|
63,084
|
|
The following table details the estimated intangibles amortization expense for the remainder of Fiscal
2018
, each of the succeeding four fiscal years and the periods thereafter.
|
|
|
|
|
|
|
|
Fiscal
|
|
|
2018
|
$
|
3,253
|
|
|
2019
|
5,616
|
|
|
2020
|
5,119
|
|
|
2021
|
4,658
|
|
|
2022
|
3,057
|
|
|
Thereafter
|
15,610
|
|
|
Total
|
$
|
37,313
|
|
Note 5: Indebtedness
The Company’s Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
March 31, 2017
|
|
|
Revolving credit agreement
(1)
|
$
|
78,000
|
|
$
|
88,400
|
|
|
Term loan
(1)
|
50,000
|
|
—
|
|
|
Other
|
1,165
|
|
1,346
|
|
|
Total debt
|
$
|
129,165
|
|
$
|
89,746
|
|
|
Less: current portion
(2)
|
(5,756
|
)
|
(964
|
)
|
|
Long-term debt
|
$
|
123,409
|
|
$
|
88,782
|
|
(1) Refer below for additional details regarding the Company's amended credit agreement which includes a revolving credit agreement and a term loan.
(2) The Company's current portion of total debt primarily consists of minimum repayments of the term loan that are due in the next 12 months, which are
$5,000
as of
September 30, 2017
.
In addition, the Company finances certain vendor-specific inventory under an unsecured revolving arrangement through third parties which provide extended payment terms beyond those offered by the vendor at no incremental cost to the Company. The outstanding balance for these unsecured revolving arrangements was
$3,584
as of
September 30, 2017
,
$3,366
of which is classified as a current liability, and
$3,387
as of
March 31, 2017
,
$3,169
of which was classified as a current liability. These balances are recorded as Other liabilities within the Company's Consolidated Balance Sheets.
On May 9, 2016, the Company refinanced its then existing
$200,000
credit facility in the form of a line of credit pursuant to a new credit agreement (the "Credit Agreement") with PNC Bank, National Association, as administrative agent, Bank of America, N.A., as syndication agent, and certain other lender parties (the "Banks"). The Credit Agreement expires on May 9, 2021. Borrowings under the Credit Agreement were permitted up to a maximum amount of
$200,000
, and included up to
$15,000
of swing-line loans and
$25,000
of letters of credit. Interest on outstanding indebtedness under the Credit Agreement accrued, at the Company’s option, at a rate based on either: (a) a Base Rate Option equal to the highest of (i) the federal funds open rate, plus fifty (50) basis points (
0.5%
), (ii) the bank’s prime rate, and (iii) the daily LIBOR rate, plus 100 basis points (
1.0%
), in each case plus
0%
to
1.00%
(determined by a leverage ratio based on the Company’s consolidated EBITDA) or (b) a rate per annum equal to the LIBOR rate plus
1.00%
to
2.00%
(determined by a leverage ratio based on the Company’s consolidated EBITDA). The
Credit Agreement required the Company to maintain compliance with certain non-financial and financial covenants such as leverage and interest coverage ratios.
The Company’s obligations under the Credit Agreement were secured by substantially all of the assets of the Company’s material direct and indirect subsidiaries that are incorporated (or organized) under the laws of the District of Columbia or under the laws of any state or commonwealth of the United States and are guaranteed by such domestic subsidiaries.
On August 9, 2017, the Company and certain of the Banks entered into an Amendment and Joinder Agreement to amend and restate the Credit Agreement (as amended and restated, the “Amended Credit Agreement”) in order to avoid a default of its leverage covenant. Under the Amended Credit Agreement, the credit facility has been reduced to
$170,000
comprised of a
$50,000
term loan and
$120,000
line of credit. As of August 9, 2017,
$50,000
was borrowed under the term loan and
$52,528
remained outstanding under the line of credit. The amortization of the term loan is
$1,250
per quarter for four (4) quarters beginning in the quarter ending December 31, 2017 and
$2,500
per quarter beginning in the quarter ending December 31, 2018 through the end of the Amended Credit Agreement on May 9, 2021, the same expiration date of the Credit Agreement. Mandatory prepayments of the term loan are required with the net proceeds from certain asset sales, insurance recoveries and debt or equity issuances, as well as from
75%
to
50%
of any excess cash flow generated in Fiscal 2019 and Fiscal 2020. Interest on the term loan is, at the Company’s option: (i) a Base Rate Option equal to the highest of (i) the federal funds open rate, plus fifty (50) basis points (
0.5%
), (ii) the bank’s prime rate, and (iii) the daily LIBOR rate, plus 100 basis points (
1.0%
), in each case plus
2.5%
or (ii) LIBOR plus
3.5%
. Interest on outstanding indebtedness under the line of credit accrues, at the Company’s option, at a rate based on either: (a) the Base Rate Option plus
0.25%
to
2.00%
(determined by a leverage ratio based on the Company’s consolidated EBITDA) or (b) a rate per annum equal to the LIBOR rate plus
1.25%
to
3.00%
(determined by a leverage ratio based on the Company’s consolidated EBITDA).
Under the Amended Credit Agreement, the leverage ratio covenant is suspended until the second quarter of Fiscal 2019. The Amended Credit Agreement contains a minimum Adjusted EBITDA covenant and a provision requiring the Company to repay revolving credit loans with any excess cash. During that same period, a covenant will limit capital expenditures to an agreed upon amount. The ability of the Company to make dividends or other distributions (including stock repurchases other than up to a limited dollar amount for tax payments from vested equity awards) has been eliminated.
The leverage ratio covenant that starts in the second quarter of Fiscal 2019 will be
4.00
to 1.00 and will reduce to
3.00
to 1.00 over the remaining life of the credit facility. A fixed charge coverage ratio of
1.00
to 1.00 begins in the second quarter of Fiscal 2019 increasing to
1.10
to 1.00 in the fourth quarter of Fiscal 2019 and thereafter.
The Company’s obligations under the Amended Credit Agreement are secured by substantially all of the assets of the Company and the Company’s direct and indirect subsidiaries that are incorporated (or organized) under the laws of the District of Columbia or under the laws of any state or commonwealth of the United States (a “U.S. Entity”) and are guaranteed by such domestic subsidiaries. Under the Amended Credit Agreement, the Company and each U.S. Entity pledged
65%
of the voting ownership interests and
100%
of the non-voting ownership interests of its foreign subsidiaries.
The cost of the Amended Credit Agreement was approximately
$632
, substantially all of which will be amortized over the remaining term of the Amended Credit Agreement. In 2Q18, we recognized expense of
$204
related to the write-off of deferred amortization costs of our Credit Agreement due to the reduction in size of the facility in the Amended Credit Agreement.
Our Amended Credit Agreement contains covenants requiring us to achieve a certain minimum adjusted EBITDA during each quarter through the first quarter of Fiscal 2019. A leverage ratio and a fixed charge coverage ratio commence in the second quarter of Fiscal 2019 through maturity in May 2021. The covenants in our Amended Credit Agreement were determined based upon our current expectation of revenues and profitability. If we fail to achieve our expected revenues and profitability, we could fail to maintain compliance with the covenants in our Amended Credit Agreement. There can be no assurance that we will be able to remain in compliance with these or other covenants in our Amended 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-months ended
September 30, 2017
was
$140,648
,
$133,615
and
3.9%
, respectively, compared to
$145,100
,
$131,973
and
2.6%
, respectively, for the three-months ended
September 30, 2016
. The maximum amount of debt outstanding under the Credit Agreement, the weighted-average balance outstanding under the Credit Agreement and the weighted-average interest rate on all outstanding debt for the
six
-months ended
September 30, 2017
was
$171,237
,
$137,054
and
3.3%
, respectively, compared to
$150,075
,
$132,643
and
2.5%
, respectively, for the
six
-months ended
September 30, 2016
.
As of
September 30, 2017
, the Company had
$4,850
outstanding in letters of credit and
$37,150
in unused commitments, which are limited by a financial covenant, under the Amended Credit Agreement.
Note 6: 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 Company’s derivatives reflects this credit risk.
The Company enters into foreign currency contracts to hedge exposure to variability in expected fluctuations in foreign currencies. 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 Company’s Consolidated Statements of Operations.
As of
September 30, 2017
, 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, all of which have been designated as cash flow hedges. These contracts had a notional amount of
$43,012
and will expire within
4
months. There was no hedge ineffectiveness during Fiscal
2018
or Fiscal
2017
.
The following tables summarize the carrying amounts of derivative assets/liabilities and the impact on the Company’s Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
Liability Derivatives
|
|
|
|
September 30,
|
|
March 31,
|
|
September 30,
|
|
March 31,
|
|
|
|
Classification
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other liabilities (current)
|
|
|
$
|
966
|
|
$
|
573
|
|
|
Foreign currency contracts
|
Other assets (current)
|
$
|
160
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended
|
Six-months ended
|
|
|
|
September 30
|
September 30
|
|
|
Classification
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (effective portion), net of taxes
|
Other comprehensive
income
|
$
|
(221
|
)
|
$
|
(295
|
)
|
$
|
(888
|
)
|
$
|
(443
|
)
|
|
Amounts reclassified from AOCI into results of operations (effective portion), net of taxes
|
Selling, general &
administrative expenses
|
736
|
|
289
|
|
1,122
|
|
516
|
|
Note 7: Fair Value Disclosures
Recurring fair value measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of
September 30, 2017
, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets at Fair Value
|
|
|
|
|
|
Defined benefit pension plan assets
(1)
|
$
|
22,261
|
|
$
|
11,667
|
|
$
|
—
|
|
$
|
33,928
|
|
|
Foreign currency contracts
|
$
|
—
|
|
$
|
160
|
|
$
|
—
|
|
$
|
160
|
|
|
Total Assets at Fair Value
|
$
|
22,261
|
|
$
|
11,827
|
|
$
|
—
|
|
$
|
34,088
|
|
|
Liabilities at Fair Value
|
|
|
|
|
|
Foreign currency contracts
|
$
|
—
|
|
$
|
966
|
|
$
|
—
|
|
$
|
966
|
|
(1) The fair value of pension plan assets is measured annually, thus this value is as of
March 31, 2017
.
Non-recurring fair value measurements
The Company's 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.
Note 8: Stockholder's Equity
Accumulated Other Comprehensive Income
The components of AOCI consisted of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
March 31, 2017
|
|
|
Foreign Currency Translation Adjustment
|
$
|
1,329
|
|
$
|
(3,843
|
)
|
|
Derivative Instruments
|
(114
|
)
|
(348
|
)
|
|
Defined Benefit Pension
|
(11,104
|
)
|
(11,290
|
)
|
|
Accumulated other comprehensive income
|
$
|
(9,889
|
)
|
$
|
(15,481
|
)
|
Common Stock Repurchases
The following table presents information about the Company's common stock repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended
|
Six-months ended
|
|
|
September 30
|
September 30
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Shares of common stock purchased
|
—
|
|
—
|
|
44,507
|
|
39,735
|
|
|
Aggregate purchase price
|
$
|
—
|
|
$
|
—
|
|
$
|
393
|
|
$
|
477
|
|
|
Average purchase price
|
$
|
—
|
|
$
|
—
|
|
$
|
8.84
|
|
$
|
12.01
|
|
During the
six
-month period ended
September 30, 2017
, the Company made tax payments of
$393
and withheld
44,507
shares of common stock, which were designated as treasury shares, at an average price per share of
$8.84
, in order to satisfy employee income taxes due as a result of the vesting of certain restricted stock units. During the
six
-month period ended
September 30, 2016
, the Company made tax payments of
$477
and withheld
39,735
shares of common stock, which were designated as treasury shares, at an average price per share of
$12.01
, in order to satisfy employee income taxes due as a result of the vesting of certain restricted stock units.
Since the inception of its repurchase programs beginning in April 1999 and through
September 30, 2017
, the Company has repurchased
11,392,851
shares of common stock for an aggregate purchase price of
$408,621
, or an average purchase price per share of
$35.87
. These shares do not include the treasury shares withheld for tax payments due upon the vesting of certain restricted stock units and performance shares. As of
September 30, 2017
,
1,107,149
shares were available under the most recent repurchase programs.
Under the Amended Credit Agreement, the Company is no longer permitted to repurchase common stock through its repurchase program but is allowed to repurchase a limited amount of shares for tax payments related to the vesting certain restricted stock units and performance shares, as applicable. This restriction is in effect until May 9, 2021. The Company expects to use the funds that were previously available for stock repurchases to supplement spending for our previously announced US-based ERP project and to develop and implement growth initiatives for the Company, both of which we believe will create long-term shareholder value. See Note 5 for additional information regarding our Amended Credit Agreement.
Note 9: Income Taxes
The Company's provision for income taxes for the three-months ended
September 30, 2017
was
$2,434
, an effective tax rate of
(27.1)%
on a loss before provision for income taxes of
$8,966
, compared to a benefit from income taxes of
$1,524
, an effective tax rate of
20.0%
on a loss before benefit from income taxes of
$7,629
for the three-months ended
September 30, 2016
. The effective tax rate
decrease
from
20.0%
to
(27.1)%
was primarily due to the mix of income and losses across various taxing jurisdictions along with valuation allowances recorded against federal foreign tax credits and state and foreign net operating losses. The Company's benefit from income taxes for the
six
-months ended
September 30, 2017
was
$2,064
, an effective tax rate of
8.9%
on a loss before benefit from income taxes of
$23,211
, compared to a provision for income taxes of
$808
, an effective tax rate of
(14.0)%
on a loss before provision for income taxes of
$5,773
for the
six
-months ended
September 30, 2016
. The effective tax rate increase from
(14.0)%
to
8.9%
was primarily due to the mix of income and losses across various taxing jurisdictions along with valuation allowances recorded against federal foreign tax credits and state and foreign net operating losses. The effective tax rate for the
six
-months ended
September 30, 2017
of
(27.1)%
differs from the federal statutory rate primarily due to valuation allowances recorded against federal foreign tax credits and state and foreign net operating losses along with the reduction of deferred tax assets associated with equity awards and the mix of income across various taxing jurisdictions.
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.
Fiscal 2013 through Fiscal 2017 remain open to examination by the Internal Revenue Service ("IRS") and Fiscal 2011 through Fiscal 2017 remain open to examination by certain state and foreign taxing jurisdictions.
A valuation allowance is provided on deferred tax assets if determined that it is more likely than not that the asset will not be realized. The Company considers all available evidence, both positive and negative, in assessing the need for a valuation allowance in each taxing jurisdiction. The evidence considered in evaluating deferred tax assets includes but is not limited to cumulative financial income over the three-year period ended September 30, 2017, excluding significant one-time charges for impairment (goodwill and other), the composition and reversal patterns of existing taxable and deductible temporary differences between financial reporting and tax, and subjective projected future income.
Based on the available evidence, a valuation allowance of $5,192 has been recorded against deferred tax assets relating to U.S. Federal foreign tax credits for $3,800, and state and foreign net operating losses for $1,000 and $392, respectively. Future positive and negative events, such as the significant underperformance relative to projected or future operating results, will be monitored accordingly and a determination will be made on the ability to realize deferred tax assets at that time.
Note 10: Stock-based Compensation
In August 2008, the Company’s stockholders approved the 2008 Long-Term Incentive Plan, as amended (the "Incentive Plan"), which replaced the 1992 Stock Option Plan, as amended, and the 1992 Director Stock Option Plan, as amended. As of
September 30, 2017
, the Incentive Plan is authorized to issue stock options, restricted stock units and performance shares, among other types of awards, for up to
6,491,631
shares of common stock, par value
$0.001
per share (the "common stock").
The Company recognized stock-based compensation expense of
$1,040
and
$939
for the three-months ended
September 30, 2017
and
2016
, respectively, and
$3,238
and
$3,172
for the
six
-months ended
September 30, 2017
and
2016
, respectively. The Company recognized total income tax benefit for stock-based compensation arrangements of
$387
and
$349
for the three-months ended
September 30, 2017
and
2016
, respectively, and
$1,205
and
$1,180
for the
six
-months ended
September 30, 2017
and
2016
,
respectively. Stock-based compensation expense is recorded in Selling, general & administrative expenses within the Company’s Consolidated Statements of Operations.
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
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.
|
|
|
|
|
|
|
|
|
|
Six-months ended
|
|
|
September 30
|
|
|
2017
|
|
2016
|
|
|
Expected life (in years)
|
6.1
|
|
6.8
|
|
|
Risk-free interest rate
|
2.1
|
%
|
1.6
|
%
|
|
Annual forfeiture rate
|
2.7
|
%
|
1.8
|
%
|
|
Expected volatility
|
45.3
|
%
|
41.7
|
%
|
|
Dividend yield
|
3.9
|
%
|
3.1
|
%
|
The following table summarizes the Company’s stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in 000’s)
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Life (Years)
|
Intrinsic Value (000’s)
|
|
|
March 31, 2017
|
1,080
|
|
$
|
21.84
|
|
|
|
|
Granted
|
609
|
|
8.10
|
|
|
|
|
Exercised
|
—
|
|
—
|
|
|
|
|
Forfeited or cancelled
|
(110
|
)
|
20.02
|
|
|
|
|
September 30, 2017
|
1,579
|
|
$
|
16.67
|
|
6.4
|
$
|
—
|
|
|
Exercisable
|
744
|
|
$
|
24.93
|
|
3.2
|
$
|
—
|
|
The weighted-average grant-date fair value of options granted during the
six
-months ended
September 30, 2017
and
2016
was
$2.51
and
$3.74
, respectively. The intrinsic value of options exercised during the
six
-months ended
September 30, 2017
and
2016
was
$0
and
$0
, respectively. The aggregate intrinsic value in the preceding table is based on the closing stock price of the common stock on
September 29, 2017
, which was
$3.25
.
The following table summarizes certain information regarding the Company’s non-vested stock options:
|
|
|
|
|
|
|
|
|
|
|
Shares (in 000’s)
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
March 31, 2017
|
419
|
|
$
|
4.45
|
|
|
Granted
|
609
|
|
2.51
|
|
|
Vested
|
(159
|
)
|
4.99
|
|
|
Forfeited
|
(33
|
)
|
4.45
|
|
|
September 30, 2017
|
836
|
|
$
|
2.93
|
|
As of
September 30, 2017
, there was
$1,958
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
2.3
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 Company’s restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
Shares (in 000’s)
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
March 31, 2017
|
340
|
|
$
|
14.24
|
|
|
Granted
|
420
|
|
8.03
|
|
|
Vested
|
(223
|
)
|
12.38
|
|
|
Forfeited
|
(25
|
)
|
13.66
|
|
|
September 30, 2017
|
512
|
|
$
|
9.99
|
|
The total fair value of shares that vested during the
six
-months ended
September 30, 2017
and
2016
was
$1,894
and
$2,039
, respectively.
As of
September 30, 2017
, there was
$3,636
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
2.1
years.
Performance share awards
Performance share awards are subject to one of the performance goals - the Company's Relative Total Shareholder Return ("TSR") Ranking or cumulative Adjusted EBITDA - each over a
three
-year period. The Company’s Relative TSR Ranking metric is based on the three-year cumulative return to stockholders 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 Company’s Relative TSR Ranking) is estimated on the grant date using the Monte-Carlo simulation valuation method which includes the following weighted-average assumptions.
|
|
|
|
|
|
|
|
|
|
Six-months ended
|
|
|
September 30
|
|
|
2017
|
|
2016
|
|
|
Risk-free interest rate
|
1.4
|
%
|
0.9
|
%
|
|
Expected volatility
|
46.7
|
%
|
45.1
|
%
|
|
Dividend yield
|
3.9
|
%
|
3.4
|
%
|
The following table summarizes the Company’s performance share award activity:
|
|
|
|
|
|
|
|
|
|
|
Shares (in 000’s)
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
March 31, 2017
|
319
|
|
$
|
15.93
|
|
|
Granted
|
309
|
|
8.26
|
|
|
Vested
|
(68
|
)
|
23.05
|
|
|
Forfeited
|
(33
|
)
|
14.66
|
|
|
September 30, 2017
|
527
|
|
$
|
10.60
|
|
The total fair value of shares that vested during the
six
-months ended
September 30, 2017
and
2016
was
$0
and
$0
, respectively, as there were no payouts because certain performance obligations were not met.
As of
September 30, 2017
, there was
$2,319
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
2.3
years.
Note 11: Earnings (loss) Per Share
The following table details the computation of basic and diluted earnings (loss) per common share from continuing operations for the periods presented (share numbers in table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended
|
Six-months ended
|
|
|
September 30
|
September 30
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Net income (loss)
|
$
|
(11,400
|
)
|
$
|
(6,105
|
)
|
$
|
(21,147
|
)
|
$
|
(6,581
|
)
|
|
Weighted-average common shares outstanding (basic)
|
15,138
|
|
15,149
|
|
15,057
|
|
15,088
|
|
|
Effect of dilutive securities from equity awards
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Weighted-average common shares outstanding (diluted)
|
15,138
|
|
15,149
|
|
15,057
|
|
15,088
|
|
|
Basic earnings (loss) per common share
|
$
|
(0.75
|
)
|
$
|
(0.40
|
)
|
$
|
(1.40
|
)
|
$
|
(0.44
|
)
|
|
Dilutive earnings (loss) per common share
|
$
|
(0.75
|
)
|
$
|
(0.40
|
)
|
$
|
(1.40
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
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
2,507,792
and
1,333,272
non-dilutive equity awards outstanding for the three-months ended
September 30, 2017
and
2016
, respectively, and
2,507,792
and
1,339,604
non-dilutive equity awards outstanding for the
six
-months ended
September 30, 2017
and
2016
, respectively, that are not included in the corresponding period Weighted-average common shares outstanding (diluted) computation.
Note 12: Segment Information
The Company conducts business globally and is managed on a geographic-service type basis consisting of
four
operating segments which are (i) North America Products, (ii) North America Services, (iii) International Products and (iv) International Services. These operating segments are also the Company's reporting units for purposes of testing goodwill for impairment and its reporting segments for financial reporting purposes. Revenues within our North America segments are primarily attributed to the United States while revenues within our International segments are attributed to countries in Europe, the Pacific Rim and Latin America.
The accounting policies of the operating segments are the same as those of the Company. The Company allocates resources to its operating segments and evaluates the performance of the operating segments based upon operating income.
During the second quarter of Fiscal 2018, as a result of changes in our management structure of certain segments, several entities were realigned to different segments. The segment information outlined below is reflective of this realignment for the second quarter. If the first quarter of Fiscal 2018 results were included in the 2QYTD18 Revenues and Gross profit, Revenues would be
$36,650
,
$31,591
, and
$16,404
, and Gross profit would be
$16,763
,
$12,757
, and
$3,511
for North America Products, International Products, and International Services, respectively.
The financial results for the Company's reporting segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Products
|
|
North America Services
|
|
International Products
|
|
International Services
|
|
Total
|
|
|
2Q18
|
|
|
|
|
|
|
Revenues
|
$
|
19,858
|
|
$
|
148,533
|
|
$
|
17,390
|
|
$
|
8,383
|
|
$
|
194,164
|
|
|
Gross profit
|
9,145
|
|
38,536
|
|
6,937
|
|
1,875
|
|
56,493
|
|
|
Operating income (loss)
|
1,848
|
|
(7,177
|
)
|
(361
|
)
|
(1,682
|
)
|
(7,372
|
)
|
|
Depreciation
|
451
|
|
1,702
|
|
175
|
|
107
|
|
2,435
|
|
|
Intangibles amortization
|
—
|
|
1,984
|
|
125
|
|
—
|
|
2,109
|
|
|
Restructuring expense
|
(659
|
)
|
697
|
|
(1,073
|
)
|
1,182
|
|
147
|
|
|
Asset impairment loss
|
—
|
|
1,426
|
|
—
|
|
—
|
|
1,426
|
|
|
Capital expenditures
|
204
|
|
1,009
|
|
120
|
|
258
|
|
1,591
|
|
|
Assets (as of September 30)
|
62,527
|
|
318,149
|
|
43,112
|
|
15,431
|
|
439,219
|
|
|
|
|
|
|
|
|
|
2Q17
|
|
|
|
|
|
|
Revenues
|
$
|
20,954
|
|
$
|
169,782
|
|
$
|
21,309
|
|
$
|
6,704
|
|
$
|
218,749
|
|
|
Gross profit
|
6,533
|
|
37,955
|
|
8,517
|
|
1,439
|
|
54,444
|
|
|
Operating income (loss)
|
(749
|
)
|
(6,106
|
)
|
65
|
|
252
|
|
(6,538
|
)
|
|
Depreciation
|
417
|
|
1,691
|
|
187
|
|
60
|
|
2,355
|
|
|
Intangibles amortization
|
—
|
|
2,189
|
|
115
|
|
—
|
|
2,304
|
|
|
Restructuring expense
|
125
|
|
2,125
|
|
671
|
|
20
|
|
2,941
|
|
|
Asset impairment loss
|
—
|
|
536
|
|
—
|
|
—
|
|
536
|
|
|
Capital expenditures
|
(449
|
)
|
1,728
|
|
107
|
|
417
|
|
1,803
|
|
|
Assets (as of September 30)
|
46,752
|
|
354,715
|
|
36,033
|
|
17,002
|
|
454,502
|
|
|
|
|
|
|
|
|
|
2QYTD18
|
|
|
|
|
|
|
Revenues
|
$
|
37,121
|
|
$
|
301,163
|
|
$
|
33,015
|
|
$
|
14,509
|
|
$
|
385,808
|
|
|
Gross profit
|
16,924
|
|
76,066
|
|
13,019
|
|
3,087
|
|
109,096
|
|
|
Operating income (loss)
|
374
|
|
(14,533
|
)
|
(4,102
|
)
|
(2,008
|
)
|
(20,269
|
)
|
|
Depreciation
|
900
|
|
3,336
|
|
339
|
|
184
|
|
4,759
|
|
|
Intangibles amortization
|
—
|
|
4,101
|
|
238
|
|
—
|
|
4,339
|
|
|
Restructuring expense
|
647
|
|
1,975
|
|
640
|
|
1,207
|
|
4,469
|
|
|
Asset impairment loss
|
—
|
|
1,426
|
|
—
|
|
—
|
|
1,426
|
|
|
Capital expenditures
|
333
|
|
1,708
|
|
373
|
|
274
|
|
2,688
|
|
|
Assets (as of September 30)
|
62,527
|
|
318,149
|
|
43,112
|
|
15,431
|
|
439,219
|
|
|
|
|
|
|
|
|
|
2QYTD17
|
|
|
|
|
|
|
Revenues
|
$
|
40,039
|
|
$
|
341,517
|
|
$
|
42,105
|
|
$
|
13,568
|
|
$
|
437,229
|
|
|
Gross profit
|
15,467
|
|
87,098
|
|
16,531
|
|
3,001
|
|
122,097
|
|
|
Operating income (loss)
|
194
|
|
(4,959
|
)
|
396
|
|
551
|
|
(3,818
|
)
|
|
Depreciation
|
822
|
|
3,306
|
|
369
|
|
103
|
|
4,600
|
|
|
Intangibles amortization
|
—
|
|
4,523
|
|
232
|
|
—
|
|
4,755
|
|
|
Restructuring expense
|
125
|
|
2,125
|
|
671
|
|
20
|
|
2,941
|
|
|
Asset impairment loss
|
—
|
|
536
|
|
—
|
|
—
|
|
536
|
|
|
Capital expenditures
|
826
|
|
2,416
|
|
201
|
|
432
|
|
3,875
|
|
|
Assets (as of September 30)
|
46,752
|
|
354,715
|
|
36,033
|
|
17,002
|
|
454,502
|
|
Note 13: Commitments and Contingencies
In connection with the Amended Credit Agreement disclosed in Note 5, the Company is required to make payments of
$5,000
on its term loan over the next 12 months. Correspondingly, the Company expects its long-term payments (greater than 1 year) under the credit facility to decrease by
$5,000
.
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 these matters are adequately provided for, covered by insurance, without merit or not probable that an unfavorable material outcome will result.
There has been no other significant or unusual activity during Fiscal
2018
.
Note 14: 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 expense”) in a continued effort to consolidate back office functions and to make its organization more efficient. These restructuring activities are compartmentalized and are not part of an overall plan and therefore the Company cannot estimate the total amount to be incurred in connection with the activity. Employee severance is generally payable within the next twelve months with certain facility costs extending through Fiscal 2019.
The following table summarizes the changes to the restructuring liability for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
|
|
Facility
Closures
|
|
Total
|
|
|
Balance at March 31, 2017
|
$
|
4,850
|
|
$
|
286
|
|
$
|
5,136
|
|
|
Restructuring expense
|
4,133
|
|
336
|
|
4,469
|
|
|
Cash expenditures
|
(4,462
|
)
|
(286
|
)
|
(4,748
|
)
|
|
Balance at September 30, 2017
|
$
|
4,521
|
|
$
|
336
|
|
$
|
4,857
|
|
Of the
$4,857
above,
$4,793
is classified as a current liability under Other liabilities on the Company’s Consolidated Balance Sheets for the period ended
September 30, 2017
.
The following table summarizes restructuring expense, which is recorded in Selling, general & administrative expenses in the Company’s Consolidated Statements of Operations, for the
six
months ended
September 30, 2017
, for the Company’s reporting segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Products
|
|
North America Services
|
|
International Products
|
|
International Services
|
|
Total
|
|
|
Employee Severance
|
$
|
647
|
|
$
|
1,651
|
|
$
|
628
|
|
$
|
1,207
|
|
$
|
4,133
|
|
|
Facility Closures
|
—
|
|
324
|
|
12
|
|
—
|
|
336
|
|
|
Total
|
$
|
647
|
|
$
|
1,975
|
|
$
|
640
|
|
$
|
1,207
|
|
$
|
4,469
|
|
Company management is considering initiatives to reset the business model and align costs with revenue to improve profitability. As a result, during
FY18
, our profits could be negatively impacted by restructuring expenses resulting from such initiatives, which are designed to maximize the efficiency of the cost structure for each of our segments to enhance the Company's profitability. The Company believes there is a significant cost savings for such restructuring initiatives that will provide a return on investment in a relatively short period of time. However, there can be no assurance that we would realize adequate returns on this investment nor that we would be able to maintain such cost savings in the future. Such restructuring initiatives have not been formalized and the Company cannot state with any certainty the timing or whether or not such events will occur.