UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 2, 2004
Commission File No. 0-18706
Black Box Corporation
| Delaware | 95-3086563 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
1000 Park Drive
Lawrence, Pennsylvania 15055
(Address of principal executive offices)
724-746-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
As of November 11, 2004, there were 17,295,481 shares of common stock ($0.001 par value) outstanding.
BLACK BOX CORPORATION
INDEX
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| 36 | ||||||||
| Exhibit 10.1 | ||||||||
| Exhibit 10.2 | ||||||||
| Exhibit 10.3 | ||||||||
| Exhibit 10.4 | ||||||||
| Exhibit 10.5 | ||||||||
| Exhibit 10.6 | ||||||||
| Exhibit 10.7 | ||||||||
| Exhibit 10.8 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
BLACK BOX CORPORATION
| In thousands, except par value | October 2, | March 31, | ||||||
| Unaudited |
2004 |
2004 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 9,713 | $ | 9,306 | ||||
Accounts receivable, net of allowance for doubtful accounts of
$11,655 and $10,426 |
88,854 | 97,203 | ||||||
Inventories, net |
42,180 | 40,162 | ||||||
Costs and estimated earnings in excess of billings on uncompleted
contracts |
18,613 | 13,763 | ||||||
Deferred tax asset |
4,473 | 4,131 | ||||||
Other current assets |
11,394 | 9,610 | ||||||
Total current assets |
175,227 | 174,175 | ||||||
Property, plant and equipment |
80,551 | 80,434 | ||||||
Less accumulated depreciation |
(53,110 | ) | (51,165 | ) | ||||
Property, plant and equipment, net |
27,441 | 29,269 | ||||||
Goodwill, net |
381,134 | 380,769 | ||||||
Other intangibles, net |
29,389 | 29,546 | ||||||
Other assets |
2,900 | 2,530 | ||||||
Total assets |
$ | 616,091 | $ | 616,289 | ||||
Liabilities |
||||||||
Current debt |
$ | 364 | $ | 1,061 | ||||
Accounts payable |
29,650 | 30,709 | ||||||
Billings in excess of costs and estimated earnings on uncompleted
contracts |
4,425 | 5,665 | ||||||
Accrued compensation and benefits |
6,078 | 6,836 | ||||||
Other accrued expenses |
12,978 | 16,778 | ||||||
Accrued income taxes |
3,518 | 3,695 | ||||||
Total current liabilities |
57,013 | 64,744 | ||||||
Long-term debt |
52,208 | 35,177 | ||||||
Deferred taxes |
11,930 | 11,050 | ||||||
Other liabilities |
77 | 414 | ||||||
Stockholders’ Equity |
||||||||
Preferred stock authorized 5,000, par value $1.00, none issued |
— | — | ||||||
Common stock
authorized 100,000, par value $.001, 17,258 and
17,859 shares outstanding |
24 | 23 | ||||||
Additional capital |
333,742 | 324,219 | ||||||
Retained earnings |
421,395 | 402,675 | ||||||
Treasury stock, at cost, 6,441 and 5,534 shares |
(277,459 | ) | (239,885 | ) | ||||
Accumulated other comprehensive income |
17,161 | 17,872 | ||||||
Total stockholders’ equity |
494,863 | 504,904 | ||||||
Total liabilities and stockholders’ equity |
$ | 616,091 | $ | 616,289 | ||||
See Notes To Consolidated Financial Statements
3
BLACK BOX CORPORATION
| Three months ended |
Six months ended |
|||||||||||||||
| In thousands, except per share | October 2, | September 28, | October 2, | September 28, | ||||||||||||
| Unaudited |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Revenues |
$ | 126,595 | $ | 129,268 | $ | 250,950 | $ | 257,615 | ||||||||
Cost of sales |
74,280 | 75,393 | 146,755 | 150,293 | ||||||||||||
Gross profit |
52,315 | 53,875 | 104,195 | 107,322 | ||||||||||||
Selling, general and
administrative |
35,227 | 34,536 | 71,124 | 69,521 | ||||||||||||
Intangibles amortization |
69 | 45 | 128 | 134 | ||||||||||||
Operating income |
17,019 | 19,294 | 32,943 | 37,667 | ||||||||||||
Interest expense, net |
508 | 440 | 917 | 860 | ||||||||||||
Other expense, net |
40 | 25 | 47 | 16 | ||||||||||||
Income before provision for
income taxes |
16,471 | 18,829 | 31,979 | 36,791 | ||||||||||||
Provision for income taxes |
5,848 | 6,778 | 11,353 | 13,244 | ||||||||||||
Net income |
$ | 10,623 | $ | 12,051 | $ | 20,626 | $ | 23,547 | ||||||||
Earnings per common share |
||||||||||||||||
Basic |
$ | 0.61 | $ | 0.66 | $ | 1.17 | $ | 1.28 | ||||||||
Diluted |
$ | 0.60 | $ | 0.64 | $ | 1.14 | $ | 1.24 | ||||||||
Weighted average common
shares outstanding |
||||||||||||||||
Basic |
17,425 | 18,208 | 17,601 | 18,412 | ||||||||||||
Diluted |
17,705 | 18,803 | 18,068 | 18,931 | ||||||||||||
Dividends per share |
$ | 0.06 | $ | 0.05 | $ | 0.11 | $ | 0.10 | ||||||||
See Notes To Consolidated Financial Statements
4
BLACK BOX CORPORATION
| In thousands | Six months ended |
|||||||
| Unaudited |
October 2, 2004 |
September 28, 2003 |
||||||
Operating Activities |
||||||||
Net income |
$ | 20,626 | $ | 23,547 | ||||
Adjustments to reconcile net income to cash
provided by operating activities: |
||||||||
Depreciation and amortization |
2,840 | 3,352 | ||||||
Deferred tax provision/(benefit) |
538 | (1,252 | ) | |||||
Gain on disposal of assets |
— | (301 | ) | |||||
Stock compensation expense |
680 | — | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
8,104 | 5,903 | ||||||
Inventories, net |
(2,098 | ) | (356 | ) | ||||
Other current assets |
(3,525 | ) | 6,082 | |||||
Accounts payable and accrued liabilities |
(6,447 | ) | (6,272 | ) | ||||
Net cash provided by operating activities |
20,718 | 30,703 | ||||||
Investing Activities |
||||||||
Capital expenditures, net |
(941 | ) | 801 | |||||
Payments related to acquisitions, net of cash
acquired |
(347 | ) | (1,018 | ) | ||||
Net cash used in investing activities |
(1,288 | ) | (217 | ) | ||||
Financing Activities |
||||||||
Proceeds from borrowings |
77,049 | 147,619 | ||||||
Repayments on borrowings |
(61,073 | ) | (149,607 | ) | ||||
Proceeds from exercise of options |
5,685 | 2,785 | ||||||
Payment of dividends |
(1,774 | ) | (1,824 | ) | ||||
Deferred financing costs |
(235 | ) | — | |||||
Purchase of treasury stock |
(37,574 | ) | (36,680 | ) | ||||
Net cash used in financing activities |
(17,922 | ) | (37,707 | ) | ||||
Foreign currency exchange impact on cash |
(1,101 | ) | 1,600 | |||||
Net
increase/(decrease) in cash and cash
equivalents |
407 | (5,621 | ) | |||||
Cash and cash equivalents at beginning of year |
9,306 | 14,043 | ||||||
Cash and cash equivalents at end of period |
$ | 9,713 | $ | 8,422 | ||||
Supplemental Cash Flow: |
||||||||
Cash paid for interest |
$ | 912 | $ | 839 | ||||
Cash paid for income taxes |
10,938 | 14,785 | ||||||
See Notes To Consolidated Financial Statements
5
BLACK BOX CORPORATION
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements.
Black Box Corporation (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 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 Company’s most recent Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended March 31, 2004.
The Company’s fiscal year ends on March 31. The fiscal quarters consist of 13 weeks and, beginning in Fiscal 2005, end on the Saturday nearest each calendar quarter end. In Fiscal 2004, the fiscal quarters ended on the Sunday nearest each calendar quarter end. The actual ending dates for the periods presented in these Notes, as September 30, 2004 and 2003 were October 2, 2004 and September 28, 2003. The ending dates for all other periods are as presented.
Note 2: Significant Accounting Policies
Principles of Consolidation
The unaudited interim consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
When preparing the unaudited interim consolidated financial statements, the Company makes estimates and assumptions that affect the amounts reported. Actual results may differ from these estimates. Management believes the estimates made are reasonable.
Stock-Based Compensation
The Company accounts for the employee stock-based compensation plans under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related guidance. The pro forma information below is based on provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” issued in December 2002. SFAS No. 148 requires that the pro forma information regarding net income and earnings per share are determined as if the Company had accounted for its employee stock options under the fair value method as prescribed by the Statement.
6
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
The following table shows the effects on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to the employee stock-based awards.
| Three months ended | Six months ended | |||||||||||||||||
| In thousands, | September 30, |
September 30, |
||||||||||||||||
| except per share |
2004 |
2003 |
2004 |
2003 |
||||||||||||||
Net income
|
As reported | $ | 10,623 | $ | 12,051 | $ | 20,626 | $ | 23,547 | |||||||||
Add:
|
Stock-based employee compensation expense included in reported net income, net of related tax | 439 | — | 439 | — | |||||||||||||
Deduct:
|
Total stock-based employee compensation expense determined by the fair value method for all awards, net of related tax | (2,698 | ) | (2,354 | ) | (5,028 | ) | (5,381 | ) | |||||||||
Net income
|
Pro forma | $ | 8,364 | $ | 9,697 | $ | 16,037 | $ | 18,166 | |||||||||
Earnings per share:
|
Basic-as reported | $ | 0.61 | $ | 0.66 | $ | 1.17 | $ | 1.28 | |||||||||
| Basic-pro forma | $ | 0.48 | $ | 0.53 | $ | 0.91 | $ | 0.99 | ||||||||||
| Diluted-as reported | $ | 0.60 | $ | 0.64 | $ | 1.14 | $ | 1.24 | ||||||||||
| Diluted-pro forma | $ | 0.47 | $ | 0.52 | $ | 0.89 | $ | 0.96 | ||||||||||
The incremental fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The model requires the use of various assumptions. The following assumptions were used to determine the fiscal 2005 and 2004 stock option expense:
| Weighted-average for the six months | ||||||||
| ended September 30 |
2004 |
2003 |
||||||
Expected life (in years) |
5.0 | 4.7 | ||||||
Risk-free interest rate |
3.31 | % | 3.92 | % | ||||
Expected volatility rate |
55 | % | 53 | % | ||||
Dividend yield |
0.3 | % | 0.0 | % | ||||
During the second quarter, the Company recorded compensation expense, as a result of a modification to a retiring director's stock option agreements. Based on the guidance under FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,” the Company recorded compensation expense in the amount of $680. The expense was recorded as a component of Selling, General and Administrative expense.
7
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 3: Inventories
Inventories are stated at the lower of cost or market. The first-in first-out average cost method is used to value the majority of the Company’s inventory. However, some locations use other methods, including first-in first-out and actual current costs. The net inventory balances are as follows:
| In thousands |
September 30, 2004 |
March 31, 2004 |
||||||
Raw materials |
$ | 706 | $ | 649 | ||||
Finished goods |
46,449 | 44,353 | ||||||
Subtotal |
47,155 | 45,002 | ||||||
Excess and obsolete inventory reserves |
(4,975 | ) | (4,840 | ) | ||||
Inventory, net |
$ | 42,180 | $ | 40,162 | ||||
Note 4: Comprehensive Income
Comprehensive income consisted of the following:
| Three months ended | Six months ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| In thousands |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Net income |
$ | 10,623 | $ | 12,051 | $ | 20,626 | $ | 23,547 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency
translation adjustment |
97 | 1,304 | 43 | 6,013 | ||||||||||||
Unrealized
(losses)/gains on
derivatives designated
and qualified as cash
flow hedges, net of
reclassification of
unrealized
(losses)/gains on
expired derivatives |
(589 | ) | 83 | (754 | ) | 450 | ||||||||||
Comprehensive income |
$ | 10,131 | $ | 13,438 | $ | 19,915 | $ | 30,010 | ||||||||
The components of accumulated other comprehensive income consisted of the following:
| In thousands |
September 30, 2004 |
March 31, 2004 |
||||||
Foreign currency translation adjustment |
$ | 17,461 | $ | 17,418 | ||||
Unrealized (losses)/gains on derivatives
designated and qualified as cash flow
hedges, net of reclassification of
unrealized (losses)/gains on expired
derivatives |
(300 | ) | 454 | |||||
Total accumulated other comprehensive income |
$ | 17,161 | $ | 17,872 | ||||
8
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 5: Earnings Per Share
Earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the relevant periods. Diluted earnings per share are calculated by adjusting the weighted average number of common shares outstanding for potentially dilutive securities, including stock options and contingently issuable shares. The following table details this calculation:
| Three months ended | Six months ended | |||||||||||||||
| In thousands, | September 30, |
September 30, |
||||||||||||||
| except per share |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Net income, as reported |
$ | 10,623 | $ | 12,051 | $ | 20,626 | $ | 23,547 | ||||||||
Weighted average shares outstanding |
17,425 | 18,208 | 17,601 | 18,412 | ||||||||||||
Effect of dilutive securities from
employee stock options and
contingently issuable shares, net
of tax savings |
280 | 595 | 467 | 519 | ||||||||||||
Weighted average diluted shares
outstanding |
17,705 | 18,803 | 18,068 | 18,931 | ||||||||||||
Basic earnings per share |
$ | 0.61 | $ | 0.66 | $ | 1.17 | $ | 1.28 | ||||||||
Diluted earnings per share |
$ | 0.60 | $ | 0.64 | $ | 1.14 | $ | 1.24 | ||||||||
There is no impact to the weighted average share calculations during any period where the exercise price of a stock option is greater than the average market price during the same period. There were 2,805,486 and 937,669 non-dilutive shares outstanding during the three months ended September 30, 2004 and 2003 and 901,774 and 2,401,343 non-dilutive shares outstanding during the six months ended September 30, 2004 and 2003, that are not included in the above calculation.
Note 6: Derivative Instruments and Hedging Activities
All derivative instruments are accounted for under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The Company enters into derivative instruments to hedge exposure to variability in expected fluctuations in foreign currencies. All of the Company’s derivatives have been designated and qualify as cash flow hedges. Hedge ineffectiveness related to cash flow hedges is reported in current period earnings as cost of sales. There was no hedge ineffectiveness during the six months ended September 30, 2004.
At September 30, 2004, the Company had open contracts in Australian and Canadian Dollars, Danish Krone, Euro, Japanese Yen, Norwegian Kroner, Pound Sterling, Swedish Krona and Swiss Franc. These contracts had a notional amount of approximately $28,629 and a fair value of $29,052 and mature within the next six months.
9
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
For the three and six months ended September 30, 2004, the Company recognized in earnings approximately $68 and $22 in net gains on matured contracts.
Note 7: Goodwill and Other Intangible Assets
On April 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this Standard goodwill and intangible assets with indefinite useful lives are not amortized. The Company was required to perform an impairment test upon adoption. In addition, the Company is required to perform an impairment test annually, or as often as impairment indicators are present. The Company’s policy is to perform the annual impairment test during the third quarter of the fiscal year.
At the time of adoption, the Company performed the required impairment test by comparing the fair value of each reporting unit to its carrying value. The Company concluded that no impairment existed. The Company performed the annual test for Fiscal 2002 and 2003 and concluded that no impairment existed. During the fourth quarter of Fiscal 2003, the reportable segments were changed and, as such, the Company was required by the Standard to reevaluate the outstanding goodwill and intangibles for impairment. The Company performed the required impairment testing and concluded that no impairment existed. Based on the policy, the Company conducted the recent annual testing for Fiscal 2004, on October 1, 2003. The Company concluded that no impairment existed.
The Company has the following definite-lived intangibles:
| September 30, 2004 |
March 31, 2004 |
|||||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||||
| Carrying | Accum. | Carrying | Carrying | Accum. | Carrying | |||||||||||||||||||
| In thousands |
Amount |
Amort. |
Amount |
Amount |
Amort. |
Amount |
||||||||||||||||||
Non-Compete
Agreements |
$ | 2,261 | $ | 611 | $ | 1,650 | $ | 2,246 | $ | 439 | $ | 1,807 | ||||||||||||
Acquired Backlog |
$ | 334 | $ | 334 | $ | — | $ | 331 | $ | 331 | $ | — | ||||||||||||
Total |
$ | 2,595 | $ | 945 | $ | 1,650 | $ | 2,577 | $ | 770 | $ | 1,807 | ||||||||||||
The non-compete agreements are amortized over their estimated useful lives of 10 years. Amortization expense for the non-compete agreements was $69 and $45 for the three months ended September 30, 2004 and 2003 and $128 and $134 for the six months ended September 30, 2004 and 2003.
Based on the amortizable intangibles recorded on the balance sheet at September 30, 2004, amortization expense for each of the next five years is estimated to be approximately $236.
Intangible assets not subject to amortization consist solely of the Company’s trademark portfolio. The net carrying amount at September 30, 2004 and March 31, 2004 was $27,739.
10
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
The Company recorded the following changes in the net carrying amount of goodwill, by reporting segment:
| Six months ended | ||||||||||||||||
| September 30, 2004 |
North America |
Europe |
All Other |
Total |
||||||||||||
Balance at beginning of period |
$ | 311,540 | $ | 67,358 | $ | 1,871 | $ | 380,769 | ||||||||
Currency translation |
21 | 85 | 4 | 110 | ||||||||||||
Actual earnout payments |
81 | 182 | 82 | 345 | ||||||||||||
Other |
— | (90 | ) | — | (90 | ) | ||||||||||
Balance at end of period |
$ | 311,642 | $ | 67,535 | $ | 1,957 | $ | 381,134 | ||||||||
At September 30, 2004 certain merger agreements provided for contingent payments of up to $542. If future operating performance goals are met, goodwill will be adjusted for the amount of the contingent payments.
The changes in total intangible assets, net of accumulated amortization, from March 31, 2004 to September 30, 2004 are as follows:
| Six months ended | Non-Competes | |||||||||||||||
| September 30, 2004 |
Trademarks |
and Backlog |
Goodwill |
Total |
||||||||||||
Balance as of March 31, 2004 |
$ | 27,739 | $ | 1,807 | $ | 380,769 | $ | 410,315 | ||||||||
Change in net intangible
assets during the period
related to: |
||||||||||||||||
Amortization expense |
— | (128 | ) | — | (128 | ) | ||||||||||
Currency translation |
— | (29 | ) | 110 | 81 | |||||||||||
Actual earnout payments |
— | — | 345 | 345 | ||||||||||||
Other |
— | — | (90 | ) | (90 | ) | ||||||||||
Balance at end of period |
$ | 27,739 | $ | 1,650 | $ | 381,134 | $ | 410,523 | ||||||||
Note 8: Repurchase of Common Stock
In April 1999, the Board of Directors of the Company initiated a plan to repurchase shares of the Company’s Common Stock. The Company repurchased 354,000 and 906,000 shares for the three and six months ended September 30, 2004. The shares were repurchased for a total cost of $12,718 and $37,574, respectively. Since inception of the repurchase program, approximately 6.5 million shares have been repurchased at a total cost of approximately $278,000. Funding for the stock repurchases came primarily from cash flow from operations.
The Company expects to continue to repurchase shares; however, no assurance can be given as to the timing or amount of future repurchases.
11
BLACK BOX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Note 9: Indebtedness
Long-term debt is as follows:
| In thousands |
September 30, 2004 |
March 31, 2004 |
||||||
Revolving credit agreement |
$ | 52,000 | $ | 35,000 | ||||
Other debt |
572 | 1,238 | ||||||
Total debt |
52,572 | 36,238 | ||||||
Less: current portion |
(364 | ) | (1,061 | ) | ||||
Long-term debt |
$ | 52,208 | $ | 35,177 | ||||
| < | ||||||||