10-Q 1 j0557601e10vq.txt BLACK BOX CORPORATION Fiscal 2004 Third Quarter UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 2003 COMMISSION FILE NO. 0-18706 BLACK BOX CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-3086563 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1000 Park Drive Lawrence, Pennsylvania 15055 (Address of principal executive offices) 724-746-5500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined In Rule 12b-2 of the Exchange Act). YES X NO ----- ----- The number of shares outstanding of the Registrant's common stock, $0.001 par value, as of February 6, 2003 was 18,022,056 shares. PART I FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS BLACK BOX CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts)
(UNAUDITED) DECEMBER 28, MARCH 31, 2003 2003 -------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 9,924 $ 14,043 Accounts receivable, net of allowance for doubtful accounts of $11,655 and $11,710, respectively 100,632 100,263 Inventories, net 40,047 42,169 Costs and estimated earnings in excess of billings on uncompleted contracts 15,276 18,261 Other current assets 13,301 16,052 -------------------------------------------------------------------------------------------------------------------- Total current assets 188,666 181,302 Property, plant and equipment, net 30,800 34,737 Goodwill, net 378,870 369,790 Other intangibles, net 29,495 29,509 Other assets 2,907 4,027 -------------------------------------------------------------------------------------------------------------------- Total assets $ 623,374 $ 626,729 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current debt $ 759 $ 926 Accounts payable 30,217 30,508 Billings in excess of costs and estimated earnings on uncompleted contracts 3,599 3,295 Other accrued expenses 26,507 32,405 Accrued income taxes 2,080 2,940 -------------------------------------------------------------------------------------------------------------------- Total current liabilities 63,162 70,074 Long-term debt 46,780 49,453 Other liabilities 10,894 12,780 Stockholders' equity: Preferred stock authorized 5,000,000; par value $1.00; none issued and outstanding -- -- Common stock authorized 100,000,000; par value $.001; issued 22,865,351 and 22,594,034 shares, respectively 23 23 Additional paid-in capital 303,401 295,271 Retained earnings 392,040 359,037 Treasury stock, at cost, 4,987,817 and 3,822,500 shares, respectively (211,183) (163,547) Accumulated other comprehensive income 18,257 3,638 -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 502,538 494,422 -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 623,374 $ 626,729 ====================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 BLACK BOX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29, 2004 2002 2003 2002 =============================================================================================== Revenues $133,067 $153,062 $390,682 $470,205 Cost of sales 78,426 92,423 228,719 284,294 ----------------------------------------------------------------------------------------------- Gross profit 54,641 60,639 161,963 185,911 Selling, general and administrative expenses 34,953 37,471 104,474 113,788 Intangibles amortization 64 96 198 305 ----------------------------------------------------------------------------------------------- Operating income 19,624 23,072 57,291 71,818 Interest expense, net 498 671 1,358 2,209 Other expense, net 75 44 91 114 ----------------------------------------------------------------------------------------------- Income before income taxes 19,051 22,357 55,842 69,495 Provision for income taxes 6,858 7,580 20,102 25,018 ----------------------------------------------------------------------------------------------- Net income $ 12,193 $ 14,777 $ 35,740 $ 44,477 =============================================================================================== Basic earnings per common share $ 0.68 $ 0.75 $ 1.96 $ 2.23 Diluted earnings per common share $ 0.66 $ 0.73 $ 1.90 $ 2.17 ----------------------------------------------------------------------------------------------- Weighted average common shares 17,954 19,596 18,258 19,937 Weighted average common and common equivalent shares 18,571 20,225 18,792 20,513 ----------------------------------------------------------------------------------------------- Dividend per share $ 0.05 $ 0.05 $ 0.15 $ 0.05 ===============================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 BLACK BOX CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands, Except Share Amounts)
ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER --------------- ---------------- PAID-IN RETAINED TREASURY COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK INCOME TOTAL ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT MARCH 31, 2002 0 $0 22,351,049 $22 $287,714 $312,288 $(100,355) $(9,571) $490,098 Comprehensive income: Net income 48,685 48,685 Foreign currency translation adjustment 12,808 12,808 Unrealized gains on derivatives designated and qualified as cash flow hedges, net of tax 233 233 Reclassification of unrealized losses on expired derivatives 168 168 --------- Comprehensive income 61,894 Dividends declared (1,936) (1,936) Purchase of treasury stock (63,192) (63,192) Issuance of common stock 23,836 1 968 969 Exercise of options, net of tax 219,149 4,767 4,767 Tax benefit from exercised options 1,822 1,822 ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT MARCH 31, 2003 0 0 22,594,034 23 295,271 359,037 (163,547) 3,638 494,422 Comprehensive income: Net income 35,740 35,740 Foreign currency translation adjustment 14,369 14,369 Unrealized gains on derivatives designated and qualified as cash flow hedges, net of tax 483 483 Reclassification of unrealized gains on expired derivatives (233) (233) --------- Comprehensive income 50,359 Dividends declared (2,737) (2,737) Purchase of treasury stock (47,636) (47,636) Exercise of options, net of tax 271,317 6,014 6,014 Tax benefit from exercised options 2,116 2,116 ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 28, 2003 (unaudited) 0 $0 22,865,351 $23 $303,401 $392,040 $(211,183) $18,257 $502,538 ====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 BLACK BOX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)
NINE MONTHS ENDED ------------------------------------ DECEMBER 28, 2003 DECEMBER 29, 2002 -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 35,740 $ 44,477 Adjustments to reconcile net income to cash provided by operating activities: Intangibles amortization 198 305 Depreciation 4,824 5,747 Net gain from sale of property (531) -- Changes in working capital items: Accounts receivable, net 3,929 12,065 Inventories, net (960) 2,783 Other current assets 11,265 11,242 Accounts payable and accrued liabilities (8,103) (7,936) -------------------------------------------------------------------------------------------- Cash provided by operating activities 46,362 68,683 -------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,357) (1,454) Capital asset disposals 1,615 748 Merger transactions, net of cash acquired and prior merger-related payments (1,261) (7,561) -------------------------------------------------------------------------------------------- Cash used in investing activities (1,003) (8,267) -------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of borrowings (181,159) (110,354) Proceeds from borrowings 178,200 84,500 Proceeds from the exercise of options 6,014 4,366 Payment of dividends (2,737) -- Purchase of treasury stock (52,354) (37,853) -------------------------------------------------------------------------------------------- Cash used in financing activities (52,036) (59,341) -------------------------------------------------------------------------------------------- Foreign currency exchange impact on cash 2,558 (1,051) -------------------------------------------------------------------------------------------- (Decrease)/increase in cash and cash equivalents (4,119) 24 Cash and cash equivalents at beginning of year 14,043 13,423 -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 9,924 $ 13,477 ============================================================================================ SUPPLEMENTAL CASH FLOW: Cash paid for interest $ 1,329 $ 2,212 Cash paid for income taxes 23,771 23,472 ============================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) NOTE 1: BASIS OF PRESENTATION The consolidated financial statements presented herein and these notes are unaudited. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Black Box Corporation (the "Company") believes that these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Interim periods are not necessarily indicative of the results of operations for a full year. As such, these unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's most recent Form 10-K as filed with the SEC for the fiscal year ended March 31, 2003. The consolidated Balance Sheet as of March 31, 2003 was derived from the audited Balance Sheet included in the most recent Form 10-K. NOTE 2: FISCAL YEARS AND BASIS OF PRESENTATION The Company's fiscal year ends on March 31. Its fiscal quarters consist of 13 weeks and, beginning in Fiscal 2003, end on the Sunday nearest each calendar quarter end. The actual ending dates for the periods presented as December 31, 2003 and 2002 were December 28, 2003 and December 29, 2002, respectively. The ending dates for all other periods are as presented. NOTE 3: STOCK-BASED COMPENSATION As permitted by SFAS No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure," the Company continues to use the intrinsic value method of Opinion No. 25 rather than the fair value method of SFAS No. 123 to account for stock-based employee compensation. As required by the provisions of SFAS No. 148, disclosure must be made in the financial notes of the effects on reported net income and earnings per share of an entity's accounting policy for stock-based employee compensation. Had the Company elected to recognize compensation cost based on the fair value basis under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows: 6 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- ----------------------- 2003 2002 2003 2002 ============================================================================================================= Net income As reported $ 12,193 $ 14,777 $ 35,740 $ 44,477 Plus: Compensation expense -- -- -- -- Less: Stock-based employee compensation under fair-value based method for all awards, net of related tax effects 2,257 2,304 7,638 6,611 ------------------------------------------------- Pro forma $ 9,936 $ 12,473 $ 28,102 $ 37,866 ------------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $ 0.68 $ 0.75 $ 1.96 $ 2.23 Pro forma $ 0.55 $ 0.64 $ 1.54 $ 1.90 ------------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 0.66 $ 0.73 $ 1.90 $ 2.17 Pro forma $ 0.54 $ 0.62 $ 1.50 $ 1.85 =============================================================================================================
The incremental fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
DECEMBER 31, ----------------------- 2003 2002 =================================================================== Expected life (in years) 4.8 4.6 Risk free interest rate 3.70% 4.11% Expected volatility rate 55% 53% Dividend yield 0.1% -- ===================================================================
NOTE 4: INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. The net inventory balances are as follows:
DECEMBER 31, 2003 MARCH 31, 2003 =============================================================================== Raw materials $ 1,965 $ 1,909 Finished goods 44,600 42,119 ------------------------------------------------------------------------------ Subtotal 46,565 44,028 Excess and obsolete inventory reserves (4,396) (3,981) ------------------------------------------------------------------------------ Inventory, net $ 42,169 $40,047 ===============================================================================
7 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) NOTE 5: FINANCIAL DERIVATIVES The Company has entered and will continue in the future, on a selective basis, to enter into forward exchange contracts to reduce the foreign currency exposure related to certain intercompany transactions. On a monthly basis, the open contracts are revalued to fair market value, and the resulting gains and losses are recorded in accumulated other comprehensive income. These gains and losses offset the revaluation of the related foreign currency denominated receivables and payables, which are also included in accumulated other comprehensive income. At December 31, 2003, the open foreign exchange contracts were in Euro, Pound sterling, Canadian dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner and Australian dollar. The total open contracts, with a notional amount of approximately $14,679, have a fair value of $15,438 and will expire within seven months. The open contracts have contract rates of 0.8042 to 0.9023 Euro, 0.5971 to 0.6119 Pound sterling, 1.3132 to 1.3669 Canadian dollar, 1.2529 to 1.3254 Swiss franc, 110.46 to 116.5 Japanese yen, 7.3542 to 7.9703 Swedish krona, 6.4057 to 6.4183 Danish krone, 7.0260 to 7.0749 Norwegian kroner and 1.3643 to 1.4732 Australian dollar, all per U.S. dollar. NOTE 6: COMPREHENSIVE INCOME Comprehensive income consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------- ------------------ 2003 2002 2003 2002 ========================================================================================================== Net income $ 12,193 $ 14,777 $35,740 $ 44,477 Other comprehensive income: Foreign currency translation adjustment 8,356 6,538 14,369 10,467 Unrealized (losses)/gains on derivatives designated and qualified as cash flow hedges, net of reclassification of unrealized (losses)/gains on expired derivatives (200) (312) 250 (161) --------------------------------------------------------------------------------------------------------- Comprehensive income $ 20,349 $ 21,003 $50,359 $ 54,783 ==========================================================================================================
8 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) The components of accumulated other comprehensive income consisted of the following:
DECEMBER 31, 2003 MARCH 31, 2003 =================================================================================================== Foreign currency translation adjustment $ 17,774 $ 3,405 Unrealized gains on derivatives designated and qualified as cash flow hedges 483 233 --------------------------------------------------------------------------------------------------- Total accumulated other comprehensive income $ 18,257 $ 3,638 ===================================================================================================
NOTE 7: EARNINGS PER SHARE Basic earnings per common share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per common share were computed based on the weighted average number of common shares issued and outstanding, plus the dilutive effect of options (using the treasury stock method) and contingently issuable shares. The following table details this calculation:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- (Shares in thousands) 2003 2002 2003 2002 =============================================================================================== Net income for earnings per share computation $12,193 $14,777 $35,740 $44,477 Basic earnings per common share: Weighted average common shares 17,954 19,596 18,258 19,937 Basic earnings per common share $ 0.68 $ 0.75 $ 1.96 $ 2.23 ----------------------------------------------------------------------------------------------- Diluted earnings per common share: Weighted average common shares 17,954 19,596 18,258 19,937 Shares issuable from assumed conversion of stock options and contingently issuable shares from acquisitions (net of tax savings) 614 629 534 576 ------------------------------------------- Weighted average common and common equivalent shares 18,571 20,225 18,792 20,513 Diluted earnings per common share $ 0.66 $ 0.73 $ 1.90 $ 2.17 ===============================================================================================
The Company also has 921,469 shares and 814,064 shares issuable upon the exercise of outstanding stock options for the three months ended December 31, 2003 and 2002, respectively, and 2,642,466 shares and 1,452,134 shares for the nine months ended December 31, 2003 and 2002, respectively. The exercise price of such options was greater than the average market price for those time periods and as such do not impact the weighted average share calculations during the periods presented above. 9 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) NOTE 8: NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is one where the contractual or ownership interests in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. The Company does not believe that this statement will have a material impact on the Company's consolidated financial statements or results of operations. NOTE 9: MERGERS ACTIVITY During the nine months ended December 31, 2003 and 2002, the Company paid $1,261 and $2,966, respectively, for obligations related to mergers completed in prior periods. During Fiscal 2003, the Company successfully completed three business combinations that have been accounted for using the purchase method of accounting, June 2002 - Societe d'Installation de Reseaux Informatiques et Electriques; July 2002 - EDC Communications Limited and EDC Communications (Ireland) Limited; and January 2003 - Rowe Structured Cabling Ltd. The aggregate purchase price of these three business combinations was approximately $4,600 and resulted in goodwill of $3,317 and other intangibles of $348 in accordance with SFAS No. 141, "Business Combinations." As of December 31, 2003, certain merger agreements provide for contingent payments of up to $2,734. Upon payment, goodwill will be adjusted for the amount of the contingency. NOTE 10: INTANGIBLE ASSETS On April 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," under which goodwill and other intangible assets with indefinite lives are not amortized. Such intangibles were evaluated for impairment as of April 1, 2001 by comparing the fair value of each reporting unit to its carrying value, and no impairment existed. During the third quarter of Fiscal 2002 and 2003, the Company conducted its annual impairment analysis and no impairment existed. During the fourth quarter of Fiscal 2003, the Company changed its reportable segments and in accordance with SFAS No. 142, evaluated its intangibles for impairment and none existed. And, most recently, as of October 1, 2003, the Company conducted its annual impairment analysis and no impairment existed. During the third quarter of each future fiscal year, the Company will evaluate the intangible assets for impairment with any resulting impairment reflected as an operating expense. The Company's only intangibles as identified in SFAS No. 141 other than goodwill, are its trademarks, non-compete agreements and acquired backlog. 10 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) As of December 31, 2003, the Company's trademarks had a net carrying amount of $27,739. The Company believes this intangible has an indefinite life. The Company had the following other intangibles as of December 31, 2003:
GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION ============================================================================== Non-Compete Agreements $ 2,242 $ 486 Acquired Backlog 332 332 ------------------------------------------------------------------------------ Total $ 2,574 $ 818 ==============================================================================
The non-compete agreements and acquired backlog are amortized over their estimated useful lives of 10 years and 1 year, respectively. Amortization expense for the non-compete agreements and acquired backlog intangibles during the three months ended December 31, 2003 and 2002 was $64 and $96, respectively, and for the nine months ended December 31, 2003 and 2002 was $198 and $305, respectively. The estimated amortization expense for each of the five fiscal years subsequent to December 31, 2003 for the non-compete agreements and acquired backlog intangibles is as follows: remainder of fiscal 2004 - $64; fiscal 2005 - $256; fiscal 2006 - $256; fiscal 2007 - $256; and fiscal 2008 - $256. The changes in the carrying amount of goodwill, net of amortization, by reporting segment for the nine months ended December 31, 2003, are as follows:
NORTH AMERICA EUROPE ALL OTHER TOTAL ============================================================================================= Balance as of March 31, 2003 $309,214 $58,973 $1,603 $369,790 Goodwill during the period related to: Currency translation 15 7,864 5 7,884 Actual earnout payments 295 168 70 533 Other 611 -- 52 663 --------------------------------------------------------------------------------------------- Balance as of December 31, 2003 $310,135 $67,005 $1,730 $378,870 =============================================================================================
The changes in total intangible assets, net of accumulated amortization, from March 31, 2003 to December 31, 2003 are as follows: 11 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts)
NON-COMPETES TRADEMARKS AND BACKLOG GOODWILL TOTAL ========================================================================================================= Balance as of March 31, 2003 $27,739 $ 1,770 $369,790 $ 399,299 Change in net intangible assets during the period related to: Amortization expense -- (64) -- (64) Currency translation -- 50 7,884 7,934 Actual earnout payments -- -- 533 533 Other -- -- 663 663 --------------------------------------------------------------------------------------------------------- Balance as of December 31, 2003 $27,739 $ 1,756 $378,870 $ 408,365 =========================================================================================================
NOTE 11: TREASURY STOCK The Company previously announced intentions to repurchase up to 6.5 million shares of its Common Stock from April 1, 1999 through December 31, 2003. During the third quarter of Fiscal 2004, the Company repurchased approximately 0.4 million shares for an aggregate purchase price of $15,675 and for the first nine months of Fiscal 2004, repurchases totaled approximately 1.2 million shares for $47,636. Since inception of the repurchase program in April 1999 through December 2003, the Company has repurchased in aggregate approximately 5.0 million shares for $211,183. Funding for the stock repurchases came from existing cash flow and cash on hand. During the first quarter of this fiscal year, the Company used $4,719 of cash on hand to settle stock repurchases initiated during the fourth quarter of the prior fiscal year. Additional repurchases of stock may occur from time to time depending upon factors such as the Company's cash flows and general market conditions. While the Company expects to continue to repurchase shares for the foreseeable future, there can be no assurance as to the timing or amount of such repurchases. NOTE 12: INDEBTEDNESS Long-term debt is as follows:
DECEMBER 31, 2003 MARCH 31, 2003 =========================================================================== Revolving credit agreement $ 46,700 $ 49,100 Other debt 839 1,279 --------------------------------------------------------------------------- Total debt 47,539 50,379 Less: current portion (759) (926) --------------------------------------------------------------------------- Long-term debt $ 46,780 $ 49,453 ===========================================================================
On April 4, 2000, Black Box Corporation of PA, a domestic subsidiary of the Company, entered into a $120,000 Revolving Credit Agreement ("Long Term Revolver") and a $60,000 Short Term Credit Agreement ("Short Term Revolver") (together the "Syndicated Debt") with Mellon Bank, 12 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) N.A. and a group of lenders. The Long Term Revolver was scheduled to expire on April 4, 2003 and the Short Term Revolver was scheduled to expire on April 4, 2002. In April 2002, the Long Term Revolver was extended to April 4, 2005 and the Short Term Revolver was extended to April 2, 2003 when it expired. On April 4, 2003, the Company entered into an agreement whereby Citizens Bank of Pennsylvania became successor agent to Mellon Bank, N.A. Mellon Bank continues to be a Participant in the credit agreement. The interest on the Syndicated Debt is variable based on the Company's option of selecting the banks prime rate plus an applicable margin as defined in the Syndicated Debt agreement or the Euro-dollar rate plus an applicable margin as defined in the agreement. The weighted average interest rate on all indebtedness of the Company as of December 31, 2003 was approximately 1.9%. NOTE 13: RESTRUCTURING In the fourth quarter of Fiscal 2003, the Company recorded a restructuring charge of $6,536 primarily related to adjusting staffing levels and real estate consolidations. Of this charge, $5,034 related to severance for 245 total team members ($4,299 related to severance for 130 team members in Europe; $581 related to severance for 94 team members in North America; $154 related to severance for 21 individuals in Latin America) and $1,502 related to real estate consolidations. In the fourth quarter of Fiscal 2002, the Company recorded a restructuring charge of approximately $3,500 primarily related to adjusting staffing levels and real estate consolidations. Of this charge, $2,168 related to severance for 105 total team members ($1,830 related to severance for 60 team members in Europe; $230 related to severance for 19 team members in Latin America; $108 related to severance for 26 team members in North America) and $1,332 related to real estate consolidations. The components of the restructuring accruals at December 31, 2003 are as follows:
ACCRUED CASH ACCRUED MARCH 31, 2003 EXPENDITURES OTHER DECEMBER 31, 2003 ================================================================================================== Team Member Severance $4,375 $3,985 $ -- $390 Facility Closures 1,806 830 453 523 -------------------------------------------------------------------------------------------------- Total $6,181 $4,815 $453 $913 ==================================================================================================
The Company anticipates the majority of the restructuring accrual will be paid by the end of Fiscal 2004. 13 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) NOTE 14: SEGMENT REPORTING As required by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company reports the results of operating segments. During the fourth quarter of Fiscal 2003, the Company changed its primary segments to be on a geographical basis as this is now the way it manages the business to be more responsive to the organization's operating structure. The primary reportable segments are comprised of North America, Europe and All Other. Consistent with SFAS No. 131, the Company aggregates similar operating segments into reportable segments. The accounting policies of the various segments are the same as those described in "Summary of Significant Accounting Principles" in Note 1 of the Company's annual report on Form 10-K for the fiscal year ended March 31, 2003. The Company evaluates the performance of each segment based on operating income. Inter-segment sales and segment interest income or expense and expenditures for segment assets are not presented to or reviewed by management, and therefore are not presented below. Summary information by reportable segment is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------- ----------------------- NORTH AMERICA 2003 2002 2003 2002 =============================================================================== Revenues $ 84,665 $102,476 $259,555 $325,115 Operating income 10,900 14,784 34,595 48,024 Depreciation 1,091 1,288 3,325 4,036 Amortization 17 36 40 117 Segment assets 566,474 600,147 566,474 600,147 ===============================================================================
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------- ----------------------- EUROPE 2003 2002 2003 2002 ============================================================================== Revenues $ 38,309 $ 41,457 $103,944 $115,847 Operating income 6,325 6,532 16,278 17,613 Depreciation 429 442 1,232 1,333 Amortization 39 56 141 172 Segment assets 130,640 124,123 130,640 124,123 ==============================================================================
14 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------- --------------------- ALL OTHER 2003 2002 2003 2002 ============================================================================== Revenues $10,093 $ 9,129 $27,183 $29,243 Operating income 2,399 1,756 6,418 6,182 Depreciation 86 107 267 378 Amortization 8 4 17 16 Segment assets 17,427 17,057 17,427 17,057 ==============================================================================
The sum of the segment revenues, operating income, depreciation and amortization equals the total consolidated revenues, operating income, depreciation and amortization. The following reconciles segment assets to total consolidated assets:
ASSETS DECEMBER 31, 2003 MARCH 31, 2003 =========================================================================== Assets for North America, Europe and All Other segments $ 714,541 $ 727,349 Corporate eliminations (91,167) (100,620) --------------------------------------------------------------------------- Total consolidated assets $ 623,374 $ 626,729 ===========================================================================
Management is also presented with and reviews revenues by service type. The following information is presented:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------- ----------------------- REVENUES 2003 2002 2003 2002 =============================================================================== Hotline Services $ 61,538 $ 62,897 $176,508 $190,775 Data Services 54,305 69,323 161,448 219,147 Voice Services 17,224 20,842 52,726 60,283 ------------------------------------------------------------------------------- Total revenues $133,067 $153,062 $390,682 $470,205 ===============================================================================
NOTE 15: COMMITMENTS AND CONTINGENCIES As previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, two arbitration awards (including interest and costs through December 31, 2003) against the Company for approximately $1.6 million and approximately $1.5 million are being appealed. Regarding the case involving the $1.5 million award, the parties verbally agreed to settle all claims between them in exchange for a payment by the Company of $1.2 million. The terms of this settlement will be set forth in a written settlement agreement which is currently in the process of being negotiated by the parties. Based on the facts currently available to the Company, management believes these matters are adequately provided for, covered by insurance, without merit, or not probable that an unfavorable outcome will result. 15 BLACK BOX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts) As previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, the Company has been named as a defendant in two substantially similar complaints alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. These actions were consolidated in a lawsuit in the United States District Court for the Western District of Pennsylvania in a case captioned In Re Black Box Corporation Securities Litigation (Civil Action No. 03-CV-412). On October 3, 2003, the plaintiffs in this action filed a Consolidated Class Action Complaint in this matter. On November 17, 2003, the Company filed a Motion to Dismiss the plaintiffs' complaint. Thereafter, the plaintiffs filed a brief in opposition to the Company's Motion to Dismiss. The Company filed its response to plaintiffs' opposition on February 9, 2004. The Company believes that the claims are without merit and intends to defend itself vigorously. As previously disclosed in its Current Report on Form 8-K filed on October 28, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, the Company received a formal order of investigation issued by the Securities and Exchange Commission (the "SEC"). In connection therewith, during the quarter ended December 28, 2003, the Company and several of its officers, directors, team members and independent auditors provided information to the Staff of the SEC. In late January 2004, the SEC requested information relating to fiscal 2002 from the Company's independent auditors pursuant to an additional subpoena. The Company intends to continue to cooperate fully with the inquiry. 16 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company manages its business based on geographic segments: North America, Europe and All Other. In addition, certain revenue and gross profit information by service type is also provided herein for purposes of further analysis. Dollars in Thousands The tables below should be read in conjunction with the following discussion.
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, ---------------------------------------- --------------------------------------- 2003 2002 2003 2002 (3Q04) (3Q03) (3Q04YTD) (3Q03YTD) ================================================================================================================== % of % of % of % of total total total total revenues revenues revenues revenues -------- -------- -------- -------- BY GEOGRAPHY Revenues: North America $ 84,665 64% $102,476 67% $259,555 66% $325,115 69% Europe 38,309 29% 41,457 27% 103,944 27% 115,847 25% All Other 10,093 7% 9,129 6% 27,183 4% 29,243 6% ---------------------------------------------------------------------------------- Total $133,067 100% $153,062 100% $390,682 100% $470,205 100% ---------------------------------------------------------------------------------- Operating Income: North America $ 10,900 $ 14,784 $ 34,595 $ 48,024 % of North America 12.9% 14.4% 13.3% 14.8% revenues Europe $ 6,325 $ 6,532 $ 16,278 $ 17,613 % of Europe revenues 16.5% 15.8% 15.7% 15.2% All Other $ 2,399 $ 1,756 $ 6,418 $ 6,182 % of All Otherrevenues 23.8% 19.2% 23.6% 21.1% ---------------------------------------------------------------------------------- Total $ 19,624 $ 23,072 $ 57,291 $ 71,818 % of Total revenues 14.7% 15.1% 14.7% 15.3% ==================================================================================================================
17
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, ---------------------------------------- ----------------------------------------- 2003 2002 2003 2002 (3Q04) (3Q03) (3Q04YTD) (3Q03YTD) ==================================================================================================================== % of % of % of % of total total total total revenues revenues revenues revenues -------- -------- -------- -------- BY SERVICE TYPE Revenues: Hotline Services $ 61,538 46% $ 62,897 41% $176,508 45% $190,775 40% Data Services 54,305 41% 69,323 45% 161,448 41% 219,147 47% Voice Services 17,224 13% 20,842 14% 52,726 14% 60,283 13% ------------------------------------------------------------------------------------ Total $133,067 100% $153,062 100% $390,682 100% $470,205 100% ------------------------------------------------------------------------------------ Gross Profit: Hotline Services $ 32,241 $ 32,308 $ 92,212 $ 96,906 % of Hotline Services 52.4% 51.4% 52.2% 50.8% revenues Data Services $ 16,267 $ 21,439 $ 51,404 $ 70,117 % of Data Services 30.0% 30.9% 31.8% 32.0% revenues Voice Services $6,133 $6,892 $ 18,347 $ 18,888 % of Voice Services 35.6% 33.1% 34.8% 31.3% revenues ------------------------------------------------------------------------------------ Total $ 54,641 $ 60,639 $161,963 $185,911 % of Total revenues 41.1% 39.6% 41.5% 39.5% ====================================================================================================================
I. THIRD QUARTER FISCAL 2004 (3Q04) COMPARED TO THIRD QUARTER FISCAL 2003 (3Q03): TOTAL REVENUES Total revenues for 3Q04 were $133,067, a decrease of 13% compared to 3Q03 total revenues of $153,062. If exchange rates had remained constant from the third quarter last year, 3Q04 total revenues would have been lower by $6,041, or 4%. REVENUES BY GEOGRAPHY NORTH AMERICA REVENUES Revenues in North America were $84,665 for 3Q04, a decrease of 17% compared to $102,476 for 3Q03. The North America revenue decline was generally due to weak general economic conditions that affected client demand. EUROPE REVENUES Revenues in Europe were $38,309 for 3Q04, a decrease of 8% compared to $41,457 for 3Q03. The Europe revenue decline was due to weak general economic conditions that affected client demand, offset in part by the positive impact of exchange rates relative to the U.S. dollar. If 18 exchange rates relative to the U.S. dollar had remained unchanged from 3Q03, Europe revenues would have decreased 20%. ALL OTHER REVENUES Revenues for All Other were $10,093 for 3Q04, an increase of 11% compared to $9,129 for 3Q03. The revenue increase in these regions was due to the positive impact of exchange rates relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had remained unchanged from 3Q03, All Other revenues would have been comparable to last year's third quarter. REVENUES BY SERVICE TYPE HOTLINE SERVICES Revenues from hotline services for 3Q04 were $61,538, a decrease of 2% compared to $62,897 for 3Q03. The Company believes the overall decline in hotline services revenues was driven by weak general economic conditions, offset in part by $4,109 positive impact of exchange rates relative to the U.S. dollar for its international hotline services. DATA SERVICES Revenues from data services (previously designated as structured cabling services) were $54,305 for 3Q04, a decrease of 22% compared to $69,323 for 3Q03. The Company believes the overall decline in data services revenue was driven by weak general economic conditions, offset in part by $1,932 positive impact of exchange rates relative to the U.S. dollar for its international data services. VOICE SERVICES Revenues from voice services (previously designated as telephony services) were $17,224 for 3Q04, a decrease of 17% compared to $20,842 for 3Q03. The Company believes the overall decline in voice services revenue was driven by weak general economic conditions. GROSS PROFIT Gross profit dollars for 3Q04 decreased to $54,641 from $60,639 for 3Q03. The decrease in gross profit dollars over prior year was due to the decline in revenues. Gross profit as a percent of revenues for 3Q04 increased to 41.1% of revenues from 39.6% of revenues for 3Q03. The increase in gross profit percentage was due primarily to cost reduction efforts. Gross profit dollars for hotline services for 3Q04 was $32,241, or 52.4% of revenues, compared to $32,308, or 51.4% of revenues for 3Q03. Gross profit dollars for data services for 3Q04 was $16,267, or 30.0% of revenues, compared to $21,439, or 30.9% of revenues for 3Q03. Gross profit dollars for voice services for 3Q04 was $6,133, or 35.6% of revenues, compared to $6,892, or 33.1% of revenues for 3Q03. SG&A EXPENSES Selling, general and administrative ("SG&A") expenses for 3Q04 were $34,953 a decrease of $2,518 over SG&A expenses of $37,471 for 3Q03. The dollar decrease from 3Q04 to 3Q03 related to the Company's cost reduction efforts worldwide. SG&A expenses as a percent of 19 revenues for 3Q04 increased to 26.3% of revenues from 24.5% of revenues for 3Q03. The percentage increase is due to the percentage change in revenues being greater than the percentage change in the overall cost structure. INTANGIBLES AMORTIZATION Intangibles amortization for 3Q04 decreased to $64 from $96 for 3Q03 due to the full amortization of acquired backlog. OPERATING INCOME Operating income for 3Q04 was $19,624, or 14.7% of revenues, compared to $23,072 or 15.1% of revenues for 3Q03. The decrease in operating income dollars is primarily due to the decrease in revenues while the decline in the operating income as a percentage of revenues was due primarily to the additional SG&A expenses as a percentage of revenues as described above. NET INTEREST EXPENSE Net interest expense for 3Q04 decreased to $498 from $671 for 3Q03 due to reductions in the outstanding debt from $53,230 at the end of 3Q03 to $47,539 at the end of 3Q04 and the interest rate reduction of approximately 0.3% during the period from 3Q03 to 3Q04. PROVISION FOR INCOME TAXES The tax provision for 3Q04 was $6,858, an effective tax rate of 36.0%, compared to 3Q03 of $7,580, an effective tax rate of 33.9%. The tax rate for 3Q03 reflected the implementation of a state tax planning strategy that reduced the FY03 expected rate from 37.0% to 36.0%. The annual effective tax rates were higher than the U.S. statutory rate of 35.0% primarily due to state income taxes, offset by foreign income tax credits. NET INCOME Net income for 3Q04 was $12,193, or 9.2% of revenues, compared to $14,777, or 9.7% of revenues for 3Q03. 20 II. NINE MONTHS FISCAL 2004 (3Q04YTD) COMPARED TO NINE MONTHS FISCAL 2003 (3Q03YTD): TOTAL REVENUES Total revenues for 3Q04YTD were $390,682, a decrease of 17% compared to 3Q03YTD total revenues of $470,205. If exchange rates had remained constant from the same periods last year, 3Q04YTD total revenues would have been lower by $15,230, or 3%. REVENUES BY GEOGRAPHY NORTH AMERICA REVENUES Revenues in North America were $259,555 for 3Q04YTD, a decrease of 20% compared to $325,115 for 3Q03YTD. The North America revenue decline was generally due to weak general economic conditions that affected client demand. EUROPE REVENUES Revenues in Europe were $103,944 for 3Q04YTD, a decrease of 10% compared to $115,847 for 3Q03YTD. The Europe revenue decline was due to weak general economic conditions that affected client demand, offset in part by the positive impact of exchange rates relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had remained unchanged from the same periods last year, Europe revenues would have decreased 22%. ALL OTHER REVENUES Revenues for All Other were $27,183 for 3Q04YTD, a decrease of 7% compared to $29,243 for 3Q03YTD. The revenue decline in these regions was due to weak general economic conditions that affected client demand, offset by the positive impact of exchange rates relative to the U.S. dollar. If exchange rates relative to the U.S. dollar had remained unchanged from the same periods last year, All Other revenues would have decreased 13%. REVENUES BY SERVICE TYPE HOTLINE SERVICES Revenues from hotline services for 3Q04YTD were $176,508, a decrease of 7% compared to $190,775 for 3Q03YTD. The Company believes the overall decline in hotline services revenues was driven by weak general economic conditions, offset in part by $10,018 positive impact of exchange rates relative to the U.S. dollar for its international hotline services. DATA SERVICES Revenues from data services were $161,448 for 3Q04YTD, a decrease of 26% compared to $219,147 for 3Q03YTD. The Company believes the overall decline in data services revenue was driven by weak general economic conditions, offset in part by $5,213 positive impact of exchange rates relative to the U.S. dollar for its international data services. 21 VOICE SERVICES Revenues from voice services were $52,726 for 3Q04YTD, a decrease of 13% compared to $60,283 for 3Q03YTD. The Company believes the overall decline in voice services revenue was driven by weak general economic conditions. GROSS PROFIT Gross profit dollars for 3Q04YTD decreased to $161,963 from $185,911 for 3Q03YTD. The decrease in gross profit dollars over prior year was due to the decline in revenues. Gross profit as a percent of revenues for 3Q04YTD increased to 41.5% of revenues from 39.5% or revenues for 3Q03YTD. The increase in gross profit percentage was due primarily to cost reduction efforts. Gross profit dollars for hotline services for 3Q04YTD was $92,212, or 52.2% of revenues, compared to $96,906, or 50.8% of revenues for 3Q03YTD. Gross profit dollars for data services for 3Q04YTD was $51,404, or 31.8% of revenues, compared to $70,117, or 32.0% of revenues for 3Q03YTD. Gross profit dollars for voice services for 3Q04YTD was $18,347, or 34.8% of revenues, compared to $18,888, or 31.3% or revenues. SG&A EXPENSES Selling, general and administrative ("SG&A") expenses for 3Q04YTD were $104,474, a decrease of $9,314 over SG&A expenses of $113,788 for 3Q03YTD. The dollar decrease from 3Q04YTD to 3Q03YTD related to the Company's cost reduction efforts worldwide. SG&A expenses as a percent of revenues for 3Q04YTD were 26.7% of revenues compared to 24.2% of revenues for 3Q03YTD. The percentage increase is due to the percentage change in revenues being greater than the percentage change in the overall cost structure. INTANGIBLES AMORTIZATION Intangibles amortization for 3Q04YTD decreased to $198 from $305 for 3Q03YTD due to the full amortization of acquired backlog. OPERATING INCOME Operating income for 3Q04YTD was $57,291, or 14.7% of revenues, compared to $71,818 or 15.3% of revenues for 3Q03YTD. The decrease in operating income dollars is primarily due to the decrease in revenues while the decline in the operating income as a percentage of revenues was due primarily to the additional SG&A expenses as a percentage of revenues as described above. NET INTEREST EXPENSE Net interest expense for 3Q04YTD decreased to $1,358 from $2,209 for 3Q03YTD due to reductions in the outstanding debt from $53,230 at the end of 3Q03 to $47,539 at the end of 3Q04 and the interest rate reduction of approximately 0.3% during the period from 3Q03YTD to 3Q04YTD. 22 PROVISION FOR INCOME TAXES The tax provision for 3Q04YTD was $20,102, an effective tax rate of 36.0%, compared to 3Q03YTD of $25,018, an effective tax rate of 36.0%. The annual effective tax rates were higher than the U.S. statutory rate of 35.0% primarily due to state income taxes, offset by foreign income tax credits. NET INCOME Net income for 3Q04YTD was $35,740, or 9.1% of revenues, compared to $44,477, or 9.5% of revenues for 3Q03YTD. III. LIQUIDITY AND CAPITAL RESOURCES: CASH FLOWS FROM OPERATING ACTIVITIES Cash Provided by Operating Activities for 3Q04YTD and 3Q03YTD was $46,362 and $68,683, respectively. Reflected as a source of cash from operating activities in 3Q04YTD are decreases in accounts receivables and unbilled accounts and other current assets offset in part by an increase in inventories and a decrease in accounts payable and accrued liabilities. In 3Q03YTD, decreases in accounts receivables and unbilled accounts, inventories and other current assets were a source of cash flow from operating activities, while a decrease in accounts payable and accrued liabilities were a use of cash flow. In addition to Cash Provided by Operating Activities of $46,362 in 3Q04YTD, the Company had additional cash flow of $8,830. This was generated from $6,014 of stock option exercises, $2,558 of positive foreign currency exchange impact on cash, and $258 from disposals (net of additions) of capital assets. The Company's 3Q04YTD cash flow and $4,119 of cash on hand was used for repurchases of Company stock of $52,354, debt reduction of $2,959, dividend payments of $2,737 and merger activity of $1,261. As of the end of 3Q04, the Company had cash and cash equivalents of $9,924, working capital of $118,140 and long-term debt of $46,780. The Company believes that its cash provided by operating activities will be sufficient to satisfy its liquidity needs for the foreseeable future. INVESTING ACTIVITIES The net cash impact of merger transactions and prior merger-related payments during 3Q04YTD was $1,261. During 3Q04YTD, capital expenditures were $1,357, while capital disposals were $1,615. Capital expenditures for Fiscal 2004 are projected to be $2,000 and will be spent primarily on information systems, general equipment and facility improvements. 23 FINANCING ACTIVITIES TOTAL DEBT On April 4, 2000, Black Box Corporation of PA, a domestic subsidiary of the Company, entered into a $120,000 Revolving Credit Agreement ("Long Term Revolver") and a $60,000 Short Term Credit Agreement ("Short Term Revolver") (together the "Syndicated Debt") with Mellon Bank, N.A. and a group of lenders. The Long Term Revolver was scheduled to expire on April 4, 2003 and the Short Term Revolver was scheduled to expire on April 3, 2002. In April 2002, the Long Term Revolver was extended until April 4, 2005 and the Short Term Revolver was extended until April 2, 2003 when it expired. The Company's total debt at the end of 3Q04 of $47,539 was comprised of $46,700 under the Long Term Revolver and $839 of various other third-party, non-employee loans. The weighted average interest rate on all indebtedness of the Company at the end of 3Q04 and 3Q03 was approximately 1.9% and 2.2%, respectively. In addition, at the end of 3Q04, the Company had $6,250 of letters of credit outstanding and $67,050 available under the Long Term Revolver. Interest on the Long Term Revolver is variable based on the Company's option of selecting the bank's Euro-dollar rate plus an applicable margin or the prime rate plus an applicable margin. The majority of the Company's borrowings are under the Euro-rate option. The applicable margin is adjusted each quarter based on the consolidated leverage ratio as defined in the agreement. The applicable margin varies from 0.75% to 1.75% (0.75% at the end of 3Q04) on the Euro-dollar rate option and from zero to 0.75% (zero at the end of 3Q04) on the prime rate option. The Long Term Revolver provides for the payment of quarterly commitment fees on unborrowed funds, also based on the consolidated leverage ratio. The commitment fee percentage ranges from 0.25% to 0.375% (0.25% at the end of 3Q04). The Long Term Revolver is unsecured; however, the Company, as the ultimate parent, guarantees all borrowings and the debt contains various restrictive covenants. DIVIDENDS Beginning in the third quarter of Fiscal 2003 and in all subsequent quarters, the Company's Board of Directors has declared quarterly cash dividends of $0.05 per share on all outstanding shares of Black Box's common stock. The dividend declared in 3Q04 totaled $894 and was paid on January 15, 2004 to stockholders of record at the close of business on December 31, 2003. While the Company expects to continue to declare dividends for the foreseeable future, there can be no assurance as to the timing or amount of such dividends. TREASURY STOCK The Company previously announced intentions to repurchase up to 6.5 million shares of its Common Stock from April 1, 1999 through December 31, 2003. During 3Q04, the Company repurchased approximately 0.4 million shares for an aggregate purchase price of $15,675 and for 3Q04YTD, repurchases totaled approximately 1.2 million shares for $47,635. Since inception of the repurchase program in April 1999 through 3Q04, the Company has repurchased in aggregate approximately 5.0 million shares for $211,183. Funding for the stock repurchases came primarily from existing cash flow from operations. Additional repurchases of stock may occur 24 from time to time depending upon factors such as the Company's cash flows and general market conditions. While the Company expects to continue to repurchase shares for the foreseeable future, there can be no assurance as to the timing or amount of such repurchases. FOREIGN CURRENCY EXCHANGE IMPACT The Company has operations, clients and suppliers worldwide, thereby exposing the Company's financial results to foreign currency fluctuations. In an effort to reduce this risk, the Company generally sells and purchases inventory based on prices denominated in U.S. dollars. Intercompany sales to subsidiaries are generally denominated in the subsidiaries' local currency, although intercompany sales to the Company's subsidiaries in Brazil, Chile, Mexico and Singapore are denominated in U.S. dollars. The Company has entered and will continue in the future, on a selective basis, to enter into forward exchange contracts to reduce the foreign currency exposure related to certain intercompany transactions. On a monthly basis, the open contracts are revalued to fair market value, and the resulting gains and losses are recorded in accumulated other comprehensive income. These gains and losses offset the revaluation of the related foreign currency denominated receivables and payables, which are also included in accumulated other comprehensive income in stockholders' equity on the Consolidated Balance Sheet. At December 31, 2003, the open foreign exchange contracts were in Euro, Pound sterling, Canadian dollar, Swiss franc, Japanese yen, Swedish krona, Danish krone, Norwegian kroner and Australian dollar. The total open contracts, with a notional amount of approximately $14,679, have a fair value of $15,438 and will expire within seven months. The open contracts have contract rates of 0.8042 to 0.9023 Euro, 0.5971 to 0.6119 Pound sterling, 1.3132 to 1.3669 Canadian dollar, 1.2529 to 1.3254 Swiss franc, 110.46 to 116.50 Japanese yen, 7.3542 to 7.9703 Swedish krona, 6.4057 to 6.4183 Danish krone, 7.0260 to 7.0749 Norwegian kroner and 1.3643 to 1.4732 Australian dollar, all per U.S. dollar. IV. CRITICAL ACCOUNTING POLICIES: INTRODUCTION In preparing the Company's financial statements in conformity with accounting principles generally accepted in the United States, judgments and estimates are made about the amounts reflected in the financial statements. As part of the financial reporting process, the Company's management collaborates to determine the necessary information on which to base judgments and develop estimates used to prepare the financial statements. Historical experience and available information is used to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the financial statements. The Company's critical accounting policies for revenue recognition, accounting for judgments and estimates, long-lived assets and restructuring are described in the Form 10-K for the year 25 ended March 31, 2003. There have been no significant changes to these policies during the three subsequent quarters. In addition to those policies previously disclosed in Form 10-K, the Company is disclosing the following policy regarding loss contingencies. LOSS CONTINGENCIES The Company accrues for loss contingencies when it is determined that an unfavorable outcome is probable and estimable. V. NEW ACCOUNTING PRONOUNCEMENTS: In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is one where the contractual or ownership interests in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. The Company does not believe that this statement will have a material impact on the Company's consolidated financial statements or results of operations. VI. INFLATION: The overall effects of inflation on the Company have been nominal. Although long-term inflation rates are difficult to predict, the Company continues to strive to minimize the effect of inflation through improved productivity and cost reduction programs as well as price adjustments within the constraints of market competition. VII. FORWARD LOOKING STATEMENTS: When included in this Quarterly Report on Form 10-Q or in documents incorporated herein by reference, the words "expects," "intends," "anticipates," "believes," "estimates," and analogous expressions are intended to identify forward-looking statements. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, the ability of the Company to identify, acquire and operate additional on-site technical service companies, general economic and business conditions, competition, changes in foreign, political and economic conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid changes in technologies, customer preferences and various other matters, many of which are beyond the Company's control. These and other risk factors are discussed in greater detail in the Company's most recent Annual Report on Form 10-K on file with the United States Securities and Exchange Commission. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of this Quarterly Report on Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or any changes in the Company's expectations with regard thereto or any change in events, conditions, or circumstances on which any statement is based. Investors should also be aware that the Company does not provide forecasts regarding its future financial results. In addition, while the Company does, from time to time, communicate 26 with securities analysts and stockholders, it is against the Company's practice to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a practice against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 27 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks in the ordinary course of business that include foreign currency exchange rates. In an effort to mitigate the risk, the Company will enter into forward exchange contracts on a selective basis. At December 31, 2003, the Company had open contracts, with a notional amount of approximately $14,679 and a fair value of approximately $15,438. In the ordinary course of business, the Company is also exposed to risks that interest rate increases may adversely affect funding costs associated with the variable rate debt. For the three-month periods ended December 31, 2003 and 2002, an instantaneous 100 basis point increase in the interest rate would reduce the Company's expected net income in the subsequent three months by $76 and $85, respectively, assuming the Company employed no intervention strategies. ITEM 4 - CONTROLS AND PROCEDURES An evaluation was performed as of December 28, 2003, under the supervision and with the participation of Company management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Act"). Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Act is recorded, processed, summarized and reported in accordance with the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls' stated goals. There have been no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting or in other factors that could significantly affect internal controls subsequent to their evaluation. 28 PART II OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS As previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, two arbitration awards (including interest and costs through December 31, 2003) against the Company for approximately $1.6 million and approximately $1.5 million are being appealed. Regarding the case involving the $1.5 million award, the parties verbally agreed to settle all claims between them in exchange for a payment by the Company of $1.2 million. The terms of this settlement will be set forth in a written settlement agreement which is currently in the process of being negotiated by the parties. Based on the facts currently available to the Company, management believes these matters are adequately provided for, covered by insurance, without merit, or not probable that an unfavorable outcome will result. As previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, the Company has been named as a defendant in two substantially similar complaints alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. These actions were consolidated in a lawsuit in the United States District Court for the Western District of Pennsylvania in a case captioned In Re Black Box Corporation Securities Litigation (Civil Action No. 03-CV-412). On October 3, 2003, the plaintiffs in this action filed a Consolidated Class Action Complaint in this matter. On November 17, 2003, the Company filed a Motion to Dismiss the plaintiffs' complaint. Thereafter, the plaintiffs filed a brief in opposition to the Company's Motion to Dismiss. The Company filed its response to plaintiffs' opposition on February 9, 2004. The Company believes that the claims are without merit and intends to defend itself vigorously. As previously disclosed in its Current Report on Form 8-K filed on October 28, 2003 and in its quarterly report on Form 10-Q for the quarter ended September 28, 2003, the Company received a formal order of investigation issued by the United States Securities and Exchange Commission (the "SEC"). In connection therewith, during the quarter ended December 28, 2003, the Company and several of its officers, directors, team members and independent auditors provided information to the Staff of the SEC. In late January 2004, the SEC requested information relating to fiscal 2002 from the Company's independent auditors pursuant to an additional subpoena. The Company intends to continue to cooperate fully with the inquiry. 29 ITEM 2(E) - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
(c) TOTAL NUMBER OF (d) MAXIMUM NUMBER (OR (a) TOTAL SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF NUMBER OF (b) AVERAGE PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY SHARES (OR PRICE PAID PER PUBLICLY ANNOUNCED YET BE PURCHASED UNDER THE UNITS) SHARE (OR UNIT) PLANS OR PROGRAMS PLANS OR PROGRAMS PERIOD PURCHASED =============================================================================================================== September 29, 2003 to October 26, 2003 41,100 $43.05 41,100 826,083(1) October 27, 2003 to November 23, 2003 315,608 $44.06 315,608 1,510,475(2) November 24, 2003 to December 28, 2003 -- -- -- 1,510,475 --------------------------------------------------------------------------------------------------------------- Total 356,708 $43.94 356,708 1,510,475 ===============================================================================================================
(1) Reflects amounts remaining from an increase of 1,000,000 shares to the Company's existing common stock repurchase program announced on May 7, 2003. (2) Includes an increase of 1,000,000 shares to the Company's existing common stock repurchase program announced on November 20, 2003. Additional repurchases of stock may occur from time to time depending upon factors such as the Company's cash flows and general market conditions. While the Company expects to continue to repurchase shares for the foreseeable future, there can be no assurance as to the timing or amount of such repurchases. 30 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K furnished during the quarter ended December 28, 2003 Current Report on Form 8-K for the event dated October 21, 2003 covering Item 5 thereof disclosing and filing the Company's press release related to second quarter Fiscal 2004 financial results. Current Report on Form 8-K for the event dated October 28, 2003 covering Item 5 thereof disclosing the formal order of investigation by the United States Securities and Exchange Commission in connection with an inquiry pursuant to which additional information was requested from the Company and several of its officers, directors and team members. 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLACK BOX CORPORATION February 11, 2004 By: /s/ Michael McAndrew ------------------------------------ Michael McAndrew Chief Financial Officer, Treasurer and Principal Accounting Officer 32 EXHIBIT INDEX Exhibit No. ------- 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 33