EX-99.1 2 l38632exv99w1.htm EX-99.1 exv99w1
Exhibit 99.1
(BLACK BOX LOGO)
Contact
Black Box Corporation
Gary Doyle
Director - Investor Relations
Phone: (724) 873-6788
Email: investors@blackbox.com
FOR IMMEDIATE RELEASE
BLACK BOX CORPORATION REPORTS THIRD QUARTER AND YEAR-TO-DATE FISCAL 2010 RESULTS
PITTSBURGH, PENNSYLVANIA, January 26, 2010 - Black Box Corporation (NASDAQ:BBOX) today reported results for the third quarter of Fiscal 2010 ended December 26, 2009.
For the third quarter of Fiscal 2010, diluted earnings per share were 63¢ on net income of $11.0 million or 4.3% of revenues compared to diluted earnings per share of 56¢ on net income of $9.8 million or 3.8% of revenues for the same quarter last year. On a sequential quarter comparison basis, second quarter of Fiscal 2010 diluted earnings per share were 47¢ on net income of $8.2 million or 3.5% of revenues. Excluding reconciling items, operating earnings per share (which is a non-GAAP term and is defined below) for the third quarter of Fiscal 2010 were 77¢ on operating net income (which is a non-GAAP term and is defined below) of $13.6 million or 5.4% of revenues compared to operating earnings per share of 85¢ on operating net income of $14.9 million or 5.7% of revenues for the same quarter last year. See below for additional information regarding the comparability of Fiscal 2010 and Fiscal 2009 operating earnings per share. Management believes that presenting operating earnings per share and operating net income is useful to investors because it provides a more meaningful comparison of the ongoing operations of the Company.
For the third quarter of Fiscal 2010, the Company’s pre-tax reconciling items were $4.1 million with an after-tax impact on net income and EPS of $2.6 million and 14¢, respectively. During the third quarter of Fiscal 2009, the Company’s pre-tax reconciling items were $7.9 million with an after-tax impact on net income and EPS of $5.0 million and 29¢, respectively. See below for further discussion regarding Management’s use of non-GAAP accounting measurements and a detailed presentation of the Company’s pre-tax reconciling items for the periods presented above.
Third quarter of Fiscal 2010 total revenues were $253 million, a decrease of $9 million or 3% from $262 million for the same quarter last year. On a sequential quarter comparison basis, second quarter of Fiscal 2010 total revenues were $232 million.
Third quarter of Fiscal 2010 cash provided by operating activities was $12 million or 105% of net income, compared to $13 million or 136% of net income for the same quarter last year. Third quarter of Fiscal 2010 free cash flow (which is a non-GAAP term and is defined below) was $11 million equivalent to $11 million for the same quarter last year. On a sequential quarter comparison basis, second quarter of Fiscal 2010 cash provided by operating activities was $14 million or 177% of net income and free cash flow was $14 million. Black Box utilized its third quarter of Fiscal 2010 free cash flow primarily to fund acquisition activity of $10 million and to pay dividends of $1 million. Management believes that free cash flow, defined by the Company as cash provided by operating activities less net capital expenditures, plus proceeds from stock option exercises, plus or minus foreign currency translation adjustments, is an important measurement of liquidity as it represents the total cash available to the Company.
For the nine-month period ended December 26, 2009, diluted earnings per share were $1.54 on net income of $27.0 million or 3.7% of revenues compared to diluted earnings per share of $2.11 on net income of $37.0 million or 4.9% of revenues for the same period last year. Excluding reconciling items, operating earnings per share for the nine-month period ended December 26, 2009 were $2.20 on operating net income of $38.6 million or 5.4% of revenues compared to operating earnings per share of $2.47 on operating net income of $43.3 million or 5.7% of revenues for the same period last year.
For the nine-month period ended December 26, 2009, the Company’s pre-tax reconciling items were $18.6 million with an after-tax impact on net income and EPS of $11.6 million and 66¢, respectively. For the nine-month period ended December 27, 2008, the Company’s pre-tax reconciling items were $9.9 million with an after-tax impact on net income and EPS of $6.3 million and 36¢, respectively.
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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For the nine-month period ended December 26, 2009, total revenues were $721 million, a decrease of $37 million or 5% from $758 million for the same period last year.
Cash provided by operating activities for the nine-month period ended December 26, 2009 was $42 million or 156% of net income compared to $52 million or 140% of net income for the same period last year. Free cash flow was $41 million compared to $49 million for the same period last year. Black Box utilized its nine-month period free cash flow primarily to fund acquisition activity of $18 million, debt reduction of $14 million and to pay dividends of $3 million.
The Company’s six-month order backlog was $191 million at December 26, 2009 compared to $195 million for the same quarter last year. On a sequential quarter-end comparison basis, the Company’s six-month order backlog was $207 million at September 26, 2009.
For the fourth quarter of Fiscal 2010, the Company is targeting reported revenues of approximately $240 million to $245 million and corresponding operating earnings per share in the range of 73¢ to 78¢. Included in these projections is an effective tax rate of 37.5%.
All of the above exclude acquisition-related expense, employee severance and facility consolidations costs, historical stock option granting practices investigation and related matters costs, current legal matters costs and the impact of changes in the fair market value of the Company’s interest-rate swaps, and all of the above are before any new mergers and acquisition activity that has not been announced.
Commenting on the third quarter of Fiscal 2010 results and the fourth quarter of Fiscal 2010 outlook, Terry Blakemore, President and Chief Executive Officer said “Our third quarter performance continues to strengthen the Black Box position for growth as the economy recovers.”
“We achieved sequential organic revenue growth and solid operational cash flow, increased our world-class technical capabilities through a strategic acquisition and expanded our served market through our new distribution agreement with Avaya. As the economy improves, the Black Box comprehensive portfolio of communication and service offerings will provide our clients with the critical infrastructure they need to grow.”
The Company will conduct a conference call beginning at 5:00 p.m. Eastern Standard Time today, January 26, 2010. Terry Blakemore, President and Chief Executive Officer, will host the call. To participate in the call, please dial 612-332-1025 approximately 15 minutes prior to the starting time and ask to be connected to the Black Box Earnings Call. A replay of the conference call will be available for one week after the teleconference by dialing 320-365-3844 and using access code 140275. A live, listen-only audio webcast of the call will be available through a link on the Investor Relations page of the Company’s website at http://www.blackbox.com. A webcast replay of the call will also be archived on Black Box’s Web site for a limited period of time following the conference call.
Black Box is the world’s largest technical services company dedicated to designing, building and maintaining today’s complicated data and voice infrastructure systems. Black Box services more than 175,000 clients in 141 countries with 194 offices throughout the world. To learn more, visit the Black Box Web site at http://www.blackbox.com.
Black Box®, the Double Diamond logo and DVH® are registered trademarks of BB Technologies, Inc.
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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Any forward-looking statements contained in this release 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 release. You can identify these forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “target,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Although it is not possible to predict or identify all risk factors, they may include the timing and final outcome of the ongoing review of the Company’s stock option practices, including the related shareholder derivative lawsuit, tax matters and insurance/indemnification matters, and the impact of any actions that may be required or taken as a result of such review, shareholder derivative lawsuit, tax matters or insurance/indemnification matters, levels of business activity and operating expenses, expenses relating to corporate compliance requirements, cash flows, global economic and business conditions, successful integration of acquisitions, the timing and costs of restructuring programs, successful marketing of DVH (Data, Voice, Hotline) services, successful implementation of the Company’s M&A program, including identifying appropriate targets, consummating transactions and successfully integrating the businesses, successful implementation of our government contracting programs, competition, changes in foreign, political and economic conditions, fluctuating foreign currencies compared to the U.S. dollar, rapid changes in technologies, client preferences, the Company’s arrangements with suppliers of voice equipment and technology and various other matters, many of which are beyond the Company’s control. Additional risk factors are included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2009. We can give no assurance that any goal, plan or target set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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BLACK BOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three-months ended     Nine-months ended  
    December 26 and 27,   December 26 and 27,
  In thousands, except per share amounts   2009     2008     2009     2008  
 
Revenues
                                
Hotline products
      $ 47,012        $ 51,550        $ 134,805        $ 164,008  
On-Site services
     206,373       210,303       585,705       594,208  
             
Total
     253,385       261,853       720,510       758,216  
 
                                
Cost of sales
                                
Hotline products
     24,406       27,380       70,267       84,279  
On-Site services
     142,150       143,555       398,727       401,820  
             
Total
     166,556       170,935       468,994       486,099  
 
                                
Gross profit
     86,829       90,918       251,516       272,117  
 
                                
Selling, general & administrative expenses
     64,198       66,085       192,596       198,282  
Intangibles amortization
     3,108       3,261       9,303       6,987  
             
 
                                
Operating income
     19,523       21,572       49,617       66,848  
 
                                
Interest expense (income), net
     1,852       5,722       6,592       8,105  
Other expenses (income), net
     40       376       (187)       543  
           
 
                                
Income before provision for income taxes
     17,631       15,474       43,212       58,200  
 
                                
Provision for income taxes
     6,612       5,647       16,205       21,241  
             
 
                                
Net income
      $ 11,019        $ 9,827        $ 27,007        $ 36,959  
             
 
                                
Earnings per common share
                                
Basic
      $ 0.63        $ 0.56        $ 1.54        $ 2.11  
             
Diluted
      $ 0.63        $ 0.56        $ 1.54        $ 2.11  
             
 
                                
Weighted average common shares outstanding
                                
Basic
     17,548       17,533       17,545       17,525  
             
Diluted
     17,561       17,533       17,545       17,525  
             
 
                                
Dividends per share
      $ 0.06        $ 0.06        $ 0.18        $ 0.18  
 
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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BLACK BOX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
  In thousands, except par value   December 26, 2009     March 31, 2009  
 
Assets
                
Cash and cash equivalents
      $ 29,056        $ 23,720  
Accounts receivable, net
     152,396       163,975  
Inventories, net
     53,755       55,898  
Costs/estimated earnings in excess of billings on uncompleted contracts
     94,961       66,066  
Prepaid and other current assets
     26,332       30,809  
 
        
Total current assets
     356,500       340,468  
 
                
Property, plant and equipment, net
     24,670       28,419  
Goodwill
     649,600       621,948  
Intangibles
                
Customer relationships, net
     91,357       105,111  
Other intangibles, net
     31,667       37,684  
Other assets
     10,759       2,858  
 
        
Total assets
      $ 1,164,553        $ 1,136,488  
 
        
 
                
Liabilities
                
Accounts payable
      $ 79,663        $ 79,021  
Accrued compensation and benefits
     31,087       30,446  
Deferred revenue
     37,431       35,520  
Billings in excess of costs/estimated earnings on uncompleted contracts
     15,817       18,217  
Income taxes
     8,287       5,164  
Other liabilities
     42,837       41,891  
 
        
Total current liabilities
     215,122       210,259  
 
                
Long-term debt
     235,306       249,260  
Other liabilities
     25,370       29,670  
 
        
Total liabilities
      $ 475,798        $ 489,189  
 
                
Stockholders’ equity
                
Common stock
      $ 25        $ 25  
Additional paid-in capital
     450,030       445,774  
Retained earnings
     544,872       521,023  
Accumulated other comprehensive income
     16,923       3,572  
Treasury stock
     (323,095)       (323,095)  
 
        
Total stockholders’ equity
      $ 688,755        $ 647,299  
 
        
 
                
Total liabilities and stockholders’ equity
      $ 1,164,553        $ 1,136,488  
 
        
 
                
 
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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BLACK BOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 
    Three-months ended   Nine-months ended
    December 26 and 27,   December 26 and 27,
   In thousands   2009     2008     2009     2008  
 
Operating Activities
                                
Net income
      $ 11,019        $ 9,827        $ 27,007        $ 36,959  
Adjustments to reconcile net income to net cash provided by
(used for) operating activities
                                
Intangibles amortization and depreciation
     4,985       5,834       15,097       14,433  
Loss (gain) on sale of property
     (15)       (63)       10       (84)  
Deferred taxes
     560       (946)       1,197       (90)  
Tax impact from stock options
     64       88       766       1,135  
Stock compensation expense
     1,743       855       5,022       2,237  
Change in fair value of interest-rate swap
     (303)       2,436       (126)       (441)  
Changes in operating assets and liabilities (net of acquisitions)
                                
Accounts receivable, net
     (11,496)       2,680       11,568       14,484  
Inventories, net
     (7)       (136)       3,617       5,185  
All other current assets excluding deferred tax asset
     (5,871)       (3,054)       (16,586)       (11,626)  
Liabilities exclusive of long-term debt
     10,905       (4,143)       (5,439)       (10,429)  
             
Net cash provided by (used for) operating activities
      $ 11,584        $ 13,378        $ 42,133        $ 51,763  
 
                                
Investing Activities
                                
Capital expenditures
      $ (540)        $ (329)        $ (1,573)        $ (1,853)  
Capital disposals
     29       64       132       168  
Acquisition of businesses (payments)/recoveries
     (10,687)       (47,914)       (10,687)       (96,534)  
Prior merger-related (payments)/recoveries
     (6,433)       (427)       (7,738)       (262)  
             
Net cash provided by (used for) investing activities
      $ (17,631)        $ (48,606)        $ (19,866)        $ (98,481)  
 
                                
Financing Activities
                                
Proceeds from borrowings
      $ 56,035        $ 93,952        $ 130,890        $ 237,662  
Repayment of borrowings
     (43,450)       (58,918)       (145,298)       (190,379)  
Proceeds from the exercise of stock options
     --       --       --       545  
Deferred financing costs
     --       --       --       (125)  
Payment of dividends
     (1,053)       (1,052)       (3,157)       (3,154)  
             
Net cash provided by (used for) financing activities
      $ 11,532        $ 33,982        $ (17,565)        $ 44,549  
 
                                
Foreign currency exchange impact on cash
      $ (214)        $ (1,999)        $ 634        $ (1,926)  
             
 
                                
Increase / (decrease) in cash and cash equivalents
      $ 5,271        $ (3,245)        $ 5,336        $ (4,095)  
Cash and cash equivalents at beginning of period
     23,785       25,802       23,720       26,652  
             
Cash and cash equivalents at end of period
      $ 29,056        $ 22,557        $ 29,056        $ 22,557  
             
 
                                
 
1000 Park Drive, Lawrence, PA 15055-1018 * (724) 746-5500 * Fax (724) 746-0746

 

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Non-GAAP Financial Measures
As a supplement to United States Generally Accepted Accounting Principles (“GAAP”), the Company provides non-GAAP financial measures such as free cash flow, cash provided by operating activities excluding restructuring payments (see below for reference), operating net income, operating earnings per share, Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA, adjusted operating income and same-office revenue comparisons to illustrate the Company’s operational performance. These non-GAAP financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. Pursuant to the requirements of Regulation G, the Company has provided Management explanations regarding their use and the usefulness of non-GAAP financial measures, definitions of the non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures, which are provided below.
Management uses non-GAAP financial measures (a) to evaluate the Company’s historical and prospective financial performance as well as its performance relative to its competitors, (b) to set internal sales targets and associated operating budgets, (c) to allocate resources, (d) to measure operational profitability and (e) as an important factor in determining variable compensation for Management and its team members. Moreover, the Company has historically reported these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.
While Management believes these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of non-GAAP financial measures. The limitations include (i) the non-GAAP financial measures are not prepared in accordance with GAAP, are not reported by all of the Company’s competitors and may not be directly comparable to similarly-titled measures of the Company’s competitors due to potential differences in the exact method of calculation, (ii) the non-GAAP financial measures exclude certain non-cash amortization of intangible assets on acquisitions, however, they do not specifically exclude the added benefits of these costs, such as revenue and contributing operating margin, (iii) the non-GAAP financial measures exclude non-cash asset write-up depreciation expense on acquisitions related to acquisitions made during recent years which is derived from the book value to fair market value write-up on acquired assets, (iv) the non-GAAP financial measures exclude the non-cash change in fair value of the Company’s interest-rate swaps which will continue to impact the Company’s earnings until the interest-rate swaps are settled, (v) the non-GAAP financial measures exclude costs for employee severance and facility consolidations (“employee severance and facility consolidations costs”) incurred during the periods reported in an attempt to right-size the organization and more appropriately align the expense structure with anticipated revenues and changing market demand for its solutions and services that will impact future operating results, (vi) the non-GAAP financial measures exclude historical stock option granting practices investigation and related matters costs, including costs associated with the related Securities and Exchange Commission (“SEC”) investigation, shareholder derivative lawsuit, tax matters and insurance/indemnification matters, (vii) the non-GAAP financial measures exclude costs of settlement or resolution arising from current legal matters associated with the ongoing operations of the Company (“current legal matters costs”) and (viii) there is no assurance the excluded items in the non-GAAP financial measures will not occur in the future. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. The Company’s non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measurements, and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP.
Free cash flow
Free cash flow is defined by the Company as cash provided by operating activities less net capital expenditures, plus or minus foreign currency translation adjustments, plus proceeds from stock option exercises. Management’s reasons for exclusion of each item are explained in further detail below.
Net capital expenditures
The Company believes net capital expenditures must be taken into account along with cash provided by operating activities to more properly reflect the actual cash available to the Company. Net capital expenditures are typically material and directly impact the availability of the Company’s operating cash. Net capital expenditures are comprised of capital expenditures and capital disposals.
Foreign currency exchange impact on cash
Due to the size of the Company’s international operations, and the ability of the Company to utilize cash generated from foreign operations locally without the need to convert such currencies to U.S. dollars on a regular basis, the Company believes that it is appropriate to adjust its operating cash flows to take into account the positive and/or negative impact of such charges as such adjustment provides an appropriate measure of the availability of the Company’s operating cash on a world-wide basis. A limitation of adjusting cash flows to account for the foreign currency impact is that it may not provide an accurate measure of cash available in U.S. dollars.
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Proceeds from stock option exercises
The Company believes that proceeds from stock option exercises should be added to cash provided by operating activities to more accurately reflect the actual cash available to the Company. The Company has demonstrated a recurring inflow of cash related to its stock-based compensation plans and, since this cash is immediately available to the Company, it directly impacts the availability of the Company’s operating cash. The amount of proceeds from stock option exercises is dependent upon a number of variables, including the number and exercise price of outstanding options and the trading price of the Company’s common stock. In addition, the timing of stock option exercises is under the control of the individual option holder and is not in the control of the Company. As a result, there can be no assurance as to the timing or amount of any proceeds from stock option exercises.
A reconciliation of cash provided by operating activities to free cash flow is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Cash provided by operating activities
      $ 11,584        $ 14,462        $ 13,378        $ 42,133        $ 51,763  
Net capital expenditures
     (511)       (392)       (265)       (1,441)       (1,685)  
Foreign currency exchange impact on cash
     (214)       327       (1,999)       634       (1,926)  
               
Free cash flow before stock option exercises
      $ 10,859        $ 14,397        $ 11,114        $ 41,326        $ 48,152  
Proceeds from stock option exercises
     --       --       --       --       545  
         
Free cash flow
      $ 10,859        $ 14,397        $ 11,114        $ 41,326        $ 48,697  
 
Cash provided by operating activities excluding restructuring payments
Cash provided by operating activities excluding restructuring payments is defined by the Company as cash provided by operating activities plus restructuring payments. Restructuring payments are the cash payments made during the period for employee severance and facility consolidation costs. The Company believes that restructuring payments should be added to cash provided by operating activities to more accurately reflect the cash flow from operations.
A reconciliation of cash provided by operating activities to cash provided by operating activities excluding restructuring payments is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Cash provided by operating activities
      $ 11,584        $ 14,462        $ 13,378        $ 42,133        $ 51,763  
Restructuring payments
     1,354       2,318       2,314       7,627       7,602  
         
Cash provided by operating activities excluding restructuring payments
      $ 12,938        $ 16,780        $ 15,692        $ 49,760        $ 59,365  
 
Operating net income and operating earnings per share (“EPS”)
Management believes that operating net income, defined by the Company as net income plus reconciling items, and operating EPS, defined as operating net income divided by weighted average common shares outstanding (diluted), provide investors additional important information to enable them to assess, in a way Management assesses, the Company’s current and future operations. Reconciling items include amortization of intangible assets on acquisitions, asset write-up depreciation expense on acquisitions, the change in fair value of the interest-rate swaps, employee severance and facility consolidation costs, historical stock option granting practices investigation and related matters costs and current legal matters costs. Management’s reason for exclusion of each item is explained in further detail below.
Amortization of intangible assets on acquisitions
The Company incurs non-cash amortization expense from intangible assets related to various acquisitions it has made in recent years. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by Management after the acquisition.
Asset write-up depreciation expense on acquisitions
The Company incurs non-cash asset write-up depreciation expense on acquisitions related to acquisitions made during recent years. Specifically, this non-cash expenditure is derived from the book value to fair market value write-up on acquired assets. Asset write-
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Page 9     

ups are depreciated over their remaining useful life which generally falls between one to five years. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are fixed from acquisition to the end of the asset’s useful life and generally cannot be changed or influenced by Management after the acquisition.
Change in fair value of the interest-rate swaps
To mitigate the risk of interest-rate fluctuations associated with the Company’s variable rate debt, the Company entered into two separate interest-rate swaps (“interest-rate swaps”) that do not qualify as a cash flow hedge. Thus, the Company records the change in fair value of the interest-rate swaps as an asset/liability within the Company’s Condensed Consolidated Balance Sheets with the offset to Interest expense (income) within the Company’s Condensed Consolidated Statements of Income. Management excludes this non-cash expense and the related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs generally cannot be changed or influenced by Management.
Employee severance and facility consolidation costs
The Company believes that incurring costs in the current period(s) in an attempt to right-size the organization and more appropriately align the expense structure with anticipated revenues and changing market demand for its solutions and services will result in a long-term positive impact on financial performance in the future. Employee severance and facility consolidation costs are presented in accordance with GAAP in the Company’s Condensed Consolidated Statements of Income. However, due to the amount of additional costs incurred during a single or possibly successive periods, Management believes that exclusion of these costs and their related tax impact provides a more accurate reflection of the Company’s ongoing financial performance.
Historical stock option granting practices investigation and related matters costs
The Company incurs costs in connection with its investigation of historical stock option granting practices, including the related SEC investigation, shareholder derivative lawsuit, tax matters and insurance/indemnification matters. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are generally non-recurring and cannot be changed or influenced by Management.
Current legal matters costs
The Company incurs costs arising from current legal matters associated with the ongoing operations of the Company. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are generally non-recurring and cannot be changed or influenced by Management.
Fiscal 2010 and Fiscal 2009 comparability
During Fiscal 2009, the Company excluded stock-based compensation expense when evaluating the continuing operations of the Company. Beginning with the first quarter of Fiscal 2010, the Company will not exclude such expenses. For comparability purposes only, the Company has restated reconciling items, operating net income and operating EPS for the third quarter and third quarter year-to-date Fiscal 2009 to reflect this change in presentation.
Information on stock-based compensation expense and its after-tax impact on net income and EPS is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Stock-based compensation expense
      $ 1,743        $ 1,636        $ 855        $ 5,022        $ 2,237  
After-tax impact on net income
     1,089       1,022       543       3,139       1,421  
After-tax impact on net income EPS
     0.06       0.06       0.03       0.18       0.08  
 
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The following table represents the Company’s pre-tax reconciling items:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Non-cash charges
                                        
Amortization of intangible assets on acquisitions
      $ 3,099        $ 2,134        $ 3,231        $ 9,264        $ 6,886  
Asset write-up depreciation expense on acquisitions
     128       --       485       128       1,381  
Change in fair value of the interest-rate swaps
     (303)       380       2,436       (126)       (441)  
               
Total non-cash charges
      $ 2,924        $ 2,514        $ 6,152        $ 9,266        $ 7,826  
 
                                        
Cash charges
                                        
Employee severance and facility consolidations costs
      $ 860        $ 649        $ 1,697        $ 2,622        $ 1,697  
Historical stock option granting practices investigation and related matters costs
     318       3,992       88       4,574       420  
Current legal matters costs
     --       --       --       2,145       --  
           
Total cash charges
      $ 1,178        $ 4,641        $ 1,785        $ 9,341        $ 2,117  
               
 
                                        
Total pre-tax reconciling items
      $ 4,102        $ 7,155        $ 7,937        $ 18,607        $ 9,943  
 
A reconciliation of net income to operating net income is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Net income
      $ 11,019        $ 8,186        $ 9,827        $ 27,007        $ 36,959  
% of Revenue
     4.3%       3.5%       3.8%       3.7%       4.9%  
Reconciling items, after tax 1
     2,564       4,472       5,041       11,630       6,315  
               
Operating net income
      $ 13,583        $ 12,658        $ 14,868        $ 38,637        $ 43,274  
% of Revenue
     5.4%     5.5%       5.7%       5.4%       5.7%  
           
1 The effective tax rate utilized to determine Reconciling items, after tax, for each period, is the effective tax rate utilized to determine Net income for such period.
A reconciliation of diluted EPS to operating EPS is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Diluted EPS
      $ 0.63        $ 0.47        $ 0.56        $ 1.54        $ 2.11  
EPS impact of reconciling items
     0.14       0.25       0.29       0.66       0.36  
               
Operating EPS
      $ 0.77        $ 0.72        $ 0.85        $ 2.20        $ 2.47  
 
EBITDA and Adjusted EBITDA
Management believes that EBITDA, defined as income before provision for income taxes plus interest, depreciation and amortization, is a widely accepted measure of profitability that may be used to measure the Company’s ability to service its debt. Adjusted EBITDA, defined as EBITDA plus stock-based compensation expense, may also be used to measure the Company’s ability to service its debt. Stock-based compensation is an integral part of ongoing operations since it is considered similar to other types of compensation to employees. However, Management believes that varying levels of stock-based compensation expense could result in misleading period-over-period comparisons and is providing an adjusted disclosure which excludes stock-based compensation.
A reconciliation of income before provision for income taxes to EBITDA and adjusted EBITDA is presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Net income
      $ 11,019        $ 8,186        $ 9,827        $ 27,007        $ 36,959  
Provision for income taxes
     6,612       4,912       5,647       16,205       21,241  
Interest
     1,852       2,596       5,722       6,592       8,105  
Depreciation/Amortization
     4,985       4,034       5,834       15,097       14,433  
               
EBITDA
      $ 24,468        $ 19,728        $ 27,030        $ 64,901        $ 80,738  
Stock-based compensation expense
     1,743       1,636       855       5,022       2,237  
               
Adjusted EBITDA
      $ 26,211        $ 21,364        $ 27,885        $ 69,923        $ 82,975  
 
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Page 11     

Supplemental Information
The following supplemental information, including geographical segment results, service type results, same-office revenue comparisons and significant balance sheet ratios and other information is being provided for comparisons of reported results for the third quarter of Fiscal 2010 and 2009, second quarter of Fiscal 2010 and/or third quarter year-to-date Fiscal 2010 and 2009. All dollar amounts are in thousands unless noted otherwise.
Geographical Segment Results
Management is presented with and reviews revenues, operating income and adjusted operating income by geographical segment. Adjusted operating income is defined by the Company as operating income plus reconciling items. Reconciling items include intangible assets on acquisitions, asset write-up depreciation expense on acquisitions, employee severance and facility consolidation costs, historical stock option granting practices investigation and related matters costs and current legal matters costs. See above for additional details provided by Management regarding non-GAAP financial measures. Revenues, operating income and adjusted operating income for North America, Europe and All Other are presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Revenues
                                        
North America
      $ 217,124        $ 199,928        $ 223,820        $ 621,635        $ 631,623  
Europe
     27,190       24,172       28,591       75,248       96,112  
All Other
     9,071       7,813       9,442       23,627       30,481  
               
Total
      $ 253,385        $ 231,913        $ 261,853        $ 720,510        $ 758,216  
 
                                        
Operating income
                                        
North America
      $ 14,890        $ 11,813        $ 17,267        $ 38,278        $ 51,914  
% of North America revenues
     6.9%       5.9%       7.7%       6.2%       8.2%  
Europe
      $ 3,111        $ 2,555        $ 2,882        $ 7,755        $ 10,151  
% of Europe revenues
     11.4%       10.6%       10.1%       10.3%       10.6%  
All Other
      $ 1,522        $ 1,241        $ 1,423        $ 3,584        $ 4,783  
% of All Other revenues
     16.8%       15.9%       15.1%       15.2%       15.7%  
               
Total
      $ 19,523        $ 15,609        $ 21,572        $ 49,617        $ 66,848  
% of Total revenues
     7.7%       6.7%       8.2%       6.9%       8.8%  
 
                                        
Reconciling items (pretax) 1
                                        
North America
      $ 4,089        $ 6,693        $ 5,023        $ 17,800        $ 9,906  
Europe
     292       65       465       892       465  
All Other
     24       17       13       41       13  
               
Total
      $ 4,405        $ 6,775        $ 5,501        $ 18,733        $ 10,384  
 
                                        
Adjusted operating income
                                        
North America
      $ 18,979        $ 18,506        $ 22,290        $ 56,078        $ 61,820  
% of North America revenues
     8.7%       9.3%       10.0%       9.0%       9.8%  
Europe
      $ 3,403        $ 2,620        $ 3,347        $ 8,647        $ 10,616  
% of Europe revenues
     12.5%       10.8%       11.7%       11.5%       11.0%  
All Other
      $ 1,546        $ 1,258        $ 1,436        $ 3,625        $ 4,796  
% of All Other revenues
     17.0%       16.1%       15.2%       15.3%       15.7%  
               
Total
      $ 23,928        $ 22,384        $ 27,073        $ 68,350        $ 77,232  
% of Total revenues
     9.4%       9.7%       10.3%       9.5%       10.2%  
 
1 During Fiscal 2009, the Company excluded stock-based compensation expense when evaluating the continuing operations of the Company. Beginning with the first quarter of Fiscal 2010, the Company will not exclude such expenses. For comparability purposes only, the Company has restated reconciling items (pretax) and adjusted operating income for the third quarter and year-to-date Fiscal 2009 to reflect this change in presentation. The Company incurred stock-based compensation expense of $1,743, $1,636, $855, $5,022 and $2,237 during the third quarter of Fiscal 2010 and 2009, second quarter of Fiscal 2010 and third quarter year-to-date Fiscal 2010 and 2009, respectively.
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Page 12     

Service Type Results
Management is presented with and reviews revenues and gross profit for Data Services, Voice Services and Hotline Services which are presented below:
                                         
    3Q10     2Q10     3Q09     3QYTD10     3QYTD09  
 
Revenues
                                        
Data Services
      $ 45,342        $ 43,928        $ 52,238        $ 140,680        $ 141,836  
Voice Services
     161,031       142,474       158,065       445,025       452,372  
Hotline Services
     47,012       45,511       51,550       134,805       164,008  
               
Total
      $ 253,385        $ 231,913        $ 261,853        $ 720,510        $ 758,216  
 
                                        
Gross profit
                                        
Data Services
      $ 12,078        $ 12,142        $ 15,247        $ 38,167        $ 41,413  
% of Data Services revenues
     26.6%       27.6%       29.2%       27.1%       29.2%  
Voice Services
      $ 52,145        $ 48,287        $ 51,501        $ 148,811        $ 150,975  
% of Voice Services revenues
     32.4%       33.9%       32.6%       33.4%       33.4%  
Hotline Services
      $ 22,606        $ 21,845        $ 24,170        $ 64,538        $ 79,729  
% of Hotline Services revenues
     48.1%       48.0%       46.9%       47.9%       48.6%  
               
Total
      $ 86,829        $ 82,274        $ 90,918        $ 251,516        $ 272,117  
% of Total revenues
     34.3%       35.5%       34.7%       34.9%       35.9%  
           
Same-office revenue comparisons
Management is presented with and reviews revenues on a same-office basis which excludes the effects of revenues from acquisitions. While the information provided below is presented on a consolidated basis, the revenue from offices added below relates to the North American Data Services and North American Voice Services. Reported same-office comparisons for the Company’s North America, Data Services and Voice Services segments can be determined by excluding the revenues from offices added since 4/1/08 or 6/28/09 as shown below.
Information on quarterly revenues on a same-office basis compared to the same period last year is presented below:
                         
    3Q10     3Q09     % Change  
 
Reported revenues
      $ 253,385        $ 261,853       (3%)  
Less revenue from Data Services offices added since 4/1/08 (1Q09)
     (13,722)       (12,626)          
Less revenue from Voice Services offices added since 4/1/08 (1Q09)
     (29,191)       (14,736)          
 
                
Reported revenues on same-office basis
      $ 210,472        $ 234,491       (10%)  
Foreign currency impact
     (3,732)       --          
 
              
Revenues on same-office basis (excluding foreign currency impact)
      $ 206,740        $ 234,491       (12%)  
 
Information on year-to-date revenues on a same-office basis compared to the same period last year is presented below:
                         
    3QYTD10     3QYTD09     % Change  
 
Reported revenues
      $ 720,510        $ 758,216       (5%)
Less revenue from Data Services offices added since 4/1/08 (1Q09)
     (39,730)       (12,626)          
Less revenue from Voice Services offices added since 4/1/08 (1Q09)
     (79,661)       (31,906)          
 
                
Reported revenues on same-office basis
      $ 601,119        $ 713,684       (16%)
Foreign currency impact
     4,327       --          
 
                
Revenues on same-office basis (excluding foreign currency impact)
      $ 605,446        $ 713,684       (15%)  
 
Information on revenues on a same-office basis compared to the sequential quarter is presented below:
                         
    3Q10     2Q10     % Change  
 
Reported revenues
      $ 253,385        $ 231,913       9%  
Less revenue from Data Services offices added since 6/28/09 (2Q10)
     --       --          
Less revenue from Voice Services offices added since 6/28/09 (2Q10)
     (4,403)       --          
 
                
Reported revenues on same-office basis
      $ 248,982        $ 231,913       7%  
Foreign currency impact
     (1,310)       --          
 
                
Revenues on same-office basis (excluding foreign currency impact)
      $ 247,672        $ 231,913       7%  
 
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Page 13     

Significant Balance Sheet ratios and Other Information
Information on certain balance sheet ratios, backlog and headcount is presented below. Dollar amounts are in millions.
                                                 
    3Q10             2Q10             3Q09          
 
Accounts receivable
                                                
Gross accounts receivable
      $ 162.4                $ 149.5                $ 172.4          
Reserve $ / %
     10.0       6.2%       9.9       6.6%       11.0       6.4%  
 
                                    
Net accounts receivable
      $ 152.4                $ 139.6                $ 161.4          
 
                                                
Net days sales outstanding
   52 days             51 days             54 days          
 
                                                
Inventory
                                                
Gross inventory
      $ 74.3                $ 73.1                $ 82.5          
Reserve $ / %
     20.5       27.6%       19.8       27.1%       20.7       25.1%  
 
                                    
Net inventory
      $ 53.8                $ 53.3                $ 61.8          
 
                                                
Net inventory turns
     9.3x               8.4x               8.6x          
 
                                                
Six-month order backlog
      $ 191                $ 207                $ 195          
 
                                                
Team members
     4,384               4,335               4,745          
 
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