Black Box Corporation Reports Second Quarter and Year-to-Date Fiscal 2010 Results

October 27, 2009 4:36 PM EDT

PITTSBURGH--(BUSINESS WIRE)-- Black Box Corporation (NASDAQ: BBOX) today reported results for the second quarter of Fiscal 2010 ended September 26, 2009.

For the second quarter of Fiscal 2010, diluted earnings per share were 47 cents on net income of $8.2 million or 3.5% of revenues compared to diluted earnings per share of 82 cents on net income of $14.3 million or 5.6% of revenues for the same quarter last year. On a sequential quarter comparison basis, first quarter of Fiscal 2010 diluted earnings per share were 44 cents on net income of $7.8 million or 3.3% of revenues. Excluding reconciling items, operating earnings per share (which is a non-GAAP term and is defined below) for the second quarter of Fiscal 2010 were 72 cents on operating net income (which is a non-GAAP term and is defined below) of $12.7 million or 5.5% of revenues compared to operating earnings per share of 91 cents on operating net income of $15.9 million or 6.3% 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 second quarter of Fiscal 2010, the Company's pre-tax reconciling items were $7.2 million with an after-tax impact on net income and EPS of $4.5 million and 25 cents, respectively. Included in the Company's pre-tax reconciling items for the second quarter of Fiscal 2010 is a pre-tax charge of $4.0 million recorded in connection with an agreement in principle for settlement of the previously-disclosed pending shareholder derivative lawsuit and related matters arising out of the Company's review of its historical stock option practices. This item is reported in the "Historical stock option granting practices investigation and related matters costs" line item within the Company's pre-tax reconciling items table below. This settlement is subject to the execution of documentation regarding the settlement as well as court approval. During the second quarter of Fiscal 2009, the Company's pre-tax reconciling items were $2.5 million with an after-tax impact on net income and EPS of $1.6 million and 9 cents, 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.

Second quarter of Fiscal 2010 total revenues were $232 million, a decrease of $22 million or 9% from $254 million for the same quarter last year. On a sequential quarter comparison basis, first quarter of Fiscal 2010 total revenues were $235 million.

Second quarter of Fiscal 2010 cash provided by operating activities was $14 million or 177% of net income, compared to $26 million or 182% of net income for the same quarter last year. Second quarter of Fiscal 2010 free cash flow (which is a non-GAAP term and is defined below) was $14 million compared to $26 million for the same quarter last year. On a sequential quarter comparison basis, first quarter of Fiscal 2010 cash provided by operating activities was $16 million or 206% of net income and free cash flow was $16 million. Black Box utilized its second quarter of Fiscal 2010 free cash flow primarily to fund debt reduction of $13 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 six-month period ended September 26, 2009, diluted earnings per share were 91 cents on net income of $16.0 million or 3.4% of revenues compared to diluted earnings per share of $1.55 on net income of $27.1 million or 5.5% of revenues for the same period last year. Excluding reconciling items, operating earnings per share for the six-month period ended September 26, 2009 were $1.43 on operating net income of $25.1 million or 5.4% of revenues compared to operating earnings per share of $1.62 on operating net income of $28.4 million or 5.7% of revenues for the same period last year.

For the six-month period ended September 26, 2009, the Company's pre-tax reconciling items were $14.5 million with an after-tax impact on net income and EPS of $9.1 million and 52 cents, respectively. For the six-month period ended September 27, 2008, the Company's pre-tax reconciling items were $2.0 million with an after-tax impact on net income and EPS of $1.3 million and 7 cents, respectively.

For the six-month period ended September 26, 2009, total revenues were $467 million, a decrease of $29 million or 6% from $496 million for the same period last year.

Cash provided by operating activities for the six-month period ended September 26, 2009 was $31 million or 191% of net income compared to $38 million or 141% of net income for the same period last year. Free cash flow was $30 million compared to $38 million for the same period last year. Black Box utilized its six-month period free cash flow primarily to fund debt reduction of $27 million and to pay dividends of $2 million.

The Company's six-month order backlog was $207 million at September 26, 2009 compared to $196 million for the same quarter last year. On a sequential quarter-end comparison basis, the Company's six-month order backlog was $210 million at June 27, 2009.

For the third quarter of Fiscal 2010, the Company is targeting reported revenues of approximately $235 million to $240 million and corresponding operating earnings per share in the range of 70 cents to 75 cents. 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 second quarter of Fiscal 2010 results and the third quarter of Fiscal 2010 outlook, Terry Blakemore, President and Chief Executive Officer said "I am very pleased with another solid quarter of performance by the Black Box team. Our commercial markets are beginning to show signs of stabilization, while our government markets continue to grow. The Black Box business model is consistently providing strong margins and cash flow which position us to take full advantage of the expected economic recovery."

"Our team continues to deliver world-class technical support and solutions to our global clients. Although we have made further adjustments to right-size our cost structure, we remain focused on superior service and response."

The Company will conduct a conference call beginning at 5:00 p.m. Eastern Daylight Time today, October 27, 2009. 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 117326. 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(R), the Double Diamond logo and DVH(R) are registered trademarks of BB Technologies, Inc.

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 Securities and Exchange Commission ("SEC") investigation, 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, SEC investigation, 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. 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.

BLACK BOX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                Three-months ended      Six-months ended

                                September 26 and 27,    September 26 and 27,

In thousands, except per share  2009         2008       2009         2008
amounts

Revenues

Hotline products                $ 45,511     $ 56,819   $ 87,793     $ 112,458

On-Site services                  186,402      196,991    379,332      383,905

Total                             231,913      253,810    467,125      496,363

Cost of sales

Hotline products                  23,666       28,917     45,861       56,899

On-Site services                  125,973      131,836    256,577      258,265

Total                             149,639      160,753    302,438      315,164

Gross profit                      82,274       93,057     164,687      181,199

Selling, general &                64,515       65,729     128,398      132,197
administrative expenses

Intangibles amortization          2,150        1,900      6,195        3,726

Operating income                  15,609       25,428     30,094       45,276

Interest expense (income), net    2,596        2,648      4,740        2,383

Other expenses (income), net      (85     )    263        (227    )    167

Income before provision for       13,098       22,517     25,581       42,726
income taxes

Provision for income taxes        4,912        8,218      9,593        15,594

Net income                      $ 8,186      $ 14,299   $ 15,988     $ 27,132

Earnings per common share

Basic                           $ 0.47       $ 0.82     $ 0.91       $ 1.55

Diluted                         $ 0.47       $ 0.82     $ 0.91       $ 1.55

Weighted average common shares
outstanding

Basic                             17,548       17,524     17,544       17,520

Diluted                           17,548       17,528     17,544       17,522

Dividends per share             $ 0.06       $ 0.06     $ 0.12       $ 0.12

BLACK BOX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except par value             September 26, 2009   March 31, 2009

Assets

Cash and cash equivalents                  $ 23,785             $ 23,720

Accounts receivable, net                     139,646              163,975

Inventories, net                             53,269               55,898

Costs/estimated earnings in excess of
billings on                                  85,428               66,066
uncompleted contracts

Prepaid and other current assets             29,242               30,809

Total current assets                         331,370              340,468

Property, plant and equipment, net           25,653               28,419

Goodwill                                     646,603              621,948

Intangibles

Customer relationships, net                  89,673               105,111

Other intangibles, net                       31,248               37,684

Other assets                                 8,120                2,858

Total assets                               $ 1,132,667          $ 1,136,488

Liabilities

Accounts payable                           $ 75,317             $ 79,021

Accrued compensation and benefits            25,902               30,446

Deferred revenue                             35,696               35,520

Billings in excess of costs/estimated
earnings                                     12,662               18,217
on uncompleted contracts

Income taxes                                 7,063                5,164

Other liabilities                            47,885               41,891

Total current liabilities                    204,525              210,259

Long-term debt                               222,593              249,260

Other liabilities                            26,777               29,670

Total liabilities                          $ 453,895            $ 489,189

Stockholders' equity

Common stock                               $ 25                 $ 25

Additional paid-in capital                   448,351              445,774

Retained earnings                            534,906              521,023

Accumulated other comprehensive income       18,585               3,572

Treasury stock                               (323,095  )          (323,095  )

Total stockholders' equity                 $ 678,772            $ 647,299

Total liabilities and stockholders' equity $ 1,132,667          $ 1,136,488

BLACK BOX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                           Three-months ended         Six-months ended

                           September 26 and 27,       September 26 and 27,

In thousands               2009           2008        2009            2008

Operating Activities

Net income                 $ 8,186      $ 14,299      $ 15,988      $ 27,132

Adjustments to reconcile
net income to net cash
provided by (used for)
operating activities

Intangibles amortization     4,034        4,347         10,112        8,599
and depreciation

Loss (gain) on sale of       (51     )    (27     )     25            (21      )
property

Deferred taxes               89           (80     )     637           856

Tax impact from stock        579          887           702           1,047
options

Stock compensation           1,636        840           3,279         1,382
expense

Change in fair value of      380          (169    )     177           (2,877   )
interest-rate swap

Changes in operating
assets and liabilities
(net of acquisitions)

Accounts receivable, net     11,374       11,005        23,064        11,804

Inventories, net             1,069        1,338         3,624         5,321

All other current assets
excluding deferred tax       (8,166  )    (6,878  )     (10,715  )    (8,572   )
asset

Liabilities exclusive of     (4,668  )    395           (16,344  )    (6,286   )
long-term debt

Net cash provided by
(used for) operating       $ 14,462     $ 25,957      $ 30,549      $ 38,385
activities

Investing Activities

Capital expenditures       $ (466    )  $ (872    )   $ (1,033   )  $ (1,524   )

Capital disposals            74           82            103           104

Acquisition of businesses    --           (42,334 )     --            (48,620  )
(payments)/recoveries

Prior merger-related         (389    )    --            (1,305   )    165
(payments)/recoveries

Net cash provided by
(used for) investing       $ (781    )  $ (43,124 )   $ (2,235   )  $ (49,875  )
activities

Financing Activities

Proceeds from borrowings   $ 36,470     $ 91,135      $ 74,855      $ 143,710

Repayment of borrowings      (51,415 )    (73,013 )     (101,848 )    (131,461 )

Proceeds from the            --           545           --            545
exercise of stock options

Deferred financing costs     --           (13     )     --            (125     )

Payment of dividends         (1,052  )    (1,051  )     (2,104   )    (2,102   )

Net cash provided by
(used for) financing       $ (15,997 )  $ 17,603      $ (29,097  )  $ 10,567
activities

Foreign currency exchange  $ 327        $ 128         $ 848         $ 73
impact on cash

Increase / (decrease) in   $ (1,989  )  $ 564         $ 65          $ (850     )
cash and cash equivalents

Cash and cash equivalents    25,774       25,238        23,720        26,652
at beginning of period

Cash and cash equivalents  $ 23,785     $ 25,802      $ 23,785      $ 25,802
at end of period

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 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.

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:

                           2Q10       1Q10       2Q09        2QYTD10    2QYTD09

Cash provided by         $ 14,462   $ 16,087   $ 25,957    $ 30,549   $ 38,385
operating activities

Net capital                (392   )   (538   )   (790   )    (930   )   (1,420 )
expenditures

Foreign currency           327        521        128         848        73
exchange impact on cash

Free cash flow before    $ 14,397   $ 16,070   $ 25,295    $ 30,467   $ 37,038
stock option exercises

Proceeds from stock        --         --         545         --         545
option exercises

Free cash flow           $ 14,397   $ 16,070   $ 25,840    $ 30,467   $ 37,583

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 consolidations 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:

                              2Q10      1Q10      2Q09       2QYTD10    2QYTD09

Cash provided by operating  $ 14,462  $ 16,087  $ 25,957   $ 30,549   $ 38,385
activities

Restructuring payments        2,318     3,955     2,134      6,273      5,288

Cash provided by operating
activities                  $ 16,780  $ 20,042  $ 28,091   $ 36,822   $ 43,673
excluding restructuring
payments

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-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. During 2Q10, the Company recorded $4.0 million for the settlement of all matters related to the shareholder derivative lawsuit and related matters. The Company expects the cash payment will be made during the second half of Fiscal 2010.

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 second quarter and second 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:

                            2Q10      1Q10      2Q09     2QYTD10     2QYTD09

Stock-based compensation  $ 1,636   $ 1,643   $ 840    $ 3,279     $ 1,382
expense

After-tax impact on net     1,022     1,027     533      2,049       878
income

After-tax impact on net     0.06      0.06      0.03     0.12        0.05
income EPS

The following table represents the Company's pre-tax reconciling items:

                             2Q10     1Q10       2Q09        2QYTD10    2QYTD09

Non-cash charges

Amortization of
intangible assets on       $ 2,134  $ 4,031    $ 1,864     $ 6,165    $ 3,655
acquisitions

Asset write-up
depreciation expense on      --       --         448         --         896
acquisitions

Change in fair value of      380      (203  )    (169  )     177        (2,877 )
the interest-rate swaps

Total non-cash charges     $ 2,514  $ 3,828    $ 2,143     $ 6,342    $ 1,674

Cash charges

Employee severance and
facility consolidations    $ 649    $ 1,113    $ --        $ 1,762    $ --
costs

Historical stock option
granting practices           3,992    264        332         4,256      332
investigation and related
matters costs

Current legal matters        --       2,145      --          2,145      --
costs

Total cash charges         $ 4,641  $ 3,522    $ 332       $ 8,163    $ 332

Total pre-tax reconciling  $ 7,155  $ 7,350    $ 2,475     $ 14,505   $ 2,006
items

A reconciliation of net income to operating net income is presented below:

                        2Q10        1Q10       2Q09         2QYTD10     2QYTD09

Net income            $ 8,186     $ 7,802    $ 14,299     $ 15,988    $ 27,132

% of Revenue            3.5    %    3.3    %   5.6    %     3.4    %    5.5    %

Reconciling items,      4,472       4,594      1,572        9,066       1,274
after tax

Operating net income  $ 12,658    $ 12,396   $ 15,871     $ 25,054    $ 28,406

% of Revenue            5.5    %    5.3    %   6.3    %     5.4    %    5.7    %

A reconciliation of diluted EPS to operating EPS is presented below:

                                  2Q10    1Q10    2Q09     2QYTD10    2QYTD09

Diluted EPS                     $ 0.47  $ 0.44  $ 0.82   $ 0.91     $ 1.55

EPS impact of reconciling items   0.25    0.27    0.09     0.52       0.07

Operating EPS                   $ 0.72  $ 0.71  $ 0.91   $ 1.43     $ 1.62

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:

                               2Q10      1Q10      2Q09       2QYTD10    2QYTD09

Income before provision for  $ 13,098  $ 12,483  $ 22,517   $ 25,581   $ 42,726
income taxes

Interest                       2,596     2,144     2,648      4,740      2,383

Depreciation/Amortization      4,034     6,078     4,347      10,112     8,599

EBITDA                       $ 19,728  $ 20,705  $ 29,512   $ 40,433   $ 53,708

Stock-based compensation       1,636     1,643     840        3,279      1,382
expense

Adjusted EBITDA              $ 21,364  $ 22,348  $ 30,352   $ 43,712   $ 55,090

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 second quarter of Fiscal 2010 and 2009, first quarter of Fiscal 2010 and/or second 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:

                 2Q10         1Q10         2Q09           2QYTD10      2QYTD09

Revenues

North America  $ 199,928    $ 204,583    $ 211,467      $ 404,511    $ 407,803

Europe           24,172       23,886       31,753         48,058       67,521

All Other        7,813        6,743        10,590         14,556       21,039

Total          $ 231,913    $ 235,212    $ 253,810      $ 467,125    $ 496,363

Operating
income

North America  $ 11,813     $ 11,575     $ 20,163       $ 23,388     $ 34,647

% of North
America          5.9     %    5.7     %    9.5     %      5.8     %    8.5     %
revenues

Europe         $ 2,555      $ 2,089      $ 3,456        $ 4,644      $ 7,269

% of Europe      10.6    %    8.8     %    10.9    %      9.7     %    10.8    %
revenues

All Other      $ 1,241      $ 821        $ 1,809        $ 2,062      $ 3,360

% of All
Other            15.9    %    12.2    %    17.1    %      14.2    %    16.0    %
revenues

Total          $ 15,609     $ 14,485     $ 25,428       $ 30,094     $ 45,276

% of Total       6.7     %    6.2     %    10.0    %      6.4     %    9.1     %
revenues

Reconciling
items
(pretax)1

North America  $ 6,693      $ 7,018      $ 2,644        $ 13,711     $ 4,883

Europe           65           535          --             600          --

All Other        17           --           --             17           --

Total          $ 6,775      $ 7,553      $ 2,644        $ 14,328     $ 4,883

Adjusted
operating
income

North America  $ 18,506     $ 18,593     $ 22,807       $ 37,099     $ 39,530

% of North
America          9.3     %    9.1     %    10.8    %      9.2     %    9.7     %
revenues

Europe         $ 2,620      $ 2,624      $ 3,456        $ 5,244      $ 7,269

% of Europe      10.8    %    11.0    %    10.9    %      10.9    %    10.8    %
revenues

All Other      $ 1,258      $ 821        $ 1,809        $ 2,079      $ 3,360

% of All
Other            16.1    %    12.2    %    17.1    %      14.3    %    16.0    %
revenues

Total          $ 22,384     $ 22,038     $ 28,072       $ 44,422     $ 50,159

% of Total       9.7     %    9.4     %    11.1    %      9.5     %    10.1    %
revenues

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 second quarter and year-to-date Fiscal 2009 to reflect this change in presentation. The Company incurred stock-based compensation expense of $1,636, $840, $1,643, $3,279 and $1,382 during the second quarter of Fiscal 2010 and 2009, first quarter of Fiscal 2010 and second quarter year-to-date Fiscal 2010 and 2009, respectively.

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:

              2Q10          1Q10          2Q09           2QYTD10       2QYTD09

Revenues

Data        $ 43,928      $ 51,410      $ 42,714       $ 95,338      $ 89,598
Services

Voice         142,474       141,520       154,277        283,994       294,307
Services

Hotline       45,511        42,282        56,819         87,793        112,458
Services

Total       $ 231,913     $ 235,212     $ 253,810      $ 467,125     $ 496,363

Gross
profit

Data        $ 12,142      $ 13,947      $ 12,879       $ 26,089      $ 26,166
Services

% of Data
Services      27.6    %     27.1    %     30.2    %      27.4    %     29.2    %
revenues

Voice       $ 48,287      $ 48,379      $ 52,276       $ 96,666      $ 99,474
Services

% of Voice
Services      33.9    %     34.2    %     33.9    %      34.0    %     33.8    %
revenues

Hotline     $ 21,845      $ 20,087      $ 27,902       $ 41,932      $ 55,559
Services

% of
Hotline       48.0    %     47.5    %     49.1    %      47.8    %     49.4    %
Services
revenues

Total       $ 82,274      $ 82,413      $ 93,057       $ 164,687     $ 181,199

% of Total    35.5    %     35.0    %     36.7    %      35.3    %     36.5    %
revenues

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 4/1/09 as shown below.

Information on quarterly revenues on a same-office basis compared to the
same period last year is presented below:

                                          2Q10         2Q09         % Change

Reported revenues                         $ 231,913    $ 253,810    (9  %)

Less revenue from Data Services offices     (12,700 )    --
added since 4/1/08 (1Q09)

Less revenue from Voice Services offices    (22,053 )    (10,510 )
added since 4/1/08 (1Q09)

Reported revenues on same-office basis    $ 197,160    $ 243,300    (19 %)

Foreign currency impact                     1,846        --

Revenues on same-office basis (excluding  $ 199,006    $ 243,300    (18 %)
foreign currency impact)

Information on year-to-date revenues on a same-office basis compared to the
same period last yearis presented below:

                                          2QYTD10      2QYTD09      % Change

Reported revenues                         $ 467,125    $ 496,363    (6  %)

Less revenue from Data Services offices     (26,008 )    --
added since 4/1/08 (1Q09)

Less revenue from Voice Services offices    (50,470 )    (17,170 )
added since 4/1/08 (1Q09)

Reported revenues on same-office basis    $ 390,647    $ 479,193    (18 %)

Foreign currency impact                     7,562        --

Revenues on same-office basis (excluding  $ 398,209    $ 479,193    (17 %)
foreign currency impact)

Information on revenues on a same-office basis compared to the sequential
quarter is presented below:

                                                2Q10         1Q10       % Change

Reported revenues                               $ 231,913    $ 235,212  (1 %)

Less revenue from Data Services offices added     --           --
since 4/1/09 (1Q10)

Less revenue from Voice Services offices added    --           --
since 4/1/09 (1Q10)

Reported revenues on same-office basis          $ 231,913    $ 235,212  (1 %)

Foreign currency impact                           (2,711  )    --

Revenues on same-office basis (excluding        $ 229,202    $ 235,212  (3 %)
foreign currency impact)

Significant Balance Sheet Ratios and Other Information
Information on certain balance sheet ratios, backlog and headcount is presented
below. Dollar amounts are in millions.

               2Q10                   1Q10                   2Q09

Accounts
receivable

Gross
accounts       $ 149.5                $ 162.3                $ 168.1
receivable

Reserve $ / %    9.9        6.6  %      10.0       6.2  %      11.1       6.6  %

Net accounts   $ 139.6                $ 152.3                $ 157.0
receivable

Net days
sales            51 days                52 days                50 days
outstanding

Inventory

Gross          $ 73.1                 $ 73.9                 $ 83.4
inventory

Reserve $ / %    19.8       27.1 %      19.9       26.9 %      20.7       24.8 %

Net inventory  $ 53.3                 $ 54.0                 $ 62.7

Net inventory    8.4x                   8.5x                   8.0x
turns

Six-month      $ 207                  $ 210                  $ 196
order backlog

Team members     4,335                  4,428                  4,445

    Source: Black Box Corporation

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