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TECD > SEC Filings for TECD > Form 10-Q on 28-Nov-2012All Recent SEC Filings

Show all filings for TECH DATA CORP

Form 10-Q for TECH DATA CORP


28-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), contains forward-looking statements, as described in the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected. These forward-looking statements regarding future events and the future results of Tech Data Corporation are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are referred to the cautionary statements and important factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended January 31, 2012 for further information. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Factors that could cause actual results to differ materially include the following:

global economic and political instability

competition

narrow margins

dependence on information systems

acquisitions and divestitures

exposure to natural disasters, war and terrorism

dependence on independent shipping companies

impact of policy changes

labor strikes

risk of declines in inventory value

product availability

vendor terms and conditions

loss of significant customers

customer credit exposure

need for liquidity and capital resources; fluctuations in interest rates

foreign currency exchange rates; exposure to foreign markets

international operations

changes in income tax and other regulatory legislation

potential adverse effects of litigation or regulatory enforcement actions

changes in accounting rules

volatility of common stock price

Overview

Tech Data is one of the world's largest wholesale distributors of technology products. We serve as an indispensable link in the technology supply chain by bringing products from the world's leading technology vendors to market, as well as providing our customers with advanced logistics capabilities and value-added services. Our customers include value-added resellers ("VARs") direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. We manage our business in two geographic segments: the Americas (including North America and South America) and Europe.


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Our financial objectives are to grow sales at or above the market rate of growth for technology products, gain share in select markets, improve profitability, generate positive cash flow, and earn a return on invested capital above our weighted average cost of capital. To achieve this, we are focused on a strategy of execution, diversification and innovation that we believe differentiates our business in the marketplace.

The fundamental element of our strategy is superior execution. Our execution strategy is supported by our highly efficient logistics infrastructure, combined with our multiple service offerings, to generate demand, develop markets and provide supply chain services for our vendors and customers. The technology distribution industry in which we operate is characterized by narrow gross profit as a percentage of sales ("gross margin") and narrow income from operations as a percentage of sales ("operating margin"). Historically, our gross and operating margins have been impacted by intense price competition and declining average selling prices per unit, as well as changes in terms and conditions with our vendors, including those terms related to rebates, price protection, product returns and other incentives. We expect these conditions to continue in the foreseeable future and, therefore, we will continue to proactively evaluate our pricing policies and inventory management practices in response to potential changes in our vendor terms and conditions and the general market environment. As further discussed below, during the second quarter of fiscal 2013, we implemented the sales, inventory and credit management modules of SAP in the United States ("U.S."), which substantially completed the U.S. implementation of essentially the same SAP systems used in our European operations. While the system conversion and overall implementation went well, our execution in the U.S. was negatively impacted, as the changes in the flow of information impacted our service levels with certain customers as well as our productivity and ability to make critical margin management decisions during both the second and third quarters. While we saw an improvement in our operating income in absolute dollars and as a percentage of net sales from the second quarter of fiscal 2013 to the third quarter, we nevertheless continued to see year-over-year declines in net sales, gross profit and operating income within our U.S. operations. As discussed further below, we have made improvements to our information flow and processes within our U.S. business during the third quarter, and we will continue to work diligently to return our U.S. business to acceptable levels of performance.

In addition to superior execution, our strategy includes continuing diversification and realignment of our customer and product portfolios to improve long-term profitability throughout our operations. Our broadline distribution business, characterized as high volume, more commoditized offerings, and comprised primarily of personal computer systems, peripherals, supplies and other similar products, remains a core part of our business and represents a significant percentage of our revenue. However, as technology advances, we have continued to evolve our business model, product mix, and value-added offerings in order to provide our vendors with the most efficient distribution channel for their products, and our customers with a broad array of innovative solutions to sell. We have responded to a changing IT landscape with investments in higher growth specialty areas, including the data center, software, consumer electronics and mobility, all of which now contribute significantly to our financial results.

Our European mobility business continues to be one of our strongest operations, posting double digit sales growth during the current quarter, adding new vendors in several countries and expanding our third party logistics services to new customers. In addition, during the third quarter of fiscal 2013, we completed the acquisition of Brightstar Corp.'s fifty percent ownership interest in Brightstar Europe Limited, which was a consolidated joint venture between Tech Data and Brightstar Corp. ("the joint venture").The terms of the acquisition agreement included a payment of $165.9 million in cash for Brightstar Corp's equity in the joint venture and the repayment of all loans advanced by Brightstar Corp. to the joint venture. We funded the acquisition, repayment of the loans advanced by Brightstar Corp. and transaction costs with our available cash.

On November 1, 2012, we completed the acquisition of several distribution companies of Specialist Distribution Group, the distribution arm of Specialist Computer Holdings PLC ("SCH"), a privately-held IT services company headquartered in the United Kingdom, for a purchase price of approximately $365 million, subject to customary adjustments. We used the proceeds from the $350 million of Senior Notes issued in September 2012 and available cash to fund the acquisition. The acquired distribution companies are Specialist Distribution Group (SDG) Limited; ETC Metrologie SARL; Best'Ware France SA; ETC Africa SAS and SDG BV. (collectively "SDG"). SDG is a leading distributor of enterprise and broadline IT products in the UK, France and the Netherlands. For its fiscal year ended March 31, 2012, SDG generated third-party sales of approximately $1.75 billion. We believe the acquisition of SDG supports our diversification strategy by strengthening our European enterprise business and broadline offerings in key markets and expanding our vendor and customer portfolios, while leveraging our existing pan-European infrastructure. Simultaneously with the acquisition of SDG, the Company entered into a preferred supplier agreement whereby SCH, through its IT reseller business, will have annual purchase commitments through Tech Data for a period of five years, which the company estimates will add incremental


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annual sales of approximately $500 million. The results of SDG's operations will be included in the Company's results of operations subsequent to the date of acquisition.

Another strategic area of investment is our integrated supply chain services designed to provide innovative third party logistics and other offerings to our business partners. We have seen these offerings grow not only within our European mobility business, as mentioned above, but also within our consumer electronics and other businesses in both geographies. Our evolving mix of products, services, customers and geographies are important factors in achieving our strategic financial goals. As we execute our diversification strategy we continuously monitor the extension of credit and other terms and conditions offered to our customers to prudently balance risk, profitability and return on invested capital.

The final tenet of our strategy is innovation. Our IT systems and e-business tools and programs have provided our business with the flexibility to effectively navigate fluctuations in market conditions, structural changes in the technology industry, as well as changes created by products we sell. An example of our investment in innovation and one that we believe is providing us with the flexibility to meet the demands of the ever-evolving technology market, is our continued deployment of internal IT systems across both the Americas and Europe. We believe our pan-European IT systems provide us with a competitive advantage allowing us to drive efficiencies throughout our business while delivering innovative solutions for our business partners. In the past, we have implemented several components of our European IT systems into our North American IT infrastructure, including standardizing our North American financial systems and logistics network on SAP. During the second quarter of fiscal 2013, we implemented the sales, inventory and credit management modules of SAP within our U.S. operations, which substantially completed the implementation of the enterprise resource planning ("ERP") systems used in our European operations. As a result of our extensive experience installing essentially the same ERP systems in Europe, systemically the conversion and implementation went well. However, the changes to processes and the flow of information within Tech Data and with certain customers negatively impacted our service levels with a subset of our customers as well as our internal productivity. This degradation resulted in a loss of market share and operating leverage, and therefore, lower operating profits within the United States during the second and third quarter of fiscal 2013 as compared to the prior year. While the Company is in the process of improving the service levels utilizing the new ERP modules, there can be no absolute assurances that there will be no further disruption, delays and/or negative operational impact.

We believe our strategy of execution, diversification and innovation has differentiated us in the markets we serve and has delivered solid operating results and returns on invested capital in both the Americas and Europe for several years. We continue to believe that in the long-term our U.S. implementation of SAP will provide us with a competitive advantage, giving us greater flexibility to meet the demands of our customers and vendors, and the ability to expand our reach into new markets and services. We believe our efforts will enable us to resume solid sales growth, select market share gains, higher earnings per share, positive operating cash flow, and industry-leading returns on invested capital.

In addition to the above, we diligently monitor the factors that we can control, including our management of costs, working capital and capital spending. We also continually evaluate the current and potential profitability and return on our investments in all geographies and consider changes in current and future investments based on risks, opportunities and current and anticipated market conditions. In connection with these evaluations, we may incur additional costs to the extent we decide to increase or decrease our investments in certain geographies. We will also continue to evaluate targeted strategic investments across our operations and new business opportunities and to invest in those markets and product segments we believe provide us with the greatest opportunities for profitable growth. Finally, from a balance sheet perspective, we require working capital primarily to finance accounts receivable and inventory. We have historically relied upon debt, trade credit from our vendors, and accounts receivable financing programs for our working capital needs. At October 31, 2012, we had a debt to total capital ratio (calculated as total debt divided by the aggregate of total debt and total equity) of 19.0%.

Recent Accounting Pronouncements and Legislation

Refer to Note 1 of Notes to Consolidated Financial Statements for the discussion on recent accounting pronouncements.

Results of Operations

We do not consider stock-based compensation expense in assessing the performance of our operating segments, and therefore the Company reports stock-based compensation expense separately. The following table summarizes our net sales, change in net sales and operating income by geographic region for the three and nine months ended October 31, 2012 and 2011:


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                                           Three months ended                      Three months ended
                                            October 31, 2012                        October 31, 2011
                                        $             % of net sales            $             % of net sales
Net sales by geographic region
($ in thousands):
Americas                           $  2,367,743                39.2 %      $  2,781,263                42.2 %
Europe                                3,672,813                60.8 %         3,812,720                57.8 %

Worldwide                          $  6,040,556               100.0 %      $  6,593,983               100.0 %


                                           Nine months ended                       Nine months ended
                                            October 31, 2012                        October 31, 2011
                                        $             % of net sales            $             % of net sales
Net sales by geographic region
($ in thousands):
Americas                           $  7,221,953                40.4 %      $  8,094,723                41.8 %
Europe                               10,675,664                59.6 %        11,280,849                58.2 %

Worldwide                          $ 17,897,617               100.0 %      $ 19,375,572               100.0 %


                                           Three months ended                      Nine months ended
                                              October 31,                             October 31,
                                       2012                2011                2012                2011
Year-over-year (decrease)
increase in net sales (%):
Americas                                (14.9)%                 3.1 %           (10.8)%                 4.3 %
Europe (US$)                             (3.7)%                10.0 %            (5.4)%                18.8 %
Europe (euro)                             4.9 %                 5.6 %             4.0 %                10.8 %
Worldwide                                (8.4)%                 7.0 %            (7.6)%                12.3 %

                                           Three months ended                      Three months ended
                                            October 31, 2012                        October 31, 2011
                                        $             % of net sales            $             % of net sales
Operating income ($ in
thousands):
Americas                           $    33,747                 1.43 %      $    52,638                 1.89 %
Europe                                  39,445                 1.07 %           39,718                 1.04 %
Stock-based compensation
expense                                 (3,646)               (0.06)%           (2,787)               (0.04)%

Worldwide                          $    69,546                 1.15 %      $    89,569                 1.36 %


                                           Nine months ended                       Nine months ended
                                            October 31, 2012                        October 31, 2011
                                        $             % of net sales            $             % of net sales
Operating income ($ in
thousands):
Americas                           $   114,346                 1.58 %      $   148,146                 1.83 %
Europe                                 105,677                 0.99 %          103,850                 0.92 %
Stock-based compensation
expense                                (10,328)               (0.06)%           (7,969)               (0.04)%

Worldwide                          $   209,695                 1.16 %      $   244,027                 1.26 %

We sell products purchased from the world's leading peripheral, system, software and networking vendors. Products purchased from Hewlett Packard Company and Apple Inc. approximated 21% and 12%, respectively, of our sales for the third quarter of fiscal 2013. There were no other vendors or any customers that exceeded 10% of our consolidated sales over the past four fiscal quarters.

The following table sets forth our Consolidated Statement of Income as a percentage of net sales for the three and nine months ended October 31, 2012 and 2011, as follows:

                                   Three months ended           Nine months ended
                                       October 31,                 October 31,
                                   2012           2011          2012          2011
         Net sales                  100.00 %      100.00 %      100.00 %      100.00 %
         Cost of products sold       94.90         94.77         94.81         94.74


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                                                     Three months ended             Nine months ended
                                                        October 31,                    October 31,
                                                    2012            2011           2012           2011
Gross profit                                           5.10           5.23            5.19          5.26
Selling, general and administrative expenses           3.95           3.87            4.03          4.00

Operating income                                       1.15           1.36            1.16          1.26
Interest expense                                       0.07           0.13            0.06          0.13
Other expense, net                                     0.03             (0 )          0.01            (0 )

Income before income taxes                             1.05           1.23            1.09          1.13
Provision for income taxes                             0.27           0.36            0.31          0.31

Consolidated net income                                0.78           0.87            0.78          0.82
Net income attributable to noncontrolling
interest                                              (0.02 )        (0.06 )         (0.04 )       (0.03 )

Net income attributable to shareholders of
Tech Data Corporation                                  0.76 %         0.81 %          0.74 %        0.79 %

Three and nine months ended October 31, 2012 and 2011

Net Sales

Our consolidated net sales were $6.0 billion in the third quarter of fiscal 2013, a decrease of 8.4% when compared to the third quarter of fiscal 2012. The weakening of certain foreign currencies against the U.S. dollar negatively impacted our year-over-year net sales comparison by approximately five percentage points. On a regional basis, during the third quarter of fiscal 2013, net sales in the Americas decreased by 14.9% when compared to the third quarter of fiscal 2012 and decreased by 3.7% in Europe (an increase of 4.9% on a euro basis). On a year-to-date basis, net sales were $17.9 billion during the first nine months of fiscal 2013, a decrease of 7.6% when compared to the first nine months of fiscal 2012. The weakening of certain foreign currencies against the U.S. dollar negatively impacted our year-over-year net sales comparison by approximately six percentage points.

Beginning with the first quarter of fiscal 2013, we prospectively revised our presentation of sales of vendor warranty services and certain fulfillment contracts such that these revenues are now being presented on an agency basis as net fees, as compared to presenting gross revenues and costs of sales in prior periods. On a gross basis, these contracts would have contributed approximately $214.5 million and $605.8 million, respectively, to our net sales in the third quarter and first nine months of fiscal 2013, which negatively impacted both the quarterly and first nine months year-over-year consolidated net sales growth comparison by approximately three percentage points. This change had no impact on gross profit dollars, operating income dollars, net income dollars or earnings per share for any fiscal periods reported, but positively impacted the gross margin and operating income margin by 17 basis points and four basis points, respectively, in the third quarter and first nine months of fiscal 2013. Also included in the third quarter and first nine months of fiscal 2012, are net sales of approximately $51.7 million and $253.9 million, respectively, related to the in-country operations of Brazil and Colombia, which we exited at the end of fiscal 2012. We continue to serve both the Brazilian and Colombian markets through our Miami-based export business. Excluding the impact of the prospective presentation of sales of vendor warranty services and certain fulfillment contracts, the closure of our in-country operations in Brazil and Colombia and the negative impact of the weakening of certain foreign currencies against the U.S. dollar in the third quarter and first nine months of fiscal 2013, consolidated net sales increased by approximately one percent and two percent, respectively, in comparison with the same periods of the prior fiscal year.

During the third quarter and first nine months of fiscal 2013, net sales in the Americas were $2.4 billion and $7.2 billion respectively, representing a decrease of 14.9% and 10.8%, when compared to the same periods of the prior year. The prospective revision in presentation of sales of vendor warranty services and certain fulfillment contracts negatively impacted both the Americas' third quarter and first nine months fiscal 2013 net sales growth by four percentage points. Excluding the impact of the prospective presentation of sales of vendor warranty services and certain fulfillment contracts, the closure of our in-country operations in Brazil and Colombia and the impact of certain foreign currencies against the U.S. dollar in the third quarter and first nine months of fiscal 2013, year-over-year net sales in the Americas decreased by approximately ten and four percent, respectively, in comparison with the same periods of the prior fiscal year, primarily due to lower sales in the U.S. resulting from weak market conditions and a loss of market share following the implementation of certain modules of SAP in the second quarter of fiscal 2013, as previously discussed in this MD&A.

During the third quarter and first nine months of fiscal 2013, net sales in Europe were $3.7 billion and $10.7 billion, respectively, a decrease of 3.7% and 5.4% when compared to the same periods of the prior fiscal year (an increase of 4.9% and 4.0%, respectively, on a euro basis). Excluding the impact of the prospective presentation of sales of vendor warranty services and certain fulfillment contracts in the third quarter and first nine months of fiscal 2013, year-over-year net sales in


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Europe increased eight percent and seven percent, respectively, on a euro basis. This increase is due to strong demand for mobility products and growth in certain European markets, such as U.K., France and Germany.

Gross Profit

Gross profit as a percentage of net sales ("gross margin") during the third quarter of fiscal 2013 was 5.10%, compared to a 5.23% gross margin in the third quarter of fiscal 2012. On a year-to-date basis, gross margin decreased to 5.19% in the first nine months of fiscal 2013 compared to 5.26% in the comparable period of the prior fiscal year. As discussed above, the prospective revision of the presentation of vendor warranty services and certain fulfillment contracts had no impact on gross profit dollars but positively impacted the gross margin percentage by approximately 17 basis points for both the third quarter and first nine months of fiscal 2013. Excluding the impact of the revision of the presentation of vendor warranty services and certain fulfillment contracts, the decline in our gross margin for both the third quarter and first nine months of fiscal 2013 is attributable to competitive pricing, changes in our product mix and aggressive vendor rebate goals in both regions, as well as the implementation of the sales, inventory and credit management modules of SAP in the U.S. during the second quarter of fiscal 2013. As discussed previously, implementation of the aforementioned modules of SAP impacted our productivity and ability to make critical margin management decisions during the second and third quarters of fiscal 2013, resulting in lower gross profit earned in the U.S. during both the third quarter and first nine months of fiscal 2013.

Selling, General and Administrative Expenses ("SG&A")

SG&A as a percentage of net sales was 3.95% for the third quarter of fiscal 2013, compared to 3.87% in the third quarter of fiscal 2012. On a year-to-date basis, SG&A as a percentage of net sales was 4.03% for the first nine months of fiscal 2013 compared to 4.00% in the comparable period of the prior fiscal year. The change in our presentation of sales of vendor warranty service and certain . . .

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