NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tech Data Corporation (“Tech Data” or the “Company”) is one of the world’s largest wholesale distributors of technology products. The Company serves 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 customers with advanced logistics capabilities and value-added services. Tech Data’s customers include value-added resellers, direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. The Company is managed in two geographic segments: the Americas and Europe.
Principles of Consolidation
The consolidated financial statements include the accounts of Tech Data and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates on a fiscal year that ends on January 31.
Basis of Presentation
The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of
July 31, 2016
, its consolidated statements of income and comprehensive income for the
three and six months ended July 31, 2016 and 2015
, and its consolidated cash flows for the
six months ended July 31, 2016
and
2015
.
Seasonality
The Company’s quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of currency fluctuations and seasonal variations in the demand for the products and services offered. Narrow operating margins may magnify the impact of these factors on the Company's operating results. Recent historical seasonal variations have included an increase in European demand during the Company’s fiscal fourth quarter and decreased demand in other fiscal quarters. Given that the majority of the Company’s revenues are derived from Europe, the worldwide results closely follow the seasonality trends in Europe. The seasonal trend in Europe typically results in greater operating leverage, and therefore, lower selling, general and administrative expenses as a percentage of net sales in the region and on a consolidated basis during the second semester of the Company's fiscal year, particularly in the Company's fourth quarter. Therefore, the results of operations for the
three and six months ended July 31, 2016 and 2015
are not necessarily indicative of the results that can be expected for the entire fiscal year ended
January 31, 2017
.
LCD settlements and other, net
The Company has been a claimant in proceedings seeking damages primarily from certain manufacturers of LCD flat panel and cathode ray tube displays. The Company reached settlement agreements with certain manufacturers during the periods presented and has recorded these amounts, net of estimated attorney fees and expenses, in "LCD settlements and other, net" in the Consolidated Statement of Income.
Accounts Receivable Purchase Agreements
The Company has uncommitted accounts receivable purchase agreements under which certain accounts receivable may be sold, without recourse, to third-party financial institutions. Under these programs, the Company may sell certain accounts receivable in exchange for cash less a discount, as defined in the agreements. Available capacity under these programs, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold into these programs and the financial institutions' willingness to purchase such receivables. In addition, certain of these agreements also require that the Company continue to service, administer and collect the sold accounts receivable. At
July 31, 2016
and
January 31, 2016
, the Company had a total of
$479.6 million
and
$554.2 million
, respectively, of accounts receivable sold to and held by financial institutions under these agreements. During the
three months ended July 31, 2016 and 2015
, discount fees recorded under these facilities were
$1.5 million
and
$1.0 million
, respectively, and during the
six months ended July 31, 2016 and 2015
, discount fees recorded under these facilities were
$2.7 million
and
$1.9 million
, respectively. These discount fees are included as a component of "other (income) expense, net" in the Consolidated Statement of Income.
Goodwill
The Company tests goodwill for impairment annually at the reporting unit level, or more frequently if current events and circumstances indicate a possible impairment. During the second quarter of fiscal year 2017, the Company elected to change the timing of its annual goodwill impairment testing from January 31st to November 1st. This accounting change is considered to be preferable because it allows the Company additional time to complete the annual goodwill impairment test. This change does not represent a material change to the method of applying an accounting principle, nor does this change result in adjustments to previously issued financial statements. The Company has concluded that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each November 1st of prior reporting periods. As a result, the Company will prospectively apply the change in the annual goodwill impairment testing date beginning November 1, 2016. This change in testing date did not delay, accelerate, or avoid a goodwill impairment charge.
Recently Adopted Accounting Standards
In April 2015, the FASB issued an accounting standard which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the license element should be accounted for consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted this standard during the quarter ended April 30, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued an accounting standard which modifies how companies account for certain aspects of stock-based payments to employees. The new standard revises the accounting treatment for excess tax benefits, statutory income tax withholding requirements, and forfeitures related to stock-based awards. The standard is effective for annual periods beginning after December 15, 2016; however, early adoption is permitted. The Company early adopted this standard during the quarter ended April 30, 2016. The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by the new standard, rather than electing to account for forfeitures as they occur. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements; however, as a result of the adoption of this standard, the classification of certain amounts in the Consolidated Statement of Cash Flows for the
six months
ended
July 31, 2015
was retrospectively adjusted.
Recently Issued Accounting Standards
In May 2014, the FASB issued an accounting standard which will supersede all existing revenue recognition guidance under current GAAP. In March, April and May 2016, the FASB issued three additional accounting standard updates which provide supplemental adoption guidance and clarification to the May 2014 accounting standard update. The new standards require the recognition of revenue to depict the transfer of promised goods or services in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. The standards will be effective for the Company beginning with the quarter ending April 30, 2018. The Company would have the option to adopt one year earlier and the standard may be adopted with either a full retrospective or a modified retrospective approach. The Company is currently in the process of assessing what impact these new standards may have on its consolidated financial statements.
In July 2015, the FASB issued a new accounting standard that simplifies the subsequent measurement of inventory. Under the new standard, the cost of inventory will be compared to the net realizable value (NRV). Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The standard should be applied prospectively and will be effective for the Company beginning with the quarter ending April 30, 2017. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued an accounting standard which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of additional information about leasing arrangements. Under the new guidance, for all leases, interest expense and amortization of the right to use asset will be recorded for leases determined to be financing leases and straight-line lease expense will be recorded for leases determined to be operating leases. Lessees will initially recognize assets for the right to use the leased assets and liabilities for the obligations created by those leases. The new accounting standard must be adopted using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The accounting standard is effective for the Company beginning with the quarter ended April 30, 2019, with early adoption permitted. The Company is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
In June 2016, the FASB issued an accounting standard which revises the methodology for measuring credit losses on financial instruments and the timing of the recognition of those losses. Under the new standard, financial assets measured at an amortized cost basis are to be presented net of the amount not expected to be collected via an allowance for credit losses. Estimated credit losses are to be based on historical information adjusted for management's expectation that current conditions and supportable forecasts differ from historical experience. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2020, with early adoption permitted. The Company is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
NOTE 2 — EARNINGS PER SHARE ("EPS")
The Company presents the computation of earnings per share on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted EPS reflects the potential dilution related to equity-based incentives (further discussed in
Note 3 – Stock-Based Compensation
) using the treasury stock method. The composition of basic and diluted EPS is as follows:
|
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Three months ended July 31,
|
|
Six months ended July 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
Net income
|
$
|
46,394
|
|
|
$
|
76,412
|
|
|
$
|
79,767
|
|
|
$
|
127,689
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
35,207
|
|
|
36,506
|
|
|
35,167
|
|
|
36,661
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Equity based awards
|
171
|
|
|
109
|
|
|
206
|
|
|
168
|
|
Weighted average common shares - diluted
|
35,378
|
|
|
36,615
|
|
|
35,373
|
|
|
36,829
|
|
|
|
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|
Earnings per share:
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Basic
|
$
|
1.32
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|
|
$
|
2.09
|
|
|
$
|
2.27
|
|
|
$
|
3.48
|
|
Diluted
|
$
|
1.31
|
|
|
$
|
2.09
|
|
|
$
|
2.26
|
|
|
$
|
3.47
|
|
For the three and six months ended July 31, 2016, there were
4,028
and
203,991
shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive. For the three and six months ended July 31, 2015, there were
no
shares excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
NOTE 3 — STOCK-BASED COMPENSATION
For the
six months ended July 31, 2016
and
2015
, the Company recorded
$7.5 million
and
$7.8 million
, respectively, of stock-based compensation expense, which is included in “selling, general and administrative expenses” in the Consolidated Statement of Income.
At
July 31, 2016
, the Company had awards outstanding from two equity-based compensation plans, only one of which is currently active. The active plan was initially approved by the Company’s shareholders in June 2009 and includes
4.0 million
shares available for grant of which approximately
2.2 million
shares remain available for future grant at
July 31, 2016
. Under the active plan, the Company is authorized to award officers, employees, and non-employee members of the Board of Directors restricted stock, options to purchase common stock, maximum value stock-settled stock appreciation rights, maximum value options, and performance awards that are dependent upon achievement of specified performance goals. Equity-based compensation awards have a maximum term of 10 years, unless a shorter period is specified by the Compensation Committee of the Board of Directors ("Compensation Committee") or is required under local law. Awards under the plans are priced as determined by the Compensation Committee, and under the terms of the Company’s active equity-based compensation plan, are required to be priced at, or above, the fair market value of the Company’s common stock on the date of grant. Awards generally vest between
one
and
three
years from the date of grant.
A summary of the Company’s restricted stock activity for the
six months ended July 31, 2016
is as follows:
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Shares
|
Nonvested at January 31, 2016
|
496,329
|
|
Granted
(a)
|
232,075
|
|
Vested
|
(177,395
|
)
|
Canceled
|
(6,898
|
)
|
Nonvested at July 31, 2016
|
544,111
|
|
(a) Includes
18,563
shares of performance-based restricted stock units, which assumes maximum achievement.
The Company’s policy is to utilize shares of its treasury stock, to the extent available, to satisfy its obligation to issue shares upon the exercise of awards.
NOTE 4 — SHAREHOLDERS' EQUITY
The Company’s common share issuance activity for the
six months ended July 31, 2016
is summarized as follows:
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Shares
|
|
Weighted-average
price per share
|
Treasury stock balance at January 31, 2016
|
24,163,402
|
|
|
$
|
44.59
|
|
Shares of treasury stock reissued
|
(131,712
|
)
|
|
|
Treasury stock balance at July 31, 2016
|
24,031,690
|
|
|
$
|
44.59
|
|
There were
no
common shares repurchased by the Company during the
six months ended July 31, 2016
. The reissuance of shares from treasury stock is based on the weighted average purchase price of the shares.
NOTE 5 — FAIR VALUE MEASUREMENTS
The Company’s assets and liabilities carried or disclosed at fair value are classified in one of the following three categories: Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in Level 1 above that are observable for the asset or liability, either directly or indirectly; and Level 3 – unobservable inputs for the asset or liability. The classification of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following table summarizes the valuation of the Company's assets and liabilities that are measured at fair value on a recurring basis (in thousands):
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|
July 31, 2016
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|
January 31, 2016
|
|
Fair value measurement category
|
|
Fair value measurement category
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
ASSETS
|
|
|
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|
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|
Foreign currency forward contracts
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$
|
6,300
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|
|
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|
$
|
3,412
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|
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|
LIABILITIES
|
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|
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|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
$
|
1,845
|
|
|
|
|
|
|
$
|
2,274
|
|
|
|
The Company's foreign currency forward contracts are measured on a recurring basis based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers (Level 2 criteria) and are marked-to-market each period with gains and losses on these contracts recorded in the Consolidated Statement of Income on a basis consistent with the classification of the change in the fair value of the underlying transactions giving rise to these foreign currency exchange gains and losses in the period in which their value changes, with the offsetting amount for unsettled positions being included in either "prepaid expenses and other assets" or "accrued expenses and other liabilities" in the Consolidated Balance Sheet. See further discussion below in
Note 6 – Derivative Instruments
.
The Company utilizes life insurance policies to fund the Company’s nonqualified deferred compensation plan. The life insurance asset recorded by the Company is the amount that would be realized upon the assumed surrender of the policy. This amount is based on the underlying fair value of the invested assets contained within the life insurance policies. The gains and losses are recorded in the Company’s Consolidated Statement of Income within "other (income) expense, net." The related deferred compensation liability is also marked-to-market each period based upon the returns of the various investments selected by the plan participants and the gains and losses are recorded in the Company’s Consolidated Statement of Income within "selling, general and administrative expenses." The net realizable value of the Company's life insurance investments and related deferred compensation liability was
$35.1 million
and
$35.2 million
, respectively, at
July 31, 2016
and
$30.2 million
and
$30.5 million
, respectively, at January 31, 2016.
In September 2012, the Company issued
$350.0 million
aggregate principal amount of
3.75%
Senior Notes in a public offering (the "Senior Notes") which are carried at cost, less unamortized debt discount and debt issuance costs. As of
July 31, 2016
and
January 31, 2016
, the estimated fair value of the Senior Notes was approximately
$356.9 million
and
$359.6 million
, respectively, based upon quoted market information (Level 1 criteria). The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of debt outstanding pursuant to revolving credit facilities and loans payable approximates fair value as the majority of these instruments have variable interest rates which approximate current market rates (Level 2 criteria).
NOTE 6 — DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company is exposed to movements in foreign currency exchange rates. The Company’s foreign currency risk management objective is to protect earnings and cash flows from the impact of exchange rate changes primarily through the use of foreign currency forward contracts to hedge both intercompany and third party loans, accounts receivable and accounts payable. These derivatives are not designated as hedging instruments.
The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The Company’s transactions in its foreign operations are denominated primarily in the following currencies: British pound, Canadian dollar, Czech koruna, Danish krone, euro, Mexican peso, Norwegian krone, Polish zloty, Swedish krona, Swiss franc and U.S. dollar.
The Company considers inventory as an economic hedge against foreign currency exposure in accounts payable in certain circumstances. This practice offsets such inventory against corresponding accounts payable denominated in currencies other than the functional currency of the subsidiary buying the inventory when determining the net exposure to be hedged using traditional forward contracts. Under this strategy, the Company would expect to increase or decrease selling prices for products purchased in foreign currencies based on fluctuations in foreign currency exchange rates affecting the underlying accounts payable. To the extent the Company incurs a foreign currency exchange loss (gain) on the underlying accounts payable denominated in the foreign currency, a corresponding increase (decrease) in gross profit would be expected as the related inventory is sold. This strategy can result in a certain degree of quarterly earnings volatility as the underlying accounts payable is remeasured using the foreign currency exchange rate prevailing at the end of each period, or settlement date if earlier, whereas the corresponding increase (decrease) in gross profit is not realized until the related inventory is sold.
The Company recognizes foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign currency denominated accounts receivable and accounts payable as a component of “cost of products sold” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged accounts receivable or accounts payable. The Company recognizes foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign currency denominated financing transactions as a component of “other (income) expense, net” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged loans. The total amount recognized in earnings on the Company's foreign currency forward contracts, which depending upon the nature of the underlying hedged asset or liability is included as a component of either “cost of products sold” or “other (income) expense, net”, was a net foreign currency exchange gain of
$6.6 million
and
$5.9 million
, respectively, for the
three months ended July 31, 2016
and
2015
, and a net foreign currency exchange loss of
$0.8 million
and
$2.1 million
, respectively, for the
six months ended July 31, 2016
and
2015
. The gains and losses on the Company’s foreign currency forward contracts are largely offset by the change in the fair value of the underlying hedged assets or liabilities.
The notional amount of forward exchange contracts is the amount of foreign currency to be bought or sold at maturity. Notional amounts are indicative of the extent of the Company’s involvement in the various types and uses of derivative financial instruments and are not a measure of the Company’s exposure to credit or market risks through its use of derivatives. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices.
The Company's average notional amounts of derivative financial instruments outstanding during the
three months ended July 31, 2016
and
2015
were approximately
$0.5 billion
and
$0.6 billion
, respectively, with average maturities of
32 days
and
33 days
, respectively. The Company's average notional amounts of derivative financial instruments outstanding during both the
six months ended July 31, 2016
and
2015
were approximately
$0.5 billion
with average maturities of
31 days
and
35 days
, respectively. As discussed above, under the Company's hedging policies, gains and losses on the derivative financial instruments are largely offset by the gains and losses on the underlying assets or liabilities being hedged.
The Company’s foreign currency forward contracts are also discussed in
Note 5 – Fair Value Measurements
.
NOTE 7 — COMMITMENTS & CONTINGENCIES
Synthetic Lease Facility
The Company has a synthetic lease facility with a group of financial institutions (the “Synthetic Lease”) under which the Company leases certain logistics centers and office facilities from a third-party lessor, that expires in June 2018. Properties leased under the Synthetic Lease are located in Clearwater and Miami, Florida; Fort Worth, Texas; Fontana, California; Suwanee, Georgia; Swedesboro, New Jersey; and South Bend, Indiana. The Synthetic Lease is accounted for as an operating lease and rental payments are calculated at the applicable LIBOR rate plus a margin based on the Company's credit ratings.
Upon not less than 30 days notice, the Company, at its option, may purchase one or any combination of the properties, at an amount equal to each of the property's cost, as long as the lease balance does not decrease below a defined amount. Upon not less than 270 days, nor more than 360 days, prior to the lease expiration, the Company may, at its option, (i) purchase a minimum of two of the properties, at an amount equal to each of the property's cost, (ii) exercise the option to renew the lease for a minimum of two of the properties or (iii) exercise the option to remarket a minimum of two of the properties and cause a sale of the properties. If the Company
elects to remarket the properties, the Company has guaranteed the lessor a percentage of the cost of each property, in the aggregate amount of approximately
$133.8 million
. Future annual lease payments under the Synthetic Lease are approximately
$2.9 million
per year.
Guarantees
The Company has arrangements with certain finance companies that provide inventory financing facilities to the Company’s customers. In conjunction with certain of these arrangements, the Company would be required to purchase certain inventory in the event the inventory is repossessed from the customers by the finance companies. As the Company does not have access to information regarding the amount of inventory purchased from the Company still on hand with the customer at any point in time, the Company’s repurchase obligations relating to inventory cannot be reasonably estimated. Repurchases of inventory by the Company under these arrangements have been insignificant to date. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to these inventory repurchase obligations is remote.
The Company provides additional financial guarantees to finance companies on behalf of certain customers. The majority of these guarantees are for an indefinite period of time, where the Company would be required to perform if the customer is in default with the finance company related to purchases made from the Company. The Company reviews the underlying credit for these guarantees on at least an annual basis. As of
July 31, 2016
and
January 31, 2016
, the outstanding amount of guarantees under these arrangements totaled
$5.0 million
and
$4.6 million
, respectively. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to the above guarantees is remote.
Contingencies
Prior to fiscal 2004, one of the Company’s subsidiaries, located in Spain, was audited in relation to various value added tax (“VAT”) matters. As a result of those audits, the Spanish subsidiary received notices of assessment related to fiscal years 1994 through 2001 from the Regional Inspection Unit of Spain’s taxing authority that allege the subsidiary did not properly collect and remit VAT. The Spanish subsidiary appealed these assessments to the Madrid Central Economic Administrative Courts beginning in March 2010. Following the administrative court proceedings the matter was appealed to the Spanish National Appellate Court. During 2013, the Spanish National Appellate Court issued an opinion upholding the assessments for several of the assessed years. During fiscal 2015, the Madrid Central Economic Administrative Court issued a decision revoking the penalties for certain of the assessed years. During fiscal 2016, the Spanish Supreme Court issued final decisions for the assessments related to fiscal years 1996 through 2001 which barred certain of the assessed amounts. As a result of these decisions, during the three months ended July 31, 2015, the Company decreased its accrual for costs associated with this matter by
$25.4 million
, including
$16.4 million
related to an accrual for assessments and penalties recorded in “value added tax assessments” and
$9.0 million
related to accrued interest recorded in “interest expense” in the Consolidated Statement of Income. The Company paid the remaining assessed amounts for fiscal years 1996 through 2001 of
$12.3 million
during the third quarter of fiscal 2016.
During the second quarter of fiscal 2017, the Spanish National Appellate Court issued an opinion upholding the assessments for fiscal years 1994 and 1995. Although the Company believes that the Spanish subsidiary's defense to the assessments has solid legal grounds and is continuing to vigorously defend its position by appealing to the Spanish Supreme Court, certain of the amounts assessed for fiscal years 1994 and 1995 are not eligible to be appealed to the Spanish Supreme Court. As a result, the Company increased its accrual for costs associated with this matter by
$2.6 million
in the second quarter of fiscal 2017, including
$1.5 million
recorded in "value added tax assessments" and
$1.1 million
recorded in "interest expense" in the Consolidated Statement of Income. The Company estimates the probable liability for these remaining assessments, including various penalties and interest, was approximately
$7.4 million
at July 31, 2016 which is included in "accrued expenses and other liabilities" in the Consolidated Balance Sheet.
In December 2010, in a non-unanimous decision, a Brazilian appellate court overturned a 2003 trial court which had previously ruled in favor of the Company’s Brazilian subsidiary related to the imposition of certain taxes on payments abroad related to the licensing of commercial software products, commonly referred to as “CIDE tax.” The Company estimates the total exposure related to the CIDE tax, including interest, was approximately
$21.9 million
at
July 31, 2016
. The Brazilian subsidiary has appealed the unfavorable ruling to the Supreme Court and Superior Court, Brazil's two highest appellate courts. Based on the legal opinion of outside counsel, the Company believes that the chances of success on appeal of this matter are favorable and the Brazilian subsidiary intends to vigorously defend its position that the CIDE tax is not due. However, due to the lack of predictability of the Brazilian court system, the Company has concluded that it is reasonably possible that the Brazilian subsidiary may incur a loss up to the total exposure described above. The Company believes the resolution of this litigation will not be material to the Company’s consolidated net assets or liquidity.
In addition to the CIDE tax matter discussed above, the Company’s Brazilian subsidiary has been undergoing several examinations of non-income related taxes. Given the lack of predictability of the Brazilian tax system, the Company believes that it is reasonably possible that a loss may have been incurred. However, due to the complex nature of the Brazilian tax system and the absence of communication from the local tax authorities regarding these examinations, the Company is currently unable to determine the likelihood of these examinations resulting in assessments or to estimate the amount of loss, if any, that may be reasonably possible if such assessment were to be made.
In the second quarter of fiscal 2016, the Company determined that it had additional VAT liabilities due in one of its European subsidiaries. As a result, the Company recorded a charge of
$6.8 million
in “value added tax assessments” in the Consolidated
Statement of Income during the second quarter of fiscal 2016 representing the probable liability for VAT and associated penalties. The Company has subsequently paid all VAT associated with this matter and filed amended tax returns with the tax authorities.
The Company is subject to various other legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in any of these other legal proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
NOTE 8 — SEGMENT INFORMATION
The Company operates predominantly in a single industry segment as a distributor of technology products, logistics management, and other value-added services. While the Company operates primarily in one industry, it is managed based on geographic segments: the Americas and Europe. The Company does not consider stock-based compensation expense in assessing the performance of its operating segments, and therefore the Company reports stock-based compensation expense as a separate amount. The accounting policies of the segments are the same as those described in
Note 1 – Business and Summary of Significant Accounting Policies
.
Financial information by geographic segment is as follows (in thousands):
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Three months ended July 31,
|
|
Six months ended July 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales to unaffiliated customers:
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|
Americas
(1)
|
$
|
2,674,886
|
|
|
$
|
2,745,429
|
|
|
$
|
5,062,890
|
|
|
$
|
5,084,689
|
|
Europe
|
3,678,853
|
|
|
3,834,964
|
|
|
7,254,211
|
|
|
7,382,933
|
|
Total
|
$
|
6,353,739
|
|
|
$
|
6,580,393
|
|
|
$
|
12,317,101
|
|
|
$
|
12,467,622
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
Americas
(2)
|
$
|
41,241
|
|
|
$
|
60,752
|
|
|
$
|
72,516
|
|
|
$
|
123,111
|
|
Europe
(3)
|
35,927
|
|
|
49,443
|
|
|
60,867
|
|
|
72,840
|
|
Stock-based compensation expense
|
(3,813
|
)
|
|
(3,960
|
)
|
|
(7,470
|
)
|
|
(7,778
|
)
|
Total
|
$
|
73,355
|
|
|
$
|
106,235
|
|
|
$
|
125,913
|
|
|
$
|
188,173
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Americas
|
$
|
4,905
|
|
|
$
|
4,472
|
|
|
$
|
9,795
|
|
|
$
|
8,513
|
|
Europe
|
9,143
|
|
|
9,520
|
|
|
18,300
|
|
|
19,658
|
|
Total
|
$
|
14,048
|
|
|
$
|
13,992
|
|
|
$
|
28,095
|
|
|
$
|
28,171
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Americas
|
$
|
5,388
|
|
|
$
|
4,222
|
|
|
$
|
11,485
|
|
|
$
|
8,086
|
|
Europe
|
5,384
|
|
|
3,530
|
|
|
10,850
|
|
|
6,910
|
|
Total
|
$
|
10,772
|
|
|
$
|
7,752
|
|
|
$
|
22,335
|
|
|
$
|
14,996
|
|
|
|
|
|
|
|
|
|
|
As of:
|
July 31, 2016
|
|
January 31, 2016
|
Identifiable assets:
|
|
|
|
Americas
|
$
|
2,162,473
|
|
|
$
|
2,078,443
|
|
Europe
|
4,040,985
|
|
|
4,279,845
|
|
Total
|
$
|
6,203,458
|
|
|
$
|
6,358,288
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
Americas
(1)
|
$
|
33,851
|
|
|
$
|
29,402
|
|
Europe
|
38,287
|
|
|
36,626
|
|
Total
|
$
|
72,138
|
|
|
$
|
66,028
|
|
|
|
|
|
Goodwill & acquisition-related intangible assets, net:
|
|
|
|
Americas
|
$
|
34,455
|
|
|
$
|
35,615
|
|
Europe
|
265,055
|
|
|
274,401
|
|
Total
|
$
|
299,510
|
|
|
$
|
310,016
|
|
|
|
(1)
|
Net sales to unaffiliated customers in the United States represented
91%
of the total Americas' net sales to unaffiliated customers for the
three months ended July 31, 2016
and
2015
, and
89%
of the total Americas' net sales to unaffiliated customers for the
six months ended July 31, 2016
and
2015
. Total long-lived assets in the United States represented
95%
of the Americas' total long-lived assets at both
July 31, 2016
and
January 31, 2016
.
|
|
|
(2)
|
Operating income in the Americas includes a gain recorded in LCD settlements and other, net, of
$2.6 million
and
$21.5 million
, respectively, for the three months ended July 31, 2016 and 2015, and
$3.1 million
and
$60.0 million
, respectively, for the six months ended July 31, 2016 and 2015 (see further discussion in
Note 1 – Business and Summary of Significant Accounting Policies
).
|
(3) Operating income in Europe for the three and six months ended July 31, 2016 includes an increase of
$1.5 million
in the accrual for assessments and penalties for a VAT matter in the Company's subsidiary in Spain. Operating income in Europe for the three and six months ended July 31, 2015 includes a net decrease of
$9.6 million
in the accrual for assessments and penalties for various VAT matters in two European subsidiaries (see further discussion in
Note 7 – Commitments & Contingencies
).