NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Tech Data serves as a vital link in the evolving technology ecosystem by bringing products from the world’s leading technology vendors to market, as well as helping customers create solutions best suited to maximize business outcomes for their end-user customers. Tech Data’s customers include value-added resellers, direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. On February 27, 2017, the Company purchased all of the outstanding shares of Avnet, Inc.'s ("Avnet") Technology Solutions ("TS") business (see Note 5 - Acquisitions for further discussion). Prior to the acquisition of TS, the Company managed its operations in two geographic segments: the Americas and Europe. As a result of the acquisition of TS, the Company now manages its operations in three geographic segments: the Americas, Europe and Asia-Pacific. There were no Tech Data operations in the Asia-Pacific region prior to the acquisition of TS.
Principles of Consolidation
The consolidated financial statements include the accounts of Tech Data and its subsidiaries, including the results of TS from the date of acquisition of February 27, 2017. 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, pursuant to the rules and regulations of the United States ("U.S.") Securities and Exchange Commission (“SEC”). The Company prepares its financial statements in conformity with generally accepted accounting principles in the U.S. (“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.
Revenue Recognition
Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which generally happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed or determinable; and (4) collectability must be reasonably assured. Shipping revenue is included in net sales while the related costs, including shipping and handling costs, are included in the cost of products sold. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded at the time of sale based upon historical experience. The Company also has certain fulfillment, extended warranty and service contracts with certain customers and suppliers whereby the Company assumes an agency relationship in the transaction. In such arrangements where the Company is not the primary obligor, revenues are recognized as the net fee associated with serving as an agent. Taxes imposed by governmental authorities on the Company’s revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
Service revenue associated with configuration, training, fulfillment and other services is recognized when the work is complete and the four criteria discussed above have been met. Service revenues represented less than 10% of consolidated net sales for fiscal years
2018, 2017 and 2016
.
The following table provides a comparison of sales generated from products purchased from vendors that exceeded 10% of the Company's consolidated net sales for fiscal
2018, 2017 and 2016
(as a percent of consolidated net sales):
|
|
|
|
|
|
2018
|
2017
|
2016
|
Apple, Inc.
|
16%
|
20%
|
20%
|
HP Inc.
|
10%
|
13%
|
|
Hewlett-Packard Company
(a)
|
|
|
13%
|
Cisco Systems, Inc.
|
10%
|
10%
|
|
(a) Effective November 1, 2015, Hewlett-Packard Company split into two companies, HP Inc. and Hewlett Packard Enterprise. The amount presented for fiscal year 2016 represents the sales generated from products purchased from Hewlett-Packard Company prior to the split.
Cash and Cash Equivalents
Short-term investments which are highly liquid and have an original maturity of 90 days or less are considered cash equivalents. The Company’s cash equivalents consist primarily of highly liquid investments in money market funds with maturity periods of three months or less.
Investments
The Company invests in 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."
Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable and sales returns for estimated losses resulting from the inability of its customers to make required payments and estimated product returns by customers for exchange or credit. In estimating the required allowance, the Company takes into consideration the overall quality and aging of the receivable portfolio, the large number of customers and their dispersion across wide geographic areas, the existence of credit insurance where applicable, specifically identified customer risks, historical write-off and sales returns experience and the current economic environment.
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
January 31, 2018
and
2017
, the Company had a total of
$687.2 million
and
$506.7 million
, respectively, of accounts receivable sold to and held by financial institutions under these agreements. Discount fees recorded under these facilities, which are included as a component of "other (income) expense, net" in the Company's Consolidated Statement of Income, were
$9.0 million
,
$6.1 million
and
$4.4 million
during the fiscal years ended January 31,
2018, 2017 and 2016
, respectively.
Inventories
Inventories, consisting entirely of finished goods, are stated at the lower of cost or net realizable value, cost being determined on a moving average cost basis, which approximates the first-in, first-out method. Inventory is written down for estimated obsolescence equal to the difference between the cost of inventory and the net realizable value, based upon an aging analysis of the inventory on hand, specifically known inventory-related risks (such as technological obsolescence and the nature of vendor terms surrounding price protection and product returns), foreign currency fluctuations for foreign-sourced products and assumptions about future demand.
Vendor Programs
The Company participates in various vendor programs under which the vendor may provide certain incentives such as cooperative advertising allowances, infrastructure funding, more favorable payment terms, early pay discounts and rebate arrangements. These programs are generally under quarterly, semi-annual or annual agreements with the vendors; however, some of these programs are negotiated on an ad-hoc basis mutually developed with the vendor. Unrestricted volume rebates and early payment discounts received from vendors are recorded when they are earned as a reduction of inventory and as a reduction of cost of products sold as the related inventory is sold. Vendor incentives for specifically identified cooperative advertising programs and infrastructure funding are recorded when earned as adjustments to cost of products sold or selling, general and administrative expenses, depending on the nature of the program. Reserves for receivables on vendor programs are recorded for estimated losses resulting from vendors’ inability to pay or rejections of claims by vendors.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense includes depreciation of purchased property and equipment. Depreciation expense is computed over the shorter of the estimated economic lives or lease periods using the straight-line method, generally as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
Buildings and improvements
|
|
|
|
|
|
15
|
-
|
39
|
Leasehold improvements
|
|
|
|
|
|
3
|
-
|
10
|
Furniture, fixtures and equipment
|
|
|
|
|
|
3
|
-
|
10
|
Expenditures for renewals and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to operations when incurred. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are eliminated and any gain or loss is recognized at such time.
Intangible Assets, net
Included within "intangible assets, net," at both
January 31, 2018
and
2017
are capitalized software and development costs, as well as customer and vendor relationships, trade names and other intangible assets acquired in connection with various business acquisitions. Such capitalized costs and intangible assets are being amortized over a period of
three
to
fourteen
years.
The Company’s capitalized software has been obtained or developed for internal use only. Development and acquisition costs are capitalized for computer software only when management authorizes and commits to funding a computer software project through the approval of a capital expenditure requisition, and the software project is either for the development of new software, to increase the life of existing software or to add significantly to the functionality of existing software. Once these requirements have been met, capitalization would begin at the point that conceptual formulation, evaluation, design and testing of possible software project alternatives have been completed. Capitalization ceases when the software project is substantially complete and ready for its intended use. The Company’s accounting policy is to amortize capitalized software costs on a straight-line basis over periods ranging from
three
to
ten
years, depending upon the nature of the software, the stability of the hardware platform on which the software is installed, its fit in the Company’s overall strategy and the Company's experience with similar software.
Prepaid maintenance fees associated with a software application are accounted for separately from the related software and amortized over the life of the maintenance agreement. General, administrative, overhead, training, non-development data conversion processes, and maintenance costs, as well as the costs associated with the preliminary project and post-implementation stages are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment and intangible assets, are reviewed for potential impairment at such time when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is evaluated when the sum of the expected, undiscounted future net cash flows is less than the carrying amount of the asset. Any impairment loss is measured by comparing the fair value of the asset to its carrying value.
Goodwill
The Company performs an annual review for the potential impairment of the carrying value of goodwill, or more frequently if current events and circumstances indicate a possible impairment. For purposes of its goodwill analysis, the Company has three reporting units, which are also the Company’s operating segments. The Company evaluates the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the quantitative impairment test will not be performed. The factors that were considered in the qualitative analysis included macroeconomic conditions, industry and market considerations, cost factors such as increases in product cost, labor, or other costs that would have a negative effect on earnings and cash flows and other relevant entity-specific events and information.
If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative impairment test is performed. The quantitative impairment test compares the fair values of the Company's reporting units with their carrying amounts, including goodwill. The fair values of the reporting units are estimated using market and discounted cash flow approaches. The assumptions used in the market approach are based on the value of a business through an analysis of multiples of guideline companies and recent sales or offerings of a comparable entity. The assumptions used in the discounted cash flow approach are based on historical and forecasted revenue, operating costs, future economic conditions and other relevant factors. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, only to the extent of the carrying value of goodwill allocated to that reporting unit.
Product Warranty
The Company’s vendors generally warrant the products distributed by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. The Company typically does not independently warrant the products it distributes; however, in several countries where the Company operates, the Company is responsible for defective product as a matter of law. The time period required by law in certain countries exceeds the warranty period provided by the manufacturer. The Company is obligated to provide warranty protection for sales of certain IT products within the European Union (“EU”) for up to
two
years as required under the EU directive where vendors have not affirmatively agreed to provide pass-through protection. To date, the Company has not incurred any significant costs for defective products under these legal requirements. The Company does warrant services with regard to products integrated for its customers. A provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. To date, the Company has not incurred any significant service warranty costs.
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the book basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the fiscal period that includes the enactment date.
The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets, including the scheduled reversal of temporary differences, recent cumulative losses, recent and projected future taxable income and prudent and feasible tax planning strategies. In making this determination, the Company places greater emphasis on recent cumulative losses and recent taxable income due to the inherent lack of subjectivity associated with these factors. In addition, the Company is subject to the periodic examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
Concentration of Credit Risk
The Company’s financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and foreign currency exchange contracts. The Company’s cash and cash equivalents are deposited and/or invested with various financial institutions globally that are monitored on a regular basis by the Company for credit quality.
The Company sells its products to a large base of value-added resellers, direct marketers, retailers and corporate resellers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company has obtained credit insurance, primarily in Europe, which insures a percentage of credit extended by the Company to certain of its customers against possible loss. The Company maintains provisions for estimated credit losses.
No
single customer accounted for more than 10% of the Company’s net sales during fiscal years
2018, 2017 and 2016
.
The Company also enters into foreign currency exchange contracts. In the event of a failure to honor one of these contracts by one of the banks with which the Company has contracted, the Company believes any loss would be limited in most circumstances to the exchange rate differential from the time the contract was executed until the time the contract was settled. The Company’s foreign currency exchange contracts are executed with various financial institutions globally and are monitored on a regular basis by the Company for credit quality.
Foreign Currency Translation and Remeasurement
The assets and liabilities of the Company's foreign subsidiaries for which the local currency is the functional currency are translated into U.S. dollars using the exchange rate in effect at each balance sheet date and income and expense accounts are translated using weighted average exchange rates for each period during the year. Translation gains and losses are reported as components of "accumulated other comprehensive income (loss)", included within shareholders’ equity in the Company's Consolidated Balance Sheet. Gains and losses from foreign currency transactions are included in the Company's Consolidated Statement of Income.
Derivative Financial Instruments
The Company faces exposure to changes in foreign currency exchange rates. The Company reduces its exposure by creating offsetting positions through the use of derivative financial instruments, in the form of foreign currency forward contracts, in situations where there are not offsetting balances that create an economic hedge. Substantially all of these instruments have terms of 90 days or less. It is the Company’s policy to utilize financial instruments to reduce risk where appropriate and prohibit entering into derivative financial instruments for speculative or trading purposes.
Derivative financial instruments used to reduce exposure to foreign currency risk are not designated as hedging instruments. The derivative instruments are marked-to-market each period with gains and losses on these contracts recorded in the Company’s Consolidated Statement of Income within “cost of products sold” for derivative instruments used to manage the Company’s exposure to foreign denominated accounts receivable and accounts payable and within “other (income) expense, net,” for derivative instruments used to manage the Company’s exposure to foreign denominated financing transactions. Such mark-to-market gains and losses are recorded in the period in which their value changes, with the offsetting entry for unsettled positions being recorded to either "prepaid expenses and other assets" or "accrued expenses and other liabilities" in the Company's Consolidated Balance Sheet.
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, and is comprised of “net income” and “other comprehensive income.” The Company’s "accumulated other comprehensive income (loss)" is comprised exclusively of changes in the Company’s currency translation adjustment account.
Stock-Based Compensation
The Company records all equity-based incentive grants to employees and non-employee members of the Company’s Board of Directors in “selling, general and administrative expenses” in the Company’s Consolidated Statement of Income based on their fair values determined on the date of grant. Stock-based compensation expense, reduced for estimated forfeitures, is recognized on a straight-line basis over the requisite service period of the award. The Company estimates forfeiture rates based on its historical experience.
Treasury Stock
Treasury stock is accounted for at cost. Shares repurchased by the Company are held in treasury for general corporate purposes, including issuances under equity incentive and benefit plans. The reissuance of shares from treasury stock is based on the weighted average purchase price of the shares.
Contingencies
The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal and other regulatory matters such as imports and exports, the imposition of international governmental controls, changes in the interpretation and enforcement of international laws (particularly related to items such as duty and taxation), and the impact of local economic conditions and practices, which are all subject to change as events evolve and as additional information becomes available during the administrative and litigation process.
Acquisition, integration and restructuring expenses
Acquisition, integration and restructuring expenses are primarily comprised of professional services, restructuring costs, transaction related costs and other costs related to the acquisition of TS (see Note 5 – Acquisitions for further discussion).
LCD settlements and other, net
The Company has been a claimant in proceedings seeking damages 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 attorney fees and expenses, in "LCD settlements and other, net," in the Consolidated Statement of Income.
Recently Adopted Accounting Standards
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 is 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 is applied prospectively and was effective for the Company beginning with the quarter ended April 30, 2017. The adoption of this standard had no material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued a new standard that simplifies the subsequent measurement of goodwill by eliminating Step 2 from the annual goodwill impairment test. With the elimination of Step 2, entities measure goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, only to the extent of the carrying value of goodwill allocated to that reporting unit. The accounting standard is applied prospectively. The Company early adopted the guidance during the quarter ended April 30, 2017. The adoption of this standard had no material impact on the Company's consolidated financial statements.
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, May and December 2016, the FASB issued additional updates to the new accounting standard which provide supplemental adoption guidance and clarifications. The new standard requires 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 accounting standard is effective for the Company beginning with the quarter ending April 30, 2018. The standard may be adopted using either a full retrospective or a modified retrospective approach. The Company established a project implementation team and developed a multi-phase plan to assess the Company’s business, as well as any changes to processes or systems to adopt the requirements of the new standard.
The Company will adopt the standard utilizing the full retrospective approach. The adoption of this standard is expected to impact the reporting of certain revenues on a gross or net basis, primarily related to changes in the reporting of certain software revenue transactions moving from a gross basis to a net basis. The Company is currently in the process of finalizing its conclusions and expects that the change in the reporting of certain revenues from a gross to a net basis will result in a reduction in revenues for fiscal 2017 and 2018 of approximately
7%
to
10%
. Furthermore, the adoption of this standard is not expected to have a significant impact on gross profit, operating income, net income or cash flows from operations.
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 ending April 30, 2019, with early adoption permitted. The Company is in the process of assessing the impact of this new standard, however, the Company currently expects that the primary impact will be an increase in its total assets and total liabilities due to the recognition of right-of-use assets and corresponding lease liabilities upon implementation for leases currently accounted for as operating leases.
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 does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In August 2016, the FASB issued a new accounting standard that addresses how certain cash receipts and cash payments are presented and classified on the statement of cash flows. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2018, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In October 2016, the FASB issued a new accounting standard that revises the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2018, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued a new accounting standard that clarifies the guidance regarding the changes to the terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2018, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In August 2017, the FASB issued a new accounting standard that amends and simplifies guidance related to hedge accounting to more accurately portray the economics of an entity’s risk management activities in its financial statements. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 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 composition of EPS 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 (see
Note 8 – Employee Benefit Plans
for further discussion) using the treasury stock method. The composition of basic and diluted EPS (in thousands, except per share data) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
|
2018
|
|
2017
|
|
2016
|
Net income
|
|
$
|
116,641
|
|
|
$
|
195,095
|
|
|
$
|
265,736
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
37,957
|
|
|
35,194
|
|
|
35,898
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Equity-based awards
|
|
259
|
|
|
234
|
|
|
199
|
|
Weighted average common shares - diluted
|
|
38,216
|
|
|
35,428
|
|
|
36,097
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
Basic
|
|
$
|
3.07
|
|
|
$
|
5.54
|
|
|
$
|
7.40
|
|
Diluted
|
|
$
|
3.05
|
|
|
$
|
5.51
|
|
|
$
|
7.36
|
|
For the fiscal years ended January 31, 2018 and 2017 there were
3,017
and
5,191
shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive. For the fiscal year ended January 31, 2016 there were
no
shares excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
NOTE 3 — PROPERTY AND EQUIPMENT, NET
The Company's property and equipment (in thousands) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of January 31:
|
|
|
2018
|
|
2017
|
Land
|
|
|
$
|
44,515
|
|
|
$
|
3,957
|
|
Buildings and leasehold improvements
|
|
|
216,344
|
|
|
69,065
|
|
Furniture, fixtures and equipment
|
|
|
319,528
|
|
|
269,032
|
|
Property and equipment
|
|
|
580,387
|
|
|
342,054
|
|
Less: accumulated depreciation
|
|
|
(301,296
|
)
|
|
(267,815
|
)
|
Property and equipment, net
|
|
|
$
|
279,091
|
|
|
$
|
74,239
|
|
Depreciation expense for the fiscal years ended January 31,
2018, 2017 and 2016
totaled
$28.9 million
,
$16.2 million
and
$16.3 million
, respectively.
On October 25, 2017, the Company terminated its synthetic lease arrangement with a group of financial institutions (the "Synthetic Lease") under which the Company previously leased certain logistics centers and office facilities and purchased the real property that was subject to the Synthetic Lease for
$156.2 million
. The properties acquired as a result of the termination of the Synthetic Lease are located in Clearwater and Miami, Florida; Fort Worth, Texas; Fontana, California; Suwanee, Georgia; Swedesboro, New Jersey; and South Bend, Indiana.
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment, for the fiscal year ended
January 31, 2018
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
Europe
|
|
Asia-Pacific
|
|
Total
|
Balance as of February 1, 2017
|
$
|
19,559
|
|
|
$
|
179,462
|
|
|
$
|
—
|
|
|
$
|
199,021
|
|
Goodwill acquired during the year
(1)
|
468,931
|
|
|
176,341
|
|
|
76,889
|
|
|
722,161
|
|
Foreign currency translation adjustment
|
285
|
|
|
39,560
|
|
|
8,141
|
|
|
47,986
|
|
Balance as of January 31, 2018
|
$
|
488,775
|
|
|
$
|
395,363
|
|
|
$
|
85,030
|
|
|
$
|
969,168
|
|
(1)
Amounts related to the acquisition of TS.
In conjunction with the Company’s annual impairment testing, the Company’s goodwill was tested for impairment as of November 1, 2017. The results of the testing indicated that the fair value of each of the Company’s reporting units was greater than its carrying value. As a result, no goodwill impairment was recorded during the fiscal year ended
January 31, 2018
.
The Company's intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net book
value
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net book
value
|
Capitalized software and
development costs
|
$
|
458,799
|
|
|
$
|
(318,110
|
)
|
|
$
|
140,689
|
|
|
$
|
320,113
|
|
|
$
|
(269,872
|
)
|
|
$
|
50,241
|
|
Customer and vendor relationships
|
1,098,958
|
|
|
(197,517
|
)
|
|
901,441
|
|
|
175,872
|
|
|
(107,267
|
)
|
|
68,605
|
|
Other intangible assets
|
92,573
|
|
|
(47,931
|
)
|
|
44,642
|
|
|
40,555
|
|
|
(28,725
|
)
|
|
11,830
|
|
Total
|
$
|
1,650,330
|
|
|
$
|
(563,558
|
)
|
|
$
|
1,086,772
|
|
|
$
|
536,540
|
|
|
$
|
(405,864
|
)
|
|
$
|
130,676
|
|
Other intangible assets is primarily comprised of trade names from previous acquisitions. The Company capitalized intangible assets of approximately
$1.0 billion
,
$14.6 million
and
$29.2 million
for the fiscal years ended January 31,
2018, 2017 and 2016
, respectively. For fiscal 2018, these capitalized assets primarily relate to approximately
$1.0 billion
of intangible assets recorded in conjunction with the acquisition of TS, including
$875 million
related to customer relationships,
$75 million
of capitalized software and development costs and
$44 million
related to trade names (see Note 5 - Acquisitions for further discussion). For fiscal 2017, these capitalized assets related primarily to software and software development expenditures to be used in the Company's operations. For fiscal 2016, these capitalized assets included acquired identifiable intangible assets and software and software development expenditures to be used in the Company's operations.
Capitalized software and development costs amortization expense for the fiscal years ended January 31,
2018, 2017 and 2016
totaled
$32.0 million
,
$17.1 million
and
$17.7 million
, respectively. Other intangible assets amortization expense for the fiscal years ended January 31, 2018, 2017 and 2016 totaled
$89.1 million
,
$21.1 million
and
$23.3 million
, respectively. Estimated amortization expense of existing capitalized software and development costs and other intangible assets (which includes customer and vendor relationships and other intangible assets) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year:
|
Capitalized software and development costs
|
|
Other intangible assets
|
|
Total
|
2019
|
$
|
30,503
|
|
|
$
|
90,426
|
|
|
$
|
120,929
|
|
2020
|
26,511
|
|
|
84,839
|
|
|
111,350
|
|
2021
|
22,715
|
|
|
84,787
|
|
|
107,502
|
|
2022
|
19,118
|
|
|
83,120
|
|
|
102,238
|
|
2023
|
8,813
|
|
|
74,803
|
|
|
83,616
|
|
NOTE 5 — ACQUISITIONS
Acquisition of TS
On September 19, 2016, Tech Data entered into an interest purchase agreement, as subsequently amended, with Avnet to acquire all the shares of TS. TS delivers data center hardware and software solutions and services. The TS acquisition strengthens the Company's end-to-end solutions and deepens its value added capabilities in the data center and next-generation technologies. The addition of TS also extends the Company's geographic reach into the Asia-Pacific region while broadening its capabilities in Europe and the Americas, including re-entering Latin America with a focus on the delivery of new technologies that drive and complement the data center in this market. Pursuant to the interest purchase agreement, and subject to the terms and conditions contained therein, at the closing of the acquisition on February 27, 2017, Tech Data acquired all of the outstanding shares of TS for an aggregate purchase price of approximately
$2.8 billion
, comprised of approximately
$2.5 billion
in cash, including estimated closing adjustments, and
2,785,402
shares of the Company's common stock, valued at approximately
$247 million
based on the closing price of the Company's common stock on February 27, 2017.
The Company has accounted for the TS acquisition as a business combination and allocated the purchase price to the fair values of assets acquired and liabilities assumed. The Company has completed its evaluation of assets acquired and liabilities assumed and finalized its estimate of the purchase price. The final cash consideration is subject to certain working capital and other adjustments, as determined through the process established in the interest purchase agreement, which has not yet been agreed upon by the Company and Avnet. The company has accrued its best estimate of the expected final purchase price and the resulting liability to Avnet. However, the final purchase price may vary significantly from these estimates once these adjustments are finalized. As the measurement period has concluded, the impact of any adjustments to the purchase price will be recorded in the Consolidated Statement of Income in the period such change occurs.
During the year ended January 31, 2018, the Company updated its preliminary estimated fair values of certain assets acquired and liabilities assumed. This includes an increase in goodwill of
$229 million
, a decrease in intangible assets of
$116 million
, a decrease in other long-term assets of
$22 million
, a decrease in current assets of
$19 million
and a decrease in total liabilities of
$12 million
.
The allocation of the purchase price to assets acquired and liabilities assumed is as follows:
|
|
|
|
|
(in millions)
|
|
Cash
|
$
|
176
|
|
Accounts receivable
|
1,829
|
|
Inventories
|
239
|
|
Prepaid expenses and other current assets
|
100
|
|
Property and equipment, net
|
62
|
|
Goodwill
|
722
|
|
Intangible assets
|
919
|
|
Other assets, net
|
158
|
|
Total assets
|
4,205
|
|
|
|
Other current liabilities
|
1,170
|
|
Revolving credit loans and long-term debt
|
134
|
|
Other long-term liabilities
|
99
|
|
Total liabilities
|
1,403
|
|
|
|
Purchase price
|
$
|
2,802
|
|
Identifiable intangible assets are comprised of approximately
$875 million
of customer relationships with a weighted-average amortization period of
14 years
and
$44 million
of trade names with an amortization period of
5 years
. Goodwill is the excess of the consideration transferred over the net assets recognized and primarily represents the expected revenue and cost synergies of the combined company and assembled workforce. Approximately
$1.2 billion
of the goodwill and identifiable intangible assets are expected to be deductible for tax purposes. The Company has recorded certain indemnification assets for expected amounts to be received from Avnet related to liabilities recorded for unrecognized tax benefits and other items (See
Note 7 – Income Taxes
for further discussion).
Included within the Company’s Consolidated Statement of Income are estimated net sales for the year ended January 31, 2018, of approximately
$8.9 billion
from TS subsequent to the acquisition date of February 27, 2017. As the Company began integrating certain sales and other functions after the closing of the acquisition, these amounts represent an estimate of the TS net sales for the fiscal year ended January 31, 2018. It is not necessarily indicative of how the TS operations would have performed on a stand-alone basis. As a result of certain integration activities subsequent to the date of acquisition, it is impracticable to disclose earnings from TS for the period subsequent to the acquisition date.
The following table presents unaudited supplemental pro forma information as if the TS acquisition had occurred at the beginning of fiscal 2017. The pro forma results presented are based on combining the stand-alone operating results of the Company and TS for the periods prior to the acquisition date after giving effect to certain adjustments related to the transaction. The pro forma results exclude any benefits that may result from potential cost synergies of the combined company and certain non-recurring costs. As a result, the pro forma information below does not purport to present what actual results would have been had the acquisition actually been consummated on the date indicated and it is not necessarily indicative of the results of operations that may result in the future.
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
2018
|
|
2017
|
|
(in millions)
|
(unaudited)
|
Pro forma net sales
|
$
|
37,508
|
|
|
$
|
35,482
|
|
|
Pro forma net income
|
$
|
129
|
|
|
$
|
232
|
|
|
Adjustments reflected in the pro forma results include the following:
|
|
•
|
Amortization of acquired intangible assets
|
|
|
•
|
Interest costs associated with the transaction
|
|
|
•
|
Removal of certain non-recurring transaction costs of
$20 million
and
$12 million
in fiscal 2018 and 2017, respectively
|
|
|
•
|
Tax effects of adjustments based on an estimated statutory tax rate
|
Acquisition, integration and restructuring expenses
Acquisition, integration and restructuring expenses are comprised of professional services, restructuring costs, transaction related costs and other costs related to the acquisition of TS. Professional services are primarily comprised of integration related activities, including professional fees for project management, accounting, tax and IT consulting services. Restructuring costs are comprised of severance and facility exit costs. Transaction related costs primarily consist of investment banking fees, legal expenses and due diligence costs incurred in connection with the completion of the transaction. Other costs primarily consist of payroll related costs including retention, stock compensation, relocation and travel expenses, as well as other IT related costs, incurred as part of the integration of TS.
Acquisition, integration and restructuring expenses for the years ended January 31, 2018 and 2017 are comprised of the following
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
Professional services
|
$
|
49,599
|
|
|
$
|
14,338
|
|
Restructuring costs
|
35,070
|
|
|
—
|
|
Transaction related costs
|
20,167
|
|
|
12,083
|
|
Other
|
31,436
|
|
|
2,545
|
|
Total
|
$
|
136,272
|
|
|
$
|
28,966
|
|
During the year ended January 31, 2018, the Company recorded restructuring costs of
$16.1 million
in the Americas and
$19.0 million
in Europe. The accrued restructuring charges are included in “accrued expenses and other liabilities” in the Consolidated Balance Sheet.
Restructuring activity during the year ended January 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Facility Exit Costs
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
Fiscal 2018 restructuring expenses
|
|
$
|
29,717
|
|
|
$
|
5,353
|
|
|
$
|
35,070
|
|
Cash payments
|
|
(16,830
|
)
|
|
(3,928
|
)
|
|
(20,758
|
)
|
Foreign currency translation
|
|
479
|
|
|
205
|
|
|
684
|
|
Balance at January 31, 2018
|
|
$
|
13,366
|
|
|
$
|
1,630
|
|
|
$
|
14,996
|
|
NOTE 6 — DEBT
The carrying value of the Company's outstanding debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
As of January 31:
|
2018
|
|
2017
|
Senior Notes, interest at 3.70% payable semi-annually, due February 15, 2022
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Senior Notes, interest at 4.95% payable semi-annually, due February 15, 2027
|
500,000
|
|
|
500,000
|
|
Senior Notes, interest at 3.75% payable semi-annually, due September 21, 2017
|
—
|
|
|
350,000
|
|
Less—unamortized debt discount and debt issuance costs
|
(8,678
|
)
|
|
(10,633
|
)
|
Senior Notes, net
|
991,322
|
|
|
1,339,367
|
|
Term Loans, interest rate of 3.07% at January 31, 2018
|
500,000
|
|
|
—
|
|
Other committed and uncommitted revolving credit facilities, average interest rate of 6.07% and 8.35% at January 31, 2018 and January 31, 2017, respectively
|
119,826
|
|
|
23,680
|
|
Other long-term debt
|
26,761
|
|
|
—
|
|
|
1,637,909
|
|
|
1,363,047
|
|
Less—current maturities (included as “revolving credit loans and current maturities of long-term debt, net”)
|
(132,661
|
)
|
|
(373,123
|
)
|
Total long-term debt
|
$
|
1,505,248
|
|
|
$
|
989,924
|
|
Senior Notes
In January 2017, the Company issued
$500.0 million
aggregate principal amount of
3.70%
Senior Notes due February 15, 2022 (the "3.70% Senior Notes") and
$500.0 million
aggregate principal amount of
4.95%
Senior Notes due February 15, 2027 (the "4.95% Senior Notes") (collectively the "2017 Senior Notes"), resulting in proceeds of approximately
$989.9 million
, net of debt discount and debt issuance costs of approximately
$1.6 million
and
$8.5 million
, respectively. The net proceeds from the issuance of the 2017 Senior Notes were used to fund a portion of the purchase price of the acquisition of TS. The debt discount and debt issuance costs incurred in connection with the public offering are amortized over the life of the 2017 Senior Notes as additional interest expense using the effective interest method. The Company pays interest on the 2017 Senior Notes semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2017. The interest rate payable on the 2017 Senior Notes will be subject to adjustment from time to time if the credit rating assigned to such series of notes changes. At no point will the interest rate be reduced below the interest rate payable on the notes on the date of the initial issuance or increase more than 2.00% above the interest rate payable on the notes of the series on the date of their initial issuance. The 2017 Senior Notes are senior unsecured obligations of the Company and will rank equally with all other unsecured and unsubordinated indebtedness of the Company from time to time outstanding.
The Company, at its option, may redeem the 3.70% Senior Notes at any time prior to January 15, 2022 and the 4.95% Senior Notes at any time prior to November 15, 2026, in each case in whole or in part, at a redemption price equal to the greater of (i)
100%
of the principal amount of the 2017 Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2017 Senior Notes to be redeemed, discounted to the date of redemption on a semi-annual basis at a rate equal to the sum of the applicable Treasury Rate plus
30
basis points for the 3.70% Senior Notes and
40
basis points for the 4.95% Senior Notes, plus the accrued and unpaid interest on the principal amount being redeemed up to the date of redemption. The Company may also redeem the 2017 Senior Notes, at any time in whole or from time to time in part, on or after January 15, 2022 for the 3.70% Senior Notes and November 15, 2026 for the 4.95% Senior Notes, in each case, at a redemption price equal to 100% of the principal amount of the 2017 Senior Notes to be redeemed.
In September 2012, the Company issued
$350.0 million
aggregate principal amount of
3.75%
Senior Notes in a public offering (the “3.75% Senior Notes”). The 3.75% Senior Notes matured on September 21, 2017 and the Company repaid the remaining principal balance of
$350.0 million
.
Other Credit Facilities
The Company has a
$1.25 billion
revolving credit facility with a syndicate of banks (the “Credit Agreement”), which among other things, provides for (i) a maturity date of November 2, 2021 and (ii) an interest rate on borrowings, facility fees and letter of credit fees based on the Company’s non-credit enhanced senior unsecured debt rating as determined by Standard & Poor’s Rating Service and Moody’s Investor Service. The Company pays interest on advances under the Credit Agreement at LIBOR (or similar interbank offered rates depending on currency draw) plus a predetermined margin that is based on the Company’s debt rating. There were
no
amounts outstanding under the Credit Agreement at January 31,
2018 and 2017
.
The Company entered into a term loan credit agreement on November 2, 2016 with a syndicate of banks (the "Term Loan Credit Agreement") which provides for the borrowing of (i) a tranche of senior unsecured term loans in an original aggregate principal amount of
$250.0 million
and maturing three years after the funding date and (ii) a tranche of senior unsecured term loans in an original aggregate principal amount of
$750.0 million
and maturing five years after the funding date. The Company pays interest on advances under the Term Loan Credit Agreement at a variable rate based on LIBOR (or similar interbank offered rates depending on currency draw) plus a predetermined margin that is based on the Company's debt rating. In connection with the acquisition of TS on February 27, 2017, the Company borrowed
$1.0 billion
under the Term Loan Credit Agreement in order to fund a portion of the cash consideration paid to Avnet. The borrowings were comprised of a
$250.0 million
tranche of three-year senior unsecured term loans (the “2020 Term Loans”) and a
$750.0 million
tranche of five-year senior unsecured term loans (the “2022 Term Loans”). The 2020 Term Loans were repaid in full during fiscal 2018.
The outstanding principal amount of the 2022 Term Loans is payable in equal quarterly installments of (i) for the first three years after the funding date,
5.0%
per annum of the initial principal amount and (ii) for the fourth and fifth years after the funding date,
10.0%
per annum of the initial principal amount, with the remaining balance payable on February 27, 2022. The Company may repay the 2022 Term Loans, at any time in whole or in part, without penalty or premium prior to the maturity date. Quarterly installment payments due under the 2022 Term Loans are reduced by the amount of any prepayments made by the Company. During fiscal 2018, the Company made principal payments of
$250.0 million
on the 2022 Term Loans. At January 31, 2018, there was
$500.0 million
outstanding on the 2022 Term Loans at an interest rate of
3.07%
.
The Company also has an agreement with a syndicate of banks (the “Receivables Securitization Program”) that allows the Company to transfer an undivided interest in a designated pool of U.S. accounts receivable, on an ongoing basis, to provide collateral for borrowings up to a maximum of
$750.0 million
. Under this program, the Company transfers certain U.S. trade receivables into a wholly-owned bankruptcy remote special purpose entity. Such receivables, which are recorded in the Consolidated Balance Sheet, totaled
$1.483 billion
and
$748.6 million
at January 31,
2018 and 2017
, respectively. As collections reduce accounts receivable balances included in the collateral pool, the Company may transfer interests in new receivables to bring the amount available to be borrowed up to the maximum. This program has a maturity date of August 8, 2019, and interest is to be paid on advances under the Receivables Securitization Program at the applicable commercial paper or LIBOR rate plus an agreed-upon margin. There were
no
amounts outstanding under the Receivables Securitization Program at January 31,
2018 and 2017
.
In addition to the facilities described above, the Company has various other committed and uncommitted lines of credit and overdraft facilities totaling approximately
$485.3 million
at
January 31, 2018
to support its operations. Most of these facilities are provided on an unsecured, short-term basis and are reviewed periodically for renewal. There was
$119.8 million
outstanding on these facilities at
January 31, 2018
, at a weighted average interest rate of
6.07%
, and there was
$23.7 million
outstanding at
January 31, 2017
, at a weighted average interest rate of
8.35%
.
At
January 31, 2018
, the Company had also issued standby letters of credit of
$28.0 million
. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The issuance of these letters of credit reduces the Company's borrowing availability under certain of the above-mentioned credit facilities.
Certain of the Company’s credit facilities contain limitations on the amounts of annual dividends and repurchases of common stock and require compliance with other obligations, warranties and covenants. The financial ratio covenants under these credit facilities include a maximum total leverage ratio and a minimum interest coverage ratio. At
January 31, 2018
, the Company was in compliance with all such financial covenants.
Future payments of debt at
January 31, 2018
and for succeeding fiscal years are as follows (in thousands):
|
|
|
|
|
Fiscal Year:
|
|
2019
|
$
|
132.7
|
|
2020
|
7.2
|
|
2021
|
4.8
|
|
2022
|
14.4
|
|
2023
|
987.5
|
|
Thereafter
|
500.0
|
|
Total principal payments
|
$
|
1,646.6
|
|
NOTE 7 — INCOME TAXES
Significant components of the provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
2018
|
|
2017
|
|
2016
|
Current tax expense:
|
|
|
|
|
|
Federal
|
$
|
131,107
|
|
|
$
|
37,724
|
|
|
$
|
71,502
|
|
State
|
6,515
|
|
|
4,030
|
|
|
5,989
|
|
Foreign
|
49,082
|
|
|
30,914
|
|
|
36,804
|
|
Total current tax expense
|
186,704
|
|
|
72,668
|
|
|
114,295
|
|
Deferred tax (benefit) expense:
|
|
|
|
|
|
Federal
|
(1,129
|
)
|
|
(8,380
|
)
|
|
(3,984
|
)
|
State
|
363
|
|
|
(799
|
)
|
|
543
|
|
Foreign
|
(3,495
|
)
|
|
(1,823
|
)
|
|
5,828
|
|
Total deferred tax (benefit) expense
|
(4,261
|
)
|
|
(11,002
|
)
|
|
2,387
|
|
|
$
|
182,443
|
|
|
$
|
61,666
|
|
|
$
|
116,682
|
|
The reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
2018
|
|
2017
|
|
2016
|
U.S. statutory rate
|
33.8
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.1
|
|
|
0.8
|
|
|
1.1
|
|
Net changes in deferred tax valuation allowances
|
1.2
|
|
|
(3.4
|
)
|
|
0.0
|
|
Tax on foreign earnings different than U.S. rate
|
(6.7
|
)
|
|
(9.9
|
)
|
|
(7.4
|
)
|
Nondeductible interest
|
1.0
|
|
|
2.1
|
|
|
1.6
|
|
Effect of company-owned life insurance
|
(1.0
|
)
|
|
(0.7
|
)
|
|
0.2
|
|
U.S. Tax Reform transition tax
|
33.8
|
|
|
0.0
|
|
|
0.0
|
|
U.S. Tax Reform impact of rate change on deferred taxes
|
(1.9
|
)
|
|
0.0
|
|
|
0.0
|
|
Other, net
|
(0.3
|
)
|
|
0.1
|
|
|
0.0
|
|
|
61.0
|
%
|
|
24.0
|
%
|
|
30.5
|
%
|
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) which significantly revised U.S. corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate from
35%
to
21%
and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. Due to the complexities involved in accounting for U.S. Tax Reform, the SEC issued Staff Accounting Bulletin (“SAB”) 118 which requires that the Company include in its financial statements the reasonable estimate of the impact of U.S. Tax Reform on earnings to the extent such reasonable estimate has been determined. Accordingly, in fiscal 2018, the Company recorded income tax expenses of
$95.4 million
, which represents the Company’s reasonable estimate of the impact of enactment of U.S. Tax Reform. The amounts recorded include income tax expenses of
$101.1 million
for the transition tax and a net income tax benefit of
$5.7 million
related to the remeasurement of net deferred tax liabilities as a result of the change in the U.S. federal corporate income tax rate.
SAB 118 allows the Company to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. The Company considers both the recognition of the transition tax and the remeasurement of deferred taxes incomplete. The final impact from the enactment of U.S. Tax Reform may differ from the reasonable estimate of
$95.4 million
due to substantiation of foreign-based earnings and profits and foreign tax credits and the utilization of those foreign tax credits. Additionally, new guidance from regulators, interpretation of the law, and refinement of the Company’s estimates from ongoing analysis of data and tax positions may change the provisional amounts recorded. Any changes in the provisional amount recorded will be reflected in income tax expense in the period they are identified.
Additionally, U.S. Tax Reform subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The Company can make an accounting policy election to either treat taxes due on the GILTI as a current period expense, or factor such amounts into our measurement of deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating and has not yet determined its accounting policy.
At January 31, 2018, there are
$959.4 million
of consolidated cumulative undistributed earnings of foreign subsidiaries. Historically, such earnings were indefinitely reinvested outside of the United States. Due to the enactment of US Tax Reform, the Company is currently in the process of evaluating this position. As a result, deferred tax liabilities with respect to state income taxes and foreign withholding taxes have not been provided on undistributed earnings of foreign subsidiaries, however, the Company does not expect that the amount would be material to its consolidated financial statements.
The components of pretax income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
2018
|
|
2017
|
|
2016
|
U.S.
|
$
|
115,041
|
|
|
$
|
92,067
|
|
|
$
|
195,219
|
|
Foreign
|
184,043
|
|
|
164,694
|
|
|
187,199
|
|
|
$
|
299,084
|
|
|
$
|
256,761
|
|
|
$
|
382,418
|
|
The significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of January 31:
|
2018
|
|
2017
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
$
|
106,560
|
|
|
$
|
48,910
|
|
Capitalized marketing program costs
|
6,104
|
|
|
7,525
|
|
Goodwill
|
16,496
|
|
|
7,581
|
|
Deferred costs currently deductible
|
7,558
|
|
|
4,110
|
|
Other, net
|
12,540
|
|
|
5,241
|
|
Total deferred tax liabilities
|
149,258
|
|
|
73,367
|
|
Deferred tax assets:
|
|
|
|
Accrued liabilities
|
54,970
|
|
|
41,509
|
|
Loss carryforwards
|
127,881
|
|
|
92,338
|
|
Amortizable goodwill
|
1,377
|
|
|
2,191
|
|
Depreciation and amortization
|
13,997
|
|
|
4,547
|
|
Disallowed interest expense
|
11,057
|
|
|
6,249
|
|
Acquisition and transaction related costs
|
3,823
|
|
|
5,605
|
|
Other, net
|
14,527
|
|
|
10,928
|
|
|
227,632
|
|
|
163,367
|
|
Less: valuation allowances
|
(80,714
|
)
|
|
(46,764
|
)
|
Total deferred tax assets
|
146,918
|
|
|
116,603
|
|
Net deferred tax (liability) asset
|
$
|
(2,340
|
)
|
|
$
|
43,236
|
|
In fiscal 2018 and 2017, the Company recorded an income tax (expense)/benefit of
$(1.2) million
and
$12.5 million
, respectively, related to changes in deferred tax valuation allowances in certain European jurisdictions. The net change in the deferred tax valuation allowances in fiscal 2018 was an increase of
$33.9 million
primarily resulting from deferred tax valuation allowances recorded in various jurisdictions related to the acquisition of TS. The net change in the deferred tax valuation allowances in fiscal 2017 was a decrease of
$13.4 million
primarily resulting from the reversal of deferred tax valuation allowances related to certain European jurisdictions as discussed previously.
The valuation allowances at both January 31,
2018 and 2017
primarily relate to foreign net operating loss carryforwards. The Company’s net operating loss carryforwards totaled
$576.8 million
and
$432.8 million
at January 31,
2018 and 2017
, respectively. The majority of the net operating losses have an indefinite carryforward period with the remaining portion expiring in fiscal years 2019 through 2034. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets. To the extent that the Company generates consistent taxable income within those operations with valuation allowances, the Company may reduce the valuation allowances, thereby reducing income tax expense and increasing net income in the period the determination is made.
The estimates and assumptions used by the Company in computing the income taxes reflected in the Company’s consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when such returns are finalized or the related adjustments are identified.
A reconciliation of the beginning and ending balances of the total amount of gross unrecognized tax benefits, excluding accrued interest and penalties, for the years ended January 31,
2018, 2017 and 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended January 31:
|
2018
|
|
2017
|
|
2016
|
Gross unrecognized tax benefits at beginning of period
|
$
|
18,305
|
|
|
$
|
12,989
|
|
|
$
|
5,125
|
|
Increases in tax positions for prior years
|
66,180
|
|
|
5,443
|
|
|
8,443
|
|
Decreases in tax positions for prior years
|
(3,727
|
)
|
|
(118
|
)
|
|
(348
|
)
|
Increases in tax positions for current year
|
164
|
|
|
1,022
|
|
|
106
|
|
Expiration of statutes of limitation
|
(6,924
|
)
|
|
(292
|
)
|
|
(77
|
)
|
Settlements
|
(3,515
|
)
|
|
(370
|
)
|
|
(104
|
)
|
Changes due to translation of foreign currencies
|
1,769
|
|
|
(369
|
)
|
|
(156
|
)
|
Gross unrecognized tax benefits at end of period
|
$
|
72,252
|
|
|
$
|
18,305
|
|
|
$
|
12,989
|
|
At January 31,
2018, 2017 and 2016
, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was
$38.1 million
,
$12.5 million
and
$10.1 million
, respectively. In connection with the acquisition of TS, pursuant to the interest purchase agreement, Avnet agreed to indemnify the Company in relation to certain tax matters. As a result, the Company has recorded certain indemnification assets for expected amounts to be received from Avnet related to liabilities recorded for unrecognized tax benefits. During the year ended January 31, 2018, due to the expiration of statutes of limitation, the Company recorded a benefit in income tax expense of
$6.5 million
related to the reduction of certain liabilities recorded for unrecognized tax benefits at the date of acquisition. As a result, the Company recorded an expense of
$6.5 million
during the year ended January 31, 2018, which is included in “selling, general and administrative expenses” in the Consolidated Statement of Income, to reduce the corresponding indemnification asset. The net reduction of these liabilities for unrecognized tax benefits and indemnification assets had no impact on the Company's net income.
Unrecognized tax benefits that have a reasonable possibility of significantly decreasing within the 12 months following
January 31, 2018
totaled
$35.4 million
, including
$6.2 million
that would impact the effective tax rate if recognized, primarily related to the foreign taxation of certain transactions. Consistent with prior periods, the Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company’s accrued interest at
January 31, 2018
, would not have a material impact on the effective tax rate if reversed. The provision for income taxes for each of the fiscal years ended January 31,
2018, 2017 and 2016
includes interest expense on unrecognized income tax benefits for current and prior years which is not significant to the Company’s Consolidated Statement of Income. The change in the balance of accrued interest for fiscal
2018, 2017 and 2016
, includes the current year end accrual, an interest benefit resulting from the expiration of statutes of limitation, and the translation adjustments on foreign currencies.
The Company conducts business primarily in the Americas, Europe and Asia-Pacific, and as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign tax jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Company is no longer subject to examinations by the Internal Revenue Service for years before fiscal 2015. Income tax returns of various foreign jurisdictions for fiscal 2006 and forward are currently under taxing authority examination or remain subject to audit.
NOTE 8 — EMPLOYEE BENEFIT PLANS
Overview of Equity Incentive Plans
At
January 31, 2018
, the Company had awards outstanding from two equity-based compensation plans, only one of which is currently active. The active plan was approved by the Company’s shareholders in June 2009 and includes
4.0 million
shares available for grant, of which approximately
1.6 million
shares remain available for future grant at
January 31, 2018
. 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 are used by the Company to attract talent and as a retention mechanism for the award recipients and have a maximum term of
ten
years, unless a shorter period is specified by the Compensation Committee of the Company’s 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. 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.
For the fiscal years ended January 31,
2018, 2017 and 2016
, the Company recorded
$29.4 million
,
$13.9 million
and
$14.9 million
, respectively, of stock-based compensation expense, and related income tax benefits of
$9.6 million
,
$4.6 million
and
$4.6 million
, respectively. There was
no
cash received from equity-based incentives exercised during the fiscal years ended January 31,
2018
and 2017 and
$0.6 million
of cash received from equity-based incentives exercised in
2016
. The actual benefit received from the tax deduction from the exercise of equity-based incentives was
$5.9 million
,
$4.8 million
and
$5.2 million
for the fiscal years ended January 31,
2018
,
2017
and
2016
, respectively.
Restricted Stock
The Company’s restricted stock awards are primarily in the form of restricted stock units (“RSUs”) and typically vest in annual installments lasting between
one
and
three
years from the date of grant, unless a different vesting schedule is mandated by country law. All of the RSUs have a fair market value equal to the closing price of the Company’s common stock on the date of grant. Stock-based compensation expense includes
$25.8 million
,
$13.3 million
and
$14.8 million
related to RSUs during fiscal
2018, 2017 and 2016
, respectively.
A summary of the Company’s RSU activity for the fiscal year ended
January 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average grant date fair value
|
Nonvested at January 31, 2017
|
487,596
|
|
|
$
|
67.86
|
|
Granted
|
454,480
|
|
|
92.08
|
|
Vested
|
(194,145
|
)
|
|
65.64
|
|
Canceled
|
(47,399
|
)
|
|
81.73
|
|
Nonvested at January 31, 2018
|
700,532
|
|
|
83.25
|
|
The total fair value of RSUs which vested during the fiscal years ended January 31,
2018, 2017 and 2016
is
$12.7 million
,
$11.4 million
and
$15.4 million
, respectively. The weighted-average estimated fair value of the
222,095
RSUs granted during the fiscal year ended January 31, 2017 was $
78.42
per share. The weighted-average estimated fair value of the
275,539
RSUs granted during the fiscal year ended January 31, 2016 was
$59.30
per share. As of
January 31, 2018
, the unrecognized stock-based compensation expense related to non-vested RSUs was
$29.8 million
, which the Company expects to be recognized over the next
3 years
(over a remaining weighted average period of
1.7
years).
Performance based restricted stock units
The Company's performance based restricted stock unit awards ("PRSUs") are subject to vesting conditions, including meeting specified cumulative performance objectives over a period of
3 years
. Each performance based award recipient could vest in 0% to 150% of the target shares granted contingent on the achievement of the Company's financial performance metrics. Stock-based compensation expense includes
$3.3 million
and
$0.4 million
related to PRSUs during fiscal 2018 and 2017, respectively.
A summary of the Company’s PRSU activity, assuming maximum achievement, for the year ended January 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average grant date fair value
|
Nonvested at January 31, 2017
|
17,486
|
|
|
$
|
78.42
|
|
Granted
|
159,148
|
|
|
90.95
|
|
Canceled
|
(5,949
|
)
|
|
90.95
|
|
Nonvested at January 31, 2018
|
170,685
|
|
|
89.67
|
|
As of January 31, 2018, the unrecognized stock-based compensation expense related to non-vested PRSUs was
$7.9 million
, which the Company expects to be recognized over the next
3 years
(over a remaining weighted average period of
1.9
years). The weighted-average estimated fair value of the
18,563
PRSUs granted during the fiscal year ended January 31, 2017 was
$78.42
per share.
Employee Stock Purchase Plan
Under the 1995 Employee Stock Purchase Plan (the “ESPP”), the Company is authorized to issue up to
1.0 million
shares of common stock to eligible employees in the Company’s U.S. and Canadian subsidiaries. Under the terms of the ESPP, employees can choose to have a fixed dollar amount or percentage deducted from their bi-weekly compensation to purchase the Company’s common stock and/or elect to purchase shares once per calendar quarter. The purchase price of the stock is
85%
of the market value on the purchase date and employees are limited to a maximum purchase of
$25,000
in fair market value each calendar year. From the inception of the ESPP through
January 31, 2018
, the Company has issued
531,387
shares of common stock to the ESPP. All shares purchased under the ESPP must be held by the employees for a period of
one
year. Stock-based compensation expense related to the ESPP was insignificant during fiscal
2018, 2017 and 2016
.
Retirement Savings Plan
The Company sponsors the Tech Data Corporation 401(k) Savings Plan (the “401(k) Savings Plan”) for its U.S. employees. At the Company’s discretion, participant deferrals are matched in cash, in an amount equal to
50%
of the first
6%
of participant deferrals and participants are fully vested following
four
years of qualified service. Aggregate contributions made by the Company to the 401(k) Savings Plan were
$6.4 million
,
$3.1 million
and
$2.8 million
for fiscal
2018, 2017 and 2016
, respectively.
NOTE 9 — SHAREHOLDERS' EQUITY
The Company’s common share repurchase and issuance activity for fiscal
2018 and 2017
is summarized as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted- average
price per share
|
Treasury stock balance at January 31, 2016
|
24,163,402
|
|
|
$
|
44.59
|
|
Shares of treasury stock reissued for equity incentive plans
|
(144,419
|
)
|
|
|
Treasury stock balance at January 31, 2017
|
24,018,983
|
|
|
44.59
|
|
Shares of treasury stock reissued for equity incentive plans
|
(149,609
|
)
|
|
|
Shares of treasury stock reissued for acquisition of TS
|
(2,785,402
|
)
|
|
|
Treasury stock balance at January 31, 2018
|
21,083,972
|
|
|
$
|
44.59
|
|
As part of the acquisition of TS, the Company reissued
2,785,402
shares of Tech Data's common stock out of treasury stock (see Note 5 - Acquisitions for further discussion). There were
no
common shares repurchased by the Company during the years ended January 31, 2018 and 2017. The reissuance of shares from treasury stock is based on the weighted average purchase price of the shares.
NOTE 10 — 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
Fair value measurement category
|
|
Fair value measurement category
|
|
Level 1
|
Level 2
|
Level 3
|
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
—
|
|
|
|
|
$
|
1,000,010
|
|
|
|
Foreign currency forward contracts
|
|
$
|
5,025
|
|
|
|
|
$
|
2,264
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
11,675
|
|
|
|
|
$
|
9,711
|
|
|
The Company’s cash equivalents consist primarily of highly liquid investments in money market funds with maturity periods of three months or less.
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 Company’s 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 Note 11 – Derivative Instruments for further discussion).
The Company utilizes life insurance policies to fund the Company’s nonqualified deferred compensation plan. The life insurance asset, which is recorded in the Company's Consolidated Balance Sheet in "other assets, net", 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, which is recorded in the Company's Consolidated Balance Sheet in "accrued expenses and other liabilities," is 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
$44.8 million
and
$44.7 million
, respectively, at January 31, 2018 and
$35.2 million
and
$35.3 million
, respectively, at January 31, 2017.
The carrying value of the 3.70% Senior Notes, 4.95% Senior Notes and 3.75% Senior Notes (collectively the "Senior Notes") discussed in Note 6 - Debt represents cost less unamortized debt discount and debt issuance costs. The estimated fair value of the Senior Notes is based upon quoted market information (Level 1). The estimated fair value of the Senior Notes was
$1.020 billion
and
$1.354 billion
, respectively, at January 31, 2018 and 2017 and the carrying value was
$991.3 million
and
$1.339 billion
, respectively, at January 31, 2018 and 2017. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of debt outstanding pursuant to revolving credit facilities and the
$500 million
outstanding under the Term Loan Credit Agreement approximate fair value as the majority of these instruments have variable interest rates which approximate current market rates (Level 2 criteria).
NOTE 11 — 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: Australian dollar, British pound, Canadian dollar, Czech koruna, Danish krone, euro, Indian rupee, Indonesian rupiah, Mexican peso, Norwegian krone, Polish zloty, Singapore dollar, 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 loss of
$32.7 million
, loss of
$4.3 million
and gain of
$9.0 million
, respectively, for the fiscal years ended January 31,
2018
,
2017
and
2016
. 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 foreign currency forward contracts are also discussed in Note 10 – Fair Value Measurements.
The Company’s average notional amounts of derivative financial instruments outstanding during the fiscal years ended January 31,
2018, 2017 and 2016
were approximately
$1.0 billion
,
$0.6 billion
and
$0.6 billion
, respectively, with average maturities of
31
days,
29
days and
30
days, respectively. As discussed above, under the Company’s hedging policies, gains and losses on the derivative financial instruments have been and would be expected to continue to be largely offset by the gains and losses on the underlying assets or liabilities being hedged.
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases logistics centers, office facilities and certain equipment under non-cancelable operating leases, which expire at various dates through fiscal 2030. Fair value renewal and escalation clauses exist for a substantial portion of the operating leases. Rental expense for all operating leases, including minimum commitments under an agreement for data center services, totaled
$83.6 million
,
$53.0 million
and
$45.3 million
in fiscal years
2018, 2017 and 2016
, respectively. Future minimum lease payments at
January 31, 2018
, under all such leases, including minimum commitments under agreements for data center services, for succeeding fiscal years and thereafter are as follows (in thousands):
|
|
|
|
|
Fiscal year:
|
|
2019
|
$
|
65,000
|
|
2020
|
63,800
|
|
2021
|
53,600
|
|
2022
|
35,500
|
|
2023
|
28,300
|
|
Thereafter
|
40,200
|
|
Total payments
|
$
|
286,400
|
|
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. 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 fiscal 2016, 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 fiscal 2016.
During fiscal 2017, the Spanish National Appellate Court issued an opinion upholding the assessments for fiscal years 1994 and 1995. The Company appealed this opinion to the Spanish Supreme Court; however, certain of the amounts assessed for fiscal years 1994 and 1995 were 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
during 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.
During fiscal 2018, the Spanish Supreme Court issued a decision upholding the assessment for fiscal years 1994 and 1995. As a result, the Company increased its accrual for costs associated with this matter by
$2.1 million
during fiscal 2018, including
$1.2 million
recorded in "value added tax assessments" and
$0.9 million
recorded in "interest expense" in the Consolidated Statement of Income. As of January 31, 2018, the Company has recorded a liability of approximately
$10.7 million
, which is included in "accrued expenses and other liabilities" in the Consolidated Balance Sheet, for the entire amount of these remaining assessments, including various penalties and interest.
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 CIDE tax, including interest, was approximately
$23.6 million
at
January 31, 2018
. 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 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
$7.6 million
in “value added tax assessments” in the Consolidated Statement of Income during the year ended January 31, 2016 for VAT and associated costs. 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.
Guarantees
As is customary in the technology industry, to encourage certain customers to purchase products from Tech Data, 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 at least annually. As of January 31,
2018 and 2017
, the outstanding amount of guarantees under these arrangements totaled
$3.3 million
and
$3.7 million
, respectively. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to the above guarantees is remote.
NOTE 13 — SEGMENT INFORMATION
Tech Data operates predominately 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. Prior to the acquisition of TS, the Company managed its operations in two geographic segments: the Americas and Europe. As a result of the acquisition of TS, the Company now manages its operations in three geographic segments: the Americas, Europe and Asia-Pacific. There were no Tech Data operations in the Asia-Pacific region prior to the acquisition of TS. Therefore, the recasting of the Company's segment disclosure for all periods presented did not have an impact on the prior presentation.
The Company does not consider stock-based compensation expense in assessing the performance of its operating segments, and therefore the Company excludes stock-based compensation expense from segment information. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31:
|
2018
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
Americas
(1)
|
$
|
15,949,959
|
|
|
$
|
10,384,523
|
|
|
$
|
10,356,716
|
|
Europe
|
19,713,942
|
|
|
15,850,353
|
|
|
16,023,067
|
|
Asia-Pacific
|
1,111,110
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
36,775,011
|
|
|
$
|
26,234,876
|
|
|
$
|
26,379,783
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
Americas
(2)
(3) (4)
|
$
|
248,350
|
|
|
$
|
144,246
|
|
|
$
|
235,577
|
|
Europe
(5) (6)
|
173,611
|
|
|
161,603
|
|
|
180,741
|
|
Asia-Pacific
|
17,499
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
(29,381
|
)
|
|
(13,947
|
)
|
|
(14,890
|
)
|
Total
|
$
|
410,079
|
|
|
$
|
291,902
|
|
|
$
|
401,428
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Americas
|
$
|
84,265
|
|
|
$
|
18,844
|
|
|
$
|
18,243
|
|
Europe
|
57,794
|
|
|
35,593
|
|
|
39,010
|
|
Asia-Pacific
|
7,987
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
150,046
|
|
|
$
|
54,437
|
|
|
$
|
57,253
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Americas
|
$
|
207,399
|
|
|
$
|
19,275
|
|
|
$
|
18,139
|
|
Europe
|
21,471
|
|
|
20,060
|
|
|
15,833
|
|
Asia-Pacific
|
3,067
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
231,937
|
|
|
$
|
39,335
|
|
|
$
|
33,972
|
|
|
|
|
|
|
|
|
|
|
As of January 31:
|
2018
|
|
2017
|
Identifiable assets:
|
|
|
|
Americas
|
$
|
4,925,608
|
|
|
$
|
3,238,162
|
|
Europe
|
7,158,052
|
|
|
4,693,704
|
|
Asia-Pacific
|
568,976
|
|
|
—
|
|
Total
|
$
|
12,652,636
|
|
|
$
|
7,931,866
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
Americas
(1)
|
$
|
214,922
|
|
|
$
|
35,581
|
|
Europe
|
57,781
|
|
|
38,658
|
|
Asia-Pacific
|
6,388
|
|
|
—
|
|
Total
|
$
|
279,091
|
|
|
$
|
74,239
|
|
|
|
|
|
Goodwill & acquisition-related intangible assets, net:
|
|
|
|
Americas
|
$
|
1,139,273
|
|
|
$
|
33,296
|
|
Europe
|
645,134
|
|
|
246,002
|
|
Asia-Pacific
|
130,093
|
|
|
—
|
|
Total
|
$
|
1,914,500
|
|
|
$
|
279,298
|
|
|
|
(1)
|
Net sales in the U.S. represented
89%
,
90%
and
90%
of the total Americas' net sales for the fiscal years ended January 31,
2018, 2017 and 2016
, respectively. Total long-lived assets in the U.S. represented
97%
and
94%
of the Americas' total long-lived assets at January 31,
2018 and 2017
, respectively.
|
|
|
(2)
|
Operating income in the Americas for the fiscal year ended January 31, 2018 includes acquisition, integration and restructuring expenses of
$75.5 million
(see Note 5 - Acquisitions for further discussion) and a gain recorded in LCD settlements and other, net, of
$42.6 million
(see
Note 1 – Business and Summary of Significant Accounting Policies
for further discussion).
|
|
|
(3)
|
Operating income in the Americas for the fiscal year ended January 31, 2017 includes acquisition, integration and restructuring expenses of
$18.0 million
and a gain recorded in LCD settlements and other, net, of
$4.1 million
.
|
|
|
(4)
|
Operating income in the Americas for the fiscal year ended January 31, 2016 includes a gain recorded in LCD settlements and other, net, of
$98.4 million
.
|
|
|
(5)
|
Operating income in Europe for the fiscal years ended January 31, 2018 and 2017 includes acquisition, integration and restructuring expenses of
$56.2 million
and
$11.0 million
, respectively.
|
|
|
(6)
|
Operating income in Europe for the fiscal year ended January 31, 2016 includes a net benefit of
$8.8 million
related to various VAT matters in two European subsidiaries (see
Note 12 – Commitments and Contingencies
for further discussion).
|
NOTE 14 — INTERIM FINANCIAL INFORMATION
(UNAUDITED)
Interim financial information for fiscal years
2018
and
2017
is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2018:
|
|
|
|
|
|
|
|
Quarter ended:
|
April 30
(1)(2)
|
|
July 31
(1)(2)
|
|
October 31
(2)
|
|
January 31
(2)(3)
|
Net sales
|
$
|
7,664,063
|
|
|
$
|
8,882,691
|
|
|
$
|
9,135,728
|
|
|
$
|
11,092,529
|
|
Gross profit
|
457,088
|
|
|
515,591
|
|
|
526,081
|
|
|
616,861
|
|
Operating income
|
75,078
|
|
|
103,531
|
|
|
79,567
|
|
|
151,903
|
|
Net income
|
$
|
30,654
|
|
|
$
|
47,459
|
|
|
$
|
37,268
|
|
|
$
|
1,260
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.82
|
|
|
$
|
1.24
|
|
|
$
|
0.98
|
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.82
|
|
|
$
|
1.24
|
|
|
$
|
0.97
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2017:
|
|
|
|
|
|
|
|
Quarter ended:
|
April 30
(4)
|
|
July 31
(4)(5)
|
|
October 31
(5)
|
|
January 31
(5)(6)
|
Net sales
|
$
|
5,963,362
|
|
|
$
|
6,353,739
|
|
|
$
|
6,490,265
|
|
|
$
|
7,427,510
|
|
Gross profit
|
298,611
|
|
|
316,450
|
|
|
315,839
|
|
|
371,027
|
|
Operating income
|
52,558
|
|
|
73,355
|
|
|
62,872
|
|
|
103,117
|
|
Net income
|
$
|
33,373
|
|
|
$
|
46,394
|
|
|
$
|
36,506
|
|
|
$
|
78,822
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.95
|
|
|
$
|
1.32
|
|
|
$
|
1.04
|
|
|
$
|
2.24
|
|
Diluted
|
$
|
0.94
|
|
|
$
|
1.31
|
|
|
$
|
1.03
|
|
|
$
|
2.22
|
|
|
|
(1)
|
During the first and second quarters of fiscal 2018, the Company recorded a gain of
$12.7 million
and
$28.7 million
, respectively, in LCD settlements and other, net (see Note 1 - Business and Summary of Significant Accounting Policies for further discussion).
|
|
|
(2)
|
During the first, second, third and fourth quarters of fiscal 2018, the Company recorded
$42.1 million
,
$30.1 million
,
$29.7 million
and
$34.3 million
of acquisition, integration and restructuring expenses, respectively (see Note 5 - Acquisitions for further discussion).
|
|
|
(3)
|
The Company recorded income tax expenses of
$95.4 million
in the fourth quarter of fiscal 2018 related to the impact of the enactment of U.S. Tax Reform (see Note 7 - Income Taxes for further discussion).
|
|
|
(4)
|
During the first and second quarters of fiscal 2017, the Company recorded a gain of
$0.4 million
and
$3.7 million
, respectively, in LCD Settlements and other, net.
|
|
|
(5)
|
During the second, third and fourth quarters of fiscal 2017, the Company recorded
$2.0 million
,
$13.0 million
and
$14.0 million
of acquisition, integration and restructuring expenses, respectively.
|
|
|
(6)
|
The Company recorded an income tax benefit of
$12.5 million
in the fourth quarter of fiscal 2017 primarily related to the reversal of deferred tax valuation allowances in certain jurisdictions in Europe (see Note 7 - Income Taxes for further discussion).
|