FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 31, 2001
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-14625
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TECH DATA CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Florida No. 59-1578329
---------------------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5350 Tech Data Drive, Clearwater, Florida 33760
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(727) 539-7429
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
CLASS August 27, 2001
- ------------------------------- ---------------
Common stock, par value $.0015 per share 54,253,707
TECH DATA CORPORATION AND SUBSIDIARIES
Form 10-Q for the Three and Six Months Ended July 31, 2001
----------------------------------------------------------
INDEX
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheet as of
July 31, 2001 (Unaudited) and
January 31, 2001 3
Consolidated Statement of Income
(Unaudited) for the three months and six
months ended July 31, 2001 and 2000 4
Consolidated Statement of Cash Flows
(Unaudited) for the six months
ended July 31, 2001 and 2000 5
Notes to Consolidated Financial Statements
(Unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. OTHER INFORMATION
Items 1-5 required in Part II have been previously filed, have been
included in Part I of this report or are not applicable for the quarter
ended July 31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
July 31, January 31,
2001 2001
---------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 221,725 $ 138,925
Accounts receivable, less allowance for
doubtful accounts of $61,280 and $64,465 1,641,839 2,142,792
Inventories 1,106,477 1,669,574
Prepaid and other assets 133,457 114,977
---------------- ---------------
Total current assets 3,103,498 4,066,268
Property and equipment, net 137,101 153,196
Excess of cost over fair value of acquired net assets, net 277,713 299,692
Other assets, net 78,485 96,389
---------------- ---------------
$ 3,596,797 $ 4,615,545
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans $ 684,172 $ 1,249,576
Accounts payable 1,106,219 1,519,167
Accrued expenses 289,564 330,242
---------------- ---------------
Total current liabilities 2,079,955 3,098,985
Long-term debt 319,617 320,757
---------------- ---------------
Total liabilities 2,399,572 3,419,742
---------------- ---------------
Minority interest 459 489
----------------- ---------------
Shareholders' equity:
Preferred stock, par value $.02; 226,500 shares authorized;
none and 226,500 issued and outstanding; liquidation
preference $.20 per share (see Note 6) - 5
Common stock, par value $.0015; 200,000,000 shares
authorized; 54,236,140 and 53,796,432 issued and
outstanding 81 81
Additional paid-in capital 581,535 575,223
Retained earnings 780,017 734,231
Accumulated other comprehensive loss (164,867) (114,226)
---------------- ---------------
Total shareholders' equity 1,196,766 1,195,314
---------------- ---------------
$ 3,596,797 $ 4,615,545
================ ===============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
3
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three months ended Six months ended
July 31, July 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ -------------- ------------ -------------
Net sales $ 4,136,584 $ 4,996,973 $ 8,816,576 $ $9,921,489
Cost of products sold 3,912,422 4,731,740 8,341,221 9,398,397
------------ -------------- ------------ -------------
Gross profit 224,162 265,233 475,355 523,092
Selling, general and administrative expenses 166,779 180,788 346,641 363,266
Special charges (see Note 8) 20,000 - 20,000 -
------------ -------------- ------------ -------------
Operating income 37,383 84,445 108,714 159,826
Interest expense, net 15,932 21,768 38,711 40,519
Net foreign currency exchange loss (gain) 258 (243) 630 (1,038)
------------ -------------- ------------ -------------
Income before income taxes 21,193 62,920 69,373 120,345
Provision for income taxes 7,206 22,031 23,587 42,129
------------ -------------- ------------ -------------
Income before minority interest 13,987 40,889 45,786 78,216
Minority interest - 107 - 215
------------ -------------- ------------ -------------
Net income $ 13,987 $ 40,782 $ 45,786 $ 78,001
============ ============== ============ =============
Net income per common share:
Basic $ .26 $ .77 $ .85 $ 1.48
============ ============== ============ =============
Diluted $ .25 $ .72 $ .83 $ 1.40
============ ============== ============ =============
Weighted average common shares outstanding:
Basic 54,146 53,162 53,990 52,747
============ ============== ============ =============
Diluted 55,217 60,036 54,982 59,258
============ ============== ============ =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
4
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six months ended
July 31,
--------------------------------------
2001 2000
--------------- ----------------
Cash flows from operating activities:
Cash received from customers $ 9,227,780 $ 9,842,566
Cash paid to suppliers and employees (8,520,132) (9,810,691)
Interest paid (39,076) (44,961)
Income taxes paid (49,189) (39,943)
--------------- ----------------
Net cash provided by (used in) operating activities 619,383 (53,029)
--------------- ----------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired - (17,407)
Capital expenditures (17,747) (24,882)
--------------- ----------------
Net cash used in investing activities (17,747) (42,289)
--------------- ----------------
Cash flows from financing activities:
Proceeds from the issuance of common stock 6,307 39,028
Net (repayments) borrowings under revolving credit loans (518,047) 109,856
Principal payments on long-term debt (291) (84)
--------------- ----------------
Net cash (used in) provided by financing activities (512,031) 148,800
--------------- ----------------
Effect of currency exchange rate changes on cash (6,805) (3,008)
--------------- ----------------
Net increase in cash and cash equivalents 82,800 50,474
Cash and cash equivalents at beginning of period 138,925 31,786
--------------- ----------------
Cash and cash equivalents at end of period $ 221,725 $ 82,260
=============== ================
Reconciliation of net income to net cash provided by (used in)
operating activities:
Net income $ 45,786 $ 78,001
--------------- ----------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 31,623 31,123
Special charges (Note 8) 20,000 -
Provision for losses on accounts receivable 21,941 21,884
Foreign currency transaction loss (gain) 630 (1,038)
Decrease (increase) in assets:
Accounts receivable 411,204 (78,927)
Inventories 516,377 (46,461)
Prepaid and other assets (30,043) (10,995)
Increase (decrease) in liabilities:
Accounts payable (371,899) (107,795)
Accrued expenses (26,236) 61,179
--------------- ----------------
Total adjustments 573,597 (131,030)
--------------- ----------------
Net cash provided by (used in) operating activities $ 619,383 $ (53,029)
=============== ================
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
5
TECH DATA CORPORATION AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - BASIS OF PRESENTATION:
The consolidated financial statements and related notes included herein have
been prepared by Tech Data Corporation (the "Company" or "Tech Data"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the financial position
of Tech Data Corporation and subsidiaries as of July 31, 2001 and the results of
their operations for the three and six months ended July 31, 2001 and 2000 and
their cash flows for the six months ended July 31, 2001 and 2000. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the six months ended July 31, 2001
are not necessarily indicative of the results that can be expected for the
entire fiscal year ending January 31, 2002.
NOTE 2 - NET INCOME PER COMMON SHARE:
Basic Earnings Per Share ("Basic EPS") excludes from the calculation of earnings
per share the potential for dilution of earnings by certain common stock
equivalents and is computed by dividing net income by the weighted average
number of common shares outstanding during the reported period. Diluted
Earnings Per Share ("Diluted EPS") reflects the potential dilution that could
occur assuming the conversion of certain common stock equivalents, such as the
Company's convertible subordinated notes, as well as the exercise of stock
options, using the if-converted and treasury stock methods, respectively.
The composition of basic and diluted net income per common share is as follows:
Three months ended July 31,
---------------------------------------------------------------------------------------
2001 2000
---------------------------------------- -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
----------- ---------- --------- ------------ ---------- ---------
(In thousands, except per share amounts)
Basic EPS $ 13,987 54,146 $ .26 $ 40,782 53,162 $ .77
========= =========
Effect of dilutive securities:
Stock options - 1,071 - 1,541
5% convertible subordinated notes - - 2,438 5,333
----------- ---------- ------------ ----------
Diluted EPS $ 13,987 55,217 $ .25 $ 43,220 60,036 $ .72
=========== ========== ========= ============ ========== =========
6
NOTE 2 - NET INCOME PER COMMON SHARE (continued):
Six months ended July 31,
---------------------------------------------------------------------------------------
2001 2000
---------------------------------------- -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
----------- ---------- --------- ------------ ---------- ---------
(In thousands, except per share amounts)
Basic EPS $ 45,786 53,990 $ .85 $ 78,001 52,747 $ 1.48
========= =========
Effect of dilutive securities:
Stock options - 992 - 1,178
5% convertible subordinated notes - - 4,875 5,333
----------- ---------- ------------ ----------
Diluted EPS $ 45,786 54,982 $ .83 $ 82,876 59,258 $ 1.40
=========== ========== ========= ============ ========== =========
The Company has excluded 1,459,090 shares from its calculation of diluted
earnings per share for the three and six months ended July 31, 2001 and has
excluded 175,300 shares from its calculation of diluted earnings per share for
the three and six months ended July 31, 2000 because their effect would have
been anti-dilutive. In addition, for purposes of calculating diluted earnings
per share for the three and six months ended July 31, 2001, the effect of the
convertible subordinated notes was excluded, as its inclusion would have been
anti-dilutive.
NOTE 3 - 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. The Company's balance of other
comprehensive income ("OCI") is comprised exclusively of changes in the
Company's foreign currency translation adjustment ("CTA") account. Changes in
foreign currency loan balances hedging net investments in foreign operations
recorded in the CTA account for the three months ended July 31, 2001 and 2000
was a gain of $2.4 million and a loss of $2.4 million, respectively (net of
related income taxes), and for the six months ended July 31, 2001 and 2000 was a
gain of $11.0 million and $10.3 million, respectively (net of related income
taxes). In total, the Company's comprehensive income for the three months ended
July 31, 2001 and 2000 was $5.1 million and $42.7 million, respectively. The
Company's comprehensive (loss) income was ($4.9) million and $41.7 million, for
the six months ended July 31, 2001 and 2000, respectively.
NOTE 4 - SEGMENT INFORMATION:
The Company operates predominantly in a single industry segment as a wholesale
distributor of computer-based technology products and related logistics and
other value-added services. Based on geographic location, the Company has three
segments. These geographical segments are 1) the United States, 2) Europe
(including the Middle East) and 3) Other International areas (Canada, South
America, and export sales to Latin America and the Caribbean from the U.S.). The
measure of segment profit is operating income.
7
NOTE 4 - SEGMENT INFORMATION (continued):
Financial information by geographic segment is as follows (in thousands):
Other
United States Europe International Total
------------- ------------- ------------- -------------
Three months ended July 31, 2001
- --------------------------------
Net sales to unaffiliated customers $ 2,225,966 $ 1,614,011 $ 296,607 $ 4,136,584
============= ============= ============= =============
Operating income {a}:
before special charges $ 43,488 $ 9,258 $ 4,637 $ 57,383
============= ============= ============= =============
after special charges $ 23,488 $ 9,258 $ 4,637 $ 37,383
============= ============= ============= =============
Identifiable assets $ 1,409,163 $ 1,871,329 $ 316,305 $ 3,596,797
============= ============= ============= =============
Three months ended July 31, 2000
- --------------------------------
Net sales to unaffiliated customers $ 2,917,715 $ 1,759,278 $ 319,980 $ 4,996,973
============= ============= ============= =============
Operating income $ 62,996 $ 18,158 $ 3,291 $ 84,445
============= ============= ============= =============
Identifiable assets $ 2,012,952 $ 1,888,896 $ 302,240 $ 4,204,088
============= ============= ============= =============
Other
United States Europe International Total
------------- ------ ------------- -------------
Six months ended July 31, 2001
- ------------------------------
Net sales to unaffiliated customers $ 4,664,842 $ 3,508,143 $ 643,591 $ 8,816,576
============= ============= ============= =============
Operating income {a}:
before special charges $ 86,888 $ 30,998 $ 10,828 $ 128,714
============= ============= ============= =============
after special charges $ 66,888 $ 30,998 $ 10,828 $ 108,714
============= ============= ============= =============
Identifiable assets $ 1,409,163 $ 1,871,329 $ 316,305 $ 3,596,797
============= ============= ============= =============
Six months ended July 31, 2000
- ------------------------------------------------------
Net sales to unaffiliated customers $ 5,553,420 $ 3,711,191 $ 656,878 $ 9,921,489
============= ============= ============= =============
Operating income $ 112,687 $ 40,182 $ 6,957 $ 159,826
============= ============= ============= =============
Identifiable assets $ 2,012,952 $ 1,888,896 $ 302,240 $ 4,204,088
============= ============= ============= =============
{a} The $20.0 million in pre-tax special charges referred to above relate to
U.S. operations, and were taken during the second quarter of fiscal 2002, as
further described in Note 8 to these consolidated financial statements.
NOTE 5 - REVOLVING CREDIT LOANS:
The Company has an agreement (the "Receivables Securitization Program") with six
financial institutions that allows the Company to transfer an undivided interest
in a designated pool of U.S. accounts receivable on an ongoing basis to provide
borrowings up to a maximum of $700 million (as amended on May 17, 2001, which
extended the maturity date to May 16, 2002). Under this program, the Company
legally isolated certain U.S. trade receivables into a wholly-owned bankruptcy
remote special purpose entity (balances included in accounts receivable were
$723 million and $860 million as of July 31, 2001 and January 31, 2001
respectively). As collections reduce accounts receivable balances included in
the pool, the Company may transfer interests in new receivables to bring the
amount available to be borrowed up to the maximum. The Company pays interest on
advances under the Receivables Securitization Program at a designated commercial
paper rate plus an agreed-upon margin.
Under the terms of the Company's Multi-currency Revolving Credit Facility with a
syndicate of banks, the Company is able to borrow funds in major foreign
currencies up to a maximum of $495 million on an unsecured basis. The Company
pays interest on advances under this facility at the applicable eurocurrency
rate plus a margin based on certain financial ratios.
8
NOTE 5 - REVOLVING CREDIT LOANS (continued):
The Company can fix the interest rate for periods of 30 to 180 days under
various interest rate options. In addition to the facilities described above,
the Company has additional lines of credit and overdraft facilities totaling
approximately $605 million at July 31, 2001, to support its worldwide
operations. Most of these facilities are provided on an unsecured, short-term
basis and are reviewed periodically for renewal.
The Company's credit agreements contain warranties and covenants that must be
complied with on a continuing basis, including the maintenance of certain
financial ratios and restrictions on payment of dividends. At July 31, 2001, the
Company was in compliance with all such covenants.
NOTE 6 - CAPITAL STOCK:
During the six months ended July 31, 2001, the Company exchanged 192,525 shares
of its common stock for all of the issued and outstanding shares of preferred
stock.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION:
The Company entered into capital leases for a distribution center in Germany,
which totaled $5.4 million during the six months ending July 31, 2000.
The Company recorded an income tax benefit of approximately $736,000 and
$9,127,000 during the six months ended July 31, 2001 and 2000, respectively,
related to the exercise of nonqualified employee stock options.
NOTE 8 - SPECIAL CHARGES (ASSET & INVESTMENT IMPAIRMENT):
During the quarter ended July 31, 2001, the Company recorded special charges of
$20.0 million before taxes related to the disposal of certain long-lived assets
($15.2 million) and impairment of certain internet-related investments ($4.8
million). This total is presented separately as a component of income from
operations in the Consolidated Statement of Income, and relates solely to the
Company's U.S. operations.
Of the special charges, $15.2 million is for the disposition of supply-chain
software acquired for internal use by the Company. The Company made the decision
to dispose of the supply-chain software since it achieved most of the
anticipated benefits originally planned when it purchased the software through
alternative systems and processes.
The Company also recognized $4.8 million of special charges for the impairment
of the Company's investments in the equity securities of certain privately-held,
internet-related companies. Recognition of an impairment charge was the result
of the investees experiencing a series of operating losses which appear to be
other than temporary, and raised substantial doubts about the Company's ability
to recoup its full investment.
9
NOTE 8 - SPECIAL CHARGES (ASSET & INVESTMENT IMPAIRMENT) (continued):
The following unaudited proforma results of operations reflect the effect on
the Company's operations if the special charges noted above had not occurred
during the periods presented below (in thousands except per share amounts):
Three months Six months
ended ended
July 31, 2001 July 31, 2001
------------- -------------
Operating income before special charges (pre-tax) $ 57,383 $ 128,714
Net income $ 27,187 $ 58,986
Net income per common share:
Diluted $ .49 $ 1.06
The unaudited proforma information is presented for informational purposes
only.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 revises the standards of business combinations by eliminating the use
of the pooling-of-interests ("pooling") method and requiring that all business
combinations be accounted for using the purchase method of accounting. SFAS 141
also changes the criteria to recognize intangible assets apart from goodwill.
The provisions of SFAS 141 are effective for all business combinations initiated
after June 30, 2001. Impact of adoption of this statement on the Company's
financial position and results of operations was not material.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 revises the standards of accounting for goodwill
and indefinite lived intangible assets by replacing the regular amortization of
these assets with the requirement that they are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS 142 are effective for fiscal years
beginning after December 15, 2001. Application of the non-amortization
provisions of the statement is expected to result in an increase in net income
after tax of approximately $8.3 million ($.14 per diluted share) per year.
During the fiscal year ending January 31, 2003, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets under the new rules. Tech Data has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements within this Quarterly Report on Form 10-Q are "forward-
looking statements" as described in the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks and uncertainties and actual results could differ materially from those
projected. Please refer to the cautionary statements and important factors
discussed in Exhibit 99A to the Company's Annual Report on Form 10-K for the
year ended January 31, 2001 for further information.
The following table sets forth the percentage of cost and expenses to net sales
derived from the Company's Consolidated Statement of Income for the three and
six months ended July 31, 2001 and 2000 as follows:
Percentage of
net sales
--------------------------------------------------------------
Three months Six months
ended ended
July 31, July 31,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales
United States 53.81% 58.39% 52.91% 55.97%
Europe 39.02 35.21 39.79 37.41
Other international 7.17 6.40 7.30 6.62
----------- ----------- ----------- -----------
Total net sales 100.00% 100.00% 100.00% 100.00%
Cost of products sold 94.58 94.69 94.61 94.73
----------- ----------- ----------- -----------
Gross profit 5.42 5.31 5.39 5.27
Selling, general and administrative expenses 4.03 3.62 3.93 3.66
Special charges .49 - .23 -
----------- ----------- ----------- -----------
Operating income .90 1.69 1.23 1.61
Interest expense, net .39 .44 .44 .41
Net foreign currency exchange loss (gain) - (.01) - (.01)
----------- ----------- ----------- -----------
Income before income taxes .51 1.26 .79 1.21
Provision for income taxes .17 .44 .27 .42
----------- ----------- ----------- -----------
Income before minority interest .34 .82 .52 .79
Minority interest - - - -
----------- ----------- ----------- -----------
Net income .34% .82% .52% .79%
=========== =========== =========== ===========
Results of Operations
- ---------------------
Three Months Ended July 31, 2001 and 2000
- -----------------------------------------
Overall net sales decreased 17.2% to $4.1 billion in the second quarter of
fiscal 2002 compared to $5.0 billion in the second quarter of last year,
primarily due to lower overall demand for products in the technology market and
a weakening of the euro. Net sales from U.S. operations fell 23.7% to $2.2
billion due primarily to overall weakened economic conditions in the region. On
a local currency basis, European net sales were almost flat from the prior year
(down only
11
1.0%), but fell approximately 8.3% in U.S. dollar terms due to softening of
several European currencies against the U.S. dollar. Other international sales
fell 7.3% from the prior year due primarily to lower overall demand for products
in Canada, offset by minor growth in Latin America.
Due to the lower sales volume, gross profit decreased $41.1 million from $265.2
million in the second quarter of fiscal 2001 to $224.2 million in the second
quarter of fiscal 2002. However, as a percent of sales, gross margin increased
11 basis points to 5.42% in the second quarter of fiscal 2002 compared to 5.31%
in the second quarter of fiscal 2001. This increase in gross margin is
attributable to the positive effects of the Company's internal focus on margin
improvement programs, as well as an increase in the mix of higher gross margin
international sales relative to worldwide sales.
Selling, general and administrative expenses decreased 7.7% from $180.8 million
in the second quarter of fiscal 2001 to $166.8 million in fiscal 2002, and as a
percentage of net sales increased from 3.62% in the second quarter of fiscal
2001 to 4.03% in the second quarter of fiscal 2002. The dollar value decrease in
selling, general and administrative expenses is attributable to cost reduction
efforts initiated by the Company in light of the reduced sales volumes. The
increase in selling, general and administrative expenses as a percentage of net
sales is primarily attributable to the overall decrease in net sales from the
prior year.
Special pre-tax charges of $20.0 million (see Note 8) were recognized in the
second quarter of fiscal 2002. These special charges relate to the Company
recording expenses for the disposal of software products previously acquired for
internal use ($15.2 million) and impairment of certain internet-related
investments ($4.8 million).
As a result of the factors described above, operating income in the second
quarter of fiscal 2002 decreased 55.7% to $37.4 million, or .90% of net sales,
compared to $84.4 million, or 1.69% of net sales in the second quarter of fiscal
2001. The main factors contributing to the decrease in the Company's operating
income were the decrease in the Company's revenues due to the decline in overall
demand for products in the technology market and the $20.0 million of special
charges, offset in part, by the Company's ability to achieve higher gross
margins on its sales. On a proforma basis without the special charges, the
operating income of the Company decreased from the prior year by 32.0% to $57.4
million, or 1.39% of net sales.
Interest expense decreased from $21.8 million in the second quarter of fiscal
2001 to $15.9 million in the current quarter due to a decrease in the Company's
average outstanding indebtedness combined with lower short-term interest rates
on the Company's floating rate indebtedness.
The Company reported a net foreign currency exchange loss of $0.3 million in the
second quarter of fiscal 2002, as compared to a net foreign currency exchange
gain of $0.2 million in the comparable quarter last year. The fluctuation from
the prior year was not significant for any of the Company's reportable segments.
The provision for income taxes decreased 67.3% to $7.2 million in the second
quarter of fiscal 2002 compared to $22.0 million last year. The decrease is
attributable to a decrease in the Company's income before income taxes and a
reduction in the Company's effective tax rate. The Company's estimated effective
tax rate decreased from 35% in the second quarter of fiscal 2001 to 34% in the
current fiscal quarter due to fluctuations in the amount of federal, state and
foreign taxable income reported in each period.
12
As a result of the factors described above, net income decreased 65.7% to $14.0
million, or $.25 per diluted share, compared to $40.8 million or $.72 per
diluted share, in the prior year. On a proforma basis without special charges,
net income decreased 33.3% to $27.2 million, or $.49 per diluted share.
Six Months Ended July 31, 2001 and 2000
- ---------------------------------------
Net sales decreased 11.1% to $8.8 billion in the first six months of fiscal 2002
compared to $9.9 billion in the first six months of last year, primarily due to
lower overall demand for products in the technology market and a weakening of
the euro. Net sales from U.S. operations fell 16.0% to $4.7 billion due
primarily to overall weakened economic conditions in the region. On a local
currency basis, European net sales were 1.2% higher during the first six months
of the current year, but fell 5.5% in U.S. dollar terms due to softening of
several European currencies against the U.S. dollar. Other international sales
fell 2.0% in the first half of fiscal 2002 compared to the first six months of
last year due mostly to lower overall demand for products in Canada, offset by
growth in Latin America.
Due to the lower sales volume, gross profit decreased $47.7 million from $523.1
million in the first six months of fiscal 2001 to $475.4 million in the first
six months of fiscal 2002. Gross margins, however, increased 12 basis points to
5.39% in the first half of fiscal 2002 compared to 5.27% in the first half of
fiscal 2001. This increase in gross margin is attributable to the positive
effects of the Company's internal focus on margin improvement programs, as well
as an increase in the mix of higher gross margin international sales relative to
worldwide sales.
Selling, general and administrative expenses decreased 4.6% from $363.3 million
in the first half of fiscal 2001 to $346.6 million in fiscal 2002, and as a
percentage of net sales increased from 3.66% in the first half of fiscal 2001 to
3.93% in the first half of fiscal 2002. The dollar value decrease in selling,
general and administrative expenses is attributable to cost reduction efforts
initiated by the Company in light of the reduced sales volumes. The increase in
selling, general and administrative expenses as a percentage of net sales is
primarily attributable to the overall decrease in net sales from the prior year.
Special pre-tax charges of $20.0 million (see Note 8) were recognized in the
first six months of fiscal 2002. These special charges relate to the Company
recording pre-tax expenses for the disposal of certain software products
previously acquired for internal use ($15.2 million) and impairment of certain
internet-related investments ($4.8 million).
As a result of the factors described above, operating income in the first half
of fiscal 2002 decreased 32.0% to $108.7 million, or 1.23% of net sales,
compared to $159.8 million, or 1.61% of net sales in the first half of fiscal
2001. The main factors contributing to the decrease in the Company's operating
income were the decrease in the Company's revenues due to the decline in overall
demand for products in the technology market and the $20.0 million of special
charges, offset in part, by the Company's ability to achieve higher gross
margins on its sales. On a proforma basis without the special charges, the
operating income of the Company decreased from the prior year by 19.5% to $128.7
million, or 1.46% of net sales.
Interest expense decreased from $40.5 million in the first six months of fiscal
2001 to $38.7 million in the first six months of 2002 due to a decrease in the
Company's average outstanding indebtedness combined with lower short-term
interest rates on the Company's floating rate indebtedness.
13
The Company reported a net foreign currency exchange loss of $0.6 million in the
first six months of fiscal 2002, as compared to a net foreign currency exchange
gain of $1.0 million in the first half of last year. The fluctuation from the
prior year was not significant for any of the Company's reportable segments.
The provision for income taxes decreased 44.0% to $23.6 million in the first six
months of fiscal 2002 compared to $42.1 million for the first six months of
2001. The decrease is attributable to a decrease in the Company's income before
income taxes and a reduction in the Company's effective tax rate. The Company's
estimated effective tax rate decreased from 35% in the first half of 2001 to 34%
in the first half of 2002 due to fluctuations in the amount of federal, state
and foreign taxable income reported in each period.
As a result of the factors described above, net income decreased 41.3% to $45.8
million, or $.83 per diluted share in the first six months of 2002, compared to
$78.0 million, or $1.40 per diluted share in the first six months of 2001. On
a proforma basis without special charges, net income decreased 24.4% to $59.0
million, or $1.06 per diluted share in the first six months of 2002.
Quarterly Data - Seasonality
- ----------------------------
The Company's quarterly operating results have fluctuated significantly in the
past and will likely continue to do so in the future as a result of seasonal
variations in the demand for the products and services offered by the Company.
The Company's narrow operating margins may magnify the impact of these factors
on the Company's operating results. Specific historical seasonal variations in
the Company's operating results have included a reduction of demand in Europe
during the summer months, but an increase in demand in Europe during the
Company's fiscal fourth quarter, and increased Canadian government purchasing
in the first quarter. In addition, the product cycle of major products may
materially impact the Company's business, financial condition, or results of
operations.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities of $619.4 million during the first six
months of fiscal 2002 was primarily attributable to income from operations of
$45.8 million combined with a decrease in accounts receivable and inventories,
offset by a reduction in accounts payable and accrued expenses.
Net cash used in investing activities of $17.7 million during the first six
months of fiscal 2002 was attributable to the continuing investment related to
the expansion of the Company's management information systems, office facilities
and equipment for its distribution centers. The Company expects to make capital
expenditures of approximately $70 million during fiscal 2002 to further expand
its management information systems, office facilities and equipment for
distribution centers.
Net cash used in financing activities of $512.0 million during the first six
months of fiscal 2002 reflects the net repayments on the Company's revolving
credit loans of $518.0 million and principal payments on long-term debt of $0.3
million, offset by the proceeds from stock option exercises (including the
related income tax benefit) of $6.3 million.
14
The Company currently maintains a $495 million revolving credit facility with a
syndicate of banks which expires in May 2003. The Company pays interest under
this revolving credit facility at the applicable eurocurrency rate plus a margin
based on the Company's credit rating. Additionally, the Company currently
maintains a $700 million Receivables Securitization Program with a syndicate of
banks expiring in May 2002. The Company pays interest on the Receivables
Securitization Program at designated commercial paper rates plus an agreed-upon
margin. In addition to these credit facilities, the Company maintains additional
lines of credit and overdraft facilities totaling approximately $605 million.
The aforementioned credit facilities total approximately $1.8 billion, of which
$684 million was outstanding at July 31, 2001. These credit facilities contain
covenants that must be complied with on a continuous basis, including the
maintenance of certain financial ratios and restrictions on payment of
dividends. The Company is in compliance with all such covenants.
In August 2000, the Company filed a universal shelf registration statement with
the Securities and Exchange Commission for $500 million of debt and equity
securities. The net proceeds from any issuance are expected to be used for
general corporate purposes, including capital expenditures, the repayment or
refinancing of debt and to meet working capital needs. As of July 31, 2001, the
Company had not issued any debt or equity securities, nor can any assurances be
given that the Company will issue any debt or equity securities under this
registration statement in the future.
The Company believes that cash from operations, available and obtainable bank
credit lines, and trade credit from its vendors will be sufficient to satisfy
its working capital and capital expenditure requirements through fiscal 2002.
Asset Management
- ----------------
The Company manages its inventories by maintaining sufficient quantities to
achieve high order fill rates while attempting to stock only those products in
high demand with a rapid turnover rate. Inventory balances fluctuate as the
Company adds new product lines and when appropriate, makes large purchases,
including cash purchases from manufacturers and publishers when the terms of
such purchases are considered advantageous. The Company's contracts with most of
its vendors provide price protection and stock rotation privileges to reduce the
risk of loss due to vendor price reductions and slow moving or obsolete
inventory. In the event of a vendor price reduction, the Company generally
receives a credit for the impact on products in inventory, subject to certain
limitations. In addition, the Company has the right to rotate a certain
percentage of purchases, subject to certain limitations. Historically, price
protection and stock rotation privileges, as well as the Company's inventory
management procedures have helped to reduce the risk of loss of carrying
inventory.
The Company attempts to control losses on credit sales by closely monitoring
customers' creditworthiness through its information technology systems, which
contain detailed information on each customer's payment history and other
relevant information. The Company has obtained credit insurance that insures a
percentage of the credit extended by the Company to certain of its larger
domestic and international customers against possible loss. Customers who
qualify for credit terms are typically granted net 30-day payment terms. The
Company also sells products on a prepay, credit card, cash on delivery and floor
plan basis.
15
Euro Conversion
- ---------------
On January 1, 1999, eleven of the fifteen member countries of the European Union
commenced a conversion from their existing sovereign currencies to a new, single
currency called the euro. Fixed conversion rates between the existing
currencies, the legacy currencies, and the euro were established and the euro
became the common legal currency of the participating countries. The legacy
currencies will remain legal tender as denominations of euro until January 1,
2002. At that time, countries will issue new euro-denominated bills for use in
cash transactions. All legacy currency will be withdrawn prior to July 1, 2002
completing the euro conversion on this date. As of January 1, 1999, the
participating countries no longer control their own monetary policies by
directing independent interest rates for the legacy currencies, and instead, the
authority to direct monetary policy, including money supply and official
interest rates for the euro, is exercised by the new European Central Bank.
The Company has implemented plans to address the issues raised by the euro
conversion. These issues include, but are not limited to: the competitive impact
created by cross-border price transparency; the need for the Company and its
business partners to adapt IT and non-IT systems to accommodate euro-denominated
transactions; and the need to analyze the legal and contractual implications of
the Company's contracts. The Company currently anticipates that the required
modifications to its systems, equipment and processes will be made on a timely
basis and does not expect that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
Since the implementation of the euro on January 1, 1999, the Company has
experienced improved efficiencies in its cash management program in Europe and
has been able to reduce certain hedging activities as a direct result of the
conversion. The Company has not experienced any material adverse effects on its
financial position or results of operations in connection with the initial roll-
out of the euro.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 revises the standards of business combinations by eliminating the use
of the pooling-of-interests ("pooling") method and requiring that all business
combinations be accounted for using the purchase method of accounting. SFAS 141
also changes the criteria to recognize intangible assets apart from goodwill.
The provisions of SFAS 141 are effective for all business combinations initiated
after June 30, 2001. Impact of adoption of this statement on the Company's
financial position and results of operations was not material.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 revises the standards of accounting for goodwill
and indefinite lived intangible assets by replacing the regular amortization of
these assets with the requirement that they are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS 142 are effective for fiscal years
beginning after December 15, 2001. Application of the non-amortization
provisions of the statement is expected to result in an increase in net income
after tax of approximately $8.3 million ($.14 per diluted share) per year.
During the fiscal year ending January 31, 2003, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets under the new rules. Tech Data has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
16
Comments on Forward-Looking Information
- ---------------------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company, in Exhibit 99A to its Annual Report
on Form 10-K for the year ended January 31, 2001, outlined cautionary statements
and identified important factors that could cause the Company's actual results
to differ materially from those projected in forward-looking statements made by,
or on behalf of, the Company. Such forward-looking statements, as made within
this Form 10-Q, should be considered in conjunction with the information
included within the aforementioned Exhibit 99A.
17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the quantitative and qualitative market
risk disclosure of the Company as presented in the Company's Annual Report on
Form 10-K for the year ended January 31, 2001.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the 2001 Annual Meeting of Shareholders held June 19, 2001, the
shareholders approved the election of two directors, Charles E. Adair
and John Y. Williams, terms to expire in 2004. Directors Steven A.
Raymund, Jeffery P. Howells, Maximilian Ardelt, James M. Cracchiolo,
Daniel M. Doyle, Kathy Misunas, and David M. Upton will continue in
office for their respective terms.
The vote upon such proposal was 50,496,721 in favor, 90,497 against and
as follows for each individual director:
For Against Abstentions
------------------------------------
C. Adair 50,492,996 94,222 3,725
J. Williams 50,464,306 122,912 32,415
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-AAk - Amendment Number 2 to the Transfer and Administration
Agreement dated May 17, 2001.
(b) Reports on Form 8-K
None
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH DATA CORPORATION
---------------------
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ Steven A. Raymund Chairman of the Board of September 5, 2001
- --------------------- Directors; Chief Executive Officer
Steven A. Raymund
/s/ Jeffery P. Howells Executive Vice President and September 5, 2001
- ---------------------- Chief Financial Officer; Director
Jeffery P. Howells (principal financial officer)
/s/ Joseph B. Trepani Senior Vice President and September 5, 2001
- --------------------- Corporate Controller (principal
Joseph B. Trepani accounting officer)
/s/ Arthur W. Singleton Corporate Vice President, September 5, 2001
- ----------------------- Treasurer and Secretary
Arthur W. Singleton
20