TECH DATA CORPORATION
This Annual Report on Form 10-K, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A"), contains
forward-looking statements, as described in the "safe harbor" provision of the
Private Securities Litigation Reform Act of 1995. These statements involve a
number of risks and uncertainties and actual results could differ materially
from those projected. These forward-looking statements regarding future events
and the future results of Tech Data Corporation ("Tech Data ," "we," "our," "us"
or the "Company") are based on current expectations, estimates, forecasts, and
projections about the industries in which we operate and the beliefs and
assumptions of our management. Words such as "expects," "anticipates,"
"targets," "goals," "projects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words, and similar expressions are intended to
identify such forward-looking statements. In addition, any statements that refer
to our future financial performance, our anticipated growth and trends in our
businesses, and other characterizations of future events or circumstances, are
forward-looking statements. Readers are cautioned that these forward-looking
statements are only predictions and are subject to risks, uncertainties, and
assumptions. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Readers are referred to the
cautionary statements and important factors discussed in Item 1A, "Risk Factors"
in this Annual Report on Form 10-K for the year ended January 31, 2020 for
further information with respect to important risks and other factors that could
cause actual results to differ materially from those in the forward-looking
statements. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
OVERVIEW
We are one of the world's largest IT distribution and solutions companies. We
serve a critical role in the center of the IT ecosystem, bringing products from
the world's leading technology vendors to market, as well as helping our
customers create solutions best suited to maximize business outcomes for their
end-user customers. We distribute and market products from many of the world's
leading technology hardware manufacturers and software publishers, as well as
suppliers of next-generation technologies and delivery models such as converged
and hyperconverged infrastructure, the cloud, security, analytics/Internet of
things ("IoT"), and services. Our customers include value-added resellers,
direct marketers, retailers, corporate resellers and managed service providers
who support the diverse technology needs of end users.
On February 27, 2017 , we acquired Avnet, Inc's. ("Avnet") Technology Solutions
business ("TS"). TS delivered data center hardware and software solutions and
services and the TS acquisition strengthened our end-to-end solutions and
deepened our value added capabilities in the data center and next-generation
technologies. We acquired TS for an aggregate purchase price of approximately
$2.8 billion , comprised of approximately $2.5 billion in cash and 2,785,402
shares of the Company's common stock.
On November 25, 2019 , we completed the acquisition of DLT Solutions ("DLT"), a
premier software and cloud solutions aggregator focused on the U.S. public
sector. We acquired all of the outstanding shares of DLT for a preliminary
purchase price of approximately $210 million in cash, subject to certain working
capital and other adjustments. The DLT acquisition enables us to proactively
develop opportunities, accelerate growth and simplify complexity for our channel
partners that are serving the U.S. public sector space.
Planned Acquisition
On November 12, 2019 , we entered into an Agreement and Plan of Merger, as
subsequently amended on November 27, 2019 (the ''Merger Agreement''), with the
affiliates of certain funds (the "Apollo Funds"), managed by affiliates of
Apollo Global Management, LLC ("Apollo"), a leading global alternative
investment manager. Pursuant to the Merger Agreement, the affiliates of the
Apollo Funds will acquire all the outstanding shares of the Company's common
stock (other than shares held by us as treasury stock or held by certain
affiliates of the Apollo Funds) for $145 per share in cash (the "Merger"). On
February 12, 2020 , we held a special meeting of shareholders. At such meeting,
the Merger Agreement was approved and adopted by a majority of the outstanding
shares of the Company's common stock entitled to vote thereon. The waiting
period with respect to the premerger notification and report form filed by the
parties under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, has expired. The completion of the Merger remains subject to other
customary closing conditions and to certain foreign regulatory approvals. All
applications for foreign regulatory approvals have been filed, and some have
been granted while others are still pending.
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NON-GAAP FINANCIAL INFORMATION
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in theU.S. ("GAAP"), the Company also discloses certain non-GAAP financial information. Certain of these measures are presented as adjusted for the impact of changes in foreign currencies (referred to as "impact of changes in foreign currencies"). Removing the impact of the changes in foreign currencies provides a framework for assessing our financial performance as compared to prior periods. The impact of changes in foreign currencies is calculated by using the exchange rates from the prior year comparable period applied to the results of operations for the current period. The non-GAAP financial measures presented in this document include: • Net sales, as adjusted, which is defined as net sales adjusted for the impact of changes in foreign currencies;
• Gross profit, as adjusted, which is defined as gross profit as adjusted
for the impact of changes in foreign currencies;
• Selling, general and administrative expenses ("SG&A"), as adjusted, which
is defined as SG&A as adjusted for the impact of changes in foreign
currencies;
• Non-GAAP operating income, which is defined as operating income asadjusted to exclude acquisition, integration and restructuring expenses;
goodwill impairment; legal settlements and other, net; gain on disposal of
subsidiary; value added tax assessments; tax indemnifications; and
acquisition-related intangible assets amortization expense;
• Non-GAAP net income, which is defined as net income as adjusted to exclude
acquisition, integration and restructuring expenses; goodwill impairment;
legal settlements and other, net; gain on disposal of subsidiary; value
added tax assessments and related interest expense; acquisition-related
intangible assets amortization expense; acquisition-related financing
expenses; tax indemnifications; the income tax effects of these
adjustments; change in deferred tax valuation allowances and the impact of
U.S. Tax Reform; • Non-GAAP earnings per share-diluted, which is defined as earnings per
share-diluted as adjusted to exclude the per share impact of acquisition,
integration and restructuring expenses; goodwill impairment; legal
settlements and other, net; gain on disposal of subsidiary; value added
tax assessments and related interest expense; acquisition-relatedintangible assets amortization expense; acquisition-related financing
expenses; tax indemnifications; the income tax effects of these
adjustments; change in deferred tax valuation allowances and the impact of
Management believes that providing this additional information is useful to the
reader to assess and understand our financial performance as compared with
results from previous periods. Management also uses these non-GAAP measures to
evaluate performance against certain operational goals. However, analysis of
results on a non-GAAP basis should be used as a complement to, and in
conjunction with, data presented in accordance with GAAP. Additionally, because
these non-GAAP measures are not calculated in accordance with GAAP, they may not
necessarily be comparable to similarly titled measures reported by other
companies.
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Table of Contents RESULTS OF OPERATIONS The following table sets forth our Consolidated Statement of Income as a percentage of net sales. Year ended January 31: 2020 2019 2018 Net sales 100.00 % 100.00 % 100.00 % Cost of products sold 93.79 93.94 93.70 Gross profit 6.21 6.06 6.30 Operating expenses: Selling, general and administrative expenses 4.57 4.43
4.79
Acquisition, integration and restructuring expenses 0.07 0.23
0.41
Goodwill impairment - 0.13
-
Legal settlements and other, net - (0.04 ) (0.12 )
Gain on disposal of subsidiary - (0.02 ) -
4.64 4.73 5.08
Operating income 1.57 1.33 1.22
Interest expense 0.23 0.29 0.33
Other expense (income), net 0.03 0.04 -
Income before income taxes 1.31 1.00 0.89
Provision for income taxes 0.30 0.09 0.54
Net income 1.01 % 0.91 % 0.35 %
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Table of ContentsNET SALES
The following tables summarize our net sales and change in net sales by
geographic region for the fiscal years ended
[[Image Removed: chart-39b655e62f6f52cba8f.jpg]][[Image Removed: chart-339a194d758e52c8a4d.jpg]]
Year ended
2020 2019 $ Change % Change
(in millions)
Consolidated net sales, as reported $ 36,998 $ 37,239 $ (241 ) (0.6)%
Impact of changes in foreign currencies 986 - 986
Consolidated net sales, as adjusted
2.0%
Americas net sales, as reported$ 16,600 $ 16,041 $ 559
3.5%
Impact of changes in foreign currencies 60 - 60 Americas net sales, as adjusted$ 16,660 $ 16,041 $ 619
3.9%
Europe net sales, as reported$ 19,132 $ 20,026 $ (894 ) (4.5)% Impact of changes in foreign currencies 907 - 907 Europe net sales, as adjusted$ 20,039 $ 20,026 $ 13
0.1%
8.0%
Impact of changes in foreign currencies 19 - 19
9.6%
2020 - 2019 NET SALES COMMENTARY
• The increase in
million is primarily due to growth in personal computer systems and software,
including the impact of the acquisition of DLT in
• The increase in
is primarily due to growth in software. The impact of changes in foreign
currencies is primarily due to the weakening of the euro against the
dollar.
• The increase in
primarily due to growth in data center products.
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Table of Contents Year ended January 31: 2019 2018 $ Change % Change (in millions) Consolidated net sales, as reported$ 37,239 $ 33,598 $ 3,641
10.8%
Impact of changes in foreign currencies (238 ) - (238 )
Consolidated net sales, as adjusted
10.1%
Americas net sales, as reported$ 16,041 $ 14,419 $ 1,622
11.2%
Impact of changes in foreign currencies 45 - 45 Americas net sales, as adjusted$ 16,086 $ 14,419 $ 1,667
11.6%
Europe net sales, as reported$ 20,026 $ 18,148 $ 1,878
10.3%
Impact of changes in foreign currencies (314 ) - (314 )
$ 19,712 $ 18,148 $ 1,564
8.6%
13.7%
Impact of changes in foreign currencies 31 - 31
16.7%
2019 - 2018 NET SALES COMMENTARY
• The increase inAmericas net sales, as adjusted, of approximately$1.7 billion is primarily due to growth in data center products, software products and personal computer systems, including the impact of an
additional month of TS operations due to the timing of the completion of
the acquisition in the prior year.
EUROPE • The increase inEurope net sales, as adjusted, of approximately$1.6
billion is primarily due to growth in data center, software and mobility
products, including the impact of an additional month of TS operations due
to the timing of the completion of the acquisition in the prior year. The
impact of changes in foreign currencies is primarily due to the
strengthening of the euro against the U.S. dollar.
• The increase in
primarily due to growth in data center products and the impact of an
additional month of TS operations due to the timing of the completion of
the acquisition in the prior year.
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Table of Contents GROSS PROFIT The following tables provide a comparison of our gross profit and gross profit as a percentage of net sales for the fiscal years endedJanuary 31, 2020 , 2019 and 2018: [[Image Removed: chart-f4d78e0a755b5bbdb3d.jpg]][[Image Removed: chart-3d375b995a4053df810.jpg]] Year ended January 31: 2020 2019 $ Change % Change (in millions) Gross profit, as reported$ 2,298 $ 2,256 $ 42 1.9% Impact of changes in foreign currencies 57 - 57 Gross profit, as adjusted$ 2,355 $ 2,256 $ 99 4.4% Year ended January 31: 2019 2018 $ Change % Change (in millions) Gross profit, as reported$ 2,256 $ 2,116 $ 140 6.6% Impact of changes in foreign currencies (10 ) - (10 ) Gross profit, as adjusted$ 2,246 $ 2,116 $ 130 6.1% COMMENTARY 2020 - 2019
• The increase in gross profit, as adjusted, of
an increase in net sales volume and the mix of products sold. The increase in
our year-over-year gross profit as a percentage of net sales is primarily due
to the mix of products sold.
2019 - 2018
• The increase in gross profit, as adjusted, of
attributable to increased sales volume and the impact of an additional month
of TS operations due to the timing of the completion of the acquisition in
the prior year. The decrease in our year-over-year gross profit as a
percentage of net sales is primarily due to the mix of products sold and the
impact of a competitive environment.
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Table of Contents OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following tables provide a comparison of our selling, general and administrative expenses: Year ended January 31: 2020 2019 $ Change % Change (in millions) SG&A, as reported$ 1,691 $ 1,649 $ 42 2.5% Impact of changes in foreign currencies 46 - 46 SG&A, as adjusted$ 1,737 $ 1,649 $ 88 5.3% SG&A as a percentage of net sales, as reported 4.57 % 4.43 % 14 bps The increase in SG&A, as adjusted, of approximately$88 million and SG&A as a percentage of net sales, as reported, of 14 basis points is primarily due to increased investments in our strategic priorities and a benefit in the prior year of approximately$25 million related to the collection of an accounts receivable balance previously considered uncollectible, partially offset by savings from our Global Business Optimization Program. Year ended January 31: 2019 2018 $ Change % Change (in millions) SG&A, as reported$ 1,649 $ 1,611 $ 38 2.4% Impact of changes in foreign currencies (11 ) - (11 ) SG&A, as adjusted$ 1,638 $ 1,611 $ 27 1.7% SG&A as a percentage of net sales, as reported 4.43 % 4.79 % (36) bps The increase in SG&A, as adjusted, of$27 million is primarily due to an additional month of TS operations due to the timing of the completion of the acquisition in the prior year, partially offset by a benefit of approximately$25 million related to the collection of an accounts receivable balance previously considered uncollectible. The decrease in SG&A as a percentage of net sales, as reported, of 36 basis points is primarily due to greater operating leverage from our increased sales and a benefit of approximately$25 million related to the collection of an accounts receivable balance previously considered uncollectible. 25
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ACQUISITION, INTEGRATION AND RESTRUCTURING EXPENSES
Acquisition, integration and restructuring expenses are primarily comprised of costs related to the fiscal 2018 acquisition of TS, restructuring costs related to the Global Business Optimization Program which was initiated in fiscal 2019, the fiscal 2020 acquisition of DLT and the proposed Merger.
Acquisition of TS
Acquisition, integration and restructuring expenses related to the acquisition of TS are primarily comprised of restructuring costs, IT related costs, professional services, transaction related costs and other costs. Restructuring costs are comprised of severance and facility exit costs. IT related costs consist primarily of data center and non-ERP application migration and integration costs, as well as, IT related professional services. Professional services are primarily comprised of integration related activities, including professional fees for project management, accounting, tax and other consulting services. 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 includes payroll related costs including retention, stock compensation, relocation and travel expenses incurred as part of the integration of TS. For the fiscal year endedJanuary 31, 2019 , other costs are partially offset by a gain of$9.6 million related to the final working capital adjustment for the acquisition of TS as part of a settlement agreement with Avnet. We incurred no acquisition, integration and restructuring expenses related to the acquisition of TS during the year endedJanuary 31, 2020 and do not expect to incur any additional costs in future periods. Acquisition, integration and restructuring expenses for fiscal 2019 and 2018 related to the acquisition of TS are comprised of the following: Year ended January 31: 2019 2018 (in millions) Restructuring costs$ 19.8 $ 35.1 IT related costs 13.2 18.3 Professional services 6.0 42.6 Transaction related costs 1.7 20.2 Other costs 4.7 20.1 Total$ 45.4 $ 136.3 Pending Merger and DLT Acquisition Additionally, we incurred$8.6 million of professional services and other transaction related costs during the year endedJanuary 31, 2020 related to the proposed Merger and the acquisition of DLT. Global Business Optimization Program In fiscal 2019, our Board of Directors approved the Global Business Optimization Program (the "GBO Program") to increase investment in our strategic priorities and implement operational initiatives to drive productivity and enhance profitability. Under the GBO Program, we expect to incur cumulative cash charges through fiscal 2021 of approximately$70 million to$80 million , primarily comprised of$40 million to$45 million of charges inEurope and$30 million to$35 million of charges in theAmericas . The cash charges primarily consist of severance costs, and also include professional services and other costs. The GBO Program is expected to result in annual cost savings of$70 million to$80 million by the end of fiscal 2021, of which approximately half is expected to be reinvested to accelerate our strategic priorities. Restructuring expenses related to the GBO Program are comprised of the following: Cumulative Amounts Year ended January 31: 2020 2019 Incurred to Date (in millions) Severance costs $ 12.0 $ 26.4 $ 38.4 Professional services and other costs 5.4 16.1 21.5 Total $ 17.4 $ 42.5 $ 59.9 26
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Restructuring expenses related to the GBO Program by segment are as follows: Year ended January 31: 2020 2019 (in millions) Americas$ 7.9 $ 12.1 Europe 8.4 29.0 Asia-Pacific 1.1 1.4 Total$ 17.4 $ 42.5 GOODWILL IMPAIRMENT During the fourth quarter of fiscal 2019, we recorded goodwill impairment expense of$47.4 million related to ourAsia-Pacific reporting unit (see Note 4 of Notes to Consolidated Financial Statements for further discussion). LEGAL SETTLEMENTS AND OTHER, NET We have been a claimant in proceedings seeking damages primarily from certain manufacturers of LCD flat panel and cathode ray tube displays, as well as reimbursement from insurance providers of certain costs associated with the restatement of our consolidated financial statements and other financial information from fiscal 2009 to 2013. We have reached settlement agreements during the periods presented and have recorded these amounts net of attorney fees and other expenses, in "legal settlements and other, net" in the Consolidated Statement of Income. GAIN ON DISPOSAL OF SUBSIDIARY During fiscal 2019, we executed an agreement to sell certain of our operations inIreland for a total sales price of approximately$15.3 million . We recorded a gain on sale of$6.7 million during the year endedJanuary 31, 2019 , which includes the reclassification of$5.1 million from accumulated other comprehensive income for cumulative translation adjustments associated with our investment in this foreign entity. We recorded an additional gain on the sale of this entity of$1.4 million during the year endedJanuary 31, 2020 . The operating results of this entity during the years endedJanuary 31, 2019 and 2018 were insignificant relative to the consolidated financial results. 27
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Table of Contents OPERATING INCOME The following tables provide a comparison of GAAP operating income and non-GAAP operating income on a consolidated and regional basis as well as a reconciliation of GAAP operating income to non-GAAP operating income on a consolidated and regional basis for the fiscal years endedJanuary 31, 2020 , 2019 and 2018: [[Image Removed: chart-2db315918f5458838bd.jpg]][[Image Removed: chart-0b08d036f9312bf3754.jpg]] 2020 - 2019 COMMENTARY • The increase in GAAP operating income of$88.5 million as compared to the
prior fiscal year is primarily due to a decrease of
acquisition, integration and restructuring costs, a prior year goodwill
impairment expense of
increase in net sales volume, excluding the impact of changes in foreign
currencies. This was partially offset by an increase in SG&A costs, including
a prior year benefit of
receivable balance previously considered uncollectible, and lower gains on
legal settlements.
• The decrease in non-GAAP operating income of
prior fiscal year is primarily due to an increase in SG&A costs, including a
prior year benefit of
receivable balance previously considered uncollectible. This was partially
offset by favorable changes in product mix and an increase in net sales
volume, excluding the impact of changes in foreign currencies.
2019 - 2018 COMMENTARY
• The increase in GAAP operating income of
prior fiscal year is primarily due to an increase in net sales volume, a
decrease in acquisition, integration and restructuring expenses and a benefit
of approximately
receivable balance previously considered uncollectible, partially offset by
goodwill impairment expense of
reporting unit and lower gains on legal settlements.
• The increase in non-GAAP operating income of
the prior fiscal year is primarily due to an increase in net sales volume and
a benefit of approximately
accounts receivable balance previously considered uncollectible.
• The GAAP and non-GAAP results are also impacted by an additional month of TS
operations due to the timing of the completion of the acquisition in the
prior year.
CONSOLIDATED GAAP TO NON-GAAP RECONCILIATION OF OPERATING INCOME
Year ended January 31: 2020 2019 2018 (in millions) Operating income$ 582.3 $ 493.8 $ 410.1 Acquisition, integration and restructuring expenses 26.0 87.9
136.3
Goodwill impairment - 47.4
-
Legal settlements and other, net (0.6 ) (15.4 ) (41.3 ) Gain on disposal of subsidiary (1.4 ) (6.7 ) - Value added tax assessments - - 1.7 Tax indemnifications 1.2 9.6 6.5 Acquisition-related intangible assets amortization expense 86.9 91.3 89.4 Non-GAAP operating income$ 694.4 $ 707.9 $ 602.7 28
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Table of ContentsAMERICAS [[Image Removed: chart-efa270f0d4b255a9b84.jpg]][[Image Removed: chart-3ae3925b6a085e35933.jpg]] 2020 - 2019 COMMENTARY • The decrease in GAAP operating income of$33.4 million as compared to the
prior fiscal year is primarily due to a prior year benefit of
related to the collection of an accounts receivable balance previously
considered uncollectible, increased investments in our strategic priorities
and lower gains from legal settlements. This was partially offset by an
increase in net sales volume, favorable changes in product mix and a decrease
in acquisition, integration and restructuring costs.
• The decrease in non-GAAP operating income of
prior fiscal year is primarily due to a prior year benefit of
related to the collection of an accounts receivable balance previously
considered uncollectible and increased investments in our strategic
priorities. This was partially offset by an increase in net sales volume and
favorable changes in product mix.
2019 - 2018 COMMENTARY
• The increase in GAAP operating income of
prior fiscal year is primarily due to an increase in net sales volume, a
decrease in acquisition, integration and restructuring expense and a benefit
of approximately
receivable balance previously considered uncollectible, partially offset by
lower gains from legal settlements.
• The increase in non-GAAP operating income of
prior fiscal year is primarily due to an increase in net sales volume and a
benefit of approximately
receivable balance previously considered uncollectible.
• The GAAP and non-GAAP results are also impacted by an additional month of TS
operations due to the timing of the completion of the acquisition in the
prior year.
Year ended January 31: 2020 2019 2018 (in millions) Operating income - Americas$ 333.2 $ 366.6 $ 248.4 Acquisition, integration and restructuring expenses 16.1 25.2
75.5
Legal settlements and other, net (0.6 ) (15.4 ) (42.6 ) Value added tax assessments - -
0.5
Tax indemnifications - 0.7 - Acquisition-related intangible assets amortization expense 56.4 54.2
51.9
Non-GAAP operating income - Americas$ 405.1 $ 431.3 $ 333.7 29
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Table of ContentsEUROPE [[Image Removed: chart-e94ac1f9e218562a807.jpg]][[Image Removed: chart-c2c7aa7a89aa55ebb4c.jpg]] 2020 - 2019 COMMENTARY • The increase in GAAP operating income of$77.1 million , as compared to the
prior fiscal year, is primarily due to a reduction in acquisition,
integration and restructuring costs and favorable changes in product mix.
• The increase in non-GAAP operating income of
the prior fiscal year, is primarily due to favorable changes in product mix.
2019 - 2018 COMMENTARY
• The increase in GAAP operating income and non-GAAP operating income of
million and
year, is primarily due to an increase in net sales volume, partially offset
by an increase in SG&A expenses.
• The GAAP and non-GAAP results are also impacted by an additional month of TS
operations due to the timing of the completion of the acquisition in the
prior year.
Year ended January 31: 2020 2019 2018 (in millions) Operating income - Europe$ 272.5 $ 195.4 $ 173.6 Acquisition, integration and restructuring expenses 8.4 57.7
56.2
Legal settlements and other, net - -
1.3
Gain on disposal of subsidiary (1.4 ) (6.7 ) - Value added tax assessments - - 1.2 Tax indemnifications 1.3 9.5 6.5 Acquisition-related intangible assets amortization expense 25.3 31.7
32.5
Non-GAAP operating income - Europe$ 306.1 $ 287.6 $ 271.3 30
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Table of ContentsASIA-PACIFIC Year ended January 31: 2020 2019 2018 as a % of as a % of net as a % of $ in millions net sales $ in millions sales $ in millions net sales Operating income (loss) - Asia-Pacific $ 8.8 0.69 %$ (36.7 ) (3.13 )% $ 17.5 1.70 % Acquisition, integration and restructuring expenses 1.1 2.4 0.8 Goodwill impairment - 47.4 - Tax indemnifications (0.1 ) (0.6 ) - Acquisition-related intangible assets amortization expense 5.2 5.4 5.0 Non-GAAP operating income - Asia-Pacific$ 15.0 1.18 %$ 17.9 1.53 % $ 23.3 2.26 %
2020 - 2019 COMMENTARY
• GAAP operating income increased by
year primarily due to the prior year goodwill impairment expense of
million and an increase in net sales volume, partially offset by an increase
in SG&A expenses.
• The decrease in non-GAAP operating income of
the prior fiscal year is primarily due to an increase in SG&A expenses,
partially offset by an increase in net sales volume.
2019 - 2018 COMMENTARY
• GAAP operating income decreased by
year primarily due to goodwill impairment expense of
increase in SG&A expenses, partially offset by an increase in net sales
volume.
• The decrease in non-GAAP operating income of
the prior fiscal year is primarily due to an increase in SG&A expenses,
partially offset by an increase in net sales volume.
• The GAAP and non-GAAP results are also impacted by an additional month of TS
operations due to the timing of the completion of the acquisition in the
prior year.
OPERATING INCOME BY REGION
We do not consider stock-based compensation expenses in assessing the
performance of our operating segments, and therefore we report stock-based
compensation expenses separately. The following table summarizes our operating
income (loss) by geographic region.
Year ended January 31: 2020 2019 2018
(in millions)
Americas $ 333.2 $ 366.6 $ 248.4
Europe 272.5 195.4 173.6
Asia-Pacific 8.8 (36.7 ) 17.5
Stock-based compensation expense (32.2 ) (31.5 ) (29.4 )
Operating income $ 582.3 $ 493.8 $ 410.1
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INTEREST EXPENSE
% Change:
Year ended
2019 to 2018 (in millions) Interest expense$ 86.0 $ 106.7 $ 112.2 (19.4 )% (4.9 )% Percentage of net sales 0.23 % 0.29 % 0.33 % The decrease in interest expense in fiscal 2020 compared to fiscal 2019 of$20.7 million is primarily due to a benefit of$10.2 million related to our net investment hedges (see further discussion in Note 12 of Notes to Consolidated Financial Statements) and lower interest rates and average balances outstanding on term loan credit agreements. The decrease in interest expense in fiscal 2019 compared to fiscal 2018 of$5.5 million is primarily due to$8.3 million of prior year interest expense on$350 million of Senior Notes that matured inSeptember 2017 ,$4.6 million of costs incurred in the prior year related to a commitment for a bridge loan facility obtained in conjunction with the acquisition of TS, and lower amounts outstanding on term loan credit agreements, partially offset by higher average borrowings and interest rates on other credit facilities during the period.
OTHER EXPENSE (INCOME), NET
Year ended
Other expense (income), net, consists primarily of gains and losses on the investments contained within life insurance policies used to fund our nonqualified deferred compensation plan, interest income, discounts on the sale of accounts receivable and net foreign currency exchange gains and losses on certain financing transactions and the related derivative instruments used to hedge such financing transactions. The change in other expense (income), net, in fiscal 2020 compared to fiscal 2019 is primarily attributable to higher gains on the investments contained within life insurance policies, partially offset by lower interest income and higher discount fees on of the sale of accounts receivable. The gains on investments are substantially offset in our payroll costs which are reflected in SG&A as part of operating income. The change in other expense (income), net, during fiscal 2019 compared to fiscal 2018 is primarily attributable to lower gains on the investments contained within life insurance policies of$9.0 million and higher discount fees on the sale of accounts receivable of$5.9 million . 32
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Table of Contents PROVISION FOR INCOME TAXES
[[Image Removed: chart-18ef069ac11953b2adb.jpg]][[Image Removed: chart-95bb602d4e4a51508a9.jpg]] 2020 - 2019 COMMENTARY
The increase in both the effective tax rate and the provision for income taxes
in fiscal 2020 as compared to fiscal 2019 is primarily due to the impact of the
following:
• In fiscal 2019, we finalized our analysis of the impact of the
enactment of U.S. Tax Reform and decreased our estimate of the one-time
transition tax by $49.2 million .
• In fiscal 2019, we recorded income tax benefits of
relation to the settlement agreement reached with Avnet (see Note 5 of
Notes to Consolidated Financial Statements for further discussion).
• In fiscal 2019, we recorded income tax benefits of$9.6 million due to the resolution of certain pre-acquisition tax matters related to TS. • In fiscal 2019, we recorded income tax benefits of$6.0 million related to changes in deferred tax valuation allowances. Additionally, the increase in the absolute dollar value of the provision for income taxes as compared to the prior year is due to an increase in taxable earnings. The change in the effective tax rate was also impacted by goodwill impairment expense in fiscal 2019 which was not deductible for tax purposes and the relative mix of earnings and losses within the taxing jurisdictions in which we operate. 2019 - 2018 COMMENTARY The decrease in both the effective tax rate and the provision for income taxes in fiscal 2019 as compared to fiscal 2018 is primarily due to the impact of the following: • In fiscal 2018, we recorded income tax expense of$95.4 million related to our provisional estimate of the impact of the enactment ofU.S. Tax Reform • In fiscal 2019, we finalized our analysis of the impact of the enactment ofU.S. Tax Reform and decreased our estimate of the one-time transition tax by$49.2 million .
• In fiscal 2019, we recorded income tax benefits of
relation to the settlement agreement reached with Avnet.
• In fiscal 2019, we recorded income tax benefits of
to changes in deferred tax valuation allowances.
• The decrease in the
Global Intangible Low-Taxed Income provisions due to U.S. Tax Reform.
Additionally, the change in the effective tax rate was impacted by the relative mix of earnings and losses within the taxing jurisdictions in which we operate.
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OnDecember 22, 2017 , theU.S. federal government enacted theU.S. Tax Cuts and Jobs Act ("U.S. Tax Reform") which significantly revisedU.S. corporate income tax law by, among other things, reducing theU.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. TheSEC provided accounting and reporting guidance that allowed us to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. In the fourth quarter of fiscal 2018, we recorded income tax expense of$95.4 million , which represented our reasonable estimate of the impact of the enactment ofU.S. Tax Reform. The amounts recorded include income tax expense of$101.1 million for the one-time 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 theU.S. federal corporate income tax rate. During fiscal 2019, we finalized our analysis of the impact of the enactment ofU.S. Tax Reform and decreased our estimate of the one-time transition tax by$49.2 million , primarily due to further analysis of earnings and profits of our foreign subsidiaries and the utilization of foreign tax credits (see Note 9 of Notes to Consolidated Financial Statements for further discussion).
Tax Indemnifications
In connection with the acquisition of TS, pursuant to the interest purchase agreement, the Company and Avnet agreed to indemnify each other in relation to certain tax matters. As a result, we have recorded certain indemnification assets and liabilities for expected amounts to be received from and paid to Avnet. During the years endedJanuary 31, 2020 , 2019 and 2018, due to the resolution of certain pre-acquisition tax matters and the expiration of certain statutes of limitation, we recorded benefits in income tax expense of$1.2 million ,$9.6 million and$6.5 million , respectively. As a result, we recorded expenses of$1.2 million ,$9.6 million and$6.5 million during the years endedJanuary 31, 2020 , 2019 and 2018, respectively, which are included in "selling, general and administrative expenses" in the Consolidated Statement of Income, related to changes in the corresponding indemnification assets and liabilities recorded. The net impact of these items had no impact on our net income. 34
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NET INCOME AND EARNINGS PER SHARE - DILUTED
The following table provides a comparison of GAAP net income and earnings per share-diluted and non-GAAP net income and earnings per share-diluted as well as a reconciliation of results recorded in accordance with GAAP and non-GAAP financial measures for the fiscal years endedJanuary 31, 2020 , 2019 and 2018 ($ in millions, except per share data): [[Image Removed: chart-4f2eeeead7ab57b3b90.jpg]][[Image Removed: chart-0bb9b8f65a525c3d829.jpg]] GAAP TO NON-GAAP RECONCILIATION OF NET INCOME AND EARNINGS PER SHARE-DILUTED Net Income Earnings per Share-Diluted Year ended January 31: 2020 2019 2018 2020 2019 2018 (in millions) GAAP Results$ 374.5 $ 340.6 $ 116.6 $ 10.27 $ 8.89 $ 3.05 Acquisition, integration and restructuring expenses 26.0 87.9 136.3 0.71 2.29 3.57 Goodwill impairment - 47.4 - - 1.24 - Legal settlements and other, net (0.6 ) (15.4 ) (41.0 ) (0.02 ) (0.40 ) (1.07 ) Gain on disposal of subsidiary (1.4 ) (6.7 ) - (0.04 ) (0.18 ) - Value added tax assessments and related interest expense - (0.9 ) 2.6 - (0.02 ) 0.06 Acquisition-related intangible assets amortization expense 86.9 91.3 89.4 2.38 2.38 2.34 Acquisition-related financing expenses - - 8.8 - - 0.23 Tax indemnifications 1.2 9.6 6.5 0.03 0.25 0.17 Income tax effect of tax indemnifications (1.2 ) (9.6 ) (6.5 ) (0.03 ) (0.25 ) (0.17 ) Income tax effect of other adjustments above (27.9 ) (40.1 ) (61.0 ) (0.76 ) (1.04 ) (1.60 ) Income tax benefit from acquisition settlement - (13.0 ) - - (0.34 ) - Change in deferred tax valuation allowances 1.3 (6.0 ) 1.2 0.04 (0.16 ) 0.03 Impact of U.S. Tax Reform - (49.2 ) 95.4 - (1.28 ) 2.50 Non-GAAP results$ 458.8 $ 435.9 $ 348.3 $ 12.58 $ 11.38 $ 9.11 35
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LIQUIDITY AND CAPITAL RESOURCES
Our discussion of liquidity and capital resources includes an analysis of our cash flows and capital structure for all periods presented.
CASH CONVERSION CYCLE
[[Image Removed: chart-696d283ec2cf598188d.jpg]]
As a distribution company, our business requires significant investment in
working capital, particularly accounts receivable and inventory, partially
financed through our accounts payable to vendors. An important driver of our
operating cash flows is our cash conversion cycle (also referred to as "net cash
days"). Our net cash days are defined as days of sales outstanding in accounts
receivable plus days of supply on hand in inventory, less days of purchases
outstanding in accounts payable. The following tables present the components of
our cash conversion cycle, in days, as of January 31, 2020 , 2019 and 2018.
[[Image Removed: chart-7c3fddcd86b38589ff9a03.jpg]][[Image Removed: chart-09c5e413573b592bb30.jpg]][[Image Removed: chart-c6183bd67a90555d9df.jpg]]
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CASH FLOWS
The following table summarizes our Consolidated Statement of Cash Flows:
Year ended
2020 2019 2018
(in millions)
Net cash provided by (used in):
Operating activities $ 593.1 $ 380.1 $ 1,094.5
Investing activities (290.3 ) (171.7 ) (2,479.2 )
Financing activities (243.5 ) (332.2 ) 119.9
Effect of exchange rate changes on cash and cash equivalents (17.1 ) (32.7 ) 94.8
Net increase (decrease) in cash and cash equivalents $ 42.2 $ (156.5 ) $ (1,170.0 )
OPERATING ACTIVITIES
The increase in cash resulting from operating activities in fiscal 2020 compared
to fiscal 2019 is primarily due to the favorable impact of changes in working
capital and higher earnings.
The decrease in cash resulting from operating activities in fiscal 2019 compared
to fiscal 2018 is primarily due to favorable changes in working capital in
fiscal 2018, including the impacts of changes in payment terms with certain
vendors and the acquisition of TS.
The significant components of our investing and financing cash flow activities
are listed below.
INVESTING ACTIVITIES
2020
• $210 million cash paid for the acquisition of DLT (see Note 5 of Notes to
Consolidated Financial Statements for further discussion)
•
2019 •$120 million in cash paid for the acquisition of TS pertaining to a settlement agreement with Avnet (see Note 5 of Notes to Consolidated Financial Statements for further discussion)
•
2018
•
•$156 million paid to purchase certain logistics centers and office facilities upon termination of a synthetic lease arrangement FINANCING ACTIVITIES 2020 •$170.2 million paid to repurchase common stock under our share repurchase
program
• Repayment of
2019
• Repayment of
•
program
2018
• Net borrowings under the term loan credit agreements of
• Repayment of
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CAPITAL RESOURCES AND DEBT COMPLIANCE
Our debt to total capital ratio was 32% atJanuary 31, 2020 . As part of our capital structure and to provide us with significant liquidity, we have a diverse range of financing facilities across our geographic regions with various financial institutions. Also providing us liquidity are our cash and cash equivalents balances across our regions which are deposited and/or invested with various financial institutions. We are exposed to risk of loss on funds deposited with these financial institutions; however, we monitor our financing and depository financial institution partners regularly for credit quality. We believe that our existing sources of liquidity, including our financing facilities and cash resources, as well as cash expected to be provided by operating activities will be sufficient to meet our working capital needs and cash requirements for at least the next 12 months. AtJanuary 31, 2020 , we had approximately$841.4 million in cash and cash equivalents, of which approximately$749.6 million was held in our foreign subsidiaries. As discussed above, we currently have sufficient resources, cash flows and liquidity within theU.S. to fund current and expected future working capital requirements. As ofJanuary 31, 2019 , we completed our accounting for the tax effects ofU.S. Tax Reform including finalizing the accounting related to our indefinite reinvestment assertion. As a result of the transition tax incurred pursuant toU.S. Tax Reform, we were able to repatriate foreign cash, along with the majority of our remaining foreign earnings which have been previously taxed, with minimal additional tax consequences. We plan to continue reinvesting future foreign earnings indefinitely outside theU.S. Any future remittances of foreign cash could be subject to additional foreign withholding tax,U.S. state taxes and certain tax impacts relating to foreign currency exchange effects.
The following is a discussion of our various financing facilities:
Senior notes InJanuary 2017 , we issued$500.0 million aggregate principal amount of 3.70% Senior Notes dueFebruary 15, 2022 (the "3.70% Senior Notes") and$500.0 million aggregate principal amount of 4.95% Senior Notes dueFebruary 15, 2027 (the "4.95% Senior Notes") (collectively the "2017 Senior Notes"). We pay interest on the 2017 Senior Notes semi-annually in arrears onFebruary 15 andAugust 15 of each year. 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 from time to time outstanding. We, at our option, may redeem the 3.70% Senior Notes at any time prior toJanuary 15, 2022 and the 4.95% Senior Notes at any time prior toNovember 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. We may also redeem the 2017 Senior Notes, at any time in whole or from time to time in part, on or afterJanuary 15, 2022 for the 3.70% Senior Notes andNovember 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. OnMarch 10, 2020 ,Tiger Merger Sub Co. , an affiliate of certain investment funds managed by affiliates of Apollo, launched an offer to purchase for cash any and all of our outstanding 3.70% Senior Notes and any and all of our outstanding 4.95% Senior Notes and a consent solicitation to amend the indenture and global securities establishing the 3.70% Senior Notes and the 4.95% Senior Notes to (i) eliminate the requirement to make a "change of control" offer in connection with the proposed merger ofTiger Merger Sub Co. into the Company pursuant to the Merger Agreement and (ii) make certain other customary changes for a privately-held company to the "change of control" provisions (the "Proposed Amendments"). Concurrently with, but separate from, the aforementioned offer to purchase and consent solicitation, Tiger Merger Sub. Co. launched a consent solicitation for the Proposed Amendments for holders of the 4.95% Senior Notes. OnMarch 24, 2020 ,Tiger Merger Sub Co. announced that the requisite more than 50% of consents were received to adopt the Proposed Amendments. OnMarch 24, 2020 , we entered into a Supplemental Indenture with respect to the Indenture and Global Security for the 3.70% Senior Notes and a Supplemental Indenture with respect to the Indenture and Global Security for the 4.95% Senior Notes effecting the Proposed Amendments. Other credit facilities We have a$1.5 billion revolving credit facility with a syndicate of banks (the "Credit Agreement") which, among other things, provides for (i) a maturity date ofMay 15, 2024 , (ii) an interest rate on borrowings, facility fees and letter of credit fees based on our debt rating, (iii) the ability to increase the facility to a maximum of$1.75 billion , subject to certain conditions and (iv) certain of our subsidiaries to be designated as borrowers. The applicable borrower will pay interest on advances under the Credit Agreement based on LIBOR (or similar interbank offered rates depending on currency draw) plus a predetermined margin that is based on our debt rating. Our borrowings under the Credit Agreement vary within the period primarily based on changes in our working capital. There were no amounts outstanding under the Credit Agreement atJanuary 31, 2020 and 2019.
We entered into a term loan credit agreement in
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billion. We paid interest on advances under the 2016 Term Loan Credit Agreement at a variable rate based on LIBOR plus a predetermined margin based on our debt rating. We had$300 million outstanding under the 2016 Term Loan Credit Agreement atJanuary 31, 2019 . OnAugust 2, 2019 , we entered into a new term loan credit agreement (the "2019 Term Loan Credit Agreement"), the proceeds of which were used to repay in full the amounts outstanding under the 2016 Term Loan Credit Agreement. The 2019 Term Loan Credit Agreement, among other things, (i) provides for a$300 million term loan credit facility with a maturity date ofAugust 2, 2021 , (ii) provides for an interest rate on the outstanding principal amount of the loan that is based on LIBOR plus a predetermined margin, and (iii) may be increased up to a total of$500 million , subject to certain conditions. We had$300.0 million outstanding under the 2019 Term Loan Credit Agreement atJanuary 31, 2020 . We also have an agreement with a syndicate of banks (the "Receivables Securitization Program") that allows us to transfer an undivided interest in a designated pool ofU.S. accounts receivable, on an ongoing basis, to provide collateral for borrowings up to a maximum of$1.0 billion . The scheduled termination date of the agreement isApril 16, 2021 . Under this program, we transfer certainU.S. trade receivables into a wholly-owned bankruptcy remote special purpose entity. Such receivables, which are recorded in the Consolidated Balance Sheet, totaled approximately$1.6 billion and$1.7 billion , respectively, atJanuary 31, 2020 and 2019. As collections reduce accounts receivable balances included in the collateral pool, we may transfer interests in new receivables to bring the amount available to be borrowed up to the maximum. We pay interest on advances under the Receivables Securitization Program at designated commercial paper or LIBOR-based rates plus an agreed-upon margin. Our borrowings under the Receivables Securitization Agreement vary within the period primarily based on changes in our working capital. There were no amounts outstanding under the Receivables Securitization Program atJanuary 31, 2020 and 2019. In addition to the facilities described above, we have various other committed and uncommitted lines of credit, short-term loans and overdraft facilities totaling approximately$374.8 million atJanuary 31, 2020 to support our operations. Most of these facilities are provided on an unsecured, short-term basis and are reviewed periodically for renewal. Our borrowings under these facilities vary within the period primarily based on changes in our working capital. There was$108.4 million outstanding on these facilities atJanuary 31, 2020 , at a weighted average interest rate of 6.79%, and there was$102.3 million outstanding atJanuary 31, 2019 , at a weighted average interest rate of 8.05%. AtJanuary 31, 2020 , we had also issued standby letters of credit of$38.2 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 certain of these letters of credit reduces the Company's borrowing availability under certain of the above-mentioned credit facilities. Certain of our 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 within these credit facilities include a maximum total leverage ratio and a minimum interest coverage ratio. AtJanuary 31, 2020 , we were in compliance with all such financial covenants. Accounts receivable purchase agreements We have uncommitted accounts receivable purchase agreements under which certain accounts receivable may be sold, without recourse, to third-party financial institutions. Under these programs, we may sell certain accounts receivable in exchange for cash less a discount, as defined in the agreements. Available capacity under these programs, which we use 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 we continue to service, administer and collect the sold accounts receivable. AtJanuary 31, 2020 and 2019, we had a total of$739 million and$1.1 billion , respectively, of accounts receivable sold to and held by financial institutions under these agreements. During the fiscal years endedJanuary 31, 2020 , 2019 and 2018, discount fees recorded under these facilities were$15.9 million ,$14.9 million and$9.0 million , respectively, which are included as a component of "other expense (income), net" in the Consolidated Statement of Income. Share Repurchase Program InOctober 2018 , our Board of Directors authorized a share repurchase program for up to$200.0 million of our common stock. InFebruary 2019 , the Board of Directors approved a$100.0 million increase to the program. InAugust 2019 , our Board of Directors authorized the repurchase of up to an additional$200.0 million of our common stock, resulting in a total share repurchase authorization of$500.0 million . In conjunction with our share repurchase program, a 10b5-1 plan was executed that instructs the broker selected by the Company to repurchase shares on our behalf. The amount of common stock repurchased in accordance with the 10b5-1 plan on any given trading day is determined by a formula in the plan, which is based on the market price of our common stock. Shares we repurchase are held in treasury for general corporate purposes, including issuances under equity incentive and benefit plans. We repurchased 1,723,081 shares of our common stock at a cost of$170.2 million during the year endedJanuary 31, 2020 and 1,429,154 shares of our common stock at a cost of$107.0 million during the year endedJanuary 31, 2019 . Pursuant to the terms of the Merger Agreement with the affiliates of Apollo Funds, we suspended our share repurchase program as ofNovember 13, 2019 . 39
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Table of Contents CONTRACTUAL OBLIGATIONS As ofJanuary 31, 2020 , future payments due under contractual obligations are as follows: U.S. Tax (in millions) Operating leases Debt (1) Reform (2) Total Fiscal year: 2021 $ 70.3$ 164.2 $ -$ 234.5 2022 51.8 381.3 - 433.1 2023 42.4 547.2 4.9 594.5 2024 32.7 25.4 10.3 68.4 2025 21.7 24.8 12.8 59.3 Thereafter 56.7 561.9 - 618.6 Total payments 275.6 1,704.8 28.0 2,008.4 Less amounts representing interest - (247.8 ) - (247.8 ) Total principal payments $ 275.6$ 1,457.0 $
28.0
(1) Amounts include fixed rate interest on the Senior Notes as well as the
estimated interest on the outstanding balance of the 2019 Term Loan Credit
Agreement based on the applicable interest rate as of
Amounts exclude estimated interest on other committed and uncommitted
revolving credit facilities as these facilities are at variable rates of
interest.
(2) Represents our remaining obligation under
transition tax on certain non-U.S. earnings (see Note 9 of Notes to
Consolidated Financial Statements for further discussion).
Purchase orders for the purchase of inventory and other goods and services are
not included in the table above. We are not able to determine the aggregate
amount of such purchase orders that represent contractual obligations, as
purchase orders typically represent authorizations to purchase rather than
binding agreements. For the purposes of this table, contractual obligations for
purchase of goods or services are defined as agreements that are enforceable and
legally binding on us and that specify all significant terms, including: fixed
or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase orders
are based on our current demand expectations and are fulfilled by our vendors
within short time horizons. We do not have significant non-cancelable agreements
for the purchase of inventory or other goods specifying minimum quantities or
set prices that exceed our expected requirements for the next three months. We
also enter into contracts for outsourced services; however, the obligations
under these contracts were not significant and the contracts generally contain
clauses allowing for cancellation without significant penalty.
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OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
As is customary in the technology industry, to encourage certain customers to purchase product from us, we have arrangements with certain finance companies that provide inventory financing facilities for our customers. In conjunction with certain of these arrangements, we have agreements with the finance companies that would require us to repurchase certain inventory, which might be repossessed from the customers by the finance companies. Due to various reasons, including among other items, the lack of information regarding the amount of saleable inventory purchased from us still on hand with the customer at any point in time, our repurchase obligations relating to inventory cannot be reasonably estimated. Repurchases of inventory by us under these arrangements have been insignificant to date. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The information included within MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. On an ongoing basis, we evaluate these estimates, including those related to accounts receivable, inventory, vendor programs, goodwill and intangible assets, deferred taxes, and contingencies. Our estimates and judgments are based on currently available information, historical results, and other assumptions we believe are reasonable. Actual results could differ materially from these estimates. We believe the critical accounting policies discussed below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accounts Receivable We maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability or unwillingness of our customers to make required payments. In estimating the required allowance, we take into consideration the overall quality and aging of the receivable portfolio, the existence of credit insurance and specifically identified customer risks. Also influencing our estimates are the following: (i) the large number of customers and their dispersion across wide geographic areas; (ii) the fact that no single customer accounts for more than 10% of our net sales; (iii) the value and adequacy of collateral received from customers, if any; (iv) our historical write-off experience; and (v) the current economic environment. If actual customer performance were to deteriorate to an extent not expected by us, additional allowances may be required which could have an adverse effect on our consolidated financial results. Conversely, if actual customer performance were to improve to an extent not expected by us, a reduction in allowances may be required which could have a favorable effect on our consolidated financial results. Inventory We value our inventory at the lower of its cost or net realizable value, cost being determined on a moving average cost basis. We write down our inventory 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. Market conditions or changes in terms and conditions by our vendors that are less favorable than those projected by management may require additional inventory write-downs, which could have an adverse effect on our consolidated financial results. Vendor Programs We participate 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 agreements. 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. 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. We also provide reserves for receivables on vendor programs for estimated losses resulting from vendors' inability to pay or rejections by vendors of claims. Should amounts recorded as outstanding receivables from vendors be deemed uncollectible, additional allowances may be required which could have an adverse effect on our consolidated financial results. Conversely, if actual vendor performance were to improve to an extent not expected by us, a reduction in allowances may be required which could have a favorable effect on our consolidated financial results.Goodwill , Intangible Assets and Other Long-Lived Assets We perform 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 our goodwill analysis, we have three reporting units, which are also our operating segments. We evaluate 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 41
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reporting unit is greater than its carrying amount, the quantitative impairment test will not be performed. The factors that are considered in the qualitative analysis include 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 we conclude 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 value of our 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, working capital requirements, 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. We also examine the carrying value of our intangible assets with finite lives, which includes capitalized software and development costs, purchased intangibles and other long-lived assets as current events and circumstances warrant determining whether there are any impairment losses. Factors that may cause an intangible asset or other long-lived asset impairment include negative industry or economic trends and significant under-performance relative to historical or projected future operating results. Income Taxes We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. We consider all positive and negative evidence available in determining the potential of realizing 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, we place greater emphasis on recent cumulative losses and recent taxable income due to the inherent lack of subjectivity associated with these factors. If we determine it is more likely than not that we will be able to use a deferred tax asset in the future in excess of its net carrying value, an adjustment to the deferred tax asset valuation allowance would be made to reduce income tax expense, thereby increasing net income in the period such determination is made. Should we determine that we are not likely to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be made to increase income tax expense, thereby reducing net income in the period such determination is made. Contingencies We accrue for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our position and make 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 (in particular 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. RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for the discussion on recent accounting pronouncements.
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