NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tech Data Corporation (“Tech Data” or the “Company”) is one of the world’s largest IT distribution and solutions companies. Tech Data serves 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 customers create solutions best suited to maximize business outcomes for their end-user customers. Tech Data’s customers include value-added resellers, direct marketers, retailers, corporate resellers and managed service providers who support the diverse technology needs of end users. The Company manages its operations in three geographic segments: the Americas, Europe and Asia-Pacific.
On November 12, 2019, the Company 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 Apollo Funds will acquire all the outstanding shares of the Company’s common stock (other than shares held by the Company as treasury stock or held by certain affiliates of the Apollo Funds) for $145 per share in cash (the “Merger”).
On February 12, 2020, the Company 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 Company has received all regulatory approvals necessary to complete the Merger, except for the approval of the Australian Foreign Investment Review Board (“AFIRB”), which has the matter under consideration. The Company and Apollo are still targeting a closing in the first half of calendar year 2020, although this timing may shift based on the timeline for receipt of Australian regulatory approval. The Company and Apollo expect to proceed with closing the transaction promptly after the final approval from the AFIRB is received, taking into account the timing requirements of the Merger Agreement, including the Marketing Period (as defined in the Merger Agreement).
Principles of Consolidation
The consolidated financial statements include the accounts of Tech Data and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates on a fiscal year that ends on January 31.
Basis of Presentation
The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States ("U.S.") Securities and Exchange Commission (“SEC”). The Company prepares its financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of April 30, 2020 and its consolidated statements of income, comprehensive (loss) income, shareholders' equity and cash flows for the three months ended April 30, 2020 and 2019.
Seasonality
The Company’s quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of currency fluctuations and seasonal variations in the demand for the products and services we sell. Narrow operating margins may magnify the impact of these factors on the Company's quarterly operating results. Historical seasonal variations have included an increase in European demand during the Company’s fiscal fourth quarter and decreased demand in other fiscal quarters. The seasonal trend in Europe typically results in greater operating leverage, and therefore, lower selling, general and administrative expenses as a percentage of net sales in the region and on a consolidated basis during the second half of the Company's fiscal year, particularly in the Company's fourth quarter.
Furthermore, in March 2020, the World Health Organization declared the outbreak of the 2019 novel coronavirus ("COVID-19") a pandemic. The global impact of the COVID-19 pandemic has had a negative effect on the global economy, disrupting the financial markets and creating increasing volatility, impacting customer demand and impeding global supply chains. The Company cannot at this time accurately predict what effects these conditions will have on its operations and financial condition, including due to uncertainties relating to the ultimate geographic spread of the virus, the severity and duration of the pandemic, the effect on its customers and customer demand and the length of the restrictions and closures imposed by various governments. Therefore, the results of operations for the three months ended April 30, 2020 are not necessarily indicative of the results that can be expected for the entire fiscal year ended January 31, 2021.
Revenue Recognition
The Company’s revenues primarily result from the sale of various technology products and services. The Company recognizes revenue as control of products is transferred to customers, which generally happens at the point of shipment. Products sold by the Company are delivered via shipment from the Company’s facilities, dropshipment directly from the vendor, or by electronic delivery of keys for software products. In relation to product support, supply chain management and other services performed by the Company, revenue is recognized over time as the services are performed. Service revenues and related contract liabilities were not material for the periods presented.
The Company has contracts with certain customers where the Company’s performance obligation is to arrange for the products or services to be provided by another party. In these arrangements, as the Company assumes an agency relationship in the transaction, revenue is recognized in the amount of the net fee associated with serving as an agent. These arrangements primarily relate to certain fulfillment contracts, as well as sales of software services and extended warranty services.
The Company allows its customers to return product for exchange or credit subject to certain limitations. A liability is recorded at the time of sale for estimated product returns based upon historical experience and an asset is recognized for the amount expected to be recorded in inventory upon product return. The Company also provides volume rebates and other discounts to certain customers which are considered variable consideration. A provision for customer rebates and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.
The Company considers shipping and handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of products sold. Taxes imposed by governmental authorities on the Company’s revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
The Company disaggregates its operating segment revenue by geography, which the Company believes provides a meaningful depiction of the nature of its revenue. Net sales shown in Note 11 – Segment Information includes service revenues, which are not a significant component of total revenue and are aggregated within the respective geographies.
The following table provides a comparison of sales generated from products purchased from vendors that exceeded 10% of the Company's consolidated net sales for the three months ended April 30, 2020 and 2019 (as a percent of consolidated net sales):
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Three months ended April 30,
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2020
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2019
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|
Apple, Inc.
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14%
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|
13%
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|
Cisco Systems, Inc.
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12%
|
|
11%
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|
HP Inc.
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11%
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10%
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Accounts Receivable
The Company maintains an allowance for credit losses related to accounts receivable for future expected credit losses resulting from the inability or unwillingness of its customers to make required payments. In estimating the required allowance, the Company takes into consideration historical credit losses, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made for differences in current conditions as well as changes in forecasted macroeconomic conditions, such as changes in unemployment rates or gross domestic product growth. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis.
The Company has uncommitted accounts receivable purchase agreements under which certain accounts receivable may be sold, without recourse, to third-party financial institutions. Under these programs, the Company may sell certain accounts receivable in exchange for cash less a discount, as defined in the agreements. Available capacity under these programs, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold into these programs and the financial institutions' willingness to purchase such receivables. In addition, certain of these agreements also require that the Company continue to service, administer and collect the sold accounts receivable. At April 30, 2020 and January 31, 2020, the Company had a total of $569.0 million and $739.2 million, respectively, of accounts receivable sold to and held by financial institutions under these agreements. During the three months ended April 30, 2020 and 2019, discount fees recorded under these facilities were $3.1 million and $3.7 million, respectively. These discount fees are included as a component of "other expense (income), net" in the Consolidated Statement of Income.
Recently Adopted Accounting Standards
In June 2016, the FASB issued an accounting standard which revises the methodology for measuring credit losses on financial instruments and the timing of the recognition of those losses. Under the new standard, financial assets measured at an amortized cost basis are to be presented net of the amount not expected to be collected via an allowance for credit losses. Estimated credit losses are to be based on historical information adjusted for management's expectation that current conditions and supportable forecasts differ
from historical experience. The Company adopted this standard during the quarter ending April 30, 2020. The adoption of this standard had no material impact on its consolidated financial statements.
Recently Issued Accounting Standards
In December 2019, the FASB issued an accounting standard which simplifies and clarifies various aspects of the income tax accounting guidance. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2021, with early adoption permitted. Certain amendments should be applied prospectively, while other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of this new standard.
In March 2020, the FASB issued an accounting standard which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. This guidance provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions that are expected to be affected by reference rate reform, if certain criteria are met. The amendments in the guidance are elective and were effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of this new standard.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
NOTE 2 — EARNINGS PER SHARE ("EPS")
The Company presents the computation of earnings per share on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted EPS reflects the potential dilution related to equity-based incentives (see Note 6 – Stock-Based Compensation for further discussion) using the treasury stock method. The composition of basic and diluted EPS is as follows:
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Three months ended April 30,
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2020
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2019
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(in thousands, except per share data)
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Net income
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$
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48,065
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|
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$
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55,400
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Weighted average common shares - basic
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35,688
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37,011
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Effect of dilutive securities:
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Equity based awards
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314
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236
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Weighted average common shares - diluted
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36,002
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37,247
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Earnings per share:
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Basic
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$
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1.35
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$
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1.50
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Diluted
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$
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1.34
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|
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$
|
1.49
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|
For the three months ended April 30, 2020 there were no shares excluded from the computation of diluted earnings per share because their effect would have been antidilutive. For the three months ended April 30, 2019 there were 322 shares excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
NOTE 3 — ACQUISITIONS
DLT Acquisition
On November 25, 2019, the Company completed the acquisition of DLT Solutions ("DLT"), a premier software and cloud solutions aggregator focused on the U.S. public sector. The Company 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 Tech Data to proactively develop opportunities, accelerate growth and simplify complexity for its channel partners that are serving the U.S. public sector space.
The Company has accounted for the DLT acquisition as a business combination and allocated the preliminary estimated purchase price to the estimated fair values of assets acquired and liabilities assumed. The Company has not yet completed its evaluation and determination of certain assets acquired and liabilities assumed, primarily related to the final assessment and valuation of certain other assets acquired and liabilities assumed, including accounts receivable, deferred taxes, accrued expenses and other liabilities. Therefore, the final fair values of the assets acquired and liabilities assumed may vary from the Company's preliminary estimates. During the three months ended April 30, 2020, the Company updated its estimated fair values of certain assets acquired and liabilities assumed, including an increase in goodwill of $15 million and a decrease in intangible assets of $15 million.
The preliminary allocation of the estimated purchase price to assets acquired and liabilities assumed is as follows:
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(in thousands)
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Cash
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$
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545
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Accounts receivable
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219,543
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Prepaid expenses and other current assets
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22,832
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Property and equipment, net
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4,207
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Goodwill
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97,481
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Intangible assets
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211,400
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Other assets, net
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52,539
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Total assets
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608,547
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Accounts payable, accrued expenses and other current liabilities
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297,833
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Revolving credit loans and other long-term debt
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91,026
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Other long-term liabilities
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9,220
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Total liabilities
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398,079
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Estimated purchase price
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$
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210,468
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The allocation of the value of identifiable intangible assets is comprised of approximately $193.0 million of customer and vendor relationships with an amortization period of 15 years and $18.4 million of trade names with an amortization period of 10 years. Goodwill is the excess of the consideration transferred over the net assets recognized and primarily represents the expected cost synergies of the combined company and assembled workforce and is expected to be deductible for tax purposes. Pro forma information has not been provided as the acquisition was not material to the Company's consolidated financial position or results of operations.
NOTE 4 — ACQUISITION, INTEGRATION AND RESTRUCTURING EXPENSES
Acquisition, integration and restructuring expenses are primarily comprised of costs related to the Global Business Optimization Program which was initiated in fiscal 2019, the proposed Merger and the fiscal 2020 acquisition of DLT.
Global Business Optimization Program
In fiscal 2019, the Company's Board of Directors approved the Global Business Optimization Program (the "GBO Program") to increase investment in the Company’s strategic priorities and implement operational initiatives to drive productivity and enhance profitability. Under the GBO Program, the Company expects 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 in Europe and $30 million to $35 million of charges in the Americas. The cash charges primarily consist of severance costs, and also include professional services and other costs.
Restructuring costs related to the GBO Program are comprised of the following:
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Three months ended April 30,
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Cumulative Amounts Incurred to Date
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2020
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2019
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(in thousands)
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Severance costs
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$
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1,379
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$
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4,147
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$
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39,773
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Professional services and other costs
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290
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|
2,074
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21,808
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Total
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$
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1,669
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$
|
6,221
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$
|
61,581
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Restructuring costs related to the GBO Program by segment are as follows:
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Three months ended April 30,
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Cumulative Amounts Incurred to Date
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2020
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2019
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(in thousands)
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Americas
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$
|
1,017
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$
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2,911
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$
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20,994
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Europe
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(251
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)
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3,024
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37,165
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Asia-Pacific
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903
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286
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3,422
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Total
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$
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1,669
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$
|
6,221
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$
|
61,581
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Restructuring activity during the three months ended April 30, 2020 related to the GBO Program is as follows:
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Three months ended April 30, 2020
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Severance
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Professional services and other costs
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Total
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(in thousands)
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Balance at January 31, 2020
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$
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8,718
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$
|
17
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|
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$
|
8,735
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Fiscal 2021 restructuring expenses
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|
1,379
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|
|
290
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|
|
1,669
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Cash payments
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|
(4,187
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)
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|
(302
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)
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|
(4,489
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)
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Foreign currency translation
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|
(165
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)
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(1
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)
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(166
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)
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Balance at April 30, 2020
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$
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5,745
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$
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4
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$
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5,749
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Pending Merger and DLT Acquisition
During the three months ended April 30, 2020, the Company incurred professional services and other transaction related costs of $15.1 million related to the proposed Merger and $0.9 million related to the acquisition of DLT. The costs are primarily related to professional services fees for operational, tax, legal and other consulting services.
NOTE 5 — DEBT
The carrying value of the Company's outstanding debt consists of the following (in thousands):
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As of:
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April 30, 2020
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January 31, 2020
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Senior Notes, interest at 3.70% payable semi-annually, due February 15, 2022
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$
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500,000
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$
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500,000
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Senior Notes, interest at 4.95% payable semi-annually, due February 15, 2027
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500,000
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500,000
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Term Loan, interest rate of 1.45% and 2.70% at April 30, 2020 and January 31, 2020, respectively
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300,000
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300,000
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Other committed and uncommitted revolving credit facilities, average interest rate of 6.17% and 6.79% at April 30, 2020 and January 31, 2020, respectively
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104,563
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108,449
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Other long-term debt
|
46,681
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48,547
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Less—unamortized debt discount and debt issuance costs
|
(5,546
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)
|
|
(5,978
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)
|
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1,445,698
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|
1,451,018
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Less—current maturities (included as “revolving credit loans and current maturities of long-term debt, net”)
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(108,157
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)
|
|
(112,882
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)
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Total long-term debt
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$
|
1,337,541
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|
|
$
|
1,338,136
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Senior Notes
In January 2017, the Company issued $500.0 million aggregate principal amount of 3.70% Senior Notes due February 15, 2022 (the "3.70% Senior Notes") and $500.0 million aggregate principal amount of 4.95% Senior Notes due February 15, 2027 (the "4.95% Senior Notes") (collectively the "2017 Senior Notes"). The Company pays interest on the 2017 Senior Notes semi-annually in arrears on February 15 and August 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.
The Company, at its option, may redeem the 3.70% Senior Notes at any time prior to January 15, 2022 and the 4.95% Senior Notes at any time prior to November 15, 2026, in each case in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2017 Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2017 Senior Notes to be redeemed, discounted to the date of redemption on a semi-annual basis at a rate equal to the sum of the applicable Treasury Rate plus 30 basis points for the 3.70% Senior Notes and 40 basis points for the 4.95% Senior Notes, plus the accrued and unpaid interest on the principal amount being redeemed up to the date of redemption. The Company may also redeem the 2017 Senior Notes, at any time in whole or from time to time in part, on or after January 15, 2022 for the 3.70% Senior Notes and November 15, 2026 for the 4.95% Senior Notes, in each case, at a redemption price equal to 100% of the principal amount of the 2017 Senior Notes to be redeemed.
On March 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 the Company’s outstanding 3.70% Senior Notes and any and all of the Company’s 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 of Tiger 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. On March 24, 2020, Tiger Merger Sub Co. announced that the requisite more than 50% of consents were received to adopt the Proposed Amendments. The aforementioned consent solicitations were conducted by Tiger Merger Sub Co. pursuant to the terms of, and subject to the conditions set forth in, the offer to purchase and consent solicitation statement, dated March 10, 2020 (the “Offer to Purchase and Consent Solicitation”), and the separate consent solicitation statement, dated March 10, 2020 (the “4.95% Consent Solicitation” and, together with the Offer to Purchase and Consent Solicitation, the “Offer to Purchase and Consent Solicitation Statements”). On March 24, 2020, the Company entered into a Supplemental Indenture with respect to the Indenture and Global Security for the 3.70% Senior Notes (the “3.70% Supplemental Indenture”) and a Supplemental Indenture with respect to the Indenture and Global Security for the 4.95% Senior Notes (the “4.95% Supplemental Indenture” and, together with the 3.70% Supplemental Indenture, the “Supplemental Indentures”) effecting the Proposed Amendments.
The Proposed Amendments implemented by the Supplemental Indentures will become operative with respect to the 2017 Senior Notes only at such time as the following conditions are satisfied or otherwise waived, if applicable, by Tiger Merger Sub Co.: (1) the 2017 Senior Notes that are validly tendered (and not validly withdrawn) have been accepted for purchase by Tiger Merger Sub Co. in accordance with the terms of the Offer to Purchase and Consent Solicitation Statements (and, in the case of the 4.95% Senior Notes, when Tiger Merger Sub Co. provides notice that it will pay the consent fee as part of the 4.95% Consent Solicitation) and (2) the other conditions to the consent solicitations set forth in the Offer to Purchase and Consent Solicitation Statements, including the substantially concurrent consummation of the Merger, have been satisfied.
Other Credit Facilities
The Company has 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 of May 15, 2024, (ii) an interest rate on borrowings, facility fees and letter of credit fees based on the Company’s debt rating, (iii) the ability to increase the facility to a maximum of $1.75 billion, subject to certain conditions and (iv) certain subsidiaries of the Company 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 the Company’s debt rating. There were no amounts outstanding under the Credit Agreement at April 30, 2020 and January 31, 2020.
On August 2, 2019, the Company entered into a term loan credit agreement (the “2019 Term Loan Credit Agreement”) which, among other things, (i) provides for a $300 million term loan credit facility with a maturity date of August 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. The Company had $300 million outstanding under the 2019 Term Loan Credit Agreement at both April 30, 2020 and January 31, 2020.
The Company also has an agreement with a syndicate of banks (the “Receivables Securitization Program”) that allows the Company to transfer an undivided interest in a designated pool of U.S. accounts receivable, on an ongoing basis, to provide collateral for borrowings up to a maximum of $1.0 billion. The scheduled termination date of the agreement is April 16, 2021. Under this program, the Company transfers certain U.S. trade receivables into a wholly-owned bankruptcy remote special purpose entity. Such receivables, which are recorded in the Consolidated Balance Sheet, totaled approximately $1.6 billion at both April 30, 2020 and January 31, 2020. As collections reduce accounts receivable balances included in the collateral pool, the Company may transfer interests in new receivables to bring the amount available to be borrowed up to the maximum. Interest is to be paid on advances under the Receivables Securitization Program at the applicable commercial paper or LIBOR rate plus an agreed-upon margin. There were no amounts outstanding under the Receivables Securitization Program at April 30, 2020 and January 31, 2020.
In addition to the facilities described above, the Company has various other committed and uncommitted lines of credit, short-term loans and overdraft facilities totaling approximately $458.2 million at April 30, 2020 to support its operations. Most of these facilities are provided on an unsecured, short-term basis and are reviewed periodically for renewal. There was $104.6 million outstanding on these facilities at April 30, 2020, at a weighted average interest rate of 6.17%, and there was $108.4 million outstanding at January 31, 2020, at a weighted average interest rate of 6.79%.
At April 30, 2020, the Company had also issued standby letters of credit of $39.6 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 the Company’s credit facilities contain limitations on the amounts of annual dividends and repurchases of common stock and require compliance with other obligations, warranties and covenants. The financial ratio covenants under these credit facilities include a maximum total leverage ratio and a minimum interest coverage ratio. At April 30, 2020, the Company was in compliance with all such financial covenants.
NOTE 6 — STOCK-BASED COMPENSATION
The Company recorded $6.3 million and $8.3 million, respectively, of stock-based compensation expense for the three months ended April 30, 2020 and 2019.
The 2018 Equity Incentive Plan was approved by the Company’s shareholders in June 2018 and includes 2.0 million shares available for grant, of which approximately 1.7 million shares remain available for future grant at April 30, 2020. The Company is authorized to award officers, employees, and non-employee members of the Board of Directors restricted stock, options to purchase common stock, stock appreciation rights and performance awards that are dependent upon achievement of specified performance goals. Equity-based compensation awards have a maximum term of ten years, unless a shorter period is specified by the Compensation Committee of the Board of Directors ("Compensation Committee") or is required under local law. Awards under the plan are priced as determined by the Compensation Committee and are required to be priced at, or above, the fair market value of the Company’s common stock on the date of grant. Awards generally vest between one year and three years from the date of grant. The Company’s policy is to utilize shares of its treasury stock, to the extent available, to satisfy its obligation to issue shares upon the exercise of awards.
Restricted stock units
A summary of the Company’s restricted stock activity for the three months ended April 30, 2020 is as follows:
|
|
|
|
|
|
|
|
Shares
|
|
Nonvested at January 31, 2020
|
574,980
|
|
|
Vested
|
(231,256
|
)
|
|
Canceled
|
(2,409
|
)
|
|
Nonvested at April 30, 2020
|
341,315
|
|
Pursuant to the terms of the Merger Agreement with the affiliates of Apollo Funds, upon closing of the Merger all nonvested RSU’s will vest and be cancelled and converted into the right to receive an amount of $145 per share in cash.
Performance based restricted stock units
The Company's performance based restricted stock unit awards are subject to vesting conditions, including meeting specified cumulative performance objectives over a period of three years. Each performance based award recipient could vest in 0% to 150% of the target shares granted, contingent on the achievement of the Company's financial performance metrics. A summary of the Company’s performance based restricted stock activity, assuming maximum achievement for nonvested awards, for the three months ended April 30, 2020 is as follows:
|
|
|
|
|
|
|
|
Shares
|
|
Nonvested at January 31, 2020
|
363,563
|
|
|
Vested
|
(87,985
|
)
|
|
Canceled
|
(34,305
|
)
|
|
Nonvested at April 30, 2020
|
241,273
|
|
Pursuant to the terms of the Merger Agreement with the affiliates of Apollo Funds, upon closing of the Merger nonvested PRSU’s will be cancelled and converted into the right to receive an amount of $145 per share in cash determined as follows: (i) for PRSU’s granted during fiscal 2019, the number of shares shall equal 130% of the target shares granted and (ii) for PRSU’s granted during fiscal 2020, the number of shares shall equal 110% of the target shares granted.
NOTE 7 — FAIR VALUE MEASUREMENTS
The Company’s assets and liabilities carried or disclosed at fair value are classified in one of the following three categories: Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in Level 1 above that are observable for the asset or liability, either directly or indirectly; and Level 3 – unobservable inputs for the asset or liability. The classification of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following table summarizes the valuation of the Company's assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
|
|
|
|
Fair value measurement category
|
|
Fair value measurement category
|
|
|
|
Balance sheet location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
812
|
|
|
|
|
Foreign currency forward contracts
|
|
Other assets, net
|
|
|
|
—
|
|
|
|
|
|
|
24,933
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
Prepaid expenses and other assets
|
|
|
|
—
|
|
|
|
|
|
|
124
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
|
|
3,113
|
|
|
|
|
|
|
3,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
Accrued expenses and other liabilities
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
492
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses and other liabilities
|
|
|
|
4,480
|
|
|
|
|
|
|
5,916
|
|
|
|
The Company's derivative instruments are measured on a recurring basis based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers (Level 2 criteria) and are marked-to-market each period (see Note 8 – Derivative Instruments for further discussion).
The Company utilizes life insurance policies to fund the Company’s nonqualified deferred compensation plan. The life insurance asset recorded by the Company is the amount that would be realized upon the assumed surrender of the policy. This amount is based on the underlying fair value of the invested assets contained within the life insurance policies. The gains and losses are recorded in the Company’s Consolidated Statement of Income within "other expense (income), net." The related deferred compensation liability is also marked-to-market each period based upon the returns of the various investments selected by the plan participants and the gains and losses are recorded in the Company’s Consolidated Statement of Income within "selling, general and administrative expenses." The net realizable value of the Company's life insurance investments and related deferred compensation liability was $38.2 million and $38.3 million, respectively, at April 30, 2020 and $41.1 million and $41.0 million, respectively, at January 31, 2020.
The carrying value of the 2017 Senior Notes discussed in Note 5 – Debt represents cost less unamortized debt discount and debt issuance costs. The estimated fair value of the 2017 Senior Notes is based upon quoted market information (Level 1). The estimated fair value of the 2017 Senior Notes was $983 million and $1.04 billion, respectively, at April 30, 2020 and January 31, 2020 and the carrying value was $994.9 million and $994.3 million, respectively, at April 30, 2020 and January 31, 2020. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of debt outstanding pursuant to revolving credit facilities and term loan credit agreements approximated fair value as the majority of these instruments have variable interest rates which approximate current market rates (Level 2 criteria).
NOTE 8 — DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company is exposed to movements in foreign currency exchange rates. The Company's foreign currency risk management objective has been to protect earnings and cash flows from the impact of exchange rate changes primarily through the use of foreign currency forward contracts and a cross-currency swap.
Net Investment Hedges
In fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in euro denominated foreign operations which were designated as net investment hedges. The Company entered into the net investment hedges to offset the risk of change in the U.S. dollar value of the Company's investment in a euro functional subsidiary due to fluctuating foreign exchange rates. The Company terminated these net investment hedge contracts during the three months ended April 30, 2020. Gains and losses on the net investment hedges have been recorded in other comprehensive income (loss) and will remain in other comprehensive income (loss) until the sale or substantial liquidation of the underlying assets of the Company's investment. The initial fair value of hedge components excluded from the assessment of effectiveness has been recognized in the Consolidated Statement of Income. The Company classifies cash flows related to the settlement of its net investment hedges as investing activities in the Consolidated Statement of Cash Flows.
The following tables present the effects of the Company's net investment hedges on accumulated other comprehensive income ("AOCI") and earnings for the three months ended April 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2020
|
|
|
|
Derivatives designated as net investment hedges:
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
Amount of gain (loss) reclassified from AOCI into income
|
|
Amount of gain (loss) recognized in income (amount excluded from effectiveness testing)
|
|
Location of gain (loss) recognized in income (amount excluded from effectiveness testing)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
24,934
|
|
|
$
|
—
|
|
|
$
|
3,316
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2019
|
|
|
|
Derivatives designated as net investment hedges:
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
Amount of gain (loss) reclassified from AOCI into income
|
|
Amount of gain (loss) recognized in income (amount excluded from effectiveness testing)
|
|
Location of gain (loss) recognized in income (amount excluded from effectiveness testing)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
2,496
|
|
|
$
|
—
|
|
|
$
|
316
|
|
|
Interest expense
|
Cash Flow Hedges
The Company entered into a cross-currency swap to hedge its cash flows related to certain foreign-currency denominated debt which was designated as a cash flow hedge. The notional value of this swap was $4.5 million at January 31, 2020 and the swap matured in February 2020. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges was initially reported as a component of other comprehensive income (loss). Gains and losses were subsequently reclassified into earnings in the same period during which the hedged transaction affected earnings and have been presented in the same income statement line item as the earnings effect of the hedged item. The Company has classified cash flows related to the settlement of its cash flow hedges as financing activities in the Consolidated Statement of Cash Flows.
The following tables present the effects of the Company's cash flow hedges on AOCI and earnings for the three months ended April 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2020
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
Amount of gain (loss) reclassified from AOCI into income
|
|
Location of gain (loss) reclassified from AOCI into income
|
|
(in thousands)
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
$
|
402
|
|
|
$
|
(90
|
)
|
|
Interest expense
|
|
|
|
|
|
507
|
|
|
Other expense (income), net
|
|
Total
|
|
$
|
402
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2019
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
Amount of gain (loss) reclassified from AOCI into income
|
|
Location of gain (loss) reclassified from AOCI into income
|
|
(in thousands)
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
$
|
(575
|
)
|
|
$
|
120
|
|
|
Interest expense
|
|
|
|
|
|
(484
|
)
|
|
Other expense (income), net
|
|
Total
|
|
$
|
(575
|
)
|
|
$
|
(364
|
)
|
|
|
Derivatives Not Designated as Hedges
The Company additionally utilizes forward contracts that are not designated as hedging instruments to hedge intercompany loans, accounts receivable and accounts payable. The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The Company’s transactions in its foreign operations are denominated primarily in the following currencies: Australian dollar, British pound, Canadian dollar, Czech koruna, Danish krone, euro, Indian rupee, Indonesian rupiah, Mexican peso, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and U.S. dollar.
The Company considers inventory as an economic hedge against foreign currency exposure in accounts payable in certain circumstances. This practice offsets such inventory against corresponding accounts payable denominated in currencies other than the functional currency of the subsidiary buying the inventory when determining the net exposure to be hedged using traditional forward contracts. Under this strategy, the Company would expect to increase or decrease selling prices for products purchased in foreign currencies based on fluctuations in foreign currency exchange rates affecting the underlying accounts payable. To the extent the Company incurs a foreign currency exchange loss (gain) on the underlying accounts payable denominated in the foreign currency, a corresponding increase (decrease) in gross profit would be expected as the related inventory is sold. This strategy can result in a certain degree of quarterly earnings volatility as the underlying accounts payable is remeasured using the foreign currency exchange rate prevailing at the end of each period, or settlement date if earlier, whereas the corresponding increase (decrease) in gross profit is not realized until the related inventory is sold.
The Company recognizes foreign currency exchange gains and losses on its derivative instruments not designated as hedges that are used to manage its exposures to foreign currency denominated accounts receivable and accounts payable as a component of “cost of products sold” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged accounts receivable or accounts payable. The Company recognizes foreign currency exchange gains and losses on its derivative instruments not designated as hedges that are used to manage its exposures to foreign currency denominated financing transactions as a component of “other expense (income), net,” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged loans. The gains and losses on the Company's foreign currency forward contracts are largely offset by the change in the fair value of the underlying hedged assets or liabilities. The Company classifies cash flows related to the settlement of forward contracts that are not designated as hedging instruments as operating activities in the Consolidated Statement of Cash Flows.
The total amount of gains (losses) recognized in earnings on the Company's derivatives not designated as hedges for the three months ended April 30, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in earnings
|
|
|
|
|
|
Three months ended April 30,
|
|
Derivatives not designated as hedges
|
|
Income statement location
|
|
2020
|
|
2019
|
|
(in millions)
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Cost of products sold
|
|
$
|
8.2
|
|
|
$
|
0.9
|
|
|
Foreign currency forward contracts
|
|
Other expense (income), net
|
|
(14.1
|
)
|
|
(0.3
|
)
|
|
Total
|
|
|
|
$
|
(5.9
|
)
|
|
$
|
0.6
|
|
The Company's average notional amounts of derivatives not designated as hedges outstanding during the three months ended April 30, 2020 and 2019 were approximately $1.3 billion and $1.3 billion, respectively, with average maturities of 22 days and 24 days, respectively. As discussed above, under the Company's hedging policies, gains and losses on these derivative financial instruments are largely offset by the gains and losses on the underlying assets or liabilities being hedged.
The Company’s derivatives are also discussed in Note 7 – Fair Value Measurements.
NOTE 9 — SHAREHOLDERS' EQUITY
Share Repurchase Program
In October 2018, the Company's Board of Directors authorized a share repurchase program for up to $200.0 million of the Company's common stock. In February 2019, the Board of Directors approved a $100.0 million increase to the program. In August 2019, the Company's Board of Directors authorized the repurchase of up to an additional $200.0 million of the Company's common stock, resulting in a total share repurchase authorization of $500.0 million. In conjunction with the Company’s share repurchase program, a 10b5-1 plan was executed that instructs the broker selected by the Company to repurchase shares on behalf of the Company. 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 the Company’s common stock. Shares repurchased by the Company are held in treasury for general corporate purposes, including issuances under equity incentive and benefit plans. The reissuance of shares from treasury stock is based on the weighted average purchase price of the shares.
As of April 30, 2020, the Company had $222.8 million available for future repurchases of its common stock under the authorized share repurchase program. Pursuant to the terms of the Merger Agreement with the affiliates of Apollo Funds, the Company suspended its share repurchase program as of November 13, 2019.
The Company’s common share issuance activity for the three months ended April 30, 2020 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average
price per share
|
|
Treasury stock balance at January 31, 2020
|
23,819,230
|
|
|
$
|
50.30
|
|
|
Shares of treasury stock reissued for equity incentive plans
|
(232,030
|
)
|
|
|
|
Treasury stock balance at April 30, 2020
|
23,587,200
|
|
|
$
|
50.30
|
|
Accumulated Other Comprehensive Income
The following tables summarize the change in the components of AOCI for the three months ended April 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of taxes
|
|
Unrealized gains (losses) on cash flow hedges, net of taxes
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance at January 31, 2020
|
|
$
|
1,449
|
|
|
$
|
15
|
|
|
$
|
1,464
|
|
|
Other comprehensive income (loss) before reclassification
|
|
(56,547
|
)
|
|
402
|
|
|
(56,145
|
)
|
|
Reclassification of (gain) loss from AOCI into income
|
|
—
|
|
|
(417
|
)
|
|
(417
|
)
|
|
Balance at April 30, 2020
|
|
$
|
(55,098
|
)
|
|
$
|
—
|
|
|
$
|
(55,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of taxes
|
|
Unrealized gains (losses) on cash flow hedges, net of taxes
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance at January 31, 2019
|
|
$
|
43,786
|
|
|
$
|
—
|
|
|
$
|
43,786
|
|
|
Other comprehensive income (loss) before reclassification
|
|
(40,523
|
)
|
|
(575
|
)
|
|
(41,098
|
)
|
|
Reclassification of (gain) loss from AOCI into income
|
|
—
|
|
|
364
|
|
|
364
|
|
|
Balance at April 30, 2019
|
|
$
|
3,263
|
|
|
$
|
(211
|
)
|
|
$
|
3,052
|
|
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has arrangements with certain finance companies that provide inventory financing facilities to the Company’s customers. In conjunction with certain of these arrangements, the Company would be required to purchase certain inventory in the event the inventory is repossessed from the customers by the finance companies. As the Company does not have access to information regarding the amount of inventory purchased from the Company still on hand with the customer at any point in time, the Company’s repurchase obligations relating to inventory cannot be reasonably estimated. Repurchases of inventory by the Company under these arrangements have been insignificant to date. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to these inventory repurchase obligations is remote.
Contingencies
In December 2010, in a non-unanimous decision, a Brazilian appellate court overturned a 2003 trial court which had previously ruled in favor of the Company’s Brazilian subsidiary related to the imposition of certain taxes on payments abroad related to the licensing of commercial software products, commonly referred to as “CIDE tax.” The Company estimates the total exposure related to the CIDE tax, including interest, was approximately $14.3 million at April 30, 2020. The Brazilian subsidiary has appealed the unfavorable ruling to the Supreme Court and Superior Court, Brazil's two highest appellate courts. Based on the legal opinion of outside counsel, the Company believes that the chances of success on appeal of this matter are favorable and the Brazilian subsidiary intends to vigorously defend its position that the CIDE tax is not due. Accordingly, the Company has not recorded an accrual for the total estimated CIDE tax exposure. However, due to the lack of predictability of the Brazilian court system, the Company has concluded that it is reasonably possible that the Brazilian subsidiary may incur a loss up to the total exposure described above. The Company believes the resolution of this litigation will not be material to the Company’s consolidated net assets or liquidity.
The French Autorité de la Concurrence (“Competition Authority”) began in 2013 an investigation into the French market for certain products of Apple, Inc., for which the Company is a distributor. In March 2020, the Competition Authority imposed fines on the Company, on another distributor, and on Apple, finding that the Company entered into an anticompetitive agreement with Apple regarding volume allocations of Apple products. The fine imposed on the Company was €76 million. The Company has vigorously contested the arguments of the Competition Authority, and the Company intends to appeal its determination to the French courts, seeking to set aside or reduce the fine. The Company believes it has strong arguments on appeal, but the Company is unable to predict the outcome, among other reasons because of the novelty of the case and the unprecedented size of the fines imposed for this kind of practice, or how long it will take to achieve a final resolution. Under French law, however, the pendency of the Company’s appeal does not suspend the obligation to pay the fine, and the Company expects that it will be required to pay the full fine assessed by the Competition Authority before the Company’s appeal is finally determined. At this time, the Company cannot reasonably estimate the amount of loss in these proceedings and therefore has not accrued for any loss.
The Company is subject to various other legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in any of these other legal proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
NOTE 11 — SEGMENT INFORMATION
The Company operates predominantly in a single industry segment as a distributor of technology products, logistics management, and other value-added services. While the Company operates primarily in one industry, it is managed based on three geographic segments: the Americas, Europe and Asia-Pacific.
The Company does not consider stock-based compensation expense in assessing the performance of its operating segments, and therefore the Company excludes stock-based compensation expense from segment information. The accounting policies of the segments are the same as those described in Note 1 – Business and Summary of Significant Accounting Policies.
Financial information by geographic segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
2020
|
|
2019
|
|
Net sales:
|
|
|
|
|
Americas (1)
|
$
|
3,944,760
|
|
|
$
|
3,789,198
|
|
|
Europe
|
3,971,130
|
|
|
4,309,500
|
|
|
Asia-Pacific
|
259,284
|
|
|
307,726
|
|
|
Total
|
$
|
8,175,174
|
|
|
$
|
8,406,424
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
Americas (2)
|
$
|
49,783
|
|
|
$
|
68,633
|
|
|
Europe
|
45,884
|
|
|
36,420
|
|
|
Asia-Pacific
|
(3,245
|
)
|
|
876
|
|
|
Stock-based compensation expense
|
(6,307
|
)
|
|
(8,305
|
)
|
|
Total
|
$
|
86,115
|
|
|
$
|
97,624
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
Americas
|
$
|
28,213
|
|
|
$
|
23,649
|
|
|
Europe
|
11,992
|
|
|
11,510
|
|
|
Asia-Pacific
|
1,786
|
|
|
2,098
|
|
|
Total
|
$
|
41,991
|
|
|
$
|
37,257
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
Americas
|
$
|
9,385
|
|
|
$
|
8,272
|
|
|
Europe
|
8,880
|
|
|
6,127
|
|
|
Asia-Pacific
|
1,275
|
|
|
880
|
|
|
Total
|
$
|
19,540
|
|
|
$
|
15,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of:
|
April 30, 2020
|
|
January 31, 2020
|
|
Identifiable assets:
|
|
|
|
|
Americas
|
$
|
5,494,992
|
|
|
$
|
6,147,771
|
|
|
Europe
|
6,391,331
|
|
|
6,518,761
|
|
|
Asia-Pacific
|
490,285
|
|
|
602,077
|
|
|
Total
|
$
|
12,376,608
|
|
|
$
|
13,268,609
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
Americas (1)
|
$
|
226,234
|
|
|
$
|
231,401
|
|
|
Europe
|
50,124
|
|
|
51,331
|
|
|
Asia-Pacific
|
4,378
|
|
|
4,418
|
|
|
Total
|
$
|
280,736
|
|
|
$
|
287,150
|
|
|
|
|
|
|
|
Goodwill & acquisition-related intangible assets, net:
|
|
|
|
|
Americas
|
$
|
1,321,621
|
|
|
$
|
1,339,375
|
|
|
Europe
|
517,584
|
|
|
541,102
|
|
|
Asia-Pacific
|
51,159
|
|
|
54,090
|
|
|
Total
|
$
|
1,890,364
|
|
|
$
|
1,934,567
|
|
|
|
|
|
(1)
|
Net sales in the United States represented 89% and 88%, respectively, of the total Americas' net sales for the three months ended April 30, 2020 and 2019. Total long-lived assets in the United States represented 97% and 96%, respectively, of the Americas' total long-lived assets at April 30, 2020 and January 31, 2020.
|
|
|
|
|
(2)
|
Operating income in the Americas for the three months ended April 30, 2020 and 2019 includes acquisition, integration and restructuring expenses of $17.0 million and $2.9 million, respectively (see further discussion in Note 4 – Acquisition, Integration and Restructuring Expenses).
|