TECD-07-31-13
Table of Contents


            

                                                        
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2013

OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .

Commission File Number 0-14625  

TECH DATA CORPORATION
(Exact name of Registrant as specified in its charter)
 
Florida
No. 59-1578329
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
5350 Tech Data Drive Clearwater, Florida
33760
(Address of principal executive offices)
(Zip Code)
(Registrant’s Telephone Number, including Area Code): (727) 539-7429

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ¨    No   x 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
Accelerated Filer
¨
 
 
 
 
Non-accelerated Filer
¨
Smaller Reporting Company Filer
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class

Outstanding at February 10, 2014
Common stock, par value $.0015 per share
38,061,955

 


 

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Table of Contents

TECH DATA CORPORATION AND SUBSIDIARIES
Form 10-Q for the Three and Six Months Ended July 31, 2013
INDEX

 
 
PAGE
 
Explanatory Note
 
 
 
PART I.
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 1.
ITEM 1A.
ITEM 2
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
EXHIBITS
 
CERTIFICATIONS
 
 

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EXPLANATORY NOTE
Restatement of Consolidated Financial Statements

The filing of this Quarterly Report on Form 10-Q of Tech Data Corporation (“Tech Data,” “we,” “our,” “us,” or the “Company”) for the three and six months ended July 31, 2013 was delayed pending the completion of an internal investigation of certain of the Company’s accounting practices. Concurrently, the Company engaged significant internal and external resources to perform supplemental procedures to assist in reviewing its financial statements and accounting practices (the "Supplemental Procedures"). The internal investigation and Supplemental Procedures have now been completed.
In this Quarterly Report on Form 10-Q, we present for comparison restated consolidated financial statements for the three and six months ended July 31, 2012 (the “Restated Period”). Investors should review the Annual Report on Form 10-K for the fiscal year ended January 31, 2013, which was filed on February 5, 2014, and should not rely on any other previously filed reports, earnings releases or similar communications relating to the Restated Period. We have not amended any previously filed reports.

For a description of the restatement, see Note 2 of Notes to Consolidated Financial Statements. For more information regarding the restatement and its effects, refer to Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
For a description of material weaknesses in internal control over financial reporting identified by management and management's plan to remediate the material weaknesses, see Item 4, "Controls and Procedures" and Part II, Item 9A, "Controls and Procedures" of our Annual Report on Form 10-K for the fiscal year ended January 31, 2013.

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PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements

TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except par value and share amounts)
 
 
July 31,
 
January 31,  
 
2013
 
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
586,840

 
$
340,564

Accounts receivable, less allowances of $58,123 and $58,284
2,777,486

 
3,215,920

Inventories
2,038,957

 
2,254,510

Prepaid expenses and other assets
180,866

 
334,431

Total current assets
5,584,149

 
6,145,425

Property and equipment, net
79,295

 
84,395

Other assets, net
570,627

 
601,140

Total assets
$
6,234,071

 
$
6,830,960

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,298,206

 
$
3,657,251

Accrued expenses and other liabilities
529,971

 
620,167

Revolving credit loans and current maturities of long-term debt, net
41,241

 
167,522

Total current liabilities
3,869,418

 
4,444,940

Long-term debt, less current maturities
354,186

 
354,458

Other long-term liabilities
107,731

 
113,193

Total liabilities
4,331,335

 
4,912,591

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Common stock, par value $.0015; 200,000,000 shares authorized; 59,239,085 shares issued at July 31, 2013 and January 31, 2013
89

 
89

Additional paid-in capital
671,692

 
680,715

Treasury stock, at cost (21,188,106 and 21,436,566 shares at July 31, 2013 and January 31, 2013)
(895,400
)
 
(905,900
)
Retained earnings
1,845,813

 
1,813,358

Accumulated other comprehensive income
280,542

 
330,107

Total shareholders' equity
1,902,736

 
1,918,369

Total liabilities and shareholders' equity
$
6,234,071

 
$
6,830,960

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 

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TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 July 31,
 
Six months ended
July 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
(As restated) (1)
 
 
 
(As restated) (1)
Net sales
$
6,327,476

 
$
5,968,419

 
$
12,475,233

 
$
11,878,482

Cost of products sold
6,011,636

 
5,665,826

 
11,836,979

 
11,252,481

Gross profit
315,840

 
302,593

 
638,254

 
626,001

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
275,018

 
242,282

 
558,378

 
483,232

Restatement expenses (Note 2)
10,963

 
0

 
13,986

 
0

 
285,981

 
242,282

 
572,364

 
483,232

Operating income
29,859

 
60,311

 
65,890

 
142,769

Interest expense
6,219

 
3,422

 
13,317

 
6,491

Other expense (income), net
654

 
1,812

 
(1,510
)
 
2,047

Income before income taxes
22,986

 
55,077

 
54,083

 
134,231

Provision for income taxes
8,291

 
16,550

 
21,628

 
39,692

Consolidated net income
14,695

 
38,527

 
32,455

 
94,539

Net income attributable to noncontrolling interest
0

 
(3,828
)
 
0

 
(5,662
)
Net income attributable to shareholders of Tech Data Corporation
$
14,695

 
$
34,699

 
$
32,455

 
$
88,877

Net income per share attributable to shareholders of Tech Data Corporation
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.89

 
$
0.85

 
$
2.22

Diluted
$
0.38

 
$
0.89

 
$
0.85

 
$
2.20

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,043

 
38,826

 
37,976

 
39,977

Diluted
38,180

 
39,055

 
38,177

 
40,314

(1) See Note 2 - Restatement of Consolidated Financial Statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 

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TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 July 31,
 
Six months ended
 July 31,
 
2013
 
2012
 
2013
 
2012
 
 
 
(As restated) (1)
 
 
 
(As restated) (1)
Consolidated net income
$
14,695

 
$
38,527

 
$
32,455

 
$
94,539

Other comprehensive loss:
 
 
 
 
 
 
 
          Foreign currency translation adjustment
(1,956
)
 
(111,143
)
 
(49,565
)
 
(83,972
)
Total comprehensive income (loss)
12,739

 
(72,616
)
 
(17,110
)
 
10,567

Comprehensive income attributable to noncontrolling interest
0

 
(1,758
)
 
0

 
(3,942
)
Comprehensive income (loss) attributable to shareholders of Tech Data Corporation
$
12,739

 
$
(74,374
)
 
$
(17,110
)
 
$
6,625

(1) See Note 2 - Restatement of Consolidated Financial Statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 

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TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six months ended
July 31,  
 
2013
 
2012
 
 
 
(As restated) (1)
Cash flows from operating activities:
 
 
 
Cash received from customers
$
13,484,962

 
$
12,609,784

Cash paid to vendors and employees
(13,042,982
)
 
(12,555,920
)
Interest paid, net
(11,731
)
 
(5,516
)
Income taxes paid
(37,989
)
 
(65,004
)
Net cash provided by (used in) operating activities
392,260

 
(16,656
)
Cash flows from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
8,044

 
(8,782
)
Acquisition of trademark
(1,519
)
 
0

Expenditures for property and equipment
(7,115
)
 
(8,422
)
Software and software development costs
(7,819
)
 
(14,844
)
Net cash used in investing activities
(8,409
)
 
(32,048
)
Cash flows from financing activities:
 
 
 
Proceeds from the reissuance of treasury stock
1,139

 
3,037

Cash paid for purchase of treasury stock
0

 
(180,781
)
Return of capital to joint venture partner
0

 
(9,074
)
Acquisition earn-out payment
(6,183
)
 
0

Net repayments on revolving credit loans
(125,676
)
 
(9,764
)
Principal payments on long-term debt
(261
)
 
(247
)
Excess tax benefit from stock-based compensation
894

 
4,915

Net cash used in financing activities
(130,087
)
 
(191,914
)
Effect of exchange rate changes on cash and cash equivalents
(7,488
)
 
(10,242
)
Net increase (decrease) in cash and cash equivalents
246,276

 
(250,860
)
Cash and cash equivalents at beginning of year
340,564

 
486,262

Cash and cash equivalents at end of period
$
586,840

 
$
235,402

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Net income attributable to shareholders of Tech Data Corporation
$
32,455

 
$
88,877

Net income attributable to noncontrolling interest
0

 
5,662

Consolidated net income
32,455

 
94,539

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
36,075

 
26,590

Provision for losses on accounts receivable
7,070

 
5,330

Stock-based compensation expense
5,318

 
6,607

Accretion of debt discount on Senior Notes
132

 
0

Excess tax benefits from stock-based compensation
(894
)
 
(4,915
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
357,085

 
138,323

Inventories
177,381

 
(59,422
)
Prepaid expenses and other assets
130,485

 
(4,584
)
Accounts payable
(287,967
)
 
(105,328
)
Accrued expenses and other liabilities
(64,880
)
 
(113,796
)
Total adjustments
359,805

 
(111,195
)
Net cash provided by (used in) operating activities
$
392,260

 
$
(16,656
)

(1) See Note 2 - Restatement of Consolidated Financial Statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tech Data Corporation (“Tech Data” or the “Company”) is one of the world’s largest wholesale distributors of technology products. The Company serves as an indispensable link in the technology supply chain by bringing products from the world’s leading technology vendors to market, as well as providing customers with advanced logistics capabilities and value-added services. Tech Data’s customers include value-added resellers, direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. The Company is managed in two geographic segments: the Americas (including North America and South America) and Europe.
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. Noncontrolling interest is recognized for the portion of a consolidated joint venture not owned by the Company. The noncontrolling interest of the consolidated joint venture was purchased by the Company during the third quarter of fiscal 2013. The Company operates on a fiscal year that ends on January 31.
Basis of Presentation
The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States (“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 July 31, 2013, its consolidated statements of income and comprehensive income for the three and six months ended July 31, 2013 and 2012, and its consolidated cash flows for the six months ended July 31, 2013 and 2012.
Accounts Receivable Purchase Agreements
The Company has uncommitted accounts receivable purchase agreements under which certain accounts receivable may be sold, without recourse, to third-party financial institutions. Under these programs, the Company may sell certain accounts receivable in exchange for cash less a discount, as defined in the agreements. Available capacity under these programs, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold into these programs and the financial institutions' willingness to purchase such receivables. In addition, certain of these agreements also require that the Company continue to service, administer and collect the sold accounts receivable. At July 31, 2013 and January 31, 2013, the Company had a total of $208.3 million and $284.7 million, respectively, of accounts receivable sold to and held by financial institutions under these agreements. During the second quarters of fiscal 2014 and 2013, discount fees recorded under these facilities were $0.7 million and $0.5 million, respectively, and during the first half of fiscal 2014 and 2013, discount fees recorded under these facilities were $1.4 million and $0.9 million, respectively. These discount fees are included as a component of "other expense (income), net" in the Company's Consolidated Statement of Income.
Seasonality
The Company’s quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of currency fluctuations and seasonal variations in the demand for the products and services offered. Narrow operating margins may magnify the impact of these factors on the Company's operating results. Recent historical seasonal variations have included an increase in European demand during the Company’s fiscal fourth quarter and decreased demand in other fiscal quarters, particularly quarters that include summer months. Given that more than one half of the Company’s revenues are derived from Europe, the worldwide results closely follow the seasonality trends in Europe. Additionally, the life cycles of major products, as well as the impact of future acquisitions and dispositions, may also materially impact the Company’s business, financial condition, or consolidated results of operations. Therefore, the results of operations for the three and six months ended July 31, 2013 and 2012 are not necessarily indicative of the results that can be expected for the entire fiscal year ended January 31, 2014.


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Recently Adopted Accounting Standards
In July 2012, the FASB issued a new accounting standard which allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. The accounting standard states that an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that the indefinite-lived intangible asset is impaired. This standard was effective for the Company beginning February 1, 2013. As the Company currently has no material indefinite-lived intangible assets, other than goodwill, this standard had no impact on the Company's consolidated financial position, income, comprehensive income and cash flows.
In February 2013, the FASB issued an accounting standard which requires an entity to provide additional information regarding the amounts reclassified out of accumulated other comprehensive income by component, the income statement line item to which the reclassification was made and if applicable, cross-referenced to related footnote disclosures. The accounting standard was effective for the Company beginning with the quarter ending April 30, 2013. As the requirements of this standard are disclosure only, there was no impact on the Company's consolidated financial position, income, comprehensive income or cash flows.
Recently Issued Accounting Standards
In March 2013, the FASB issued an accounting standard which clarifies the accounting for the derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The guidance also requires the accounting for a business combination achieved in stages involving a foreign entity to be treated as a single event. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2014 and is to be applied prospectively to derecognition events occurring after the effective date. Early adoption is also permitted. If an entity elects to early adopt the accounting standard, it is to be adopted as of the beginning of the entity's fiscal year of adoption. The Company will apply the provisions of this accounting standard to all transactions described above prospectively from the date of adoption.
In March 2013, the FASB also issued an accounting standard which requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of: i) the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2014 and is to be applied retrospectively for all periods presented. Early adoption is also permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial position, income, comprehensive income or cash flows.
In July 2013, the FASB issued an accounting standard which requires presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2014 and is to be applied prospectively. The Company currently follows the guidance and this update will have no impact on its financial statement disclosures.


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NOTE 2 — RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

On March 21, 2013, the Company announced that it would restate previously issued quarterly and audited annual financial statements to correct accounting improprieties involving vendor accounting within the Company's primary operating subsidiary in the UK. The Company further stated that financial statements as of and for the fiscal years ended 2011, 2012, and 2013 and each of the fiscal quarters in 2011, 2012 and 2013 should no longer be relied upon. Thereafter, the Audit Committee initiated an independent investigation by outside counsel, to review certain of the Company’s accounting practices throughout Europe. Concurrently, the Company engaged significant internal and external resources to perform supplemental procedures to assist in reviewing its financial statements and accounting practices (the "Supplemental Procedures"). The Audit Committee has completed its investigation and has identified certain accounting irregularities in the UK subsidiary and certain other European subsidiaries. As disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January, 31, 2013, filed with the SEC on February 5, 2014, the Company has restated its financial statements as of January 31, 2012, for the fiscal years ended January 31, 2011 and 2012 and as of and for the fiscal 2013 quarters ended April 30, 2012, July 31, 2012 and October 31, 2012.
The restatement reflects two primary categories of adjustments:
Adjustments relating to the inadequate control environment identified within the Company’s primary operating subsidiary in the UK and two other European subsidiaries. These adjustments are necessary primarily to correct errors arising as a result of the following:
Improper accounting for transactions with the Company’s product suppliers (also referred to as “vendor accounting”), including the recognition of vendor incentives, product discounts/price variances, promotions and other vendor credits. These errors primarily affected inventory, accounts payable and cost of goods sold.
Improper manual journal entries and the override of key balance sheet reconciliation controls by local management. These errors affected multiple accounts within the Company’s balance sheet and income statement.
Improper recognition of net foreign currency exchange losses, which resulted in an overstatement of cost of goods sold during fiscal 2013. Multiple accounts on the balance sheet were affected during this period.
Improper accounting for accounts receivable, including improper cash application and recording of value added taxes. These errors primarily affected accounts receivable, accrued expenses and net sales.
Improper cutoff of certain inventory transactions at period end, which resulted in a net understatement of inventory and understatement of accounts payable or cost of goods sold.
Improper cutoff of certain cash receipts at period end, which resulted in an overstatement of cash and understatement of accounts receivable.

Adjustments identified within subsidiaries in addition to the UK subsidiary and two other European subsidiaries noted above, including the following:
Adjustments for errors primarily related to the timing of recognition and classification of various vendor accounting transactions.
Certain adjustments previously identified and considered immaterial, including:
Reclassification of gains (losses) on investments related to the Company’s nonqualified deferred compensation plan, which had no impact on previously reported pre-tax or net income. This reclassification impacted selling, general and administrative expenses and other expense (income), net.
Adjustments to accounts receivable, inventory, sales and cost of goods sold to record the impact of estimated sales returns for which the Company had previously only recorded the net impact on gross profit.
Other immaterial adjustments to correct errors in sales or inventory cutoff and accrued expenses. These adjustments primarily affected accounts receivable, inventory, accrued expenses, and the Consolidated Statement of Income.

Income taxes, retained earnings and other comprehensive income have been adjusted primarily to consider the net impacts of the adjustments discussed above.
Restatement expenses primarily include legal and accounting fees associated with the investigation, as well as third party consulting fees to support the Supplemental Procedures and other activities in connection with the restatement. During the three and six months ended July 31, 2013, the Company has incurred approximately $11.0 million and $14.0 million of restatement expenses, respectively, which are recorded in "restatement expenses" in the accompanying Consolidated Statement of Income. The Company will incur a total of approximately $54 million to $56 million of restatement expenses during the entire fiscal year ended January 31, 2014.
The following tables present the impact of the restatement on the Company’s previously issued consolidated financial statements.


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Consolidated Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands, except per share amounts)
 
 
 
 
 
 
Net sales
$
5,961,500

 
$
6,919

(1) 
$
5,968,419

Cost of products sold
5,660,256

 
5,570

(1) 
5,665,826

Gross profit
301,244

 
1,349

(2) 
302,593

Selling, general and administrative expenses
241,988

 
294

 
242,282

Operating income
59,256

 
1,055

 
60,311

Interest expense
3,422

 
0

 
3,422

Other expense (income), net
1,178

 
634

(3) 
1,812

Income before income taxes
54,656

 
421

 
55,077

Provision for income taxes
16,370

 
180

(4) 
16,550

Consolidated net income
38,286

 
241

 
38,527

Net income attributable to noncontrolling interest
(3,828
)
 
0

 
(3,828
)
Net income attributable to shareholders of Tech Data Corporation
$
34,458

 
$
241

 
$
34,699

 
 
 
 
 
 
Net income per share attributable to shareholders of Tech Data Corporation:
 
 
 
 
 
Basic
$
0.89

 
$
0.00

 
$
0.89

Diluted
$
0.88

 
$
0.01

 
$
0.89

 
 
 
 
 
 
(1) Net sales and cost of products sold adjustments primarily reflect the impact of sales cutoff errors that were not appropriately recorded based on the delivery terms.
(2) Gross profit adjustments primarily reflect the impact of both vendor accounting errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $2.3 million, and the reversal of an improper deferral of net foreign currency exchange losses in a European subsidiary of $0.2 million, partially offset by various other immaterial errors.
(3) Other expense (income), net has been adjusted to reclassify investment losses of $0.6 million related to the Company’s deferred
compensation plan assets from selling, general and administrative expenses where it was recorded as a reduction of the corresponding payroll expense related to the plan.
(4) The provision for income taxes has been adjusted primarily to increase the tax expense as a result of the increase in profit resulting from the restatement adjustments described herein.






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Six months ended July 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands, except per share amounts)
 
 
 
 
 
 
Net sales
$
11,857,061

 
$
21,421

(1) 
$
11,878,482

Cost of products sold
11,235,600

 
16,881

(1) 
11,252,481

Gross profit
621,461

 
4,540

(2) 
626,001

Selling, general and administrative expenses
481,312

 
1,920

(3) 
483,232

Operating income
140,149

 
2,620

 
142,769

Interest expense
6,491

 
0

 
6,491

Other expense (income), net
2,522

 
(475
)
(4) 
2,047

Income before income taxes
131,136

 
3,095

 
134,231

Provision for income taxes
39,324

 
368

(5) 
39,692

Consolidated net income
91,812

 
2,727

 
94,539

Net income attributable to noncontrolling interest
(5,662
)
 
0

 
(5,662
)
Net income attributable to shareholders of Tech Data Corporation
$
86,150

 
$
2,727

 
$
88,877

Net income per share attributable to shareholders of Tech Data Corporation:
 
 
 
 
 
Basic
$
2.15

 
$
0.07

 
$
2.22

Diluted
$
2.14

 
$
0.06

 
$
2.20


(1) Net sales and cost of products sold adjustments primarily reflect the impact of sales cutoff errors that were not appropriately recorded based on the delivery terms.
(2) Gross profit adjustments primarily reflect the impact of both vendor accounting errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $5.9 million, and the reversal of an improper deferral of net foreign currency exchange losses in a European subsidiary of $0.6 million, partially offset by various other immaterial errors.
(3) Selling, general and administrative expenses include an adjustment to reclassify investment income of $0.5 million related to the Company’s deferred compensation plan assets from selling, general and administrative expenses where it was recorded as a reduction of the corresponding payroll expense related to the plan to other expense (income), net and various other adjustments to correct immaterial errors.
(4) Other expense (income), net has been adjusted to reclassify investment income of $0.5 million related to the Company’s deferred compensation plan assets from selling, general and administrative expenses where it was recorded as a reduction of the corresponding payroll expense related to the plan.
(5) The provision for income taxes has been adjusted primarily to increase tax expense as a result of the increase in profit resulting from the restatement adjustments described herein.



12

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Consolidated Statement of Comprehensive Income
 
 
 
 
 
Three months ended July 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
 
 
 
 
 
 
Consolidated net income
$
38,286

 
$
241

 
$
38,527

Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustment
(111,257
)
 
114

 
(111,143
)
Total comprehensive loss
(72,971
)
 
355

 
(72,616
)
Comprehensive income attributable to noncontrolling interest
(1,758
)
 
0

 
(1,758
)
Comprehensive loss attributable to shareholders of Tech Data Corporation
$
(74,729
)
 
$
355

 
$
(74,374
)


 
Six months ended July 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
Consolidated net income
$
91,812

 
$
2,727

 
$
94,539

Other comprehensive loss:
 
 
 
 

Foreign currency translation adjustment
(83,261
)
 
(711
)
 
(83,972
)
Total comprehensive income
8,551

 
2,016

 
10,567

Comprehensive income attributable to noncontrolling interest
(3,942
)
 
0

 
(3,942
)
Comprehensive income attributable to shareholders of Tech Data Corporation
$
4,609

 
$
2,016

 
$
6,625


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Consolidated Statement of Cash Flows
 
 
 
 
 
 
Six months ended July 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Cash received from customers
$
12,030,773

 
$
579,011

 
$
12,609,784

Cash paid to vendors and employees
(11,956,158
)
 
(599,762
)
 
(12,555,920
)
Interest paid, net
(5,516
)
 
0

 
(5,516
)
Income taxes paid
(65,004
)
 
0

 
(65,004
)
Net cash provided by (used in) operating activities
4,095

 
(20,751
)
 
(16,656
)
Cash flows from investing activities:
 
 
 
 

Acquisition of businesses, net of cash acquired
(8,782
)
 
0

 
(8,782
)
Expenditures for property and equipment
(6,758
)
 
(1,664
)
 
(8,422
)
Software development costs
(13,570
)
 
(1,274
)
 
(14,844
)
Net cash used in investing activities
(29,110
)
 
(2,938
)
 
(32,048
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from the reissuance of treasury stock
3,037

 
0

 
3,037

Cash paid for purchase of treasury stock
(180,781
)
 
0

 
(180,781
)
Return of capital to joint venture partner
(9,074
)
 
0

 
(9,074
)
Net repayments on revolving credit loans
(9,764
)
 
0

 
(9,764
)
Principal payments on long-term debt
(247
)
 
0

 
(247
)
Excess tax benefit from stock-based compensation
4,915

 
0

 
4,915

Net cash used in financing activities
(191,914
)
 
0

 
(191,914
)
Effect of exchange rate changes on cash and cash equivalents
(10,616
)
 
374

 
(10,242
)
Net decrease in cash and cash equivalents
(227,545
)
 
(23,315
)
 
(250,860
)
Cash and cash equivalents at beginning of year
505,178

 
(18,916
)
 
486,262

Cash and cash equivalents at end of year
$
277,633

 
$
(42,231
)
 
$
235,402

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
 

Net income attributable to shareholders of Tech Data Corporation
$
86,150

 
$
2,727

 
$
88,877

Net income attributable to noncontrolling interest
5,662

 
0

 
5,662

Consolidated net income
91,812

 
2,727

 
94,539

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 

Depreciation and amortization
26,590

 
0

 
26,590

Provision for losses on accounts receivable
5,241

 
89

 
5,330

Stock-based compensation expense
6,682

 
(75
)
 
6,607

Accretion of debt discount on Senior Notes and convertible senior debentures
0

 
0

 
0

Excess tax benefit from stock-based compensation
(4,915
)
 
0

 
(4,915
)
Changes in operating assets and liabilities:
 
 

 

Accounts receivable
180,171

 
(41,848
)
 
138,323

Inventories
(59,537
)
 
115

 
(59,422
)
Prepaid expenses and other assets
(5,552
)
 
968

 
(4,584
)
Accounts payable
(117,813
)
 
12,485

 
(105,328
)
Accrued expenses and other liabilities
(118,584
)
 
4,788

 
(113,796
)
Total adjustments
(87,717
)
 
(23,478
)
 
(111,195
)
Net cash provided by (used in) operating activities
$
4,095

 
$
(20,751
)
 
$
(16,656
)

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NOTE 3— EARNINGS PER SHARE (“EPS”)
The Company reports a dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income attributable to shareholders of Tech Data by the weighted average number of shares outstanding during the reported period. Diluted EPS reflects the potential dilution related to equity-based incentives (further discussed in Note 7—Stock-Based Compensation) using the treasury stock method. The composition of basic and diluted EPS is as follows:
 
 
 
 
Three months ended July 31,
 
Six months ended July 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
(As restated)
 
 
 
(As restated)
 
 
 
 
 
 
 
 
 
 
Net income attributable to shareholders of Tech Data Corporation
 
 
$
14,695

 
$
34,699

 
$
32,455

 
$
88,877

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares - basic
 
 
38,043

 
38,826

 
37,976

 
39,977

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
Equity-based awards
 
 
137

 
229

 
201

 
337

Weighted-average common shares - diluted
 
 
38,180

 
39,055

 
38,177

 
40,314

 
 
 
 
 
 
 
 
 
 
Net income per share attributable to shareholders of Tech Data Corporation
 
 
 
 
 
 
 
 
 
Basic
 
 
$
0.39

 
$
0.89

 
$
0.85

 
$
2.22

Diluted
 
 
$
0.38

 
$
0.89

 
$
0.85

 
$
2.20


At July 31, 2013 and 2012, there were 6,236 shares and 9,456 shares respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.


NOTE 4 — ACQUISITIONS  
Acquisition of SDG
On November 1, 2012, the Company acquired several distribution companies of Specialist Distribution Group, the distribution arm of Specialist Computer Holdings PLC (“SCH”), a privately-held IT services company headquartered in the United Kingdom, for a purchase price, which was finalized during the first quarter of fiscal 2014, of approximately $358 million. The acquired distribution companies were Specialist Distribution Group (SDG) Limited; ETC Metrologie SARL; Best’Ware France SA; ETC Africa SAS and SDG BV (collectively “SDG”). SDG is a leading distributor of value and broadline IT products in the UK, France and the Netherlands. Management believes the acquisition of SDG supports the Company’s diversification strategy by strengthening its European value and broadline IT offerings in key markets and expanding the Company’s vendor and customer portfolios, while leveraging the Company’s existing pan-European infrastructure. Simultaneously with the acquisition of SDG, the Company entered into a preferred supplier agreement whereby SCH, through its IT reseller business, will have annual purchase commitments through Tech Data for a period of five years, which the Company estimated would add incremental annual sales of approximately $500 million. In November 2013, the preferred supplier agreement was amended to extend the term of the agreement from five years to six years, expiring in January 2019. In connection with this amendment, while we expect the total sales during the extended term to be higher than originally forecast, we expect the incremental sales to be approximately $450 million to $475 million annually over six years versus the original forecast of $500 million annually over five years. SDG's results of operations are included in the Company's consolidated financial statements subsequent to the date of acquisition.

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The Company has accounted for the SDG acquisition as a business combination and allocated the purchase price to the estimated fair values of assets acquired and liabilities assumed (in thousands, translated using the foreign currency exchange rates on the date of acquisition):
Cash
$
65,000

Accounts receivable
260,800

Inventories
126,100

Tangible assets (includes property and equipment, deferred tax assets and other assets)
6,200

Goodwill
122,600

Identifiable intangible assets
134,300

Accounts payable
(265,200
)
Liabilities (includes accrued expenses, deferred tax liability and other liabilities)
(91,800
)
 
$
358,000

The allocation of identifiable intangible assets is comprised of approximately $103.1 million related to customer and vendor relationship assets with an estimated useful life of ten years and approximately $31.2 million related to the preferred supplier agreement to be amortized over the five year life of the agreement. As discussed previously, in November 2013, the preferred supplier agreement was amended to extend the term of the agreement from five years to six years, expiring in January 2019.

The following table presents supplemental proforma information as if the SDG acquisition and the execution of the related preferred supplier agreement had both occurred at the beginning of fiscal 2012. The proforma results include business combination accounting effects from the acquisition including amortization of acquired intangible assets and interest expense associated with the issuance of our Senior Notes (as defined herein) due in September 2017 used to fund the acquisition. This proforma information does not reflect any impact from business synergies that may be achieved by the combined business, and is presented for comparative purposes only. It is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated on the date indicated or that may result in the future:  
 
 
Three months ended
July 31, 2012
 
Six months ended
July 31, 2012
 
 
(In thousands, unaudited)
Net sales
 
 
 
 
As reported (1)
 
$
5,968,419

 
$
11,878,482

Proforma
 
$
6,538,538

 
$
13,056,685

 
 
 
 
 
Net income attributable to shareholders of Tech Data Corporation
 
 
 
 
As reported (1)
 
$
34,699

 
$
88,877

Proforma
 
$
36,264

 
$
94,566

(1) As restated



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NOTE 5 — DEBT

The carrying value of the Company's outstanding debt consists of the following:
 
July 31, 2013 
 
January 31, 2013
 
(In thousands)
Senior Notes, interest at 3.75% payable semi-annually, due September 21, 2017
$
350,000

 
$
350,000

Less—unamortized debt discount
(1,105
)
 
(1,238
)
Senior Notes, net
348,895

 
348,762

Capital leases
5,837

 
6,243

Other committed and uncommitted revolving credit facilities, average interest rate of 4.40% and 2.09% at July 31, 2013 and January 31, 2013, respectively, expiring on various dates through fiscal 2017
40,695

 
166,975

 
395,427

 
521,980

Less—current maturities (included as “Revolving credit loans and current maturities of long-term debt, net”)
(41,241
)
 
(167,522
)
Total Long-term debt
$
354,186

 
$
354,458

Senior Notes
In September 2012, the Company issued $350.0 million aggregate principal amount of 3.75% Senior Notes in a public offering, resulting in cash proceeds of approximately $345.8 million, net of debt discount and debt issuance costs of approximately $1.3 million and $2.9 million, respectively (the “Senior Notes”). The debt issuance costs incurred in connection with the public offering will be amortized over the life of the Senior Notes as additional interest expense using the effective interest method. The Company pays interest on the Senior Notes semi-annually in arrears on March 21 and September 21 of each year, beginning on March 21, 2013 and ending on the maturity date of September 21, 2017. The Company, at its option, may redeem the Senior Notes at any time in whole or from time to time in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes being redeemed, discounted at a rate equal to the sum of the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest up to the date of redemption. The Senior Notes are senior, unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness.
Other Credit Facilities
The Company has a $500.0 million revolving credit facility with a syndicate of banks (the “Credit Agreement”), which among other things, i) provides for a maturity date of September 27, 2016, ii) provides for an interest rate on borrowings, facility fees and letter of credit fees based on the Company’s non-credit enhanced senior unsecured debt rating as determined by Standard & Poor’s Rating Service and Moody’s Investor Service, and iii) may be increased to a maximum of $750.0 million, subject to certain conditions. The Credit Agreement includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers, including a maximum debt to capitalization ratio and a minimum interest coverage ratio. The Company pays interest on advances under the Credit Agreement at the applicable LIBOR rate plus a predetermined margin that is based on the Company’s debt rating. There were no amounts outstanding under the Credit Agreement at July 31, 2013. There was $42.9 million outstanding under the Credit Agreement at January 31, 2013, at an interest rate of 1.65%.
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 security or collateral for borrowings up to a maximum of $400.0 million. Under this program, the Company legally isolates 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 $702.9 million and $690.6 million at July 31 and January 31, 2013, respectively. As collections reduce accounts receivable balances included in the security or collateral pool, the Company may transfer interests in new receivables to bring the amount available to be borrowed up to the maximum. This program was renewed in October 2012 for a period of two years and interest is to be paid on advances under the Receivables Securitization Program at the applicable commercial paper or LIBOR rate plus an agreed-upon margin. There were no amounts outstanding under this program at July 31, 2013. There was $83.5 million outstanding under this program at January 31, 2013, at an interest rate of 1.02%.

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Table of Contents

In addition to the facilities described above, the Company has various other committed and uncommitted lines of credit and overdraft facilities totaling approximately $539.5 million at July 31, 2013 to support its operations. Most of these facilities are provided on an unsecured, short-term basis and are reviewed periodically for renewal. There was $40.7 million outstanding on these facilities at July 31, 2013, at a weighted average interest rate of 4.40% and $40.6 million outstanding on these facilities at January 31, 2013, at a weighted average interest rate of 4.76%.
In consideration of the financial covenants discussed below, the Company’s maximum borrowing availability on its credit facilities is approximately $780.6 million, of which $40.7 million was outstanding at July 31, 2013. 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 contained within these credit facilities include a debt to capitalization ratio and a minimum interest coverage ratio. The Company has entered into waiver agreements with respect to these and other obligations within certain of the Company's credit facilities, including the Credit Agreement and Receivables Securitization Program, in connection with the Company’s restatement as discussed in Note 2 - Restatement of Consolidated Financial Statements. Each of the waiver agreements relates primarily to representations that may have been incorrect when made, the Company’s potential failure to comply with specific covenants, including principally financial reporting covenants, as well as the potential defaults and events of default that may have arisen or could arise as a result of the foregoing. The ability to draw funds under certain credit facilities is dependent upon maintaining sufficient collateral (in the case of the Receivables Securitization Program) and meeting the aforementioned financial covenants, which may limit the Company’s ability to draw the full amount of these facilities.
At July 31, 2013, the Company had also issued standby letters of credit of $82.7 million. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The issuance of these letters of credit reduces the Company’s borrowing availability under certain of the above-mentioned credit facilities.

NOTE 6 — INCOME TAXES
The Company's effective tax rate was 36.1% in the second quarter of fiscal 2014 and 30.0% in the second quarter of fiscal 2013. The Company's effective tax rate was 40.0% for the first semester of fiscal 2014 compared to 29.6% for the same period of the prior year. The increase in the effective rate for both the second quarter and first semester of fiscal 2014 compared to the same periods of the prior year is primarily the result of the relative mix of earnings and losses within the tax jurisdictions in which the Company operates, partially offset by a discrete tax benefit during the second quarter of fiscal 2014.
On an absolute dollar basis, the provision for income taxes decreased 49.9% to $8.3 million for the second quarter of fiscal 2014 compared to $16.6 million in the same period of fiscal 2013 and decreased 45.5% to $21.6 million for the first semester of fiscal 2014 compared to $39.7 million for the same period of the prior year. The decrease in the provision for income taxes in these periods was primarily due to a decrease in taxable earnings in certain countries in which the company operates.
The effective tax rate differed from the U.S. federal statutory rate of 35% during these periods primarily due to the relative mix of earnings or losses within the tax jurisdictions in which the Company operates such as: i) losses in tax jurisdictions where the Company is not able to record a tax benefit; ii) earnings in tax jurisdictions where the Company has previously recorded a valuation allowance on deferred tax assets; and iii) earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States.
The Company's future effective tax rates will continue to be affected by changes in the relative mix of taxable income and taxable loss jurisdictions, changes in the valuation of deferred tax assets or liabilities or changes in tax laws or interpretations thereof. The Company monitors the assumptions used in estimating the annual effective tax rate and makes adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating the Company's annual effective income tax rates, future income tax expense could be materially affected.

In addition, the Company's income tax returns are subject to continuous examination by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes from these examinations to determine the adequacy of the Company's provision for income taxes. To the extent the Company prevails in matters for which accruals have been established or is required to pay amounts in excess of such accruals, the effective tax rate could be materially affected.

NOTE 7 — STOCK-BASED COMPENSATION
For the six months ended July 31, 2013 and 2012, the Company recorded $5.3 million and $6.6 million, respectively, of stock-based compensation expense, which is included in “selling, general and administrative expenses” in the Consolidated Statement of Income.
At July, 31, 2013, the Company had awards outstanding from three equity-based compensation plans, only one of which is currently active. The active plan was approved by the Company’s shareholders in June 2009 and includes 4.0 million shares available for grant

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Table of Contents

of which approximately 3.0 million shares remain available for future grant at July 31, 2013. Under the active plan, the Company is authorized to award officers, employees, and non-employee members of the Board of Directors restricted stock, options to purchase common stock, maximum value stock-settled stock appreciation rights (“MV Stock-settled SARs”), maximum value options (“MVOs”), and performance awards that are dependent upon achievement of specified performance goals. Equity-based compensation awards have a maximum term of 10 years, unless a shorter period is specified by the Compensation Committee of the Board of Directors ("Compensation Committee") or is required under local law. Awards under the plans are priced as determined by the Compensation Committee, and under the terms of the Company’s active equity-based compensation plan, are required to be priced at, or above, the fair market value of the Company’s common stock on the date of grant. Awards generally vest between one and four years from the date of grant.
A summary of the Company’s restricted stock activity for the six months ended July 31, 2013 is as follows:
 
 
 
 
Shares  
Outstanding at January 31, 2013
 
 
606,767

Vested
 
 
(262,061
)
Canceled
 
 
(18,909
)
Outstanding at July 31, 2013
 
 
325,797

A summary of the activity of the Company’s MV Stock-settled SARs, MVOs and stock options for the six months ended July 31, 2013 is as follows:
 
 
 
 
Shares  
Outstanding at January 31, 2013
 
 
502,225

Exercised
 
 
(169,246
)
Canceled
 
 
(1,514
)
Outstanding at July 31, 2013
 
 
331,465

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.


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NOTE 8 — SHAREHOLDERS’ EQUITY
The Company’s common share issuance activity for the six months ended July 31, 2013 is summarized as follows:
 
 
Shares 
 
Weighted-
average
price per
share 
Treasury stock balance at January 31, 2013
21,436,566

 
$
42.26

Shares of treasury stock reissued
(248,460
)
 
 
Treasury stock balance at July 31, 2013
21,188,106

 
$
42.26


There were no common shares repurchased by the Company during the first semester of fiscal 2014. The reissuance of shares from treasury stock is based on the weighted average purchase price of the shares.
NOTE 9 — 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:
 
July 31, 2013
 
January 31, 2013
 
Fair value measurement category
 
Fair value measurement category
 
Level 1
Level 2
Level 3
 
Level 1
Level 2
Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
12,250

 
 
 
$
19,835

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
23,454

 
 
 
$
19,628

 
Acquisition-related contingent consideration
 
 
$
9,760

 
 
 
$
18,147

The Company's foreign currency forward contracts are measured on a recurring basis based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers (level 2 criteria) and are marked-to-market each period with gains and losses on these contracts recorded in the Company's Consolidated Statement of Income on a basis consistent with the classification of the change in the fair value of the underlying transactions giving rise to these foreign currency exchange gains and losses in the period in which their value changes, with the offsetting amount for unsettled positions being included in either other current assets or other current liabilities in the Consolidated Balance Sheet. See further discussion below in Note 10 – Derivative Instruments.
The acquisition-related contingent consideration represents the future earnout payments related to the Company's acquisitions. The Company estimates the fair value of this Level 3 contingent consideration liability at each reporting date using a discounted cash flow analysis, which requires the evaluation of significant unobservable inputs that include projected revenues, expenses and cash flows, and assumed discount rates. During the six months ended July 31, 2013, adjustments to the fair value of acquisition-related contingent consideration of $0.4 million were recorded as a component of "selling, general and administrative expenses" and $0.3 million were recorded to "other expense (income), net" in the Company's Consolidated Statement of Income. Approximately $8.7 million of the acquisition-related contingent consideration was paid during the first quarter of fiscal 2014.
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 various investment return alternatives 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

20

Table of Contents

expenses." The net realizable value of the Company's life insurance investments and related deferred compensation liability at July 31, 2013 was $37.0 million and $33.4 million, respectively.
The $350 million of Senior Notes discussed in Note 5 - Debt, are carried at cost, less unamortized debt discount. The estimated fair value of the Senior Notes was approximately $358.8 million at July 31, 2013, based upon quoted market information (level 1 criteria).
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of debt outstanding pursuant to revolving credit facilities and loans payable approximates fair value as the majority of these instruments have variable interest rates which approximate current market rates (level 2 criteria).
NOTE 10 — DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company is exposed to movements in foreign currency exchange rates. The Company’s foreign currency risk management objective is to protect earnings and cash flows from the impact of exchange rate changes primarily through the use of foreign currency forward contracts to hedge both intercompany and third party loans, accounts receivable and accounts payable. These derivatives are not designated as hedging instruments.
The Company employs established policies and procedures to manage the exposure to fluctuations in the value of foreign currencies. It is the Company’s policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. Additionally, the Company does not enter into derivative instruments for speculative or trading purposes.
The Company’s foreign currency exposure relates primarily to international transactions in Europe, Canada and Latin America, 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: U.S. dollar, British pound, Canadian dollar, Chilean peso, Czech koruna, Danish krone, euro, Mexican peso, Norwegian krone, Peruvian new sol, Polish zloty, Romanian leu, Swedish krona and Swiss franc.
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 cost of products sold 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 cost of products sold is not realized until the related inventory is sold.
The Company classifies foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign currency denominated accounts receivable and accounts payable as a component of “cost of products sold” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged accounts receivable or accounts payable. The Company classifies foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign currency denominated financing transactions as a component of “other expense (income), net” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged loans. The total amount recognized in earnings on the Company's foreign currency forward contracts, which is included as a component of either “cost of products sold” or “other expense (income), net”, was a net foreign currency exchange gain of $3.6 million and a net foreign currency exchange loss of $8.2 million, respectively, for the three months ended July 31, 2013 and 2012 and a net foreign currency exchange gain of $20.5 million and a net foreign currency exchange loss of $11.7 million, respectively, for the six months ended July 31, 2013 and 2012. The gains and losses on the Company’s foreign currency forward contracts are largely offset by the change in the fair value of the underlying hedged assets or liabilities.
The notional amount of forward exchange contracts is the amount of foreign currency to be bought or sold at maturity. Notional amounts are indicative of the extent of the Company’s involvement in the various types and uses of derivative financial instruments and are not a measure of the Company’s exposure to credit or market risks through its use of derivatives. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices.

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The Company's monthly average notional amounts of derivative financial instruments outstanding during the second quarter of fiscal 2014 and 2013 were $2.0 billion and $1.6 billion, respectively, with average maturities of 29 days and 28 days, respectively. As discussed above, under the Company's hedging policies, gains and losses on the derivative financial instruments would be expected to be largely offset by the gains and losses on the underlying assets or liabilities being hedged.
The Company’s foreign currency forward contracts are also discussed in Note 9 – Fair Value Measurements.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Synthetic Lease Facility
The Company has a synthetic lease facility with a group of financial institutions (the “Synthetic Lease”) under which the Company leases certain logistics centers and office facilities from a third-party lessor, which was set to expire in June 2013. Properties leased under the Synthetic Lease are located in Clearwater and Miami, Florida; Fort Worth, Texas; Fontana, California; Suwanee, Georgia; Swedesboro, New Jersey; and South Bend, Indiana. The Synthetic Lease has been accounted for as an operating lease and rental payments are calculated at the applicable LIBOR rate plus a margin based on the Company's credit ratings.
During June 2013, we replaced the existing Synthetic Lease with a new lease agreement that expires in June 2018 (the "2013 Synthetic Lease"). The principal terms of the 2013 Synthetic Lease are substantially the same as the Synthetic Lease. Upon not less than 30 days' notice, the Company, at its option, may purchase one or any combination of the properties, at an amount equal to each of the property's cost, as long as the lease balance does not decrease below a defined amount. Upon not less than 270 days, nor more than 360 days, prior to the lease expiration, the Company may, at its option, i) purchase a minimum of two of the properties, at an amount equal to each of the property's cost, ii) exercise the option to renew the lease for a minimum of two of the properties or iii) exercise the option to remarket a minimum of two of the properties and cause a sale of the properties. If the Company elects to remarket the properties, the Company has guaranteed the lessor a percentage of the cost of each property, in the aggregate amount of approximately $133.8 million. Future annual lease payments under the 2013 Synthetic Lease are approximately $2.8 million per year.
The Synthetic Lease and the 2013 Synthetic Lease each contain covenants that must be complied with, similar to the covenants described in certain of the credit facilities discussed in Note 5 - Debt. The Company has entered into waiver agreements with respect to the Synthetic Lease and the 2013 Synthetic Lease in connection with the Company’s restatement discussed in Note 2 - Restatement of Consolidated Financial Statements. Each of the waiver agreements relates primarily to representations that may have been incorrect when made, the Company’s potential failure to comply with specific covenants, including principally financial reporting covenants, as well as the potential defaults and events of default that may have arisen or could arise as a result of the foregoing.
Guarantees
As is customary in the technology industry, to encourage certain customers to purchase products from Tech Data, the Company has arrangements with certain finance companies that provide inventory financing facilities to the Company’s customers. In conjunction with certain of these arrangements, the Company would be required to purchase certain inventory in the event the inventory is repossessed from the customers by the finance companies. As the Company does not have access to information regarding the amount of inventory purchased from the Company still on hand with the customer at any point in time, the Company’s repurchase obligations relating to inventory cannot be reasonably estimated. Repurchases of inventory by the Company under these arrangements have been insignificant to date. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to these inventory repurchase obligations is remote.
The Company provides additional financial guarantees to finance companies on behalf of certain customers. The majority of these guarantees are for an indefinite period of time, where the Company would be required to perform if the customer is in default with the finance company related to purchases made from the Company. The Company reviews the underlying credit for these guarantees on at least an annual basis. As of July 31, 2013 and January 31, 2013, the outstanding amount of guarantees under these arrangements totaled $46.2 million and $31.3 million, respectively. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to the above guarantees is remote.
Contingencies
Prior to fiscal 2004, one of the Company’s European subsidiaries, located in Spain, was audited in relation to various value-added tax (“VAT”) matters. As a result of those audits, the Spanish subsidiary received notices of assessment from the Regional Inspection Unit of Spain's taxing authority that allege the subsidiary did not properly collect and remit VAT. The Spanish subsidiary appealed these assessments to the Madrid Central Economic Administrative Courts beginning in March 2010. Following the administrative court proceedings the matter was appealed to the Spanish National Appellate Court. During the fourth quarter of fiscal year 2014, the Spanish National Appellate Court issued an opinion upholding the assessment for several of the assessed years. Although the Company believes that the Spanish subsidiary's defense to the assessments has solid legal grounds and is continuing to vigorously

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defend its position by appealing to the Spanish Supreme Court, the risk that the assessments will be upheld has significantly increased. The Company increased its accrual by $41.0 million in the fourth quarter of fiscal 2013, including $29.5 million to cover the assessment and various penalties and $11.5 million for interest that could be assessed. The Company estimates the total exposure for these assessments, including various penalties and interest, is approximately $55.0 million, including previously accrued amounts, which is reflected in "accrued expenses and other liabilities" in the Consolidated Balance Sheet at July 31, 2013.
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 where the CIDE tax, including interest, may be considered due to be approximately $26.1 million at July 31, 2013. The Brazilian subsidiary has appealed the unfavorable ruling to the Supreme Court and Superior Court, Brazil's two highest appellate courts. Based on the legal opinion of outside counsel, the Company believes that the chances of success on appeal of this matter are favorable and the Brazilian subsidiary intends to vigorously defend its position that the CIDE tax is not due. However, due to the lack of predictability of the Brazilian court system, the Company has concluded that it is reasonably possible that the Brazilian subsidiary may incur a loss up to the total exposure described above. The Company believes the resolution of this litigation will not be material to the Company’s consolidated net assets or liquidity; however, it could be material to the Company’s operating results for any particular period, depending upon the level of income for such period. In addition to the discussion regarding the CIDE tax above, the Company’s Brazilian subsidiary has been undergoing several examinations of non-income related taxes. Given the complexity and lack of predictability of the Brazilian tax system, the Company believes that it is reasonably possible that a loss may have been incurred. However, due to the early stages of the examination, the complex nature of the Brazilian tax system and the absence of communication from the local tax authorities regarding these examinations, the Company is currently unable to determine the likelihood of these examinations resulting in assessments nor estimate the amount of loss, if any, that may be reasonably possible if such assessment were to be made.
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 12 — SEGMENT INFORMATION
Tech Data operates predominantly in a single industry segment as a distributor of technology products, logistics management, and other value-added services. While the Company operates primarily in one industry, it is managed based on geographic segments: the Americas (including North America and South America) and Europe. The Company assesses performance of and makes decisions on how to allocate resources to its operating segments based on multiple factors including current and projected operating income and market opportunities. The Company does not consider stock-based compensation expense in assessing the performance of its operating segments, and therefore the Company is reporting stock-based compensation expense as a separate amount. The accounting policies of the segments are the same as those described in Note 1—Business and Summary of Significant Accounting Policies.

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Financial information by geographic segment is as follows:
 
 
Three months ended
 July 31,
 
Six months ended
 July 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
(As restated)
 
 
 
(As restated)
 
 
(In thousands)
 
(In thousands)
Net sales to unaffiliated customers
 
 
 
 
 
 
 
 
Americas (1)
 
$
2,624,546

 
$
2,407,168

 
$
4,917,328

 
$
4,864,656

Europe
 
3,702,930

 
3,561,251

 
7,557,905

 
7,013,826

Total
 
$
6,327,476

 
$
5,968,419

 
$
12,475,233

 
$
11,878,482

 
 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
 
Americas
 
$
31,988

 
$
29,868

 
$
59,219

 
$
79,646

Europe
 
98

 
34,109

 
11,989

 
69,730

Stock-based compensation expense
 
(2,227
)
 
(3,666
)
 
(5,318
)
 
(6,607
)
Total
 
$
29,859

 
$
60,311

 
$
65,890

 
$
142,769

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
Americas
 
$
4,251

 
$
4,039

 
$
8,497

 
$
7,821

Europe
 
13,857

 
9,154

 
27,578

 
18,769

Total
 
$
18,108

 
$
13,193

 
$
36,075

 
$
26,590

 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
 
Americas
 
$
1,921

 
$
4,204

 
$
3,618

 
$
13,965

Europe
 
5,279

 
4,804

 
11,316

 
9,301

Total
 
$
7,200

 
$
9,008

 
$
14,934

 
$
23,266

 
 
 
 
As of
 
 
 
July 31,
2013
 
January 31,
2013
 
 
 
(In thousands)
Identifiable assets
 
 
 
 
 
Americas
 
 
$
2,049,959

 
$
2,004,295

Europe
 
 
4,184,112

 
4,826,665

Total
 
 
$
6,234,071

 
$
6,830,960

 
 
 
 
 
 
Long-lived assets:
 
 
 
 
 
Americas (1)
 
 
$
27,639

 
$
30,492

Europe
 
 
51,656

 
53,903

Total
 
 
$
79,295

 
$
84,395

 
 
 
 
 
 
Goodwill & acquisition-related intangible assets, net:
 
 
 
 
 
Americas
 
 
$
2,966

 
$
2,966

Europe
 
 
383,926

 
409,534

Total
 
 
$
386,892

 
$
412,500

 
 
 
 
 
 
(1) Net sales to unaffiliated customers in the United States represented 86% of the total Americas' net sales to unaffiliated customers for each of the fiscal quarters ended July 31, 2013 and July 31, 2012. Net sales to unaffiliated customers in the United States represented 85% and 84%, respectively, of the total Americas' net sales to unaffiliated customers for the six months ended July 31, 2013 and July 31, 2012. Total long-lived assets in the United States represented 90% of the Americas' total long-lived assets at both July 31, 2013 and January 31, 2013.



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NOTE 13 — SUBSEQUENT EVENT
Legal Settlement
The Company has been a claimant in proceedings seeking damages from certain manufacturers of LCD flat panel displays. During the third quarter of fiscal 2014, the Company reached settlement agreements with certain manufacturers in the amount of $22.9 million, net of all attorney fees and expenses. During the fourth quarter of fiscal 2014, the Company reached a settlement agreement with an additional manufacturer in the amount of approximately $12.6 million, net of estimated attorney fees and expenses. As each of these settlement agreements represents a subsequent event in relation to a gain contingency, the amounts will be recorded as a reduction of operating expenses in the third and fourth quarters of fiscal 2014.


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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The financial information presented in this Item 2 reflects the impact of the restatement as more fully described in Note 2 of Notes to Consolidated Financial Statements included within Part I, Item 1 of this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, 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 projections of 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 Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended January 31, 2013 for further information. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Overview
Tech Data is one of the world’s largest wholesale distributors of technology products. We serve as an indispensable link in the technology supply chain by bringing products from the world’s leading technology vendors to market, as well as providing our customers with advanced logistics capabilities and value-added services. Our customers include value-added resellers (“VARs”) direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. We manage our business in two geographic segments: the Americas (including North America and South America) and Europe.
 Our financial objectives are to grow sales at or above the overall IT market growth rate by gaining share in select product areas, grow earnings in local currency, generate positive cash flow, and earn a return on invested capital above our weighted average cost of capital. To achieve this, we are focused on a strategy of execution, diversification and innovation that we believe differentiates our business in the marketplace.
The fundamental element of our strategy is superior execution. Our execution strategy is supported by our highly efficient infrastructure, combined with our multiple service offerings, to generate demand, develop markets and provide supply chain services for our vendors and customers. The technology distribution industry in which we operate is characterized by narrow gross profit as a percentage of sales (“gross margin”) and narrow income from operations as a percentage of sales (“operating margin”). Historically, our gross and operating margins have been impacted by intense price competition and declining average selling prices per unit, as well as changes in terms and conditions with our vendors, including those terms related to rebates, price protection, product returns and other incentives. We expect these conditions to continue in the foreseeable future and, therefore, we will continue to proactively evaluate our pricing policies and inventory management practices in response to potential changes in our vendor terms and conditions and the general market environment. In addition, during the second quarter of fiscal 2013, we implemented the sales, inventory and credit management modules of SAP in the United States (“U.S.”), which substantially completed the U.S. implementation of essentially the same SAP systems used in our European operations. Excluding our most recent acquisition discussed below, more than 90% of the Company's net sales are on one common IT platform, which we believe will give Tech Data significant competitive advantages in providing greater supply chain opportunities by expanding our value-added services to our customers, on-boarding new vendors and products faster and improving our ability to rapidly respond to changes in the market.
In addition to superior execution, our strategy includes ongoing diversification and realignment of our customer and product portfolios to improve long-term profitability throughout our operations. Our broadline distribution business, characterized as high volume, more commoditized offerings, and comprised primarily of personal computer systems, peripherals, supplies and other similar products, remains a core part of our business and represents a significant percentage of our revenue. However, as technology advances, we have continued to evolve our business model, product mix, and value-added offerings in order to provide our vendors with the most efficient distribution channel for their products, and our customers with a broad array of innovative solutions to sell. We have responded to a changing IT landscape with investments in specialty areas, including the data center, software, mobility and consumer electronics, which collectively now comprise more than 50% of our consolidated net sales.

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On November 1, 2012, we completed the acquisition of several distribution companies of Specialist Distribution Group, the distribution arm of Specialist Computer Holdings PLC (“SCH”), a privately-held IT services company headquartered in the United Kingdom, for a final purchase price of approximately $358 million. The acquired distribution companies were Specialist Distribution Group (SDG) Limited; ETC Metrologie SARL; Best’Ware France SA; ETC Africa SAS and SDG BV (collectively “SDG”). SDG is a leading distributor of value and broadline IT products in the UK, France and the Netherlands. We believe the acquisition of SDG supports our diversification strategy by strengthening our European value and broadline offerings in key markets and expanding our vendor and customer portfolios, while leveraging our existing pan-European infrastructure. Simultaneously with the acquisition of SDG, the Company entered into a preferred supplier agreement whereby SCH, through its IT reseller business, will have annual purchase commitments through Tech Data for a period of five years, which we estimated would add incremental annual sales of approximately $500 million. In November 2013, the preferred supplier agreement was amended to extend the term of the agreement from five years to six years, expiring in January 2019. In connection with this amendment, while we expect the total sales during the extended term to be higher than originally forecast, we expect the incremental sales to be approximately $450 million to $475 million annually over six years versus the original forecast of $500 million annually over five years.
Another strategic area of investment is our integrated supply chain services designed to provide innovative third party logistics and other offerings to our business partners. We have seen these offerings grow not only within our European mobility business but also within our consumer electronics and other businesses in both geographies. Our evolving mix of products, services, customers and geographies is important in achieving our strategic financial goals. As we execute our diversification strategy we continuously monitor the extension of credit and other terms and conditions offered to our customers to prudently balance risk, profitability and return on invested capital.
The final tenet of our strategy is innovation. Our IT systems and e-business tools and programs have provided our business with the flexibility to effectively navigate fluctuations in market conditions, structural changes in the technology industry, as well as changes created by the products we sell. An example of our investment in innovation and one that we believe is providing us with the flexibility to meet the demands of the ever-evolving technology market, is our continued deployment of internal IT systems across both our Americas and European regions. We believe our global IT systems provide us with a competitive advantage allowing us to drive efficiencies throughout our business while delivering innovative solutions for our business partners. In the past, we have implemented several components of our European IT systems into our North American IT infrastructure, including standardizing our North American financial systems and logistics network on SAP. During the second quarter of fiscal 2013, we implemented the sales, inventory and credit management modules of SAP within our U.S. operations, which substantially completed the implementation of the enterprise resource planning (“ERP”) systems used in our European operations.
We believe our strategy of execution, diversification and innovation has differentiated us in the markets we serve through our ability to deliver solid operating results and returns on invested capital over the last several years. While we initially experienced some performance degradation, we continue to believe that in the long-term, our U.S. implementation of SAP will provide us with a competitive advantage, giving us greater flexibility to meet the demands of our customers and vendors, and the ability to expand our reach into new markets and services. A positive indicator supporting this belief can be seen during the second quarter of fiscal 2014, when our Americas business grew net sales by approximately 9% over the same period of the prior year. During this quarter, we began to gain back some of the market share we lost subsequent to the aforementioned SAP implementation. We believe we have opportunities for further gains in market share as our customer satisfaction ratings continue to improve. In addition, during the past twelve months, we have also begun to gain traction on leveraging the new SAP capabilities we have in the United States, as we have added new customers to our integrated supply chain services. These services have an extensive sales and implementation cycle and while their return on investment is not immediate, we remain optimistic about our ability to profitably grow this business.
In Europe, we have seen a decline in net sales within many of our countries, although this decline was mitigated by our acquisition of SDG, as discussed above. Our decline in the region can be attributed to a decline in overall demand due to weak economic conditions in certain countries, as well as a loss of market share in several countries resulting from competitive pressures and our desire to exit or not participate in certain business opportunities due to a lack of profitability or return on capital. We have refrained from taking corresponding cost reduction or other actions in the region due to the uncertainty of the economic situation in the various countries in which we operate, as well as our desire to remain focused on completing the integration of SDG and our mobility and consumer electronics businesses in Belgium and the Netherlands. We are monitoring our performance in the region and are continuing to evaluate our ability to regain the proper level of profitable market share as well as the need for cost reductions or other actions.
We also continually evaluate the current and potential profitability and return on our investments in all geographies and consider changes in current and future investments based on risks, opportunities and current and anticipated market conditions. In connection with these evaluations, we may incur additional costs to the extent we decide to increase or decrease our investments in certain geographies. We will also continue to evaluate targeted strategic investments across our operations and new business opportunities and invest in those markets and product segments we believe provide us with the greatest opportunities for profitable growth. Finally, from a balance sheet perspective, we require working capital primarily to finance accounts receivable and inventory. We have historically

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relied upon debt, trade credit from our vendors, and accounts receivable financing programs for our working capital needs. At July 31, 2013, we had a debt to total capital ratio (calculated as total debt divided by the aggregate of total debt and total equity) of 17%.
Recent Accounting Pronouncements and Legislation
See Note 1 of Notes to Consolidated Financial Statements for the discussion on recent accounting pronouncements.
Results of Operations
We do not consider stock-based compensation expense in assessing the performance of our operating segments, and therefore the Company reports stock-based compensation expense separately. The following table summarizes our net sales, change in net sales and operating income by geographic region for the three and six months ended July 31, 2013 and 2012:
 

 
Three months ended
July 31, 2013
 
Three months ended
July 31, 2012
 
$
 
% of net sales
 
$
 
% of net sales
 
 
 
 
 
(As restated)
 
 
Net sales by geographic region ($ in thousands):
 
 
 
 
 
 
 
Americas
$
2,624,546

 
41.5
 %
 
$
2,407,168

 
40.3
 %
Europe
3,702,930

 
58.5

 
3,561,251

 
59.7

Total
$
6,327,476

 
100.0
 %
 
$
5,968,419

 
100.0
 %
 
 
 
 
 
 
 
 
 
Six months ended
July 31, 2013
 
Six months ended
July 31, 2012
 
$
 
% of net sales
 
$
 
% of net sales
 
 
 
 
 
(As restated)
 
 
Net sales by geographic region ($ in thousands):
 
 
 
 
 
 
 
Americas
$
4,917,328

 
39.4
 %
 
$
4,864,656

 
41.0
 %
Europe
7,557,905

 
60.6

 
7,013,826

 
59.0

Total
$
12,475,233

 
100.0
 %
 
$
11,878,482

 
100.0
 %
 
 
 
 
 
 
 
 
 
Three months ended July 31,
 
Six months ended July 31,
 
2013
 
2012
 
2013
 
2012
Year-over-year increase (decrease) in net sales (%):
 
 
 
 
 
 
 
Americas (US$)
9.0
 %
 
(6.4
)%
 
1.1
%
 
(4.3
)%
Europe (US$)
4.0
 %
 
(2.2
)%
 
7.8
%
 
(3.7
)%
Europe (Euro)
(0.4
)%
 
11.9
 %
 
5.8
%
 
6.3
 %
Total (US$)
6.0
 %
 
(4.0
)%
 
5.0
%
 
(4.0
)%
 
Three months ended
July 31, 2013
 
Three months ended
July 31, 2012
 
$
 
% of net sales 
 
$
 
% of net sales  
 
 
 
 
 
(As restated)
 
 
Operating income ($ in thousands):
 
 
 
 
 
 
 
Americas
$
31,988

 
1.22
 %
 
$
29,868

 
1.24
 %
Europe
98

 
0.00
 %
 
34,109

 
0.96
 %
Stock-based compensation expense
(2,227
)
 
(0.04
)%
 
(3,666
)
 
(0.06
)%
Total
$
29,859

 
0.47
 %
 
$
60,311

 
1.01
 %


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Six months ended
July 31, 2013
 
Six months ended
July 31, 2012
 
$
 
% of net sales 
 
$
 
% of net sales  
 
 
 
 
 
(As restated)
 
 
Operating income ($ in thousands):
 
 
 
 
 
 
 
Americas
$
59,219

 
1.20
 %
 
$
79,646

 
1.64
 %
Europe
11,989

 
0.16
 %
 
69,730

 
0.99
 %
Stock-based compensation expense
(5,318
)
 
(0.04
)%
 
(6,607
)
 
(0.06
)%
Total
$
65,890

 
0.53
 %
 
$
142,769

 
1.20
 %
 
Three months ended
July 31, 2013
 
Three months ended
July 31, 2012
 
$
 
% of net sales 
 
$
 
% of net sales  
 
 
 
 
 
(As restated)
 
 
Non-GAAP operating income ($ in thousands):
 
 
 
 
 
 
 
Americas
$
34,994

 
1.33
 %
 
$
29,868

 
1.24
 %
Europe
15,260

 
0.41
 %
 
37,292

 
1.05
 %
Stock-based compensation expense
(2,227
)
 
(0.04
)%
 
(3,666
)
 
(0.06
)%
Total
$
48,027

 
0.76
 %
 
$
63,494

 
1.06
 %
 
Six months ended
July 31, 2013
 
Six months ended
July 31, 2012
 
$
 
% of net sales 
 
$
 
% of net sales  
 
 
 
 
 
(As restated)
 
 
Non-GAAP operating income ($ in thousands):
 
 
 
 
 
 
 
Americas
$
63,985

 
1.30
 %
 
$
79,646

 
1.64
 %
Europe
35,633

 
0.47
 %
 
76,258

 
1.09
 %
Stock-based compensation expense
(5,318
)
 
(0.04
)%
 
(6,607
)
 
(0.06
)%
Total
$
94,300

 
0.76
 %
 
$
149,297

 
1.26
 %
For the second quarter of fiscal 2014, non-GAAP operating income excludes amortization expense of acquisition-related intangible assets in Europe of $7.2 million and restatement expenses of $3.0 million in the Americas and $8.0 million in Europe. For the second quarter of fiscal 2013, non-GAAP operating income excludes acquisition-related intangible assets amortization expense in Europe of $3.2 million. For the first semester of fiscal 2014, non-GAAP operating income excludes acquisition-related intangible assets amortization expense in Europe of $14.4 million and restatement expenses of $4.8 million in the Americas and $9.2 million in Europe. For the first semester of fiscal 2013, non-GAAP operating income excludes amortization expense of acquisition-related intangible assets in Europe of $6.5 million. Management believes that this non-GAAP measure is useful to investors because it provides a meaningful comparison of our performance between periods.
We sell products purchased from the world’s leading peripheral, system, software and networking vendors. Products purchased from Hewlett Packard Company and Apple, Inc. approximated 20% and 11%, respectively, of our net sales for the second quarter of fiscal 2014 and approximated 21% and 11%, respectively, of our net sales for the first six months of fiscal 2014. There were no other vendors or any customers that exceeded 10% of our consolidated net sales for the three and six months ended fiscal 2014.

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The following table sets forth our Consolidated Statement of Income as a percentage of net sales for the three and six months ended July 31, 2013 and 2012, as follows:  
 
Three months ended July 31,
 
Six months ended July 31,
 
2013
 
2012  
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
100.00

%
 
100.00

%
 
100.00

%
 
100.00

%
Cost of products sold
95.01

 
 
94.93

 
 
94.88

 
 
94.73

 
Gross profit
4.99

 
 
5.07

 
 
5.12

 
 
5.27

 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
4.35

 
 
4.06

 
 
4.48

 
 
4.07

 
Restatement expenses
0.17

 
 
0.00

 
 
0.11

 
 
0.00

 
 
4.52

 
 
4.06

 
 
4.59

 
 
4.07

 
Operating income
0.47

 
 
1.01

 
 
0.53

 
 
1.20

 
Interest expense
0.10

 
 
0.06

 
 
0.11

 
 
0.05

 
Other expense (income), net
0.01

 
 
0.03

 
 
(0.01
)
 
 
0.02

 
Income before income taxes
0.36

 
 
0.92

 
 
0.43

 
 
1.13

 
Provision for income taxes
0.13

 
 
0.27

 
 
0.17

 
 
0.33

 
Consolidated net income
0.23

 
 
0.65

 
 
0.26

 
 
0.80

 
Net income attributable to noncontrolling interest
0.00

 
 
(0.07
)
 
 
0.00

 
 
(0.05
)
 
Net income attributable to shareholders of Tech Data Corporation
0.23

%
 
0.58

%
 
0.26

%
 
0.75

%
Three and six months ended July 31, 2013 and 2012    
Net Sales
Our consolidated net sales were $6.3 billion in the second quarter of fiscal 2014, an increase of 6.0% when compared to the second quarter of fiscal 2013. Our acquisition of the SDG value and broadline IT products distribution businesses in November 2012 positively impacted our year-over-year net sales comparison by approximately nine percentage points and the strengthening of certain foreign currencies against the U.S. dollar positively impacted our year-over-year net sales comparison by approximately three percentage points. Excluding the net sales of SDG and the positive impact of the strengthening of certain foreign currencies against the U.S. dollar in fiscal 2014, consolidated net sales decreased by approximately five percent in comparison with the same period of the prior fiscal year. On a regional basis, during the second quarter of fiscal 2014, net sales in the Americas increased by 9.0% when compared to the second quarter of fiscal 2013 and increased by 4.0% in Europe (a decrease of 0.4% on a euro basis). Excluding SDG, net sales in our “legacy” European operations decreased by approximately 11 percent (a decrease of approximately 15 percent on a euro basis) in comparison with the same period of the prior fiscal year.
On a year-to-date basis, net sales were $12.5 billion during the first semester of fiscal 2014, an increase of 5.0% when compared to the first semester of fiscal 2013. Our acquisition of the SDG value and broadline IT products distribution businesses in November 2012 positively impacted our first semester year-over-year net sales comparison by approximately nine percentage points and the strengthening of certain foreign currencies against the U.S. dollar positively impacted our first semester year-over-year net sales comparison by approximately one percentage point. Excluding the net sales of SDG and the positive impact of the strengthening of certain foreign currencies against the U.S. dollar in fiscal 2014, consolidated net sales decreased by approximately five percent in comparison with the same period of the prior fiscal year. On a regional basis, during the first semester of fiscal 2014, net sales in the Americas increased by 1.1% when compared to the first semester of fiscal 2013 and increased by 7.8% in Europe (an increase of 5.8% on a euro basis). Excluding SDG, net sales in our legacy European operations decreased by approximately seven percent (a decrease of approximately nine percent on a euro basis) in comparison with the same period of the prior fiscal year.
The increase in net sales in the Americas during the second quarter of fiscal 2014 compared to the same period of the prior fiscal year is primarily attributable to a partial recovery of market share that we lost after we implemented the sales, inventory and credit management modules of SAP within our U.S. operations during the second quarter of fiscal 2013. The slight increase in our net sales in the Americas during the first semester of fiscal 2014 compared to the same period of the prior fiscal year can be attributed to our solid growth during the second quarter substantially offset by negative growth during the first quarter due to the aforementioned market share loss after we implemented the sales, inventory and credit management modules of SAP within our U.S. operations. The decline in our European net sales (in euro) within our legacy operations during the second quarter and first semester of fiscal 2014

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compared to the same periods of the prior fiscal year is primarily due to weak economic conditions in certain countries and a decline in market share within several of our operations due to competitive pressures and our focus on gross margin percentage.
Gross Profit
Gross profit as a percentage of net sales (“gross margin”) during the second quarter of fiscal 2014 was 4.99%, a decrease of 8 basis points compared to the 5.07% gross margin in the second quarter of fiscal 2013. On a year-to-date basis, gross margin decreased to 5.12% for the first semester of fiscal 2014 compared to 5.27% in the comparable period of the prior fiscal year. The decrease in gross margin in the second quarter of fiscal 2014 compared to the same period of the prior year is primarily due to gross margin degradation in the Americas due to the competitive environment and a change in product mix. The decline in gross margin during the first semester of fiscal 2014 compared to the same period of the prior fiscal year is primarily due to the factors discussed above regarding the second quarter, as well as higher inventory costs in Europe, primarily in the first quarter of fiscal 2014.
Selling, general and administrative expenses (“SG&A”)
SG&A as a percentage of net sales increased to 4.35% in the second quarter of fiscal 2014, compared to 4.06% in the second quarter of fiscal 2013. On a year-to-date basis, SG&A as a percentage of net sales increased to 4.48% compared to 4.07% in the first semester of the prior fiscal year. The increase in SG&A as a percentage of net sales in the second quarter and first semester of fiscal 2014 compared to the same periods of the prior year is primarily attributable to the impact of the acquisition of SDG in the fourth quarter of fiscal 2013 and the lack of leverage resulting from lower sales in our legacy operations in Europe.
In absolute dollars, SG&A increased by $32.7 million to $275.0 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 and increased by $75.1 million to $558.4 million in the first semester of fiscal 2014 compared to the same period of the prior year. The increase in SG&A during the second quarter and first semester of fiscal 2014 compared to the same periods of the prior year is primarily attributable to SG&A and integration costs associated with the SDG acquisition in the fourth quarter of fiscal 2013.
Restatement expenses
Restatement expenses primarily include legal and accounting fees associated with the investigation, as well as third party consulting fees to support the Company's supplemental procedures to assist in reviewing its financial statements and accounting practices, and other activities in connection with the restatement discussed further in Note 2 of Notes to Consolidated Financial Statements. During the second quarter and first semester of fiscal 2014, the Company incurred restatement expenses of approximately $11.0 million and $14.0 million, respectively. The Company will incur a total of approximately $54 million to $56 million of restatement expenses during the entire fiscal year ended January 31, 2014.
Interest Expense
Interest expense increased 81.7% to $6.2 million in the second quarter of fiscal 2014 compared to $3.4 million for the same period of the prior fiscal year. On a year-to-date basis, interest expense increased 105.2% to $13.3 million in the first semester of fiscal 2014 compared to $6.5 million in the first semester of the prior year. The significant increase in interest expense in fiscal 2014 is primarily attributable to the $350.0 million, 3.75% Senior Notes issued in September 2012.
Other Expense (Income), Net
Other expense (income), net consists primarily of losses (gains) on investments in life insurance policies to fund the Company's nonqualified deferred compensation plan, interest income, discounts on the sale of accounts receivable and net foreign currency exchange losses (gains) on certain financing transactions and the related derivative instruments used to hedge such financing transactions. Other expense (income), net, was $0.7 million of expense in the second quarter of fiscal 2014 compared to $1.8 million of expense in the second quarter of the prior year. On a year-to-date basis, other expense (income), net, was $1.5 million of income in the first semester of fiscal 2014 compared to $2.0 million of expense in the first semester of the prior year. The change in other expense (income), net, during the first semester of fiscal 2014 compared to the same period of the prior year is primarily attributable to an increase in gains on investments in life insurance policies related to the Company's nonqualified deferred compensation plan and an increase in net foreign currency exchange gains on certain financing transactions, as compared to the same period of the prior fiscal year.

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Provision for Income Taxes
Our effective tax rate was 36.1% in the second quarter of fiscal 2014 and 30.0% in the second quarter of fiscal 2013. Our effective tax rate was 40.0% for the first semester of fiscal 2014 compared to 29.6% for the same period of the prior year. The increase in the effective rate for both the second quarter and first semester of fiscal 2014 compared to the same periods of the prior year is primarily the result of the relative mix of earnings and losses within the tax jurisdictions in which we operate, partially offset by a discrete tax benefit during the second quarter of fiscal 2014.
On an absolute dollar basis, the provision for income taxes decreased 49.9% to $8.3 million for the second quarter of fiscal 2014 compared to $16.6 million in the same period of fiscal 2013 and decreased 45.5% to $21.6 million for the first semester of fiscal 2014 compared to $39.7 million for the same period of the prior fiscal year. The decrease in the provision for income taxes in these periods was primarily due to a decrease in taxable earnings in certain countries in which we operate.
The effective tax rate differed from the U.S. federal statutory rate of 35% during these periods primarily due to the relative mix of earnings or losses within the tax jurisdictions in which we operate such as: i) losses in tax jurisdictions where we are not able to record a tax benefit; ii) earnings in tax jurisdictions where we have previously recorded a valuation allowance on deferred tax assets; and iii) earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States.
Our future effective tax rates will continue to be affected by lower earnings than anticipated in countries with lower statutory rates, changes in the relative mix of taxable income and taxable loss jurisdictions, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. We monitor the assumptions used in estimating the annual effective tax rate and make adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual effective income tax rates, future income tax expense could be materially affected.
In addition, our income tax returns are subject to continuous examination by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes from these examinations to determine the adequacy of our provision for income taxes. To the extent we prevail in matters for which accruals have been established or we are required to pay amounts in excess of such accruals, our effective tax rate could be materially affected.
Net income attributable to noncontrolling interest
In September 2012, the Company completed the acquisition of our joint venture partner's fifty percent ownership interest in Brightstar Europe Limited ("BEL"), which was previously a consolidated joint venture between Tech Data and Brightstar. Net income attributable to noncontrolling interest was $3.8 million for the second quarter of fiscal 2013 and $5.7 million for the first semester of fiscal 2013, which represents Brightstar's portion of the operating results of BEL for the respective periods.


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Non-GAAP financial data
Management believes that the presentation of non-GAAP operating income, non-GAAP net income and non-GAAP net income per diluted share is useful to investors because it provides a meaningful comparison of our performance between periods. The following tables provide a detailed reconciliation between results reported in accordance with generally accepted accounting principles in the United States ("GAAP") and non-GAAP financial measures.
 
 
Three months ended July 31,
 
 
2013
 
2012
 
 
(In thousands, except per share amounts)
 
 
 
 
(As restated)
GAAP to non-GAAP reconciliation of operating income:
 
 
 
 
Operating income
 
$
29,859

 
$
60,311

Restatement expenses (1)
 
10,963

 
0

Acquisition-related intangible assets amortization expense (2)
 
7,205

 
3,183

Non-GAAP operating income
 
$
48,027

 
$
63,494

 
 
 
 
 
GAAP to non-GAAP reconciliation of net income attributable to shareholders of Tech Data Corporation:
 
 
 
 
Net income attributable to shareholders of Tech Data Corporation
 
$
14,695

 
$
34,699

Restatement expenses, net of tax (1)
 
7,886

 
0

Acquisition-related intangible assets amortization expense, net of tax (2)
 
5,270

 
2,357

Non-GAAP net income attributable to shareholders of Tech Data Corporation
 
$
27,851

 
$
37,056

 
 
 
 
 
GAAP to non-GAAP reconciliation of net income per share attributable to shareholders of Tech Data Corpora