Tech Data Corporation (TECD) - Description of business

Company Description
Tech Data Corporation (“Tech Data,” “we,” “our,” “us,” or the “Company”), ranked 110th of the FORTUNE 500 in 2005, is a leading distributor of information technology (“IT”) products, logistics management and other value-added services worldwide. We serve more than 90,000 value-added resellers (“VARs”), direct marketers, retailers and corporate resellers in more than 100 countries throughout the United States, Europe, Canada, Latin America, the Caribbean, the Middle East and Africa. Throughout this document we will make reference to the two primary geographic markets we serve as the Americas (including the United States, Canada, Latin America and export sales to the Caribbean) and EMEA (including Europe, the Middle East and export sales to Africa). We offer a variety of products from manufacturers and publishers such as Acer, Adobe, American Power, Apple, Autodesk, Canon, Cisco Systems, Epson, Fujitsu-Siemens, Hewlett-Packard, IBM, Intel, Kingston, Lexmark, Lenovo, Logitech, Microsoft, Nortel Networks, NEC, Samsung, Sony, Symantec, Toshiba, Viewsonic, and Xerox. Products are generally shipped from regionally located logistics centers the same day the orders are received. Customers are provided with a high level of customer service through the Company’s technical support, electronic commerce tools (including on-line order entry, product integration services and electronic data interchange (“EDI”) services), customized shipping documents and flexible financing programs. While we strive to provide our customers with a full array of services, revenues generated from the direct sale of services contributed less than 10% to Tech Data’s overall net sales. History Tech Data was incorporated in 1974 to market data processing supplies such as tapes, disk packs, and custom and stock tab forms for mini and mainframe computers directly to end users. With the advent of microcomputer dealers, we made the transition to a wholesale distributor in 1984 by broadening our product line to include hardware products and withdrawing entirely from end-user sales. From 1989 to 1994, we expanded internationally through the acquisition of privately-held distribution companies in Canada and France. In July 1998, we substantially enhanced our European presence with the acquisition of 83% of the voting common stock of Europe’s leading technology products distributor, Computer 2000 AG (“Computer 2000”). With a presence in significant geographic markets in Europe, the Middle East and Latin America, the purchase of Computer 2000 expanded Tech Data’s presence to 26 countries worldwide. In April 1999, all of the shares of Computer 2000 were integrated into Tech Data Germany AG and the remaining minority interests in Computer 2000 were acquired in the third quarter of fiscal 2003. In May 1999, we nearly doubled our Canadian business through the acquisition of Globelle Corporation (“Globelle”), a leading publicly-held Canadian distributor. The purchase of Globelle provided critical mass and a complementary product and geographic focus to our Canadian operations. In March 2003, we expanded our presence in the European networking and communications market through the acquisition of all of the outstanding stock of Azlan Group PLC (“Azlan”) for approximately $224.4 million plus acquisition-related expenses of $2.6 million, for a total purchase price of $227.0 million. The Azlan acquisition strengthened Tech Data’s position in Europe with respect to networking products and value-added services. In May 2005, the Company announced a formal restructuring program to better align the EMEA operating cost structure with the current business environment. In connection with this restructuring program, the Company has recorded and will continue to record charges for workforce reductions and the optimization of facilities and systems. Excluding external consulting costs, total cash charges associated with the restructuring program are estimated to be in the range of $40.0 to $50.0 million, comprised of $24.0 to $30.0 million related to workforce reductions and $16.0 to $20.0 million related to the optimization of facilities and systems. We expect initiatives related to the restructuring to generate annualized savings in the same range. The restructuring program is anticipated to be complete by the end of the third quarter of fiscal 2007. During the fourth quarter of fiscal 2006, in order to dedicate strategic efforts and resources to core growth opportunities, we made the decision to sell the EMEA Training Business (the “Training Business”). In March 2006, we closed the sale of the Training - 1 - Business to a third-party (the “Purchaser”) for total cash consideration of $16.5 million and $0.5 million of additional consideration which is contingent upon the satisfaction of certain post-closing conditions. The sale of the Training Business includes net assets with a book value of approximately $7.3 million at January 31, 2006, comprised primarily of accounts receivable, property and equipment, accrued expenses and other liabilities. The results of the Training Business have been reclassified and presented as discontinued operations in the fiscal 2006 Consolidated Statement of Operations and all prior periods presented have been restated and reported as discontinued operations. We are in the process of finalizing the closing balance sheet as of the sale date with the Purchaser, including the allocation of any EMEA goodwill, and do not anticipate the gain on the sale of the Training Business to be material to our consolidated operating results or financial condition. Industry The wholesale distribution model has proven to be well suited for both manufacturers and publishers of IT products (also referred to throughout this document as “vendors” or “suppliers”) and resellers of those products. The large number of resellers makes it cost efficient for vendors to rely on wholesale distributors to serve this diverse customer base. Similarly, due to the large number of vendors and products, resellers often cannot or choose not to establish direct purchasing relationships with vendors. As a result, they frequently rely on wholesale distributors, such as Tech Data, who can leverage purchasing costs across multiple vendors to satisfy a significant portion of their product procurement, logistics, financing, marketing and technical support needs. Through collaborative supply chain management initiatives, we continue to advance the efficiency of our distribution model. By leveraging our infrastructure and logistics expertise, vendors benefit from a cost-effective alternative to selling directly to resellers. Our ability to provide a “virtual warehouse” of products for resellers means they no longer need to hold inventory, which reduces their costs and risks associated with handling products. In addition to enabling fast reseller access to a comprehensive hardware and software offering, we frequently ship products directly to end-users on behalf of our customers, thereby reducing the resellers’ costs of storing, maintaining, and shipping the products themselves. We facilitate this approach by personalizing shipping labels and packing documents with the resellers’ brand identities (e.g., logos), marketing messages and other specialized content. The increasing utilization of electronic ordering and information delivery systems, including the ability to transact business over the internet, continues to have a significant impact on the cost efficiency of the wholesale distribution model. For example, we have established a seamless supply chain in which end-user orders flow immediately from reseller internet sites to our logistics centers in closest proximity to the order destination. Advances like these are possible due to the financial and technical resources available to large-scale distributors, such as ourselves, enabling a reduction in both our customers’ and our own transaction costs through more efficient purchasing and lower selling and delivery costs. In summary, the IT distribution industry continues to address a broad spectrum of reseller and vendor requirements despite certain vendors, such as Hewlett-Packard Company (“HP”), continuing with direct sales of certain products to end-users and/or resellers. New products and emerging market opportunities have helped to offset the impact of vendor direct sales on IT distributors. Further, vendors continue to seek the logistics expertise of distributors to penetrate key markets like the small- and mid-sized business (“SMB”) sector, which rely on VARs—our primary customer base—to gain access to and support for new technology. The economies of scale and global reach of large industry-leading distributors are expected to continue to be significant competitive advantages in this marketplace. Products and Vendors We sell more than 100,000 products from the world’s leading peripheral, system and networking manufacturers and software publishers. These products are typically purchased directly from the manufacturer or software publisher on a non-exclusive basis. Conversely, our vendor agreements do not restrict us from selling similar products manufactured by competitors, nor do they require us to sell a specified quantity of product. As a result, we have the flexibility to terminate or curtail sales of one product line in favor of another due to technological change, pricing considerations, product availability, customer demand, or vendor distribution policies. - 2 - We continually strengthen our product line in order to provide our customers with access to the latest technology products. However, from time to time, the demand for certain products that we sell exceeds the supply available from the manufacturer or publisher. In such cases, we generally receive an allocation of the available products. We believe that our ability to compete is not adversely affected by these periodic shortages and the resulting allocations. It is our understanding that our vendor agreements are in the form customarily used by each manufacturer. Agreements typically contain provisions that allow termination by either party upon 30 days notice. In most instances, a vendor who elects to terminate a distribution agreement will repurchase from the distributor the vendor’s products carried in the distributor’s inventory. Most of our vendor agreements also allow for stock rotation and price protection provisions. Stock rotation rights give us the ability, subject to certain limitations, to return for credit or exchange a portion of those inventory items purchased from the vendor. Price protection situations occur when a vendor credits us for declines in inventory value resulting from the vendor’s price reductions. Along with our inventory management policies and practices, these provisions reduce our risk of loss due to slow-moving inventory, vendor price reductions, product updates or obsolescence. Sometimes the industry practices discussed above are not embodied in agreements and do not protect us in all cases from declines in inventory value. However, we believe that these practices provide a significant level of protection from such declines, although no assurance can be given that such practices will continue or that they will adequately protect us against declines in inventory value (see also Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)—Asset Management). While we sell products in various countries throughout the world, and product categories may vary from region to region, over the past three years, sales within our consolidated product categories have remained fairly consistent within the following ranges:


   43% – 46%


   23% – 26%


   14% – 19%


   13% – 18% We generated approximately 27% of our consolidated net sales in fiscal 2006 from products purchased from HP compared to 28%, and 32% of consolidated net sales in fiscal 2005 and 2004, respectively. There were no other vendors that accounted for 10% or more of our consolidated net sales in fiscal 2006, 2005 or 2004. Customers and Services We purchase products directly from manufacturers and publishers in large quantities for sale to an active reseller base of more than 90,000 VARs, direct marketers, retailers and corporate resellers. While we sell products in various countries throughout the world, and customer channels may vary from region to region, over the past three years, sales within our consolidated customer channels have remained fairly consistent within the following ranges:


   55% – 59%

Direct marketers and retailers

   22% – 27%

Corporate resellers

   16% – 21% No single customer accounted for more than five percent of our net sales during fiscal 2006, 2005 or 2004. The market for VARs is attractive because VARs generally rely on distributors as their principal source of computer products and financing. This reliance is due to VARs typically lacking the resources to establish a large number of direct purchasing relationships or stock significant product inventories. Direct marketers, retailers and corporate resellers may establish direct relationships with manufacturers and publishers for their more popular products, but utilize distributors as the primary source for other product requirements and the alternative source for products acquired directly. We have also developed special programs to meet the unique needs of direct marketers and retailers. In addition to a strong product offering, we provide resellers a high level of customer service through our training and technical support, suite of electronic commerce tools (including internet order entry and EDI services), customized shipping documents, product configuration/integration services and access to flexible financing programs. We also provide services to our vendors by giving them the opportunity to participate in a number of special promotions, and marketing services targeted to the needs of our resellers. While we believe that services such as these help to set us apart from our competition, they contribute less than 10% to our overall revenues. - 3 - We provide our vendors with one of the largest bases of resellers throughout the Americas and EMEA, delivering products to customers from our 28 regionally located logistics centers. We have located our logistics centers near our customers which enables us to deliver products on a timely basis, thereby reducing the customers’ need to invest in inventory (see also