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TECH DATA CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This Annual Report on Form 10-K, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A"), contains
forward-looking statements, as described in the "safe harbor" provision of the
Private Securities Litigation Reform Act of 1995. These statements involve a
number of risks and uncertainties and actual results could differ materially
from those projected. These forward-looking statements regarding future events
and the future results of Tech Data Corporation 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 Item 1A. Risk Factors in this Annual Report
on Form 10-K for the year ended January 31, 2012 for further information. We
undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
Factors that could cause actual results to differ materially include the
following:
• global economic and political instability
• competition
• narrow margins
• dependence on information systems
• acquisitions and divestitures
• exposure to natural disasters, war and terrorism
• dependence on independent shipping companies
• impact of policy changes
• labor strikes
• risk of declines in inventory value
• product availability
• vendor terms and conditions
• loss of significant customers
• customer credit exposure
• need for liquidity and capital resources; fluctuations in interest rates
• foreign currency exchange rates; exposure to foreign markets
• international operations
• changes in income tax and other regulatory legislation
• potential adverse effects of litigation or regulatory enforcement actions
• changes in accounting rules
• volatility of common stock price
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.
The Company's financial objectives are to grow sales at or above the market rate
of growth for technology products, gain share in select markets, improve
profitability, 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.
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The fundamental element of our strategy is superior execution. Our execution
strategy is supported by our highly efficient logistics 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. From a balance sheet perspective, we require working capital
primarily to finance accounts receivable and inventory. We have historically
relied upon debt, trade credit from our vendors, and accounts receivable
financing programs for our working capital needs. At January 31, 2012, we had a
debt to capital ratio (calculated as total debt divided by the aggregate of
total debt and total equity) of 5%.
In addition to driving superior execution, we continue to diversify and realign
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, continues to
be the foundation 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 higher growth specialty areas,
namely, the data center, software, consumer electronics and mobility, all of
which now contribute significantly to our financial results. Our investments in
our European mobility joint venture with Brightstar Corp. ("Brightstar"), which
began in 2008, generated revenues of approximately $1.8 billion during fiscal
2012. The most recent examples of such investments are acquisitions made in
Europe during the second half of fiscal 2012. In October 2011, we acquired the
distribution business of Mensch und Maschine Software SE, a leading value-added
distributor in the design software market in several European countries for a
purchase price of $41.0 million, including deferred payments and earnouts,
(based on the foreign currency exchange rates on the date of acquisition). In
December 2011, we acquired an additional value-added specialty software
distributor in Belgium. These acquisitions, while not material to our
consolidated financial results, strengthen our position as Autodesk, Inc.'s
leading value-added distributor by establishing a presence in Benelux and
Romania, extend our product portfolio to include the Autodesk, Inc. software for
the manufacturing industry in Italy, France, UK and Poland, and add a number of
highly skilled and qualified professionals to our team across Europe. In
addition, in April 2011, we executed an agreement with Brightstar to establish a
U.S. joint venture to capitalize on the mobility market serving small and medium
size businesses ("SMB"). The joint venture will assist our reseller customers in
providing SMB end users with a wide array of products and services including
wireless activation and renewal processes, data services, software, hardware,
technical support and billing management. Finally, another strategic area of
investment for us is our integrated supply chain services designed to provide
innovative third party logistics and other offerings to our business partners.
Our evolving mix of products, services, customers and geographies have played a
key role in delivering balanced and improved operating results, and are
important factors 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 products we sell. One of
our most recent and significant innovations is our StreamOne Solutions Store.
The StreamOne Solutions Store provides independent software vendors and cloud
providers with a platform to market software-as-a-service and other offerings to
more than 20,000 of our resellers in the United States, thereby establishing a
previously unavailable route to market for these independent software vendors
and cloud providers. Another 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 the Americas and Europe. We believe our pan-European 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 America financial systems and logistics network on SAP.
In fiscal 2013, we will continue to deploy core applications currently operating
our European business into our Americas region and continue to invest in our IT
infrastructure in Europe. While we have had numerous successful IT system
implementations in both Europe and in North America to date, we can make no
assurances that we will not have disruptions, delays and/or negative operational
impacts from these ongoing implementations.
We believe our strategy of execution, diversification and innovation is
differentiating us in the markets we serve and is delivering solid sales growth,
select market share gains, higher earnings per share, strong operating cash
flow, and industry-leading returns on invested capital. We are constantly
monitoring the factors that we can control, including our net sales growth,
management of costs,
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working capital and capital spending. We also continuously 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. For example, during the fourth quarter of fiscal 2012, in
response to current and anticipated market conditions, we realigned our
personnel resources in Europe, reducing personnel in certain lower growth, lower
margin markets and increasing personnel in those markets providing the greatest
opportunity for profitability and shareholder returns, resulting in an
incremental year-over-year increase of $11.0 million in severance costs during
the quarter, and a net reduction of our personnel in Europe. We will continue to
invest in those markets and product segments we believe provide us with the
greatest opportunities for profitable growth. In addition, during the fourth
quarter of fiscal 2012 as part of our ongoing initiatives to optimize
profitability and return on invested capital, we closed our in-country
commercial operations in Brazil and Colombia. Both of these operations failed to
meet our goals for profitability and return on investment. As a result of these
closures, we incurred total cash and non-cash charges of $28.3 million during
the fourth quarter of fiscal 2012. These costs do not include any estimated
costs associated with the Brazilian subsidiary's contingencies related to CIDE
and other non-income related tax examinations previously disclosed. We will
maintain a legal entity in Brazil to address our future fiscal and legal
responsibilities. We will continue to serve both of these markets through our
Miami-based export business.
Critical Accounting Policies and Estimates
The information included within MD&A is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures.
On an ongoing basis, we evaluate these estimates, including those related to bad
debts, inventory, vendor incentives, goodwill and intangible assets, deferred
taxes, and contingencies. Our estimates and judgments are based on currently
available information, historical results, and other assumptions we believe are
reasonable. Actual results could differ materially from these estimates. We
believe the critical accounting policies discussed below affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Accounts Receivable
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. In estimating the
required allowance, we take into consideration the overall quality and aging of
the receivable portfolio, the existence of credit insurance and specifically
identified customer risks. Also influencing our estimates are the following:
(1) the large number of customers and their dispersion across wide geographic
areas; (2) the fact that no single customer accounts for more than 10% of our
net sales; (3) the value and adequacy of collateral received from customers, if
any; (4) our historical loss experience; and (5) the current economic
environment. If actual customer performance were to deteriorate to an extent not
expected by us, additional allowances may be required which could have an
adverse effect on our consolidated financial results. Conversely, if actual
customer performance were to improve to an extent not expected by us, a
reduction in allowances may be required which could have a favorable effect on
our consolidated financial results.
Inventory
We value our inventory at the lower of its cost or market value, with cost being
determined on the first-in, first-out method. We write down our inventory for
estimated obsolescence equal to the difference between the cost of inventory and
the estimated market value based upon an aging analysis of the inventory on
hand, specifically known inventory-related risks (such as technological
obsolescence and the nature of vendor terms surrounding price protection and
product returns), foreign currency fluctuations for foreign-sourced product, and
assumptions about future demand. Market conditions or changes in terms and
conditions by our vendors that are less favorable than those projected by
management may require additional inventory write-downs, which could have an
adverse effect on our consolidated financial results.
Vendor Incentives
We receive incentives from vendors related to cooperative advertising
allowances, infrastructure funding, volume rebates and other incentive
agreements. These incentives are generally under quarterly, semi-annual or
annual agreements with the vendors; however, some of these incentives are
negotiated on an ad-hoc basis to support specific programs mutually developed
with the vendor. Unrestricted volume rebates and early payment discounts
received from vendors are recorded when they are earned as a reduction of
inventory and as a reduction of cost of products sold as the related inventory
is sold. Vendor incentives for specifically identified cooperative advertising
programs and infrastructure funding are recorded when earned as adjustments to
product costs or selling, general and administrative expenses, depending on the
nature of the programs.
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We also provide reserves for receivables on vendor programs for estimated losses
resulting from vendors' inability to pay or rejections by vendors of claims.
Should amounts recorded as outstanding receivables from vendors be deemed
uncollectible, additional allowances may be required which could have an adverse
effect on our consolidated financial results.
Goodwill, Intangible Assets and Other Long-Lived Assets
The carrying value of goodwill is reviewed at least annually for impairment and
may also be reviewed more frequently if current events and circumstances
indicate a possible impairment. An impairment loss, if any, is charged to
expense in the period identified. The Company performed its annual goodwill
impairment test as of January 31, 2012 and determined there was no impairment.
We also examine the carrying value of our intangible assets with finite lives,
which includes capitalized software and development costs, purchased
intangibles, and other long-lived assets as current events and circumstances
warrant determining whether there are any impairment losses. If indicators of
impairment are present and future cash flows are not expected to be sufficient
to recover the assets' carrying amount, an impairment loss is charged to expense
in the period identified. Factors that may cause a goodwill, intangible asset or
other long-lived asset impairment include negative industry or economic trends
and significant underperformance relative to historical or projected future
operating results. Our valuation methodologies include, but are not limited to,
a discounted cash flow model, which estimates the net present value of the
projected cash flows of our reporting units and a market approach, which
evaluates comparative market multiples applied to our reporting units'
businesses to yield a second assumed value of each reporting unit. If actual
results are substantially lower than our projections underlying these
assumptions, or if market discount rates substantially increase, our future
valuations could be adversely affected, potentially resulting in future
impairment charges.
Income Taxes
We record valuation allowances to reduce our deferred tax assets to the amount
expected to be realized. In assessing the adequacy of a recorded valuation
allowance, we consider all positive and negative evidence and a variety of
factors including the scheduled reversal of deferred tax liabilities, historical
and projected future taxable income, and prudent and feasible tax planning
strategies. If we determine it is more likely than not that we will be able to
use a deferred tax asset in the future in excess of its net carrying value, an
adjustment to the deferred tax asset valuation allowance would be made to reduce
income tax expense, thereby increasing net income in the period such
determination was made. Should we determine that we are not likely to realize
all or part of our net deferred tax assets in the future, an adjustment to the
deferred tax asset valuation allowance would be made to income tax expense,
thereby reducing net income in the period such determination was made.
Contingencies
We accrue for contingent obligations, including estimated legal costs, when the
obligation is probable and the amount is reasonably estimable. As facts
concerning contingencies become known, we reassess our position and make
appropriate adjustments to the financial statements. Estimates that are
particularly sensitive to future changes include those related to tax, legal,
and other regulatory matters such as imports and exports, the imposition of
international governmental controls, changes in the interpretation and
enforcement of international laws (in particular related to items such as duty
and taxation), and the impact of local economic conditions and practices, which
are all subject to change as events evolve and as additional information becomes
available during the administrative and litigation process.
Recent Accounting Pronouncements 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, operating income and Non-GAAP operating income by
geographic region for the fiscal years ended January 31, 2012, 2011 and 2010:
$,000000000 $,000000000 $,000000000 $,000000000 $,000000000 $,000000000
% of % of % of
2012 net sales 2011 net sales 2010 net sales
Net sales by geographic region
($ in thousands):
Americas $ 10,839,044 40.9% $ 10,534,531 43.2% $ 9,570,088 43.3%
Europe 15,649,080 59.1 13,841,442 56.8 12,529,788 56.7
Total $ 26,488,124 100.0% $ 24,375,973 100.0% $ 22,099,876 100.0%
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$,000000000 $,000000000 $,000000000 $,000000000 $,000000000 $,000000000
2012 2011 2010
Year-over-year increase (decrease) in net
sales (%):
Americas (US$) 2.9% 10.1% (9.8)%
Europe (US$) 13.1% 10.5% (7.0)%
Europe (Euro) 8.1% 17.5% (4.2)%
Total (US$) 8.7% 10.3% (8.2)%
000000000 000000000 000000000 000000000 000000000 000000000
% of % of % of
2012 net sales 2011 net sales 2010 net sales
Operating income ($ in thousands):
Americas $ 174,882 1.61 % $ 183,639 1.74 % $ 143,869 1.50 %
Europe 163,675 1.05 % 160,233 1.16 % 126,832 1.01 %
Stock-based compensation expense (10,699) (0.04)% (9,887) (0.04)% (11,225) (0.05)%
Total $ 327,858 1.24 % $ 333,985 1.37 % $ 259,476 1.17 %
000000000 000000000 000000000 000000000 000000000 000000000
% of % of % of
2012 net sales 2011 net sales 2010 net sales
Non-GAAP Operating income ($ in
thousands):
Americas $ 203,176 1.87 % $ 183,639 1.74 % $ 143,869 1.50 %
Europe 163,675 1.05 % 160,233 1.16 % 126,832 1.01 %
Stock-based compensation
expense (10,699) (0.04)% (9,887) (0.04)% (11,225) (0.05)%
Total $ 356,152 1.34 % $ 333,985 1.37 % $ 259,476 1.17 %
Non-GAAP operating income excludes the loss on disposal of subsidiaries of $28.3
million for the exit of the Company's in-country commercial operations in Brazil
and Colombia in the fourth quarter of fiscal 2012. Management believes that this
non-GAAP measure, which excludes the costs of these actions, is useful to
investors because it provides meaningful comparisons to prior periods' financial
results.
We sell many products purchased from the world's leading systems, peripherals,
networking and software vendors. Products purchased from Hewlett-Packard Company
generated 25%, 27% and 28% of our net sales in fiscal 2012, 2011 and 2010,
respectively. There were no other vendors that accounted for 10% or more of our
net sales in the past three fiscal years.
The following table sets forth our Consolidated Statement of Income as a
percentage of net sales for each of the three most recent fiscal years:
2012 2011 2010
Net sales 100.00% 100.00% 100.00%
Cost of products sold 94.74 94.74 94.79
Gross profit 5.26 5.26 5.21
Operating expenses:
Selling, general and administrative expenses 3.91 3.89 4.04
Loss on disposal of subsidiaries 0.11 0 0
4.02 3.89 4.04
Operating income 1.24 1.37 1.17
Interest expense 0.12 0.12 0.12
Other expense (income), net 0 0 (0.01)
Income before income taxes 1.12 1.25 1.06
Provision for income taxes 0.30 0.35 0.24
Consolidated net income 0.82 0.90 0.82Net income attributable to noncontrolling interest (0.04) (0.02)
0.00
Net income attributable to shareholders of Tech Data
Corporation 0.78% 0.88% 0.82%
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Net Sales
Our consolidated net sales were $26.5 billion in fiscal 2012, an increase of
8.7% when compared to fiscal 2011. The strengthening of certain foreign
currencies against the U.S. dollar positively impacted the year-over-year net
sales comparison by approximately three percentage points. On a regional basis,
during fiscal 2012, net sales in the Americas increased by 2.9% compared to
fiscal 2011 and increased by 13.1% in Europe (an increase of 8.1% on a euro
basis).
Throughout fiscal 2012, we were impacted by an overall slowing of the IT market
and a challenging macro economic environment within certain European countries.
Despite these factors, net sales in both the Americas and Europe regions
increased during fiscal 2012 compared to fiscal 2011 primarily as a result of
the flexibility of our business model to successfully navigate the changing IT
market. The increase in net sales in the Americas during fiscal 2012 was
primarily attributable to a generally stable demand for technology products in
the region in comparison to the prior fiscal year, offset by the impact of lower
sales in Brazil and Colombia during fiscal 2012 as a result of our decision to
close both of these operations. The reduction in net sales in Brazil and
Colombia negatively impacted the Americas growth rate in fiscal 2012 by
approximately one percentage point. The increase in net sales in Europe (on a
euro basis) during fiscal 2012 was primarily attributable to our acquisitions of
Triade Holding B.V.'s ("Triade") mobility, consumer electronics and IT
distribution businesses in October 2010 and continued demand in the European
commercial sector and for mobility products in the region compared to the prior
fiscal year. While difficult to quantify due to the integration of the
acquisitions into our operations, we believe the fiscal 2011 mobility and
consumer electronics acquisitions contributed approximately four percentage
points to our European growth rates, on a euro basis. During fiscal 2012, we
experienced lower European demand for IT products in certain geographies
resulting from weak economies in countries such as Spain and Portugal. This
lower demand, however, was largely offset by strong sales performance in other
European markets, such as Germany, U.K., France and the Netherlands.
Our consolidated net sales were $24.4 billion in fiscal 2011, an increase of
10.3% when compared to fiscal 2010. The weakening of certain foreign currencies
against the U.S. dollar negatively impacted the year-over-year net sales
comparison by approximately three percentage points. On a regional basis, during
fiscal 2011, net sales in the Americas increased by 10.1% compared to fiscal
2010 and increased by 10.5% in Europe (an increase of 17.5% on a euro basis).
The increase in net sales in both the Americas and Europe during fiscal 2011 was
attributable to the robust demand environment in both regions brought about by a
recovery in IT spending throughout the fiscal year and, to a lesser extent, the
impact of our five acquisitions in Europe.
Gross Profit
Gross profit as a percentage of net sales ("gross margin") during fiscal both
2012 and 2011 was 5.26% and was 5.21% in fiscal 2010. The relative stability in
our year-over-year gross margin is indicative of our product diversification
efforts, disciplined approach to managing our customer and vendor portfolios and
effective execution of our pricing management practices.
Operating Expenses
Selling, general and administrative expenses ("SG&A")
SG&A as a percentage of net sales increased to 3.91% in fiscal 2012, compared to
3.89% in fiscal 2011. The relative stability of our SG&A as a percentage of net
sales during fiscal 2012 compared to the prior year is primarily the result of
increased costs incurred related to acquisitions and to support our sales growth
and diversification strategies being largely offset by operating leverage on the
increase in net sales and cost savings initiatives during both fiscal 2012 and
2011. In absolute dollars, SG&A increased $88.5 million in fiscal 2012 compared
to fiscal 2011. The increase in SG&A during fiscal 2012 is primarily
attributable to the impact of the acquisition of Triade's mobility and consumer
electronics businesses in the third quarter of fiscal 2011, the strengthening of
certain foreign currencies against the U.S. dollar, increased costs incurred to
support our sales growth and diversification strategies, and increased severance
costs in Europe resulting from a realignment of resources in the region during
the fourth quarter of fiscal 2012.
SG&A as a percentage of net sales declined to 3.89% in fiscal 2011, compared to
4.04% in fiscal 2010. The decrease in SG&A as a percentage of sales was
primarily attributable to the operating leverage achieved as our net sales
increased at a more rapid rate than our operating expenses. In absolute dollars,
SG&A increased $56.4 million in fiscal 2011 compared to fiscal 2010. The
increase in SG&A during fiscal 2011 was primarily attributable to continued
investments to support sales growth and strategic initiatives and operating
expenses related to acquisitions made during fiscal 2011, partially offset by
the impact of weaker foreign currencies.
Loss on Disposal of Subsidiaries
We incurred losses on disposal of subsidiaries of $28.3 million during fiscal
2012 as a result of closing the Company's in-country commercial operations in
Brazil and Colombia. The loss on disposal of these subsidiaries includes a $9.9
million impairment charge on the Company's investments in Brazil and Colombia
due to a foreign currency exchange loss (previously recorded in shareholders'
equity as accumulated other comprehensive income), $15.3 million related to the
write-off of certain value-added tax receivables, and $3.1 million comprised
primarily of severance costs, fixed asset write-offs and lease termination
penalties. These costs do not include any
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estimated costs associated with the Brazilian subsidiary's contingencies related
to CIDE and other non-income related tax examinations. The operating losses of
Brazil and Colombia for the fiscal year ended January 31, 2012, were not
significant to the Company's consolidated operating results (see Note 6 and Note
13 of Notes to Consolidated Financial Statements for further discussion).
Interest Expense
Interest expense increased 4.7% to $31.3 million in fiscal 2012 compared to
$29.9 million in fiscal 2011. The increase in interest expense in fiscal 2012 is
primarily attributable to an increase in the average outstanding revolving
credit loan balances as compared to fiscal 2011.
Interest expense increased 8.3% to $29.9 million in fiscal 2011 compared to
$27.6 million in fiscal 2010. The increase in interest expense in fiscal 2011 is
primarily attributable to an increase in the average outstanding revolving
credit loan balances as compared to fiscal 2010.
During the fiscal years 2012, 2011 and 2010, interest expense includes non-cash
interest expense of $9.0 million, $10.3 million and $10.3 million, respectively,
related to the $350 million convertible senior debentures (see Note 7 of Notes
to Consolidated Financial Statements for further discussion).
Other Expense (Income), Net
Other expense (income), net, consists primarily of interest income, discounts on
the sale of accounts receivable and net foreign currency exchange gains (losses)
on certain financing transactions and the related derivative instruments used to
hedge such financing transactions. Other expense (income), net, approximated
$1.2 million of net expense in fiscal 2012 compared to $0.4 million of net
expense in fiscal 2011. The change in other expense (income), net, during fiscal
2012 is primarily attributable to an increase in foreign currency exchange
losses on derivative instruments used to hedge certain financing transactions
and an increase in the discount expense on the sale of accounts receivable
compared to the prior year, partially offset by an increase in interest income
resulting from an increase in the average short-term cash investment balances in
Europe. Other expense (income), net, approximated $0.4 million of net expense in
fiscal 2011 compared to $3.3 million of income in fiscal 2010. The change in
other expense (income), net, during fiscal 2011 is primarily attributable to a
decrease in interest income, resulting from a decrease in the average short-term
cash investment balances, and greater discount expense on the sale of accounts
receivable compared to the prior year. Discount on sale of accounts receivable
totaled $1.1 million and $0.5 million, respectively in fiscal 2012 and 2011.
There was no discount on sale of accounts receivable for fiscal 2010 as we did
not sell accounts receivable during the fiscal year.
Provision for Income Taxes
Our effective tax rate was 26.6% in fiscal 2012 and 27.9% in fiscal 2011. The
change in the effective tax rate during fiscal 2012 compared to fiscal 2011 is
primarily due to the relative mix of earnings and losses within the taxing
jurisdictions in which we operate and changes in the amounts of income tax
reserves and valuation allowances during the respective periods. In fiscal 2012,
we recorded an income tax benefit of $13.6 million for the reversal of deferred
income tax valuation allowances primarily related to specific jurisdictions in
Europe, which had been recorded in prior fiscal years. This income tax benefit
was substantially offset by an income tax expense associated with the write-off
of deferred and other income tax assets related to the closure of our Brazil
in-country operations. On an absolute dollar basis, the provision for income
taxes decreased 7.4% to $78.5 million in fiscal 2012 compared to $84.8 million
in fiscal 2011. The change in the provision for income taxes is primarily due to
the relative mix of earnings and losses within certain countries in which we
operate and the adjustments to income tax reserves and valuation allowances
discussed above.
Our effective tax rate was 27.9% in fiscal 2011 and 22.9% in fiscal 2010. The
change in the effective tax rate during fiscal 2011 compared to fiscal 2010 is
primarily due to the relative mix of earnings and losses within the taxing
jurisdictions in which we operate and changes in the amounts of income tax
reserves and valuation allowances during the respective periods. In fiscal 2010,
we reversed a $5.4 million deferred tax valuation allowance in a specific
European jurisdiction and recorded the amount as an income tax benefit. On an
absolute dollar basis, the provision for income taxes increased 57.1% to $84.8
million in fiscal 2011 compared to $53.9 million in fiscal 2010. The change in
the provision for income taxes is primarily due to higher taxable income, the
relative mix of earnings and losses within certain countries in which we operate
and the adjustments to income tax reserves and valuation allowances discussed
above.
To the extent we generate future consistent taxable income within those
operations currently requiring valuation allowances, the valuation allowances on
the related deferred tax assets will be reduced, thereby reducing tax expense
and increasing net income in the same period. The underlying net operating loss
carryforwards remain available to offset future taxable income in the specific
jurisdictions requiring the valuation allowance, subject to applicable tax laws
and regulations.
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The effective tax rate differed from the U.S. federal statutory rate of 35%
during fiscal 2012, 2011 and 2010, due to the relative mix of earnings or losses
within the tax jurisdictions in which we operate and other adjustments,
including: 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
valuation allowances, on deferred tax assets; iii) the reversal of income tax
reserves; iv) the write-off of deferred tax assets; and (v) 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 overall effective tax rate will continue to be dependent upon the geographic
distribution of our earnings or losses and changes in tax laws or
interpretations of these laws in these operating jurisdictions. 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 income tax rates, future income tax
expense could be materially affected.
Our future effective tax rates could be adversely 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. 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 are
required to pay amounts in excess of such accruals, our effective tax rate could
be materially affected.
Net income attributable to noncontrolling interest
Net income attributable to noncontrolling interest was $10.5 million, $4.6
million and $1.0 million, respectively, in fiscal 2012, 2011 and 2010. The net
income attributable to noncontrolling interest represents Brightstar's share of
the improving results of Brightstar Europe Limited, a joint venture between Tech
Data and Brightstar as the joint venture is a consolidated subsidiary in our
financial statements. The year-over-year changes can be attributed to both the
improving results in the joint venture's operations and the acquisition of
Triade's mobility subsidiaries in Belgium and the Netherlands ("MCC") during the
third quarter of fiscal 2011.
Impact of Inflation
During the fiscal years ended January 31, 2012, 2011 and 2010, we do not believe
that inflation had a material impact on our consolidated results of operations
or on our financial position.
Quarterly Data-Seasonality
Our quarterly operating results have fluctuated significantly in the past and
will likely continue to do so in the future as a result of currency fluctuations
and seasonal variations in the demand for the products and services we offer.
Narrow operating margins may magnify the impact of these factors on our
operating results. Recent historical seasonal variations have included an
increase in European demand during our fiscal fourth quarter and decreased
demand in other fiscal quarters, particularly quarters that include summer
months. Given that the majority of our net sales are derived from Europe, our
consolidated results closely follow the seasonality trends in Europe.
Additionally, the life cycles of major products, as well as the impact of future
acquisitions and divestitures, may also materially impact our business,
financial condition, or results of operations (see Note 15 of Notes to
Consolidated Financial Statements for further information regarding our
quarterly results).
Liquidity and Capital Resources
Our discussion of liquidity and capital resources includes an analysis of our
cash flows and capital structure for all periods presented.
Cash Flows
The following table summarizes Tech Data's Consolidated Statement of Cash Flows
for the fiscal years ended January 31, 2012, 2011 and 2010:
0000000000 0000000000 0000000000
Years ended January 31,
2012 2011 2010
(In thousands)Net cash provided by (used in):
Operating activities $ 503,412 $ 161,300 $ 535,465
Investing activities (69,268 ) (173,040 ) (31,527 )
Financing activities (670,841 ) (206,358 ) 37,360
25
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0000000000 0000000000 0000000000
Years ended January 31,
2012 2011 2010
(In thousands)
Effect of exchange rate changes on cash and
cash equivalents (21,850 ) (1,090 ) 38,793
Net (decrease) increase in cash and cash
equivalents $ (258,547 ) $ (219,188 ) $ 580,091
As a distribution company, our business requires significant investment in
working capital, particularly accounts receivable and inventory, partially
financed through our accounts payable to vendors. Overall, as our sales volume
increases, our net investment in working capital typically increases, which, in
general, results in decreased cash flow from operating activities. Conversely,
when sales volume decreases, our net investment in working capital typically
decreases, which, in general, results in increased cash flow from operating
activities.
Another important driver of our operating cash flows is our cash conversion
cycle (also referred to as "net cash days"). Our net cash days are defined as
days of sales outstanding in accounts receivable ("DSO") plus days of supply on
hand in inventory ("DOS"), less days of purchases outstanding in accounts
payable ("DPO"). We manage our cash conversion cycle on a daily basis throughout
the year and our reported financial results reflect that cash conversion cycle
at the balance sheet date. Our net cash days were 20 days at the end of fiscal
2012, which was a decrease from fiscal 2011 of four days. The following table
presents the components of our cash conversion cycle, in days, as of January 31,
2012, 2011 and 2010:
000000000000 000000000000 000000000000
As of January 31,
2012 2011 2010
Days of sales outstanding 37 37 38
Days of supply in inventory 24 30 26
Days of purchases outstanding (41) (43) (41)
Cash conversion cycle (days) 20 24 23
Historically, we have presented certain book overdrafts, representing checks
issued and wire transfers that have been initiated which have not been presented
for payment to the banks, as accounts payable. Based on agreements with our
banks in certain countries, we have determined that a significant portion of
these book overdrafts are covered by rights of setoff in favor of the respective
banks and therefore, we have classified these amounts as a reduction of cash and
accounts payable as of January 31, 2012. We have adjusted the financial
statements for the years ended January 31, 2011 and 2010 to reflect the right of
setoff. The impact of this adjustment on prior periods was to decrease cash and
accounts payable as of January 31, 2011 by $76.2 million and to increase cash
flows from operating activities by $57.5 million for the year ended January 31,
2011, and to decrease cash flows from operating activities by $8.5 million for
the year ended January 31, 2010. This change had the effect of reducing days of
purchases outstanding by approximately one day in both fiscal 2011 and 2010. The
impact of this adjustment on prior quarters in fiscal 2012 was to decrease cash
and accounts payable as of October 31, July 31, and April 30, 2011 by $74.5
million, $97.8 million and $115.5 million, respectively, and to increase cash
flows from operating activities by $1.7 million for the year to date period
ended October 31, 2011 and to decrease cash flows from operating activities by
$21.6 million and $39.2 million for the year to date periods ended July 31, 2011
and April 30, 2011, respectively. Management concluded that these adjustments
are immaterial to the consolidated financial statements.
Net cash provided by operating activities was $503.4 million in fiscal 2012
compared to $161.3 million of cash provided by operating activities in fiscal
2011. The increase in cash resulting from operating activities in fiscal 2012
compared to the same period of the prior year can be attributed to i) a
significant reduction in our inventories levels, and ii) the timing of both cash
receipts from our customers and payments to our vendors. Net cash provided by
operating activities was $161.3 million in fiscal 2011 compared to $535.5
million of cash provided by operating activities in fiscal 2010. The change in
cash resulting from operating activities in fiscal 2011 compared to the same
period of the prior year can be attributed to i) the timing of both cash
receipts from our customers and payments to our vendors, and ii) additional
working capital requirements due to the stronger net sales performance in fiscal
2011 compared to fiscal 2010 as a result of a recovery in IT spending throughout
fiscal 2011.
Net cash used in investing activities of $69.3 million during fiscal 2012 is the
result of $24.9 million of cash used for acquisitions in Europe and $44.4
million of expenditures for the continuing expansion and upgrading of our IT
systems, office facilities and equipment for our logistics centers in both the
Americas and Europe. We expect to make total capital expenditures of
approximately $40.0 million during fiscal 2013 for equipment and machinery in
our logistics centers, office facilities and IT systems.
Net cash used in investing activities of $173.0 million during fiscal 2011 is
the net result of $141.1 million of cash used for acquisitions in Europe and
$31.9 million of expenditures for the continuing expansion and upgrading of our
IT systems, office facilities and equipment for our logistics centers in both
the Americas and Europe.
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Net cash used in financing activities of $670.9 million during fiscal 2012 is
primarily the result of $314.9 million of cash used in the repurchase of
6,736,436 shares of our common stock under our share repurchase programs, $45.4
million of net repayments on our revolving credit lines and the $350.0 million
repayment of our convertible senior debentures, partially offset by $35.1
million of proceeds received from the reissuance of treasury stock related to
the vesting and exercise of equity-based incentive awards and purchases made
through our Employee Stock Purchase Plan ("ESPP").
Net cash used in financing activities of $206.4 million during fiscal 2011 is
primarily the result of $200.0 million of cash used in the repurchase of
5,084,770 shares of our common stock under our share repurchase programs and
$47.1 million of net repayments on the revolving credit lines and long-term
debt, partially offset by $34.6 million of net borrowings and a capital
contribution from our joint venture partner related to our consolidated joint
venture.
Capital Resources and Debt Compliance
We have maintained a conservative capital structure and have a debt to capital
ratio of 5% at January 31, 2012. We believe this conservative approach to our
capital structure will continue to support us in a global economic environment
that remains uncertain. Within our capital structure, we have a range of
financing facilities, which are diversified by type and geographic region with
various financial institutions worldwide. A significant portion of our cash and
cash equivalents balance generally resides in our operations outside of the
United States and are deposited and/or invested with various financial
institutions globally which we monitor regularly for credit quality. However, we
are exposed to risk of loss on funds deposited with the various financial
institutions and we may experience significant disruptions in our liquidity
needs if one or more of these financial institutions were to declare bankruptcy
or other similar restructuring. We believe that our existing sources of
liquidity, including cash resources and cash provided by operating activities,
supplemented as necessary with funds available under our credit arrangements,
will provide sufficient resources to meet our working capital and cash
requirements for at least the next 12 months. Changes in our credit rating or
other market factors may increase our interest expense or other costs of capital
or capital may no longer be available to us on acceptable terms to fund our
working capital needs. The inability to obtain sufficient capital could have an
adverse effect on the Company's business. The Company's credit facilities
contain various financial and other covenants that may limit the Company's
ability to borrow or limit the Company's flexibility in responding to business
conditions.
The following is a detailed discussion of our various financing facilities.
Convertible Senior Debentures
In December 2006, we issued $350.0 million of 2.75% convertible senior
debentures due 2026. In accordance with the terms of the debentures, in November
2011, we announced our election to fully redeem the debentures on December 20,
2011, at a redemption price equal to the principal amount of the debentures plus
any accrued and unpaid interest to, but excluding, the redemption date.
As of January 31, 2012, all of the debentures had either been redeemed by us or
put to us and there were no debentures outstanding. We funded the repayment of
the debentures with available cash and our $500.0 million Credit Agreement,
discussed below.
Loans Payable to Brightstar Corp.
As of January 31, 2012, we have two loans payable to our joint venture partner,
Brightstar. The first loan was executed in October 2010, when Brightstar entered
into an agreement to loan BEL its share of the funding requirements related to
BEL's acquisition of MCC (the "Acquisition Loan") (see Note 7 of Notes to
Consolidated Financial Statements). The outstanding balance of the Acquisition
Loan from Brightstar, plus any accrued interest, has a repayment date of
September 2015, or earlier if agreed between the two parties, and bears interest
at the applicable LIBOR rate plus 4.0% per year, which is payable annually on
October 1. The Acquisition Loan at January 31, 2012 totaled $14.9 million. The
second loan is an interest-free revolving credit loan
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issued in connection with BEL's operations (the "Brightstar Revolver"). The
terms of the Brightstar Revolver contain no contractual repayment date and allow
the revolving credit loan to increase or decrease in accordance with the working
capital requirements of BEL, as determined by the Company. The amount
outstanding under the Brightstar Revolver at January 31, 2012 totaled $36.6
million. Effective October 2010, a resolution of BEL's board was approved
stating that the Brightstar Revolver will not be repaid for the foreseeable
future and therefore this revolving credit loan has been classified as long-term
debt in our Consolidated Balance Sheet at both January 31, 2012 and 2011.
Other Credit Facilities
In September 2011, we entered into a $500.0 million Credit Agreement with a
syndicate of banks (the "Credit Agreement"), which replaced our $250.0 million
Multi-currency Revolving Credit Facility scheduled to expire in March 2012. The
Credit Agreement, 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 our 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 up to $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 minimum interest
coverage. We have also provided a guarantee of certain of our significant
subsidiaries. The Credit Agreement expires in September 2016 and we pay interest
on advances under the Credit Agreement at the applicable LIBOR rate plus a
predetermined margin that is based on our debt rating. There are no amounts
outstanding under either of these facilities at either January 31, 2012 or 2011,
respectively.
As of January 31, 2012, we maintained a Receivables Securitization Program with
a syndicate of banks which allows us 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. This
program was renewed in August 2011 and amended in December 2011. The program
will expire in December 2012 and interest is to be paid on the Receivables
Securitization Program at the applicable commercial paper or LIBOR rate plus an
agreed-upon margin. There were no amounts outstanding under the Receivables
Securitization Program at January 31, 2012 or 2011.
In addition to the facilities described above, we have various other committed
and uncommitted lines of credit and overdraft facilities totaling approximately
$550.2 million at January 31, 2012 to support our operations.
In consideration of the financial covenants discussed below, our maximum
borrowing availability on the credit facilities is approximately $1.5 billion,
of which $48.0 million was outstanding at January 31, 2012. Our credit
facilities contain limitations on the amounts of annual dividends and
repurchases of common stock. Additionally, the credit facilities require
compliance with certain warranties and covenants. The financial ratio covenants
contained within the credit facilities include a debt to capitalization ratio
and a minimum interest coverage ratio. At January 31, 2012, the Company was in
compliance with all such covenants. The ability to draw funds under these credit
facilities is dependent upon 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 January 31, 2012, we had also issued standby letters of
credit of $75.1 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 our available
capacity under the above-mentioned facilities by the same amount.
In September 2011, we filed a shelf registration statement with the Securities
and Exchange Commission for the issuance of debt securities. The net proceeds
from any issuance of debt securities are expected to be used for general
corporate purposes, including the repayment or refinancing of debt, capital
expenditures and to meet working capital needs. As of January 31, 2012, we had
not issued any debt securities under this shelf registration statement, nor can
any assurances be given that we will issue any debt securities under this
registration in the future.
Share Repurchase Programs
During fiscal 2012, the Company's Board of Directors authorized share repurchase
programs for the repurchase of up to a total of $400.0 million of the Company's
common stock. Throughout fiscal 2012, the Company's share repurchases were made
on the open market through block trades or otherwise. The number of shares
purchased and the timing of the purchases were based on regulatory requirements,
working capital requirements, general business conditions and other factors,
including alternative investment opportunities. Shares repurchased by the
Company are held in treasury for general corporate purposes, including issuances
under equity incentive plans and our ESPP.
During fiscal 2012, we repurchased 6,736,436 shares at an average of $46.74 per
share, for a total cost, including expenses, of $314.9 million under these
programs.
In conjunction with the share repurchase programs discussed above, we executed
10b5-1 plans that instruct the broker selected by us to repurchase shares on
behalf of the Company. The amount of common stock repurchased in accordance with
the 10b5-1 plans on any given trading day is determined by a formula in the
plan, which is based on the market price of the Company's common stock. Shares
repurchased by the Company are held in treasury for general corporate purposes,
including issuances under equity incentive plans and our ESPP.
28--------------------------------------------------------------------------------
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Contractual Obligations
As of January 31, 2012, future payments of debt and amounts due under future
minimum lease payments, including minimum commitments under IT outsourcing
agreements, are as follows (in thousands):
0000000000 0000000000 0000000000 0000000000
Operating Capital
leases lease Debt(1) Total
Fiscal year:
2013 $ 58,500 $ 763 $47,985 $107,248
2014 49,800 763 0 50,563
2015 43,600 763 0 44,363
2016 35,100 723 14,940 50,763
2017 14,000 643 0 14,643
Thereafter 20,200 3,320 36,306 59,826
Total payments 221,200 6,975 99,231 327,406
Less amounts representing interest 0 (463) 0 (463)
Total principal payments $ 221,200 $6,512 $99,231 $326,943
(1) Amounts include all debt outstanding at January 31, 2012 under the Company's
committed and uncommitted revolving credit facilities and loan payable and
revolving credit loan payable to Brightstar and excludes estimated interest
as the revolving credit facilities and loans payable are at variable rates of
interest or interest free.
Fair value renewal and escalation clauses exist for a substantial portion of the
operating leases included above. Purchase orders for the purchase of inventory
and other goods and services are not included in the table above. We are not
able to determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders typically represent authorizations
to purchase rather than binding agreements. For the purposes of this table,
contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our current demand
expectations and are fulfilled by our vendors within short time horizons. We do
not have significant non-cancelable agreements for the purchase of inventory or
other goods specifying minimum quantities or set prices that exceed our expected
requirements for the next three months. We also enter into contracts for
outsourced services; however, the obligations under these contracts were not
significant, other than the IT outsourcing agreement included above, and the
contracts generally contain clauses allowing for cancellation without
significant penalty.
At January 31, 2012, we have $1.1 million recorded as a current liability for
uncertain tax positions. We are not able to reasonably estimate the timing of
long-term payments, or the amount by which our liability will increase or
decrease over time; therefore, the long-term portion of our liability for
uncertain tax position has not been included in the contractual obligations
table above and is not material to our consolidated financial statements (see
Note 8 of Notes to Consolidated Financial Statements).
Off-Balance Sheet Arrangements
Synthetic Lease Facility
We have a synthetic lease facility (the "Synthetic Lease") with a group of
financial institutions under which we lease certain logistics centers and office
facilities from a third-party lessor. During the second quarter of fiscal 2009,
the Company renewed its existing Synthetic Lease with a new agreement that
expires 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 our credit ratings.
During the first four years of the lease term, we may, at our option, purchase
any combination of the seven 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. During the last year of the lease term, until 180 days prior to the
lease expiration, we may, at our option, i) purchase a minimum of two of the
seven 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 seven
properties or iii) exercise the option to remarket a minimum of two of the seven
properties and cause a sale of the properties. If we elect to remarket the
properties, we have guaranteed the lessor a percentage of the cost of each
property, in the aggregate amount of approximately $107.4 million (the "residual
value"). We have also provided a residual value guarantee related to the
Synthetic Lease, which has been recorded at the estimated fair value of the
residual guarantee.
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The sum of future minimum lease payments under the Synthetic Lease is
approximately $2.7 million at January 31, 2012 and such amounts are included in
the future minimum lease payments presented above. The Synthetic Lease contains
covenants that must be complied with, similar to the covenants described in
certain of the credit facilities. As of January 31, 2012, we were in compliance
with all such covenants.
Guarantees
As is customary in the technology industry, to encourage certain customers to
purchase product from us, we have arrangements with certain finance companies
that provide inventory-financing facilities for our customers. In conjunction
with certain of these arrangements, we have agreements with the finance
companies that would require us to repurchase certain inventory, which might be
repossessed from the customers by the finance companies. Due to various reasons,
including among other items, the lack of information regarding the amount of
saleable inventory purchased from us still on hand with the customer at any
point in time, our repurchase obligations relating to inventory cannot be
reasonably estimated. Repurchases of inventory by us under these arrangements
have been insignificant to date. We also provide additional financial guarantees
to finance companies on behalf of certain customers. The majority of these
guarantees are for an indefinite period of time, where we 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 January 31, 2012 and 2011,
the aggregate amount of guarantees under these arrangements totaled
approximately $65.4 million and $62.1 million, respectively, of which
approximately $28.4 million and $43.0 million, respectively, was outstanding. We
believe that, based on historical experience, the likelihood of a material loss
pursuant to the above guarantees is remote.
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