TECH DATA CORP | 2013 | FY | 3

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.
The cumulative adjustments required to correct the errors in the financial statements prior to the fiscal year ended January 31, 2011 are reflected in the restated consolidated statement of shareholders’ equity as of February 1, 2010. The cumulative effect of those adjustments decreased previously reported retained earnings by $1.1 million. This decrease primarily relates to the impact of an improper deferral of net foreign currency exchange losses in a European subsidiary from fiscal 2009 that was recognized over several subsequent fiscal periods, partially offset by the timing of recognition of various transactions with the Company's product suppliers.

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 the three fiscal years ended January 31, 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 to correct the Company’s presentation of sales of vendor warranty services and certain fulfillment contracts. During the first quarter of fiscal 2013, the Company began presenting sales of vendor warranty services and certain fulfillment contracts on an agency basis as net fees, instead of as gross revenues and cost of sales as they had been presented in prior periods. Given this correction had no impact on gross profit, operating income or net income, and only an insignificant impact on net sales, prior periods were previously not adjusted to reflect this correction. However, in connection with the restatement, the Company has adjusted its prior period results to properly present such sales of vendor warranty services and certain fulfillment contracts on an agency basis as net fees, consistent with fiscal year 2013.
•
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.

The following tables present the impact of the restatement on the Company’s previously issued consolidated financial statements.




Consolidated Balance Sheet
 
 
 
 
 
 
As of January 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
505,178

 
$
(18,916
)
(1) 
$
486,262

Accounts receivable
2,871,243

 
(92,602
)
(2) 
2,778,641

Inventories
1,802,976

 
129,313

(3) 
1,932,289

Prepaid expenses and other assets
202,505

 
(5,197
)
(4) 
197,308

Total current assets
5,381,902

 
12,598

 
5,394,500

Property and equipment, net
88,595

 
286

 
88,881

Other assets, net
314,921

 
(2,034
)
(4) 
312,887

Total assets
$
5,785,418

 
$
10,850

 
$
5,796,268

 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
3,042,809

 
$
48,802

(5) 
$
3,091,611

Accrued expenses and other liabilities
551,280

 
(17,445
)
(6) 
533,835

Revolving credit loans and current maturities of long-term debt, net
48,490

 
0

 
48,490

Total current liabilities
3,642,579

 
31,357

 
3,673,936

Long-term debt, less current maturities
57,253

 
0

 
57,253

Other long-term liabilities
83,438

 
(488
)
(4) 
82,950

Total liabilities
3,783,270

 
30,869

 
3,814,139

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock
89

 
0

 
89

Additional paid-in capital
769,826

 
3,261

(7) 
773,087

Treasury stock, at cost
(739,614
)
 
0

 
(739,614
)
Retained earnings
1,659,767

 
(22,664
)
(7) 
1,637,103

Accumulated other comprehensive income
283,755

 
(616
)
(7) 
283,139

Equity attributable to shareholders of Tech Data Corporation
1,973,823

 
(20,019
)
 
1,953,804

Noncontrolling interest
28,325

 
0

 
28,325

Total equity
2,002,148

 
(20,019
)
 
1,982,129

Total liabilities and equity
$
5,785,418

 
$
10,850

 
$
5,796,268

(1)
Cash and cash equivalents includes adjustments to reduce cash to correct bank reconciliation cutoff errors that recognized certain cash in-transit from customers (also recognized as a reduction of accounts receivable).
(2)
Accounts receivable has been adjusted primarily to reduce the balance for estimated sales returns by $72.7 million and the cash cutoff errors discussed in (1) above. The Company had previously only recognized the net impact on gross profit for estimated sales returns.
(3)
Inventory includes an adjustment to increase the balance for estimated sales returns by $72.7 million, as discussed in (2) above, and adjustments of $55.7 million for sales and inventory cutoff errors that were not appropriately recorded based on the delivery terms.
(4)
Other assets and other liabilities contain various adjustments that are insignificant individually and in the aggregate pertaining to the errors described above, primarily related to the inadequate reconciliations of the accounts.
(5)
Accounts payable has been adjusted primarily to recognize an increase of $27.6 million for inventory cutoff errors that were not appropriately reported based on the delivery terms; and the impact of vendor accounting errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $17.9 million.
(6)
Accrued expenses and other liabilities includes adjustments primarily related to reducing the taxes payable by $11.9 million as a result of the restatement adjustments and other adjustments due to various immaterial errors.
(7)
Shareholders’ equity includes an adjustment to retained earnings and the cumulative translation account to account for the restatement errors identified herein and adjustments to additional paid-in capital primarily to correct errors related to stock-based compensation.

 
 
 
 
 
 
 
Consolidated Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands, except per share amounts)
 
 
 
 
 
 
Net sales
$
26,488,124

 
$
(840,811
)
(1) 
$
25,647,313

Cost of products sold
25,094,133

 
(824,261
)
(1) 
24,269,872

Gross profit
1,393,991

 
(16,550
)
(2) 
1,377,441

Operating expenses:
 
 
 
 
 
Selling, general and administrative expenses
1,037,839

 
6,762

(3) 
1,044,601

Loss on disposal of subsidiaries
28,294

 
0

 
28,294

 
1,066,133

 
6,762


1,072,895

Operating income
327,858

 
(23,312
)
 
304,546

Interest expense
31,343

 
34

 
31,377

Other expense (income), net
1,193

 
(335
)
 
858

Income before income taxes
295,322

 
(23,011
)
 
272,311

Provision for income taxes
78,474

 
(7,365
)
(4) 
71,109

Consolidated net income
216,848

 
(15,646
)
 
201,202

Net income attributable to noncontrolling interest
(10,452
)
 
0

 
(10,452
)
Net income attributable to shareholders of Tech Data Corporation
$
206,396

 
$
(15,646
)
 
$
190,750

 
 
 
 
 
 
Net income per share attributable to shareholders of Tech Data Corporation:
 
 
 
 
 
Basic
$
4.72

 
$
(0.36
)
 
$
4.36

Diluted
$
4.66

 
$
(0.36
)
 
$
4.30

 
 
 
 
 
 
 
 
 
 
 
 
(1) Net sales and cost of products sold adjustments primarily reflect the impact to appropriately present sales of vendor warranty services and certain fulfillment contracts on an agency basis as net fees of $833.2 million, consistent with fiscal year 2013.
(2) Gross profit adjustments primarily reflect the impact of vendor accounting errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $17.8 million and various other immaterial errors.
(3) Selling, general and administrative expenses adjustments primarily reflect the impact of errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $6.7 million, which includes adjustments for uncollectible accounts receivable of $2.6 million and various other immaterial errors.
(4) The provision for income taxes has been adjusted primarily to reduce tax expense as a result of the reduction of profit resulting from the restatement adjustments described herein.

 
Fiscal Year Ended January 31, 2011
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands, except per share amounts)
 
 
 
 
 
 
Net sales
$
24,375,973

 
$
(756,035
)
(1) 
$
23,619,938

Cost of products sold
23,092,685

 
(751,000
)
(1) 
22,341,685

Gross profit
1,283,288

 
(5,035
)
(2) 
1,278,253

Selling, general and administrative expenses
949,303

 
7,542

(3) 
956,845

Operating income
333,985

 
(12,577
)
 
321,408

Interest expense
29,926

 
0

 
29,926

Other expense (income), net
444

 
(4,794
)
(4) 
(4,350
)
Income before income taxes
303,615

 
(7,783
)
 
295,832

Provision for income taxes
84,752

 
(1,912
)
(5) 
82,840

Consolidated net income
218,863

 
(5,871
)
 
212,992

Net income attributable to noncontrolling interest
(4,620
)
 
0

 
(4,620
)
Net income attributable to shareholders of Tech Data Corporation
$
214,243

 
$
(5,871
)
 
$
208,372

Net income per share attributable to shareholders of Tech Data Corporation:
 
 
 
 
 
Basic
$
4.41

 
$
(0.12
)
 
$
4.29

Diluted
$
4.36

 
$
(0.11
)
 
$
4.25


(1) Net sales and cost of products sold adjustments primarily reflect the impact to appropriately present sales of vendor warranty services and certain fulfillment contracts on an agency basis as net fees of $740.6 million, consistent with fiscal year 2013.
(2) Gross profit adjustments primarily reflect the impact of vendor accounting errors in the Company's primary operating subsidiary in the UK and two other European subsidiaries of $5.7 million, partially offset by the impact of reversing the improper deferral of net foreign currency exchange losses in a European subsidiary of $2.9 million.
(3) Selling, general and administrative expenses include an adjustment to reclassify investment income of $4.8 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 $4.8 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 reduce tax expense as a result of the reduction of profit resulting from the restatement adjustments described herein.


Consolidated Statement of Comprehensive Income
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
 
 
 
 
 
 
Consolidated net income
$
216,848

 
$
(15,646
)
 
$
201,202

Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustment
(76,664
)
 
(155
)
 
(76,819
)
Total other comprehensive income
140,184

 
(15,801
)
 
124,383

Comprehensive income attributable to noncontrolling interest
(8,917
)
 
0

 
(8,917
)
Comprehensive income attributable to shareholders of Tech Data Corporation
$
131,267

 
$
(15,801
)
 
$
115,466



 
Fiscal Year Ended January 31, 2011
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
 
 
 
 
 
 
Consolidated net income
$
218,863

 
$
(5,871
)
 
$
212,992

Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustment
(614
)
 
(304
)
 
(918
)
Total other comprehensive income
218,249

 
(6,175
)
 
212,074

Comprehensive income attributable to noncontrolling interest
(4,703
)
 
0

 
(4,703
)
Comprehensive income attributable to shareholders of Tech Data Corporation
$
213,546

 
$
(6,175
)
 
$
207,371




Consolidated Statement of Cash Flows
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Cash received from customers
$
26,435,178

 
$
598,768

 
$
27,033,946

Cash paid to suppliers and employees
(25,827,475
)
 
(577,274
)
 
(26,404,749
)
Interest paid
(18,313
)
 
0

 
(18,313
)
Income taxes paid
(85,978
)
 
0

 
(85,978
)
Net cash provided by operating activities
503,412

 
21,494

 
524,906

Cash flows from investing activities:
 
 
 
 
 
Acquisition of businesses, net of cash acquired
(24,898
)
 
0

 
(24,898
)
Expenditures for property and equipment
(13,385
)
 
(287
)
 
(13,672
)
Software development costs
(30,985
)
 
98

 
(30,887
)
Gains on investments
0

 
335

 
335

Net cash used in investing activities
(69,268
)

146


(69,122
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from the reissuance of treasury stock
35,093

 
0

 
35,093

Cash paid for purchase of treasury stock
(314,886
)
 
0

 
(314,886
)
Borrowings on long-term loans from joint venture partner
460

 
0

 
460

Net borrowings (repayments) on revolving credit loans
(41,195
)
 
0

 
(41,195
)
Principal payments on long-term debt
(352,316
)
 
0

 
(352,316
)
Excess tax benefit from stock-based compensation
2,003

 
0

 
2,003

Net cash used in financing activities
(670,841
)
 
0

 
(670,841
)
Effect of exchange rate changes on cash and cash equivalents
(21,850
)
 
571

 
(21,279
)
Net decrease in cash and cash equivalents
(258,547
)
 
22,211

 
(236,336
)
Cash and cash equivalents at beginning of year
763,725

 
(41,127
)
 
722,598

Cash and cash equivalents at end of year
$
505,178

 
$
(18,916
)
 
$
486,262

 
 
 
 
 
 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
 
 
Net income attributable to shareholders of Tech Data Corporation
$
206,396

 
$
(15,646
)
 
$
190,750

Net income attributable to noncontrolling interest
10,452

 
0

 
10,452

Consolidated net income
216,848

 
(15,646
)
 
201,202

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Loss on disposal of subsidiaries
28,294

 
0

 
28,294

Depreciation and amortization
57,332

 
0

 
57,332

Provision for losses on accounts receivable
10,546

 
267

 
10,813

Stock-based compensation expense
10,699

 
1,295

 
11,994

Accretion of debt discount on Senior Notes and convertible senior debentures
8,994

 
0

 
8,994

Deferred income taxes
(29,746
)
 
(4,206
)
 
(33,952
)
Excess tax benefit from stock-based compensation
(2,003
)
 
0

 
(2,003
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
Accounts receivable
(48,887
)
 
38,143

 
(10,744
)
Inventories
370,858

 
86,332

 
457,190

Prepaid expenses and other assets
(43,358
)
 
5,257

 
(38,101
)
Accounts payable
(41,081
)
 
(83,496
)
 
(124,577
)
Accrued expenses and other liabilities
(35,084
)
 
(6,452
)
 
(41,536
)
Total adjustments
286,564

 
37,140

 
323,704

Net cash provided by operating activities
$
503,412

 
$
21,494

 
$
524,906

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2011
 
As Previously Reported
 
Adjustments
 
As Restated
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Cash received from customers
$
24,258,805

 
$
494,133

 
$
24,752,938

Cash paid to suppliers and employees
(24,008,367
)
 
(479,304
)
 
(24,487,671
)
Interest paid
(15,927
)
 
0

 
(15,927
)
Income taxes paid
(73,211
)
 
0

 
(73,211
)
Net cash provided by operating activities
161,300

 
14,829

 
176,129

Cash flows from investing activities:
 
 
 
 
 
Acquisition of businesses, net of cash acquired
(141,138
)
 
0

 
(141,138
)
Expenditures for property and equipment
(18,614
)
 
(74
)
 
(18,688
)
Software development costs
(13,288
)
 
1,176

 
(12,112
)
Gains on investments

0

 
4,794

 
4,794

Net cash used in investing activities
(173,040
)
 
5,896

 
(167,144
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from the reissuance of treasury stock
5,005

 
0

 
5,005

Cash paid for purchase of treasury stock
(200,000
)
 
0

 
(200,000
)
Borrowings on long-term loans from joint venture partner
34,556

 
0

 
34,556

Net borrowings (repayments) on revolving credit loans
(46,645
)
 
(4,827
)
 
(51,472
)
Principal payments on long-term debt
(454
)
 
0

 
(454
)
Excess tax benefit from stock-based compensation
1,180

 
0

 
1,180

Net cash used in financing activities
(206,358
)
 
(4,827
)
 
(211,185
)
Effect of exchange rate changes on cash and cash equivalents
(1,090
)
 
(1,543
)
 
(2,633
)
Net decrease in cash and cash equivalents
(219,188
)
 
14,355

 
(204,833
)
Cash and cash equivalents at beginning of year
982,913

 
(55,482
)
 
927,431

Cash and cash equivalents at end of year
$
763,725

 
$
(41,127
)
 
$
722,598

 
 
 
 
 
 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
 
 
Net income attributable to shareholders of Tech Data Corporation
$
214,243

 
$
(5,871
)
 
$
208,372

Net income attributable to noncontrolling interest
4,620

 
0

 
4,620

Consolidated net income
218,863

 
(5,871
)
 
212,992

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
47,285

 
0

 
47,285

Provision for losses on accounts receivable
11,517

 
281

 
11,798

Stock-based compensation expense
9,887

 
466

 
10,353

Accretion of debt discount on Senior Notes and convertible senior debentures
10,278

 
0

 
10,278

Deferred income taxes
6,972

 
258

 
7,230

Excess tax benefit from stock-based compensation
(1,180
)
 
0

 
(1,180
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
Accounts receivable
(113,303
)
 
99,577

 
(13,726
)
Inventories
(349,429
)
 
(132,143
)
 
(481,572
)
Prepaid expenses and other assets
(34,601
)
 
5,022

 
(29,579
)
Accounts payable
335,813

 
60,516

 
396,329

Accrued expenses and other liabilities
19,198

 
(13,277
)
 
5,921

Total adjustments
(57,563
)
 
20,700

 
(36,863
)
Net cash provided by operating activities
$
161,300

 
$
14,829

 
$
176,129

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