Tech Data Beats, Outlooks Depends on Exchange Rates

| About: Tech Data (TECD)

The IT products distributor Tech Data Corp. (NASDAQ:TECD) announced encouraging results for the second quarter of fiscal 2011, beating the Zacks Consensus Estimate of 78 cents per share with a surprise of 5.1%.

Net income for the reported quarter was $40.9 million, compared with $35.2 million in the year-ago quarter. Earnings per share were 82 cents, compared with 70 cents. Effective February 1, 2010, Tech Data reclassified certain foreign currency exchange gains or losses within the cost of sales from Other (income) expense.

Total revenue for the reported quarter was $5.47 billion, an increase of 5.3% from $5.18 billion in the prior-year quarter. This was above the Zacks Consensus Estimate of $5.45 billion.

North America and Latin America (representing 47% of total sales) increased 8.4% to $2.60 billion and European sales (representing 53% of total sales) increased 3.2% to $2.87 billion. The increase in net sales in both regions was due to strengthening demand.

The primary reasons for the improvement in quarterly revenues and profits were an outstanding effort in working capital management, coupled with an improving IT demand and increased IT spending. However, results were hit by a stronger U.S. dollar that negatively impacted sales by 6 percentage points in the quarter.

We believe Tech Data continues to benefit from an increase in internal investment, increased workforce and a higher spending on developing systems, which has driven growth. Tech Data sees stability in IT spending and stated that the reported quarter was its most profitable second quarter in its history. During the quarter, Tech Data also completed three acquisitions.

Operating Performance
A prudent execution of Tech Data's inventory pricing and freight management practices along with higher revenues resulted in a quarterly gross margin of 5.3%, compared with 5.2% in the prior-year quarter.

Selling, General & Administrative (SG&A) expenses in the reported quarter were $221.8 million (4.1% of total sales), compared with $215.2 million (4.2% of total sales) in the year-ago quarter. As a percent of net sales, the decrease in SG&A was primarily due to higher sales. On a dollar basis, SG&A expenses upped 3.1% year over year, primarily due to higher payroll expenses.

Overall operating income grew 22.1% year over year to $65.8 million, or 1.2% of net sales, compared with an operating income of $53.9 million, or 1.0% of net sales in the year-ago quarter.

Geographically, operating income in the Americas was $44.6 million, or 1.7% of net sales, compared with $35.4 million, or 1.5% of net sales in the year-ago quarter. Operating income in the Europe was $23.8 million, or 0.8% of net sales, compared with $21.3 million, or 0.8% of net sales.

Balance Sheet & Cash Flow
During the reported quarter, Tech Data generated $196.0 million of cash from operations. At quarter-end, the company had approximately $940.1 million of cash. Total long-term debt at the end of the quarter was $342.6 million. Tech Data had a net cash position of $520.0 million as of July 31, 2010.

During the quarter, the company repurchased 4.3 million shares for $169.9 million, under two separate $100 million share repurchase programs announced in December 2009 and July 2010. As of August 12, 2010, the company had purchased an additional 621,682 shares at a cost of $24.5 million, which completed the repurchase program announced in July 2010. Since 2005, the company has repurchased $600 million of its stock.

Tech Data expects recent demand trends to continue in the third quarter of 2011. The company expects revenues to grow year over year in both the America and Europe region. Revenues are expected to follow a seasonal pattern. The company remains on track to deliver $20 billion in revenues in 2011. However, exchange rate movement will negatively impact the company's operating results in the second half of fiscal 2011.

We maintain our long-term (6+ months) Neutral recommendation on the stock. Currently, the company has a Zacks #3 Rank, implying a short-term 'Hold' rating (1 to 3 months).