Information technology (IT) products distributor, Tech Data Corp. (TECD) reported fourth quarter 2012 earnings of $1.75 per share comprehensively beating the Zacks Consensus Estimate by a dime. Reported earnings increased 7.4% year over year, primarily driven by aggressive share buyback activity during the quarter.
Quarter Details
Total revenue of $7.11 billion in the quarter remained flat on a year-over-year basis and missed our estimate of $7.16 billion. Unfavorable foreign currency effect impacted quarterly sales by 1.0%.
Net sales in North America and Latin America (representing 39.0% of total sales) dipped 1.0% to $2.7 billion. Excluding Brazil, sales grew by 2% in the quarter. Net sales in Europe (representing 61.0% of total sales) crept up 1.0% to $4.4 billion.
Gross profit decreased 1.0% year over year to $375.0 million. Gross margin was 5.27% compared with 5.32% in the prior-year quarter. The year-over-year decline was primarily attributed to competitive pricing conditions in certain markets during the quarter.
Selling, general & administrative (SG&A) expenses in the reported quarter were $262.8 million, up 0.7% year over year. This yearly increase was primarily on the back of higher severance costs in Europe and charges pertaining to cost alignment efforts during the quarter.
Overall, operating income decreased 4.8% year over year to $112.1 million. Operating margin was 1.58% compared with 1.65% reported in the year-ago quarter.
Geographically, operating income in the Americas was $55.0 million versus $48.6 million in the year-ago quarter. Operating margin in the region was 2.01% compared with 1.75% in the year-ago quarter. Operating income in Europe was $59.8 million or 1.37% of net sales versus $71.6 million or 1.65% of net sales in the year-ago quarter.
At quarter end, the company had approximately $505.2 million in cash compared with $899.7 million in the previous quarter. Total debt at the end of the quarter was $105.8 million versus $473.1 million in the prior quarter.
Funds available for use under the company's credit facility amounted to $1.3 billion at the end of the quarter. Cash provided by operations during the quarter totaled $108 million. Capital expenditures were approximately $12.0 million in the fourth quarter.
During the quarter, Tech Data purchased approximately 300,000 shares at an average cost of $50.65 per share. In the fourth quarter, the company announced a new $100 million share repurchase program.
During the quarter, Tech Data announced the discontinuation of its unprofitable operations in Latin America (Brazil, Colombia) and realigned its resources in Europe to improve productivity and match its cost structure with market conditions.
Outlook
Tech Data expects flat sales growth for both the regions in local currencies during the first quarter of 2013. For the remaining quarters, regional sales comparisons may range from slightly positive to slightly negative, resulting in flat sales for the fiscal year in local currencies. Tech Data expects to achieve operating margin of 1.5% for fiscal 2013.
For fiscal 2013, Tech Data expect an effective tax rate of 29% to 30%. Tech Data expects to spend $40.0 million as capital expenditure for fiscal 2013.
Recommendation
Tech Data, which distributes products manufactured by Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ), expects IT spending to remain sluggish in fiscal 2013. We believe that Tech Data faces a number of headwinds in the near term, including a volatile European market (approximately 60.0% of revenue), lack of visibility in government spending in the U.S. and the negative effects of the floods in Thailand, which is expected to hurt PC shipments in the first quarter of calendar year 2012. Tech Data derives approximately 15% – 20% of revenue from PC distribution.
However, we believe that the company's profitability will be driven by higher HDD pricing in the near term. Tech Data's strategy of shifting resources from lower-performing regions to higher-growth regions, cost reductions (shutting down business in the loss-making Brazilian unit) and accretive acquisitions (14 acquisitions added $1.5 billion in sales over the last four years) will drive growth over the long term.
We, thus, maintain our long-term Neutral recommendation on the stock. Currently, the stock holds a Zacks #2 Rank, implying a short-term Buy rating.
APPLE INC (AAPL): Free Stock Analysis Report
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
TECH DATA CORP (TECD): Free Stock Analysis Report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment