Tech Data 2014 Annual Report Download - page 64

During fiscal 2014, adjustments to the fair value of acquisition-related contingent consideration of $0.8 million were recorded as a component of
"selling, general and administrative expenses" and $0.5 million was recorded to "other (income) expense, net" in the Company's Consolidated
Statement of Income. Approximately $8.7 million of the acquisition-related contingent consideration was paid during fiscal 2014 and the
remaining balance is expected to be paid by the first quarter of fiscal 2016.
The Company utilizes life insurance policies to fund the Company’s nonqualified deferred compensation plan. The life insurance asset recorded
by the Company is the amount that would be realized upon the assumed surrender of the policy. This amount is based on the underlying fair
value of the invested assets contained within the life insurance policies. The gains and losses are recorded in the Company’s Consolidated
Statement of Income within "other (income) expense, net." The related deferred compensation liability is also marked-to-market each period
based upon the various investment return alternatives selected by the plan participants and the gains and losses are recorded in the Company’s
Consolidated Statement of Income within "selling, general and administrative expenses." The net realizable value of the Company's life
insurance investments and related deferred compensation liability at January 31, 2014 is $38.4 million and $33.8 million , respectively.
The $350 million of Senior Notes discussed in Note 7 - Debt, are carried at cost, less unamortized debt discount. The estimated fair value of the
Senior Notes was approximately $364.2 million at January 31, 2014, based upon quoted market information (level 1 criteria).
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because
of the short maturity of these items. The carrying amount of debt outstanding pursuant to revolving credit facilities and loans payable
approximates fair value as the majority of these instruments have variable interest rates which approximate current market rates (Level 2
criteria).
NOTE 12 — DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company is exposed to movements in foreign currency exchange rates. The Company’s foreign currency
risk management objective is to protect earnings and cash flows from the impact of exchange rate changes primarily through the use of foreign
currency forward contracts to hedge both intercompany and third party loans, accounts receivable and accounts payable. These derivatives are
not designated as hedging instruments.
The Company employs established policies and procedures to manage the exposure to fluctuations in the value of foreign currencies. It is the
Company’s policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. Additionally, the
Company does not enter into derivative instruments for speculative or trading purposes.
The Company’s foreign currency exposure relates primarily to international transactions in Europe, Canada and Latin America, where the
currency collected from customers can be different from the currency used to purchase the product. The Company’s transactions in its foreign
operations are denominated primarily in the following currencies: U.S. dollar, British pound, Canadian dollar, Chilean peso, Czech koruna,
Danish krone, euro, Mexican peso, Norwegian krone, Peruvian new sol, Polish zloty, Romanian leu, Swedish krona and Swiss franc.
The Company considers inventory as an economic hedge against foreign currency exposure in accounts payable in certain circumstances. This
practice offsets such inventory against corresponding accounts payable denominated in currencies other than the functional currency of the
subsidiary buying the inventory, when determining the net exposure to be hedged using traditional forward contracts. Under this strategy, the
Company would expect to increase or decrease selling prices for products purchased in foreign currencies based on fluctuations in foreign
currency exchange rates affecting the underlying accounts payable. To the extent the Company incurs a foreign currency exchange loss (gain) on
the underlying accounts payable denominated in the foreign currency, a corresponding increase (decrease) in gross profit would be expected as
the related inventory is sold. This strategy can result in a certain degree of quarterly earnings volatility as the underlying accounts payable is
remeasured using the foreign currency exchange rate prevailing at the end of each period, or settlement date if earlier, whereas the corresponding
increase (decrease) in gross profit is not realized until the related inventory is sold.
The Company classifies foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign
currency denominated accounts receivable and accounts payable as a component of “cost of products sold” which is consistent with the
classification of the change in fair value upon remeasurement of the underlying hedged accounts receivable or accounts payable. The Company
classifies foreign currency exchange gains and losses on its derivative instruments used to manage its exposures to foreign currency denominated
financing transactions as a component of “other (income) expense, net” which is consistent with the classification of the change in fair value
upon remeasurement of the underlying hedged loans. The total amount recognized in earnings on the Company’s foreign currency forward
contracts, which is included as a component of either “cost of products sold” or “other (income) expense, net”, was a net foreign currency
exchange (gain) loss of $(17.2) million , $13.1 million and
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