Tech Data Corp. is closely monitoring an escalating trade war between the United States and China.
At this point the tariffs imposed by President Donald Trump on Chinese imports are unlikely to have a major impact on the Clearwater-based IT distributor, CEO Rich Hume said in a conference call with analysts discussing the first quarter of its 2020 fiscal year.
Tech Data (Nasdaq: TECD) is the largest company based on revenue of any business headquartered in the Tampa-St. Pete area. The company buys goods from technology vendors and sells them to retailers, managed service providers and other customers.
The Trump administration raised tariffs on thousands of items coming to the U.S. from China, from 10 percent to 25 percent, in mid-May. Most of the items are industrial or intermediate goods that are used as component parts in products manufactured in the U.S., CNN reported. Importers pay the 25 percent tariff once the product reaches the U.S.
Tech Data follows the lead of its vendors in price hikes, Hume said.
“As they raise their prices, as a generalization, we do an evaluation and typically we follow those price increases simultaneously,” Hume said. “So, from an overall tariff perspective, as we have seen with Round 1 [the initial tariffs imposed last year], our business is fairly seamless in being able to manage that. As it goes from potentially 10 percent to 25 percent, etc. our judgment would be that if there were an impact, it would be the overall macro-level economy slowing down, as opposed to any transactional exposures we might have in our business.”
Separately, federal legislation approved last year bars the U.S. government and its contractors from using equipment made by Chinese tech giant Huawei. Huawei is challenging the constitutionality of the law.
Analysts pressed Hume for insight into how that impacts Tech Data. Without naming Huawei specifically, Hume indicated the impact was minimal and primarily confined to inventory that Tech Data has on hand.
“We do have inventory and we will follow the laws of the United States and as they ebb and flow and determine where they want to go with that in the future, we will comply. At the same time we have responsibility to respect our vendor relationships and we certainly are doing that as well,” Hume said.
“From an ongoing sales and operating income derived from sales perspective, we don’t have a material exposure at all. We are following the guidance and complying with the law moving forward from an inventory perspective. At this point in time, [Chuck Dannewitz, Tech Data’s chief financial officer] mentioned that inventory is approximately 4 percent of our global inventory. We plan to work that down as we move forward. We’re following the regulations and news on a daily basis in this category.”
The issues almost exclusively applies to Tech Data’s European operations, and “to explicitly answer your question, we absolutely are permitted to sell,” Hume told another analyst who asked specifically about Tech Data’s Huawei inventory.
Overall, Tech Data had a “solid start” to FY 2020, Hume said. For the three months ended April 30, the company reported $55.4 million in net income, or $1.49 a share, on sales of $8.4 billion. Sales were down 2 percent compared to the year-ago quarter, but net income jumped 64 percent. See the complete earnings here.