Ingram Micro: Fiscal 4Q07 Financial Results

Ingram Micro Inc. announced financial results for the fourth quarter and fiscal year of 2007, which ended Dec. 29, 2007.
 
Worldwide sales for the fourth quarter were $10.01 billion, a 13-percent increase from $8.85 billion in the prior-year period. The translation impact of the relatively stronger foreign currencies had an approximate six-percentage-point positive effect on comparisons to the prior year. Sales for the 2007 fiscal year were a record $35.05 billion, a 12-percent increase over 2006.
 
Fourth quarter net income was $114.1 million or $0.64 per diluted share, compared with net income of $91.7 million or $0.53 per diluted share, in the prior year fourth quarter. 2007 fourth quarter results include the following items:
* The release of a portion of the reserve recorded in the first quarter of 2007 for commercial taxes on software imports into Brazil. The partial reserve release relates to the period from October through December 2002, for which the statute of limitations for an assessment has expired. The benefit from this reserve release was $3.6 million, before and after tax, or $0.02 per diluted share.
* A gain of approximately $2.9 million, or approximately $0.01 per diluted share, from the sale of the company’s Asian semiconductor business, which was acquired in the late 1990s as part of the company’s initial entry into Asia-Pacific. As the business no longer fits the company’s strategy, it was sold to Tomen Electronics, a Japanese company, in late December.
 
“I’m pleased with the progress we made in 2007 – both for the fourth quarter and the fiscal year,” said Gregory M. Spierkel, chief executive officer, Ingram Micro Inc. “Our record sales and net income results were driven by operational improvements and long-term strategic investments in our four market-leading regional operations.”

Fourth-Quarter Highlights
Regional Sales
* North American sales were $3.83 billion (38 percent of total revenues), an increase of four percent versus the $3.68 billion reported in the year-ago quarter. As described throughout 2007, warranty contract sales on behalf of vendors are now recognized as net fees, rather than gross revenues and cost of sales as reported in the prior-year period, which had an approximate four-percentage-point negative impact on growth rates when compared to the year-ago quarter.
* Europe, Middle East and Africa (EMEA) sales were $3.75 billion (38 percent of total revenues), an increase of 16 percent versus the $3.23 billion in the year-ago quarter. The translation impact of the relatively stronger European currencies had an approximate 12-percentage-point positive effect on comparisons to the prior year.
* Asia-Pacific sales were $1.94 billion (19 percent of total revenues), an increase of 29 percent versus the $1.50 billion reported in year-ago quarter. The translation impact of the relatively stronger regional currencies had an approximate 12-percentage-point positive effect on comparisons to the prior year.
* Latin American sales were $481 million (five percent of total revenues), an increase of eight percent versus the $444 million in the year-ago quarter.
 
Gross Margin
Gross margin was 5.82 percent, an increase of 37 basis points versus the prior-year quarter. The partial release of commercial tax reserves in Brazil, described above, had a positive impact of four basis points. The remaining increase is primarily attributable to the resolution of operational issues related to the upgrade to a new warehouse management system in Germany in late 2006, as well as the positive effect of the net reporting of warranty contract sales, described previously, which had a favorable impact of approximately eight basis points. Gross margin was also enhanced by the higher-margin sales of DBL Distributing, acquired in the second quarter of 2007, and by year-over-year growth in the company’s fee-for-service logistics business. Sequentially, gross margin improved 30 basis points versus the third quarter of 2007, driven by greater holiday activity in the logistics business and higher-margin specialty areas.

Operating Expenses
Total operating expenses were $406.7 million, or 4.06 percent of revenues, versus $340.7 million, or 3.85 percent of revenues, in the year-ago quarter. The increase in operating expenses as a percentage of revenues is primarily attributable to growth in the fee-for services business, investments in adjacencies and services and higher stock-based compensation. In addition, the net reporting of warranty contract sales, as described above, had a five-basis-point unfavorable impact on expenses as a percentage of revenues in the current year.
 
Operating Income
Worldwide operating income was $176.0 million or 1.76 percent of revenues, which included the gains on the release of the Brazilian commercial tax reserves and on the sale of the Asian semiconductor business described above, for a total positive impact of six basis points of revenues. In the year-ago quarter, operating income was $141.7 million or 1.60 percent of revenues which included a $4-million recovery from a customer bankruptcy.    
* North American operating income was $68.9 million or 1.80 percent of revenues. In the prior year, operating income was $64.6 million or 1.76 percent of revenues which included a $4-million recovery from a customer bankruptcy, as described above.
* EMEA operating income increased nearly 32 percent – to $64.7 million or 1.72 percent of revenues from $49.2 million or 1.52 percent of revenues in the year-ago quarter – due, in part, to the resolution of operational issues related to the German warehouse management system in the prior year.
* Asia-Pacific operating income was $35.9 million or 1.85 percent of revenues versus $22.8 million or 1.52 percent in the year-ago quarter. The current year operating income includes a $2.9 million gain, or 15 basis points of revenues, on the sale of the semiconductor business in Asia.
* Latin American operating income was $16.1 million or 3.35 percent of revenues, which includes the previously described release of the commercial tax reserve in Brazil of $3.6 million or 75 basis points of revenues. In the year-ago quarter operating income was $11.8 million or 2.66 percent of revenues.
* Stock-based compensation expense of $9.6 million in the current quarter and $6.7 million in the prior-year quarter is presented as a separate reconciling amount in the company’s segment reporting in both periods. As such, these expenses are not included in the regional operating results, but are included in the worldwide operating results.
 
Other expenses for the quarter were $18.2 million versus $16.0 million in the year-ago period.
The effective tax rate was approximately 28 percent versus 27 percent in the prior year quarter, primarily due to the mix of profits among various tax jurisdictions.
Total depreciation and amortization was $17.3 million.
Capital expenditures were approximately $15.2 million.
 
Balance Sheet
* The cash balance at the end of the quarter was $580 million, an increase of $246 million over the balance at the end of 2006.  * Total debt was $523 million, an increase of $14 million from year-end 2006. In the prior-year period, the debt balance excluded $69 million of off-balance sheet debt related to receivables that were sold under a factoring facility. Debt-to-capitalization was 13 percent, a decrease of two percentage points versus the end of 2006.
* The company repurchased approximately 1.3 million shares during the fourth quarter of 2007, for an aggregate amount of $25 million, with another 0.9 million shares repurchased in January for $15 million.
* Inventory was $2.77 billion compared to $2.68 billion at the end of the prior year.  Days of inventory outstanding were 27, a two-day improvement compared to year-end 2006.
* Working capital days were 22, essentially flat when compared to year-end 2006.
 
“While I’m proud that we surpassed the $10-billion mark in quarterly sales and broke another annual sales record, the profitability of our regions – all exceeding operating margins of 170 basis points for the first time – is a greater achievement,” said William D. Humes, executive vice president and chief financial officer, Ingram Micro Inc. “Sales and net income out-performed our guidance range, due in large part to our overall achievement in Asia-Pacific and operating income growth in EMEA.”

Fiscal Year Results
For the fiscal year ended Dec. 29, 2007, worldwide sales were $35.05 billion, a 12-percent increase over the $31.36 billion reported a year ago, to which the translation impact of stronger foreign currencies had an approximate five-percentage-point positive effect on comparisons to the prior year. Regional sales were $13.92 billion for North America (a two-percent increase versus the prior-year period, with the warranty contract sales reclassification unfavorably impacting comparisons by four percentage points); $12.44 billion for Europe (an increase of 16 percent, to which the translation impact of stronger currencies had an approximate 11-percentage-point positive effect on comparisons to the prior year); $7.13 billion for Asia-Pacific (an increase of 29 percent, to which the translation impact of stronger currencies had an approximate 10-percentage-point positive effect on comparisons to the prior year); and $1.55 billion for Latin America (an increase of five percent).
 
Full-year results were impacted by previously disclosed charges totaling $45.1 million pre-tax, ($39.3 million after tax or $0.22 per diluted share) which included: 1) a net charge for commercial taxes on software imports into Brazil of $30.1 million before and after tax or $0.17 per diluted share, including the current quarter release of a portion of these reserves as described previously; and 2) a second-quarter pre-tax charge of $15.0 million, ($9.2 million after tax or $0.05 per diluted share) related to an SEC inquiry.
 
Worldwide operating income for the 2007 fiscal year was $446.4 million, or 1.27 percent of revenues, which includes the charges described above. The net Brazilian tax charge had a nine-basis-point negative impact on full-year operating margin and the SEC-inquiry charge had a four-basis-point negative impact on full-year operating margin. In the year-ago period, operating income was $422.4 million, or 1.35 percent of revenues.  
 
Net income for the 2007 fiscal year was $275.9 million, or $1.56 per diluted share, which includes the charges described above.  In the year-ago period, net income was $265.8 million, or $1.56 per diluted share. Capital expenditures for the full year were $49.8 million, while total depreciation and amortization was $64.1 million.
 


Outlook for the First Quarter
The company’s expected results for the first quarter ending March 29, 2008, include:
* Revenue of $8.75 billion to $9.00 billion.
* Net income of $63 million to $71 million, or $0.36 to $0.40 per diluted share.
The expected results are based on approximately 177 million weighted average shares outstanding and a 28-percent effective tax rate.
 
“We believe our outlook is solid in light of concerns about the worldwide economic environment,” said Spierkel. “We are experiencing some softness in Europe and North America, which is reflected in our guidance, but Asia-Pacific and Latin America remain strong. Our strategic investments are an advantage in this environment by providing geographic, market-segment and business-model diversity. Our focus during the quarter will be on tightly managing expenses while continuing to cultivate areas that will drive growth. I’m confident that our team will continue to perform, as we have proven our ability to excel in challenging markets. I look forward to our future success.”

Ingram Micro Inc.