Ingram: Fiscal 1Q08 Financial Results

Ingram Micro Inc. announced financial results for the first quarter of 2008 (ended March 29, 2008).

Worldwide sales for the quarter were $8.58 billion, a 4-percent increase from $8.25 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.

Net income for the first quarter was $64.1 million, or $0.37 per diluted share, compared with $37.0 million, or $0.21 per diluted share, in the year-ago period. The prior-year quarter included a charge of $33.8 million, or $0.19 per diluted share, which was recorded to cost of sales for commercial taxes on software imports in Brazil, as well as a benefit of approximately $0.02 per diluted share from the favorable resolution of a U.S. tax audit.

"We’re pleased with the performance of our Asia-Pacific and Latin America regions, both of which grew at double-digit rates with good operating leverage," said Greg Spierkel, chief executive officer, Ingram Micro Inc. "However, as we discussed in February, softness in the economic environments in North America and Europe is exerting pressure on our operations in those regions. We’ve made good progress on the expense-containment plan instituted earlier this year, but additional steps are necessary in this environment. We are planning a restructuring in our Europe, Middle East and Africa (EMEA) operations, primarily in the regional headquarters, and made targeted reductions of office-based positions in North America earlier this month. We’re confident that the actions will improve productivity and operational effectiveness without sacrificing customer service or vendor relationships, or inhibiting profitable growth."

The planned actions are expected to generate $18 million to $24 million of annualized savings, beginning in the second and third quarters of 2008. Costs associated with these actions are expected to be approximately $11 million to $13 million, the majority of which are expected to be incurred during the second and third quarters of 2008.

Additional First Quarter Highlights

Regional Sales:

North American sales were $3.29 billion (38 percent of total revenues), essentially flat with the $3.28 billion posted a year ago.
EMEA sales were $3.07 billion (36 percent of total revenues), an increase of one percent versus the $3.05 billion in the year-ago quarter. The translation impact of the relatively stronger European currencies had an approximate eleven-percentage-point positive effect on comparisons to the prior year.
Asia-Pacific sales were $1.81 billion (21 percent of total revenues), an increase of 16 percent versus the $1.57 billion reported in the year-ago quarter. The translation impact of the relatively stronger regional currencies had an approximate ten-percentage-point positive effect on comparisons to the prior year.
Latin American sales were $407 million (5 percent of total revenues), an increase of 18 percent compared to the $346 million posted a year ago.

Gross margin
Gross margin was 5.66 percent, an increase of 70 basis points versus the prior-year quarter, driven by general business improvements in every region. In the prior-year quarter, the charge related to Brazilian commercial taxes adversely affected the gross margin by approximately 41 basis points.

Operating expenses
Total operating expenses were $386.2 million or 4.50 percent of revenues versus $335.1 million or 4.06 percent of revenues in the year-ago quarter. Softer sales growth due to the weaker-demand environment, additional investments in people and infrastructure to support our strategic initiatives, and growth in our fee-for-services business had a negative impact on operating expenses as a percent of revenues.

Operating income
Worldwide operating income was $99.3 million or 1.16 percent of revenues. In the year-ago quarter, operating income was $73.7 million or 0.89 percent of revenues, which includes the Brazilian tax charge of approximately $33.8 million or 41 basis points.

North American operating income was $40.6 million or 1.23 percent of revenues, compared to $57.0 million or 1.74 percent of revenues in the year-ago quarter.
EMEA operating income was $26.8 million or 0.87 percent of revenues, compared to $35.0 million or 1.15 percent of revenues in the year-ago quarter.
Asia-Pacific operating income increased 65 percent to $32.5 million or 1.79 percent of revenues from $19.7 million or 1.25 percent of revenues in the year-ago quarter.
Latin America operating income was $7.8 million or 1.92 percent of revenues. In the year ago quarter, the region recorded an operating loss of $28.4 million or 8.20 percent of revenues due to the $33.8 million commercial tax charge in Brazil, described previously, which was approximately 9.76 percent of revenues.

Stock-based compensation expense, which amounted to $8.4 million in the current quarter and $9.6 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.

The effective tax rate for the quarter was 26 percent, which includes a favorable two-percentage-point discrete impact of a tax-rate change in China. The effective rate in the prior year period was 36.6 percent, which was negatively impacted by the Brazilian commercial tax charge referenced previously.
Total depreciation and amortization was $16.9 million.
Capital expenditures were approximately $10.9 million.

Balance Sheet

The cash balance at the end of the quarter was $567 million, relatively flat with the year-end balance.
Total debt was $609 million, an increase of $86 million from year-end. Debt-to-capitalization was 15 percent versus 13 percent at the end of 2007.
The company repurchased approximately 5.3 million shares during the first quarter of 2008, for an aggregate amount of $86.6 million. Total shares repurchased since the inception of the program in mid-November 2007 through the quarter-end is 6.6 million shares for an aggregate amount of $111.7 million.
Inventory was $2.89 billion or 32 days on hand compared to $2.77 billion or 27 days on hand at the end of the year. The increase in inventory days is primarily due to the softer sales environment.
Working capital days were 26, an increase of four days from year-end, primarily due to higher inventory days. Working capital days were roughly flat with the first quarter of the prior year.

"Despite the challenging economic environment, gross margins were at the highest first-quarter level in 10 years," said William D. Humes, executive vice president and chief financial officer. "This is a direct result of our commitment to strategic initiatives that improve the margin profile and continued focus on our most profitable lines of business. Other bright spots included strong performances in many of our emerging markets. We are clearly focused on opportunities to reduce operating expenses and inventory levels. While it’s difficult to make rapid adjustments in these areas when demand slows, we have improvement plans in place and I expect to see good progress going forward."

Outlook for the Second Quarter

Sales are expected to range from $8.50 billion to $8.75 billion.
Net income is expected to range from $59 million to $64 million, or $0.34 to $0.37 per diluted share. This does not include costs related to the expense-reduction plans in North America and EMEA. The timing of the costs cannot be predicted with certainty, but are estimated to be approximately $2 million to $4 million in the second quarter, with the balance substantially incurred in the third quarter.
The weighted average shares outstanding and effective tax rate are expected to be approximately 172 million and 28 percent, respectively.

"Our second-quarter guidance reflects continued economic softness in North America and Europe, with solid growth in Asia-Pacific and Latin America," said Spierkel. "The expected sequential sales growth is following a fairly normal seasonal pattern, with a modest benefit from slightly stronger foreign currencies compared to the first quarter. While we are taking the necessary steps to manage our cost structure in the current economy, we will continue to pursue activities that improve our infrastructure, generate greater customer loyalty, diversify our business mix and enhance margins. The company has proven its resiliency in similar economic environments and we will be stronger than ever when the economy rebounds."

Ingram Micro Inc.