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IM > SEC Filings for IM > Form 10-Q on 25-Jul-2013All Recent SEC Filings

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Form 10-Q for INGRAM MICRO INC


25-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Unless otherwise stated, all currency amounts, other than per share information, contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands.
The following discussion contains forward-looking statements, including, but not limited to, management's expectations of competition; market share; revenues, margin, expenses and other operating results and ratios; economic conditions; vendor terms and conditions; deployment of enterprise systems; pricing strategies and customer terms and conditions; process and efficiency enhancements; cost-savings; cash flows; inventory levels; working capital days; capital expenditures; liquidity; capital requirements; acquisitions and integration costs; operating models; exchange rate fluctuations and related currency gains or losses; resolution of contingencies; seasonality; interest rates and expenses; and rates of return. In evaluating our business, readers should carefully consider the important factors included in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 29, 2012, as filed with the Securities and Exchange Commission. We disclaim any duty to update any forward-looking statements.

Overview of Our Business
We are the largest wholesale technology distributor and a global leader in IT supply-chain and mobile device lifecycle services worldwide based on revenues. We offer a broad range of IT products and supply chain solutions and help generate demand and create efficiencies for our customers and suppliers around the world. Our acquisition of BrightPoint in October 2012 expanded our product and service offerings to mobile device lifecycle services and logistics solutions worldwide. Our results of operations have been, and will continue to be, directly affected by the conditions in the economy in general. The IT distribution industry in which we operate is characterized by narrow gross profit as a percentage of net sales, or gross margin, and narrow income from operations as a percentage of net sales, or operating margin. Historically, our margins have also been impacted by pressures from price competition and declining average selling prices, as well as changes in vendor terms and conditions, including, but not limited to, variations in vendor rebates and incentives, our ability to return inventory to vendors, and time periods qualifying for price protection. We expect competitive pricing pressures and restrictive vendor terms and conditions to continue in the foreseeable future. In addition, our margins have and may continue to be impacted by our inventory levels, which are based on projections of future demand, product availability, product acceptance and marketability, and market conditions. Any sudden decline in demand and/or rapid technological changes in products could cause us to have a charge for excess and/or obsolete inventory. We continue to monitor and refine our pricing strategies, inventory management processes and vendor program processes to respond and to mitigate the impact of these factors. In addition, we continuously monitor and work to change, as appropriate, certain terms, conditions and credit offered to our customers to reflect those being imposed by our vendors, to recover costs and/or to facilitate sales opportunities. We also strive to improve our profitability through diversification of product offerings, including our presence in adjacent product categories, such as automatic identification/data capture and point-of-sale, or AIDC/POS, enterprise computing and data center, cloud computing, consumer electronics, fee-for-service supply chain offerings and expansion into mobile device lifecycle services and logistics solutions. Our business also requires significant levels of working capital primarily to finance trade accounts receivable and inventory. We have historically relied on, and continue to rely heavily on, trade credit from vendors, available cash, debt and factoring of trade accounts receivable for our working capital needs.
Over the past few years, we have complemented our internal growth initiatives with strategic business acquisitions including BrightPoint as noted previously; Promark Technology Inc. in North America; Eurequat SA, Intertrade A.F. AG, Paradigm Distribution Ltd., Symtech Nordic AS, Computacenter Distribution, Albora Soluciones SL, interAct BVBA and Aretê Sistemas S.A. in Europe; and Aptec Holdings Inc., Vantex Technology Distribution Limited, Value Added Distributors Limited, Asiasoft Hong Kong Limited and the Cantechs Group in Asia-Pacific. These acquisitions have expanded our geographic reach as well as our presence in the value-added distribution of mobile data and AIDC/POS solutions and in the mid-range enterprise market.
We manage our business through continuous cost controls and process and efficiency enhancements. This may also include, from time to time, reorganization actions to further enhance productivity and profitability and could result in the recognition of reorganization costs or impairment of assets. We are in the process of migrating our operations from our legacy proprietary system that was developed in the late-1980s to SAP in a phased, country-by-country approach over the next several years. We have deployed SAP in several operations globally beginning in 2009. In February 2011, we also deployed the new SAP system in Australia, one of our largest operations. This deployment was somewhat unique in that Australia had operated on a different legacy enterprise system than most of our other operations and had recently implemented Ingram Micro's warehouse management system, designed for our largest, most sophisticated distribution centers. This deployment revealed connectivity issues with our warehouse management system and certain web-based tools along with order management and customer service functionality that was not optimized. These issues resulted in order delays, decremented margins and reduced sales in 2011 and 2012. We have largely addressed these SAP system issues to better meet our customers' needs, which has helped improve our Australian operating results during the first six months


Table of Contents

Management's Discussion and Analysis Continued

of 2013. We are continuing to evaluate our SAP deployment schedule and currently do not plan any deployments in large countries in 2013. We sell finished products purchased from many vendors but generated approximately 14% of our consolidated net sales for the thirteen weeks ended June 29, 2013 from products purchased from Hewlett-Packard Company, and 20%, 11% and 11% from products purchased from Hewlett-Packard Company, Cisco Systems, Inc. and Apple Inc., respectively, for the thirteen weeks ended June 30, 2012. For the twenty-six weeks ended June 29, 2013, we generated approximately 15% of our consolidated net sales from products purchased from Hewlett-Packard Company, and 20% and 10% from products purchased from Hewlett-Packard Company and Cisco Systems, Inc., respectively, for the twenty-six weeks ended June 30, 2012. The year-over-year decreases in products purchased from these vendors, as a percentage of net sales, for the periods discussed above reflects the higher mix of products purchased from other vendors as a result of changes in the market in general and our acquisition of BrightPoint.
There were no other vendors or any customers that represented 10% or more of our consolidated net sales in either of the periods presented. Recent Events
We have been a claimant in a class action proceeding seeking damages from certain manufacturers of LCD flat panel displays. On July 12, 2013, the federal district judge overseeing the proceeding issued an order approving a plan of distribution to the class claimants. The distribution entitles us to an award of $29 million, net of all attorney fees and expenses, which is expected to be received and recognized in the third quarter of 2013. The court has deferred distribution of a portion of the settlement fund. Accordingly, we may receive up to an additional $7 million from the remaining escrowed settlement fund in the future depending on the extent to which subsequent, approved claims are made on the fund.


Table of Contents

Management's Discussion and Analysis Continued

Results of Operations for the Thirteen Weeks Ended June 29, 2013 Compared to the
Thirteen Weeks Ended June 30, 2012
                                     Thirteen Weeks Ended                       Change - Increase (Decrease)
                          June 29, 2013                June 30, 2012              Amount           Percentage
Net sales by
reporting segment
IT Distribution:
North America      $  4,039,064           39 %   $ 3,837,244           44 %   $    201,820              5  %
Europe                2,430,372           24 %     2,460,141           28 %        (29,769 )           (1 )%
Asia-Pacific          2,130,658           21 %     2,038,112           23 %         92,546              5  %
Latin America           459,828            4 %       442,398            5 %         17,430              4  %
BrightPoint           1,248,093           12 %             -            -        1,248,093              -
Total              $ 10,308,015          100 %   $ 8,777,895          100 %   $  1,530,120             17  %

                                                                                 Increase
                                     Thirteen Weeks Ended                       (Decrease)
                          June 29, 2013                June 30, 2012              Amount
Operating income
and operating
margin by
reporting segment
IT Distribution:
North America      $     65,885         1.63 %   $    68,729         1.79 %   $     (2,844 )
Europe                   12,713         0.52 %        14,913         0.61 %         (2,200 )
Asia-Pacific             19,061         0.89 %        14,835         0.73 %          4,226
Latin America             9,527         2.07 %         4,437         1.00 %          5,090
BrightPoint              13,151         1.05 %             -            -           13,151
Stock-based
compensation
expense                  (6,541 )          -          (5,129 )          -           (1,412 )
Total              $    113,796         1.10 %   $    97,785         1.11 %   $     16,011



                                          Thirteen Weeks Ended
                                    June 29, 2013     June 30, 2012
Net sales                                100.00 %           100.00 %
Cost of sales                             94.22              94.84
Gross profit                               5.78               5.16
Operating expenses:
Selling, general and administrative        4.51               4.00
Amortization of intangible assets          0.12               0.03
Reorganization costs                       0.04               0.01
Income from operations                     1.10               1.11
Other expense, net                         0.20               0.16
Income before income taxes                 0.91               0.95
Provision for income taxes                 0.23               0.25
Net income                                 0.68 %             0.70 %


Table of Contents

Management's Discussion and Analysis Continued

The increase in our consolidated net sales for the thirteen weeks ended June 29, 2013, or second quarter of 2013, compared to the thirteen weeks ended June 30, 2012, or second quarter of 2012, largely reflected our acquisitions of BrightPoint, Aptec and Promark which accounted for approximately 15 percentage points of our growth in consolidated net sales, as well as solid revenue growth in both North and Latin America, which helped offset revenue declines in both Europe and China. The translation impact of foreign currencies relative to the U.S. dollar did not have a material impact on our consolidated net sales. The increase in our North American net sales reflects strength in our key small and medium-sized business, or SMB, market and in the region's specialty division with particular strength in consumer electronics. We also had solid growth in higher margin advanced solutions led by strength in storage, networking and security. The pricing environment remained competitive as certain companies tried to win back share. Canada returned to growth with a double-digit increase in revenue driven by strong sales into the retail market, as well as solid sales of advanced solutions.
The net decline in our European net sales reflects the continued impact of weak macro-economic conditions throughout the region. Certain countries such as United Kingdom, France and the Netherlands outperformed the market due in part to a strong focus on the SMB market, while others, such as Germany, Belgium and Spain, were negatively impacted by weak economic conditions that persist in this region where we have high exposure to retail demand.
The increase in our Asia-Pacific net sales reflects the acquisition of Aptec, which contributed approximately four percentage points to the region's overall growth, with a mix of growth and declines in other markets in the region. Australia's revenue grew for the second quarter in a row, despite declines in the country's overall IT market. India generated double-digit revenue growth with continued robust sales into large format retailers and further strength across several product categories, including mobility and networking. These growth drivers were offset by weakness in China, where revenue declined for the first time in several years. This decline was driven mainly by slower sales of mobility-related products, which were a large driver of China's double-digit growth last year. China's economy has softened, which impacted the level of sales across many product categories.
The increase in Latin American net sales includes approximately two percentage points of growth from the translation impact of stronger local currencies. The region benefited from solid revenue improvement in Brazil, driven by robust performance in both consumer and enterprise markets. The region's focus on higher value businesses resulted in stronger growth in advance solutions, data capture point-of-sale and logistics services. In Mexico, our sales have been impacted by delays in government spending and a slowdown in consumer spending. Gross margin increased 62 basis points in the second quarter of 2013 compared to the second quarter of 2012. The second quarter of 2013 gross margin benefited by 58 basis points from the addition of higher gross margin revenue from BrightPoint. Gross margin in our IT distribution business increased four basis points year-over-year, benefiting from lower sales of tablets, steady pricing discipline, as we appropriately managed growth, and from early returns from our strategic investments.
Total selling, general and administrative expenses, or SG&A expenses, increased $113,925, or 32.4%, in the second quarter of 2013 compared to the second quarter of 2012, and increased 51 basis points as a percentage of consolidated net sales. The acquisition of BrightPoint added approximately $100,000 of cost and increased our consolidated operating expense ratio by 47 basis points due to the higher labor content required by the high-touch nature of its value-added services, as well as integration costs associated with this acquisition and continued investments in key strategic areas across all regions to further diversify our revenues. In the prior year quarter, SG&A expenses were impacted by acquisition-related costs of $4,045 and a charge of $1,923 associated with asset impairments resulting from the closure of our in-country Argentina operations.
Amortization of intangible assets increased $9,291, or 343.3%, in the second quarter of 2013 compared to the second quarter of 2012, and increased nine basis points as a percentage of consolidated net sales, in the second quarter of 2013 compared to the second quarter of 2012. The increase in the current-year quarter reflects our acquisitions of BrightPoint, Aptec and Promark.
During the second quarter of 2013, we incurred net reorganization costs of $4,636 comprised of: $2,876 of employee termination benefits for workforce reductions associated with the integration of our acquisitions and transition of some functions to shared services centers and $1,760 of facility exit costs related to two of our BrightPoint offices (see Note 8 to our consolidated financial statements). During the second quarter of 2012, we incurred reorganization costs of $974 related to employee termination benefits for workforce reductions, partially offset by net reorganization credits of $135 primarily for lower than expected costs associated with facility consolidations recorded in prior periods.
Operating margin decreased one basis point in the second quarter of 2013 compared to the second quarter of 2012, reflecting the higher gross margins as discussed above offset by higher SG&A expenses, amortization of intangible assets and reorganization and integration costs, all of which primarily relate to the BrightPoint acquisition.


Table of Contents

Management's Discussion and Analysis Continued

The decrease in our North American operating margin in the second quarter of 2013 compared to the second quarter of 2012 reflects our continued strategic investments; as well as slower growth in services revenue, due in part to the loss of a customer in Canada. These factors are partially offset by benefits we begin to realize from earlier strategic investments. In the prior year quarter, our operating margin was negatively impacted by 11 basis points associated with acquisition-related costs.
The decrease in our European operating margin in the second quarter of 2013 compared to the second quarter of 2012 reflects the impact of continued challenging macro-economic conditions throughout the region.
The increase in our Asia-Pacific operating margin in the second quarter of 2013 compared to the second quarter of 2012 primarily relates to improvement in Australia, which reduced its operating loss to less than $3,000 in the current year quarter from approximately $9,000 in the prior year quarter, and operating leverage on growth in India, largely offset by the market compression noted in China.
The increase in our Latin American operating margin in the second quarter of 2013 compared to the second quarter of 2012 primarily reflects growth in Brazil, stronger sales of higher value products and services and a 23 basis point benefit on the sale of land and a building in Argentina. In the prior-year quarter, our operating margin was negatively impacted by 48 basis points associated with our closure of Argentina in-country operations.
Other expense, net, consisted primarily of interest expense and income, foreign currency exchange losses and gains and other non-operating gains and losses. We incurred other expenses of $20,170 in the second quarter of 2013 compared to $14,327 in the second quarter of 2012. The year-over-year increase is primarily attributable to higher interest expense due to an increase in average debt outstanding resulting primarily from our acquisition of BrightPoint. In addition, we incurred higher net foreign currency exchange losses related to the foreign-currency translation impact on Euro-based inventory purchases in our pan-European entity, which designates the U.S. dollar as its functional currency, and which totaled approximately $1,000 in the second quarter of 2013 compared to a gain of approximately $1,600 in the second quarter of 2012. We recorded an income tax provision of $23,940, or an effective tax rate of 25.6%, in the second quarter of 2013 compared to $22,184, or an effective tax rate of 26.6%, in the second quarter of 2012. The current year income tax provision included net discrete tax benefits totaling approximately $5,766, or 6.2 percentage points, recognized in the quarter as a result of a change in estimate of the amount of BrightPoint acquisition costs deductible for tax purposes. The prior year income tax provision included net discrete benefits of approximately $4,378, or 5.3 percentage points of the effective tax rate, which primarily reflects the release of an unrecognized tax benefit due to the expiration of the applicable statute of limitations in Australia, along with other positive adjustments agreed with the U.S. Internal Revenue Service. The remaining year-over-year change in the effective tax rate primarily reflects the change in mix of profit among different tax jurisdictions and losses in other tax jurisdictions in which we are not able to record a tax benefit. We currently expect our 2013 full year effective tax rate to be approximately 31%; however, effective tax rates may vary significantly depending on the actual operating results in the various tax jurisdictions, as well as changes in the valuation allowance related to the expected recovery of our deferred tax assets.


Table of Contents

Management's Discussion and Analysis Continued

Results of Operations for the Twenty-six Weeks Ended June 29, 2013 Compared to
the Twenty-six Weeks Ended June 30, 2012
                                    Twenty-six Weeks Ended                       Change - Increase (Decrease)
                          June 29, 2013                 June 30, 2012              Amount           Percentage
Net sales by
reporting segment
IT Distribution:
North America      $  7,906,883           38 %   $  7,444,191           43 %   $    462,692              6  %
Europe                5,099,366           25 %      5,107,197           29 %         (7,831 )            -
Asia-Pacific          4,325,166           21 %      3,987,864           23 %        337,302              8  %
Latin America           921,786            5 %        874,024            5 %         47,762              5  %
BrightPoint           2,317,258           11 %              -            -        2,317,258              -
Total              $ 20,570,459          100 %   $ 17,413,276          100 %   $  3,157,183             18  %

                                                                                  Increase
                                    Twenty-six Weeks Ended                       (Decrease)
                          June 29, 2013                 June 30, 2012              Amount
Operating income
and operating
margin by
reporting segment
IT Distribution:
North America      $    121,460         1.54 %   $    138,377         1.86 %   $    (16,917 )
Europe                   26,657         0.52 %         36,914         0.72 %        (10,257 )
Asia-Pacific             32,896         0.76 %         29,255         0.73 %          3,641
Latin America            15,078         1.64 %         11,865         1.36 %          3,213
BrightPoint              22,458         0.97 %              -            -           22,458
Stock-based
compensation
expense                 (13,957 )          -          (14,575 )          -              618
Total              $    204,592         0.99 %   $    201,836         1.16 %   $      2,756


                                         Twenty-six Weeks Ended
                                    June 29, 2013     June 30, 2012
Net sales                                100.00 %           100.00 %
Cost of sales                             94.26              94.72
Gross profit                               5.74               5.28
Operating expenses:
Selling, general and administrative        4.57               4.09
Amortization of intangible assets          0.12               0.03
Reorganization costs                       0.06               0.01
Income from operations                     0.99               1.16
Other expense, net                         0.17               0.17
Income before income taxes                 0.82               0.99
Provision for income taxes                 0.24               0.12
Net income                                 0.58 %             0.87 %

The increase in our consolidated net sales for the twenty-six weeks ended June 29, 2013, or first six months of 2013, compared to the twenty-six weeks ended June 30, 2012, or first six months of 2012, largely reflects our acquisitions of BrightPoint, Aptec and Promark which contributed approximately 14 percentage points of our growth in consolidated revenue, as well as growth in


Table of Contents

Management's Discussion and Analysis Continued

our other operating regions except Europe, which is essentially flat year-over-year. The translation impact of foreign currencies relative to the U.S. dollar did not have a material impact on our consolidated net sales. The increase in our North American net sales reflects strength in our key SMB market in the U.S., which helped support growth in our specialty division, particularly consumer electronics. We also had solid growth in advanced solutions, led by strength in storage, networking and security. Canada recovered from a slower first quarter with growth in the second quarter driven by stronger sales into the retail market.
The change in our European net sales largely reflects the impact of continued challenging macro-economic conditions in several markets in the region as discussed in the results for the second quarter.
The increase in our Asia-Pacific net sales largely reflects the same factors noted in our discussion of the results for the second quarter, with the acquisition of Aptec contributing approximately four percentage points to the region's overall growth. Growth in Australia and India also is consistent with those factors noted in the discussion of the results for the second quarter. China, which had modest growth in the first quarter, experienced slower sales of mobility-related products in the second quarter of 2013, which were a large driver of its double-digit growth last year. China's overall economy has softened, which is impacting the level of sales across many product categories. The increase in Latin American net sales reflects strong revenue in Brazil, as discussed in the results for the second quarter. In Mexico, our sales have been impacted by delays in government spending and a slowdown in consumer spending in the first half of the year.
Gross margin increased 46 basis points in the first six months of 2013 compared to the first six months of 2012. The first six months of 2013 gross margin benefited by 61 basis points from the addition of BrightPoint's higher gross margin revenue, driven by its mobility services business. This benefit helped offset the dilutive impact of a greater mix of lower margin products, such as tablets and other personal devices in the first quarter of 2013, a more competitive selling environment, both in North America and Europe, as well as the loss of favorable hard disc drive pricing realized in the prior year. Total SG&A expenses increased $227,979, or 32.0%, in the first six months of 2013 compared to the first six months of 2012, and increased 48 basis points as a percentage of consolidated net sales. The acquisition of BrightPoint added approximately $197,000 of cost and increased our consolidated expense ratio by 50 basis points due to the higher labor content required by the high-touch nature of its value-added services, as well as integration costs associated with this acquisition and investments in key strategic areas across all regions to further diversify our revenues. In the prior year period, SG&A expenses were impacted by acquisition-related costs of $4,045, asset impairments of $1,923 associated with the closure of our in-country Argentina operations and costs of $2,500 associated with the transition of our chief executive officer. Amortization of intangible assets increased $18,131, or 322.0%, in the first six . . .

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