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IM > SEC Filings for IM > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for INGRAM MICRO INC

Form 10-Q for INGRAM MICRO INC


25-Jul-2014

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.
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21E of the Exchange Act, as amended. Statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements, and may include, but are not limited to, management's expectations of competition; market share; revenues, margin, expenses and other operating results or ratios; economic conditions; vendor terms and conditions; deployment of enterprise systems; pricing strategies and customer terms and conditions; organizational effectiveness program and related restructuring, integration and other reorganization costs; process and efficiency enhancements; cost savings; cash flows; working capital levels and days; capital expenditures; liquidity; capital requirements; acquisitions and integration costs and benefits to our business; operating models; exchange rate fluctuations and related currency gains and losses; resolution of contingencies; seasonality; interest rates and expenses; and rates of return. In evaluating our business, readers should carefully consider the important factors discussed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 28, 2013, as filed with the Securities and Exchange Commission. These factors could cause our actual results and conditions to differ materially from our historical performance or those projected in our forward-looking statements. We disclaim any duty to update any forward-looking statements.

Overview of Our Business
Ingram Micro helps businesses realize the promise of technology by delivering a full spectrum of global technology and supply chain services to businesses around the world. Ingram Micro's global infrastructure and deep expertise in technology solutions, supply chain, cloud and mobility help to enable its business partners to operate efficiently and successfully in the markets they serve. We are the largest wholesale technology distributor and a global leader in IT supply-chain and mobile device lifecycle services 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 results of operations have been, and will continue to be, directly affected by the conditions in the economy in general. Historically, our margins have 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. 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.
While the primary 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, we 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. Additionally, we are expanding our capabilities into what we believe are faster growing and higher margin service oriented businesses such as mobility device life cycle services, supply chain solutions and cloud. Over the past few years, we have complemented our internal growth initiatives with strategic business acquisitions. In 2014, we completed three additional strategic acquisitions; Pinnacle Service Solutions, or Pinnacle, and DAT Repair GMBH, or DRG, both in April 2014, and Global Mobility Products, or GMP, in May 2014, which will provide us with a corridor into a rapidly growing and high-value mobility and supply chain services market. In 2013, we also completed the strategic acquisitions of Softcom Technologies, Inc., or Softcom, which enhances our cloud offerings roadmap and aggregation platform, and Cloudblue Technologies, Inc., or Cloudblue, which expands our supply-chain capabilities and solutions offerings, both in September 2013. In addition, we acquired Shipwire, Inc., or Shipwire, in December 2013, which enhances our existing portfolio of products and services into the large and growing e-commerce fulfillment market. Although we expect these acquisitions along with our organic investments to expand our capabilities in these areas, service revenues currently represent less than 10% of total net sales for all periods presented. 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.


Table of Contents

Management's Discussion and Analysis Continued

To further enhance our ability to innovate and respond to market needs with greater speed and efficiency, on February 13, 2014 we announced a plan to proceed with a global organizational effectiveness program that involves the following three critical aspects:

1. Aligning and leveraging our infrastructure globally with our evolving businesses, opportunities and resources;

2. De-layering and simplifying the organization to enable us to be more nimble, responsive and collaborative; and

3. Maintaining investments in expertise and capabilities to continue to transform our business mix in faster growing, higher margin businesses.

We expect our alignment and de-layering programs to generate annual savings between $80,000 and $100,000. Restructuring, transition and other reorganization costs associated with these programs are expected to be between $80,000 and $100,000. We anticipate the majority of the cost savings will begin to occur in the second half of 2014 and the full run rate of savings will be realized in 2015. We have incurred reorganization as well as transition and other related costs aggregating $73,924 for the twenty-six weeks ended June 28, 2014, primarily related to employee termination benefits predominately associated with this program as well as integration of acquisitions.
We are currently 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. We have deployed SAP in several operations globally beginning in 2009 with our most recent deployment in early 2013 in Colombia. Due to challenges in our earlier round of implementations, additional deployments have been on hold as we continue to address certain improvements within the system to better address our internal and customer needs. We are continuing to evaluate our schedule for deploying the enterprise system in additional locations. While we will adjust the deployment schedule as required to best serve our customers, we can make no assurances that we will not have further disruptions, delays and/or negative business impacts from forthcoming deployments.
We sell finished products purchased from many vendors but generated approximately 16% and 7% of our consolidated net sales for the thirteen weeks ended June 28, 2014, and approximately 14% and 7% of our consolidated net sales for the thirteen weeks ended on June 29, 2013 from products purchased from Hewlett-Packard Company and Apple, Inc., respectively.
For the twenty-six weeks ended June 28, 2014, we generated approximately 16% and 9% of our consolidated net sales, and for the twenty-six weeks ended June 29, 2013, approximately 15% and 8% of our consolidated net sales from products purchased from Hewlett-Packard Company and Apple, Inc., respectively. Historically, our reporting units coincided with the geographic operating segments of our IT product distribution business, including North America, Europe, Asia-Pacific, and Latin America. In the fourth quarter of 2012, we acquired BrightPoint Inc., or BrightPoint, a global leader in providing devices lifecycle services to the wireless industry, and added this as a reporting segment. Since the acquisition of BrightPoint, we have continued to integrate the BrightPoint operations into our existing infrastructure, including distribution centers, offices, ERP systems and shared service centers. As we approach completion of this integration, discrete financial information for the legacy BrightPoint operations is no longer available and, therefore, we have included the results of BrightPoint into our geographic segments, North America, Europe, Asia-Pacific, Latin America. As a result, we have retrospectively reclassified the consolidated financial statements to conform to the new presentation. The measure of segment profit is income from operations.


Table of Contents

Management's Discussion and Analysis Continued

Results of Operations for the Thirteen Weeks Ended June 28, 2014 Compared to the
Thirteen Weeks Ended June 29, 2013
                                     Thirteen Weeks Ended                        Change - Increase (Decrease)
                          June 28, 2014                 June 29, 2013              Amount          Percentage
Net sales by
reporting segment
North America      $  4,610,988           42 %   $  4,267,901           41 %   $    343,087            8.0  %
Europe                3,417,696           31 %      3,030,439           29 %        387,257           12.8  %
Asia-Pacific          2,359,105           22 %      2,549,847           25 %       (190,742 )         (7.5 )%
Latin America           521,590            5 %        459,828            4 %         61,762           13.4  %
Total              $ 10,909,379          100 %   $ 10,308,015          100 %   $    601,364            5.8  %

                                                                                  Increase
                                     Thirteen Weeks Ended                        (Decrease)
                          June 28, 2014                 June 29, 2013              Amount
Operating income
and operating
margin by
reporting segment
North America      $     72,054         1.56 %   $     70,040         1.64 %   $      2,014
Europe                    3,077         0.09 %         14,752         0.49 %        (11,675 )
Asia-Pacific             23,702         1.00 %         26,018         1.02 %         (2,316 )
Latin America             7,960         1.53 %          9,527         2.07 %         (1,567 )
Stock-based
compensation
expense                  (8,574 )          -           (6,541 )          -           (2,033 )
Total              $     98,219         0.90 %   $    113,796         1.10 %   $    (15,577 )



                                          Thirteen Weeks Ended
                                    June 28, 2014     June 29, 2013
Net sales                                100.00 %           100.00 %
Cost of sales                             94.19              94.22
Gross profit                               5.81               5.78
Operating expenses:
Selling, general and administrative        4.56               4.51
Amortization of intangible assets          0.13               0.12
Reorganization costs                       0.22               0.04
Income from operations                     0.90               1.10
Other expense, net                         0.19               0.20
Income before income taxes                 0.71               0.91
Provision for income taxes                 0.24               0.23
Net income                                 0.46 %             0.68 %


Table of Contents

Management's Discussion and Analysis Continued

The 5.8% increase in our consolidated net sales for the thirteen weeks ended June 28, 2014, or second quarter of 2014, compared to the thirteen weeks ended June 29, 2013, or second quarter of 2013, largely reflected strong growth in North America, Europe and Latin America, which more than offset the decline in Asia-Pacific, which was primarily driven by significantly lower mobility business handset sales into Indonesia. The translation impact of foreign currencies relative to the U.S. dollar did not have a material impact on our consolidated net sales.
The 8.0% increase in North American net sales in the second quarter of 2014 compared to the second quarter of 2013 was primarily driven by high double digit growth in our mobility business, which benefited from new contract wins for several large retailers to support the Verizon Wireless retail channel and also benefited from the addition of two new customers in the fast growing wearables market. In addition, our technology and other solutions business grew in the low single digits as relatively strong PC sales in the U.S. and Canada were driven by share gains with key OEMs and the overall refresh cycle. Networking sales continued to be strong in the U.S. Although at a small base currently, our supply chain solutions and cloud businesses also contributed to this growth, primarily in the U.S.
The 12.8% increase in European net sales includes the translation impact of stronger foreign currencies relative to the U.S. dollar which had a positive impact on net sales of approximately six percentage points and reflects an improvement in the overall market demand environment across most of Europe. Led by solid growth across most countries, our European technology and other solutions business saw mid-single digit growth in local currency, with strength in retail and consumer markets particularly in Germany, France and the U.K. European mobility sales grew in the mid single digits in local currency led by strong smartphone sales in Germany, France, Sweden and Spain. but growth was limited by the absence of large deals related to new handset model launches that benefited last year.
The 7.5% decrease in our Asia-Pacific net sales includes the translation impact of weaker foreign currencies relative to the U.S. dollar which had a negative impact on net sales of approximately three percentage points. Asia-Pacific mobility revenue was down mid-double digits in local currency, driven by the decline of approximately $180,000 in mobility business handset sales into Indonesia related to market share losses by a large original equipment manufacturer ("OEM"), partially offset by strong growth in India and recently entered markets as we continue making inroads with established and emerging handset OEMs. Our Asia-Pacific technology and other solutions business was flat in local currency. Solid local currency growth in Australia, Singapore and India was offset by lower sales in China where revenue declined due to continued softness in demand for some of the vendor products we carry.
The 13.4% increase in Latin American net sales includes the translation impact of weaker foreign currencies relative to the U.S. dollar which had a negative impact on net sales of approximately six percentage points. The local currency sales growth was largely driven by double digit growth in Brazil, supported in part by strength in advanced solutions as well as growth in Mexico. Miami export continued to experience slower retail sales due to the lack of new product launches. We are also experiencing accelerating growth in our newly established mobility business with expansion into multiple countries in this region. Gross margin increased three basis points in the second quarter of 2014 compared to the second quarter of 2013 and benefited from a better overall mix of higher value business, including that from our recent organic investments and acquisitions, which more than offset increases in lower-margin sales to consumer and retail markets in Europe and new mobility distribution revenues to support the Verizon retail channel, which while accretive to consolidated operating margin, is relatively lower gross margin.
Total selling, general and administrative expenses, or SG&A expenses, increased $32,267, or 6.9%, in the second quarter of 2014 compared to the second quarter of 2013. The current year quarter included integration, transition and other costs of $9,999 compared to $5,930 of such costs in the prior year. The increase in SG&A expenses also reflects our acquisitions, which added approximately $13,500, growth in our supply chain solutions business, variable costs associated with the increased volume of sales, and further organic investment in higher value businesses; partially offset by savings from the integration of BrightPoint and implementation of our organizational effectiveness program. Amortization of intangible assets increased $2,424 in the second quarter of 2014 compared to the second quarter of 2013 due to our recent acquisitions. During the second quarter of 2014, we incurred net reorganization costs of $23,513, primarily related to employee termination benefits as we are adjusting our cost structure in line with our global organizational effectiveness program and included a write-off of $7,528 for a previously acquired trade name that we wrote-off as we integrated certain operations under the Ingram Micro brand. During the second quarter of 2013, we incurred net reorganization costs of $4,636, primarily for employee termination


Table of Contents

Management's Discussion and Analysis Continued

benefits for workforce reductions associated with the integration of our acquisitions, transition of some functions to shared service centers and for facility exit costs related to two of our BrightPoint offices (see Note 8 to our consolidated financial statements).
Operating margin in the second quarter of 2014 decreased 20 basis points compared to the second quarter of 2013, primarily reflecting the impact of the restructuring, integration and transition costs recognized in connection with our organizational effectiveness program, as discussed above, partially offset by the improved gross margin.
The decrease in North American operating margin in the second quarter of 2014 compared to the second quarter of 2013 reflects reorganization, integration and transition charges of $16,754, or 36 basis points, of North American net sales, in the current period compared to $7,102, or 17 basis points of North American revenue, in the prior year. These costs were partially offset by gross margin expansion from increased sales of higher value products and services as we began to realize the benefits of our previous investments.

The decrease in our European operating margin in the second quarter of 2014 compared to the second quarter of 2013 primarily reflects the impact of charges of $15,449, or 45 basis points of European net sales, for reorganization, integration and transition costs incurred in connection with our organizational effectiveness program and the integration of BrightPoint. We believe we are making good progress on the program and expect meaningful cost savings to begin towards the end of 2014.
Our Asia-Pacific operating margin in the second quarter of 2014 was relatively flat with the second quarter of 2013, but operating income decreased by $2,316 largely due to the decline in Indonesia mobility volume noted previously. The decrease in our Latin American operating margin in the second quarter of 2014 compared to the second quarter of 2013 reflects a 23 basis point gain on the sale of land and a building in Argentina in the prior year and investments in the current year to develop the market for mobility and other high value services.
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 $21,256 in the second quarter of 2014 compared to $20,170 in the second quarter of 2013. The year-over-year increase is primarily attributable to higher interest expense as a result of higher average debt levels in countries where we are experiencing strong growth and interest rates are higher, as well as higher costs for factoring and draft discounting programs. These charges are partially offset by lower net foreign currency exchange losses.
We recorded an income tax provision of $26,350, or an effective tax rate of 34.2%, in the second quarter of 2014 compared to $23,940, or an effective tax rate of 25.6%, in the second quarter of 2013. The current quarter income tax provision includes the negative impact of approximately four percentage points related to a portion of restructuring and transition costs recorded in jurisdictions where there will be no tax benefit realized. The prior year income tax provision included 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. We currently expect our 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 28, 2014 Compared to
the twenty-six Weeks Ended June 29, 2013
                                 Twenty-six Weeks Ended                          Change - Increase (Decrease)
                      June 28, 2014                  June 29, 2013                 Amount             Percentage
Net sales by
reporting
segment
North America $  8,753,085            41  %   $  8,341,804            41 %   $        411,281             4.9  %
Europe           6,876,984            32  %      6,209,842            30 %            667,142            10.7
Asia-Pacific     4,648,244            22  %      5,097,027            25 %           (448,783 )          (8.8 )
Latin America    1,015,055             5  %        921,786             4 %             93,269            10.1
Total         $ 21,293,368           100  %   $ 20,570,459           100 %   $        722,909             3.5  %

                                 Twenty-six Weeks Ended                      Increase (Decrease)
                      June 28, 2014                  June 29, 2013                 Amount
Operating
income and
operating
margin by
reporting
segment
North America $    133,768          1.53  %   $    136,693          1.64 %   $         (2,925 )
Europe              (8,129 )       (0.12 )          24,513          0.39              (32,642 )
Asia-Pacific        40,450          0.87            42,266          0.83               (1,816 )
Latin America       16,950          1.67            15,077          1.64                1,873
Stock-based
compensation
expense            (16,460 )           -           (13,957 )           -               (2,503 )
Total         $    166,579          0.78  %   $    204,592          0.99 %   $        (38,013 )



                                         Twenty-six Weeks Ended
                                    June 28, 2014     June 29, 2013
Net sales                                100.00 %           100.00 %
Cost of sales                             94.16              94.26
Gross profit                               5.84               5.74
Operating expenses:
Selling, general and administrative        4.64               4.57
Amortization of intangible assets          0.13               0.12
Reorganization costs                       0.29               0.06
Income from operations                     0.78               0.99
Other expense, net                         0.21               0.17
Income before income taxes                 0.57               0.82
Provision for income taxes                 0.21               0.24
Net income                                 0.35 %             0.58 %


Table of Contents

Management's Discussion and Analysis Continued

The 3.5% increase in our consolidated net sales for the twenty-six weeks ended June 28, 2014, or first six months of 2014, compared to the twenty-six weeks ended June 29, 2013, or first six months of 2013, largely reflected solid growth in North America, Europe and Latin America, which more than offset the expected decline in Asia-Pacific due primarily to significantly lower mobility business handset sales into Indonesia. The translation impact of foreign currencies relative to the U.S. dollar did not have a material impact on our consolidated net sales.
The 4.9% increase in North American net sales in the first six months of 2014 compared to the first six months of 2013 was driven by high double-digit growth in our mobility business, and low single-digit growth in our technology and other solutions business largely driven by the same factors noted in our discussion of the results for the second quarter.
The 10.7% increase in European net sales results is primarily attributable to an increase in Europe's technology and other solutions revenue reflecting an improvement in the overall market demand environment across most of Europe, particularly in retail and consumer markets in Germany, France, and the U.K., and mid single digit local currency growth in mobility revenue driven by sales of smartphones in Germany, France, Sweden and Spain as noted in our discussion of the results for the second quarter. The translation of stronger local currencies relative to the U.S. dollar had a positive impact of approximately five percentage points on the region's net sales.
The 8.8% decrease in our Asia-Pacific net sales largely reflects lower sales in Indonesia mobility revenue, which was partially offset by strong growth in handset sales in India. Asia-Pacific technology and other solutions revenue was relatively flat in local currency. Strong growth in Australia and India was largely offset by continued declines in China, as noted above. The translation of weaker local currencies relative to the U.S. dollar had a negative impact of approximately four percentage points on the region's net sales.
The 10.1% increase in Latin American net sales reflected solid growth in Brazil and Mexico, partially offset by weakness in Miami Export as discussed above. The translation of weaker local currencies relative to the U.S. dollar had a negative impact of approximately three percentage points on the region's net sales. . . .

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