Ingram Micro Inc. (NYSE: IM), the world’s largest technology distributor, today announced financial results for the fourth quarter and fiscal year of 2006 (ended Dec. 30, 2006).
Worldwide sales for the fourth quarter were $8.85 billion, an 11-percent increase from $7.96 billion in the prior-year period. The translation impact of the relatively stronger European currencies had an approximate three-percentage-point positive effect on comparisons to the prior year. Sales for the 2006 fiscal year were $31.36 billion, a 9-percent increase over 2005 and an all-time record.
Fourth-quarter net income was $91.7 million or $0.53 per diluted share. This includes stock-based compensation expense related to the adoption of Statement of Financial Accounting Standards No. 123R of $6.7 million or approximately $0.03 per diluted share.
The fourth-quarter results also include the following items that were not factored into the company’s guidance for the quarter:
· A favorable legal settlement of approximately $4 million, or a benefit of $0.02 per diluted share, reflecting a recovery from a customer bankruptcy.
· A reduction of the effective tax rate from 28.0 percent for the first nine months of 2006 to 27.6 percent for the full year, based primarily on the end-of-year mix of profits across various tax jurisdictions, resulting in a benefit of $0.01 per diluted share.
· An increase in outstanding shares to approximately 174 million compared to 171 million disclosed in the company’s guidance, which had a negative impact of approximately $0.01 per diluted share.
· Complications in migrating to a new warehouse management system in Germany, which had a negative impact of approximately $0.03 to $0.04 per diluted share relative to the estimates included in the company’s fourth-quarter guidance.
In addition, pending legislation in Brazil, if enacted into law before the company files its 2006 Form 10-K later this month, is likely to adversely impact the company’s fourth-quarter results. The potential impact is not included in these reported results. More detail is found under “Legal Matters” in this news release.
In the prior-year period, net income based on generally accepted accounting principles (GAAP) was $84.4 million, or $0.51 per diluted share. These results included major-program and integration costs of $8.2 million related to the company’s outsourcing and optimization plan in North America and the integration of Tech Pacific, which the company acquired in November 2004. Year-ago net income on a non-GAAP basis, which excludes these costs, was$90.0 million, or $0.54 per diluted share.
“We closed the year with record annual sales and income,” said Gregory M. Spierkel, chief executive officer, Ingram Micro Inc. “For the fourth quarter, sales hit a quarterly record and all four regions reported operating margins of more than 150 basis points for the first time in company history. Nearly every country performed well. While issues in Germany clouded our income performance during the quarter, the warehouse management system is now running effectively. We believe the upgraded system will drive a more efficient and productive operation for Germany and the region.”
Additional Fourth-Quarter Highlights
For additional detail regarding the results outlined below, please refer to the financial statements and schedules attached to this news release or visit www.ingrammicro.com.
Regional Sales
o North American sales were $3.68 billion (42 percent of total revenues), an increase of 12 percent versus the $3.27 billion reported in the year-ago quarter.
o European sales (in U.S. dollars) were $3.23 billion (36 percent of total revenues), an increase of 7 percent versus the $3.01 billion in the year-ago quarter. The translation impact of the relatively stronger European currencies had an approximate 9-percentage-point positive impact on comparisons to the prior year.
o Asia-Pacific sales were $1.50 billion (17 percent of total revenues) or an increase of 20 percent versus the $1.25 billion reported in year-ago quarter.
o Latin American sales were $444 million (5 percent of total revenues), an increase of 6 percent versus the $420 million in the year-ago quarter.
Gross Margin
Gross margin was 5.45 percent, a decrease of 16 basis points versus the prior-year quarter, but a sequential increase of five basis points. The decrease versus the prior year is due in large part to operational issues resulting from the conversion to a new warehouse management system in Germany, as well as competitive pricing in North America and Europe relative to the prior year period.
Operating Expenses
Total operating expenses were $340.7 million, or 3.85 percent of revenues, versus $314.4 million, or 3.95 percent of revenues, in the year-ago quarter. The current-quarter expenses included $6.7 million of the non-cash stock compensation described above and approximately $2.2 million in incremental technology enhancements, which were not included in the prior-year results. For comparison purposes, non-GAAP operating expenses in the year-ago period, excluding the $8.2 million in major-program and integration costs, were $306.2 million, or 3.85 percent of revenues.
Operating Income
Worldwide operating income was $141.7 million, or 1.60 percent of revenues. The aggregate impact of the non-cash stock compensation and technology enhancement expense items noted above was approximately 10 basis points.
Operating income in the prior-year quarter was $131.7 million or 1.66 percent of revenues. For comparison purposes, non-GAAP operating income in the year-ago period, excluding major-program and integration costs was $139.9 million, or 1.76 percent of revenues.
The stock-based compensation expense is presented as a separate reconciling amount in the company’s segment reporting; therefore, this expense is included in the worldwide operating results but not in the operating results of the regions.
o North American operating income was $64.6 million or 1.76 percent of revenues versus $55.1 million or 1.68 percent of revenues in the year-ago quarter. For comparison purposes, in the year-ago period, North American operating income on a non-GAAP basis, which excludes major-program costs, was $60.7 million or 1.85 percent of revenues.
o European operating income was $49.2 million or 1.52 percent of revenues versus $57.1 million or 1.90 percent of revenues in the year-ago quarter. For comparison purposes, in the year-ago period, European operating income on a non-GAAP basis was $57.1 million or 1.89 percent of revenues. The year-over-year decline in operating income is attributable to complications in migrating to the new warehouse management system in Germany, as well as competitive pricing pressures relative to the prior-year period.
o Asia-Pacific operating income was $22.8 million or 1.52 percent of revenues versus $8.9 million or 0.71 percent in the year-ago quarter. For comparison purposes, in the year-ago period, Asia-Pacific operating income on a non-GAAP basis, which excluded integration costs related to the acquisition of Tech Pacific, was $11.5 million or 0.92 percent of revenues.
o Latin American operating income was $11.8 million or 2.66 percent of revenues versus $10.6 million or 2.54 percent of revenues in the year-ago quarter.
Other income and expenses for the quarter increased to $16.0 million versus $10.8 million in the year-ago period primarily due to higher market interest rates and additional working capital associated with higher sales.
Total depreciation and amortization was $15.7 million.
Capital expenditures were approximately $11.0 million.
Balance Sheet
§ The cash balance at the end of the quarter was $333 million, a 3-percent increase from the $324 million balance at the end of 2005.
§ Total debt was $510 million, a decrease of $95 million from year-end 2005. At year end, the debt balance excludes $69 million of receivables that were sold under a factoring facility. Debt-to-capitalization was 15 percent, a decrease of five percentage points versus the end of 2005.
§ Inventory was $2.68 billion compared to $2.21 billion at the end of the prior year.
§ Working capital days were 22 compared to 21 at the end of the prior year.
“I’m pleased with the performance of our business units, particularly in light of the transition issues in Germany,” said William D. Humes, executive vice president and chief financial officer, Ingram Micro Inc. “Sales growth was strong in all parts of the world – from the U.S. to Mexico, Italy, India and China – with robust growth in the North American and Asia-Pacific regions driving sales above our guidance range and analysts’ expectations.”
Legal Matters
As previously disclosed in SEC filings, the company’s Brazilian subsidiary has been assessed for commercial taxes on its purchase of imported software for the period January to September 2002. The principal amount of the tax assessed for this period is $5.9 million. It has been management’s opinion, based upon existing law and the opinion of outside legal counsel, that the company has valid defenses to the assessment of these taxes for the 2002 assessed period, as well as any subsequent periods. Accordingly, no reserve has been established previously for such potential losses.
However, proposed changes to the tax law were approved by the Brazilian legislature on February 6, 2007, and submitted to the president for signature on February 9, 2007. If enacted, it is management’s opinion, based upon the opinion of outside legal counsel, that the company likely will be required to take a charge of approximately $33 million or $0.19 per diluted share, which represents $5.9 million of tax for the 2002 assessed period and $27.1 million of potential tax assessment for the period from October 2002 through December 2005. The pending statute provides that no tax is due on such software importation after Jan. 1, 2006.
While the tax authorities may seek to impose interest and penalties in addition to the tax assessed, the company continues to believe, based on the opinion of outside legal counsel, that it has valid defenses to the assessment of interest and penalties, which as of Dec. 30, 2006, potentially amount to approximately $41.6 million. Therefore, the company currently does not anticipate establishing an additional reserve for interest and penalties.
Management cannot assess the likelihood of the legislation in its current form being signed by the president. Therefore, the company anticipates that the $33 million charge relating to the commercial taxes will be recorded if and when the legislation is enacted. If the pending legislation is enacted prior to the filing of the company’s 2006 Form 10-K, the charge will be recorded in the fiscal quarter ended Dec. 30, 2006. If, however, the legislation is enacted after the filing of the company’s 2006 Form 10-K, the charge will be recorded in the period in which the legislation is enacted.
Fiscal Year Results
Fiscal 2006 sales and net income hit record levels. Of the $31.36 billion in worldwide sales for the year ended Dec. 30, 2006, North America generated 43 percent of revenues at
$13.58 billion (an 11-percent increase over the prior year); Europe generated 34 percent of revenues at $10.75 billion (a 3-percent increase over the prior year); Asia-Pacific generated
18 percent of revenues at $5.54 billion (a 14-percent increase over the prior year); and Latin America generated 5 percent of revenues at $1.48 billion (a 12-percent increase over the prior year). The full-year gross margin was 5.37 percent, a decrease of 10 basis points versus 2005.
Worldwide operating income for the full year was $422.4 million or 1.35 percent of revenues versus $362.2 million or 1.26 percent of revenues for 2005. The 2006 full-year results included $28.9 million of non-cash stock compensation expenses and approximately $10.3 million of incremental technology enhancement costs, which were not included in the prior-year results. The combined effect of these incremental items represents approximately 13 basis points of sales for the twelve-month period. For comparison purposes, operating income on a non-GAAP basis, excluding major-program costs of $39.2 million, was $401.4 million, or1.39 percent of revenues, in the prior-year period.
Net income was $265.8 million or $1.56 per diluted share versus $216.9 million or $1.32 per diluted share in 2005. For comparison purposes, full-year net income on a non-GAAP basis – which excludes major-program and integration costs and special items – was $248.4 million or $1.51 per diluted share in the prior year.
Capital expenditures for the full year were $39.2 million, while depreciation and amortization was $61.2 million.
Outlook for the First Quarter
The following statements are based on the company’s current expectations and internal forecasts. These statements are forward-looking and actual results may differ materially, as outlined in the company's periodic filings with the Securities and Exchange Commission.
The company’s expected results for the first quarter 2007, ending March 31, 2007, include:
· Revenue of $8.10 billion to $8.35 billion.
· Net income of $63 million to $70 million, or $0.36 to $0.40 per diluted share.
The expected results are based on approximately 175 million weighted average shares outstanding and a 28-percent effective tax rate, and excludes the potential impact of the Brazilian legal matter discussed above.
“Our first-quarter guidance reflects normal seasonality with a generally solid demand environment throughout the world,” said Spierkel. “The system issues relating to the German warehouse operations are largely behind us, with customer-service metrics back to normal levels. Now, the country’s focus will now be directed toward regaining market share and driving sales. The worldwide initiatives we developed and executed over the last 18 months provided the backbone for superior performance during 2006, and we expect these will serve us equally well into 2007. We are looking ahead, focused on growth, superior execution and innovation.”
Worldwide sales for the fourth quarter were $8.85 billion, an 11-percent increase from $7.96 billion in the prior-year period. The translation impact of the relatively stronger European currencies had an approximate three-percentage-point positive effect on comparisons to the prior year. Sales for the 2006 fiscal year were $31.36 billion, a 9-percent increase over 2005 and an all-time record.
Fourth-quarter net income was $91.7 million or $0.53 per diluted share. This includes stock-based compensation expense related to the adoption of Statement of Financial Accounting Standards No. 123R of $6.7 million or approximately $0.03 per diluted share.
The fourth-quarter results also include the following items that were not factored into the company’s guidance for the quarter:
· A favorable legal settlement of approximately $4 million, or a benefit of $0.02 per diluted share, reflecting a recovery from a customer bankruptcy.
· A reduction of the effective tax rate from 28.0 percent for the first nine months of 2006 to 27.6 percent for the full year, based primarily on the end-of-year mix of profits across various tax jurisdictions, resulting in a benefit of $0.01 per diluted share.
· An increase in outstanding shares to approximately 174 million compared to 171 million disclosed in the company’s guidance, which had a negative impact of approximately $0.01 per diluted share.
· Complications in migrating to a new warehouse management system in Germany, which had a negative impact of approximately $0.03 to $0.04 per diluted share relative to the estimates included in the company’s fourth-quarter guidance.
In addition, pending legislation in Brazil, if enacted into law before the company files its 2006 Form 10-K later this month, is likely to adversely impact the company’s fourth-quarter results. The potential impact is not included in these reported results. More detail is found under “Legal Matters” in this news release.
In the prior-year period, net income based on generally accepted accounting principles (GAAP) was $84.4 million, or $0.51 per diluted share. These results included major-program and integration costs of $8.2 million related to the company’s outsourcing and optimization plan in North America and the integration of Tech Pacific, which the company acquired in November 2004. Year-ago net income on a non-GAAP basis, which excludes these costs, was$90.0 million, or $0.54 per diluted share.
“We closed the year with record annual sales and income,” said Gregory M. Spierkel, chief executive officer, Ingram Micro Inc. “For the fourth quarter, sales hit a quarterly record and all four regions reported operating margins of more than 150 basis points for the first time in company history. Nearly every country performed well. While issues in Germany clouded our income performance during the quarter, the warehouse management system is now running effectively. We believe the upgraded system will drive a more efficient and productive operation for Germany and the region.”
Additional Fourth-Quarter Highlights
For additional detail regarding the results outlined below, please refer to the financial statements and schedules attached to this news release or visit www.ingrammicro.com.
Regional Sales
o North American sales were $3.68 billion (42 percent of total revenues), an increase of 12 percent versus the $3.27 billion reported in the year-ago quarter.
o European sales (in U.S. dollars) were $3.23 billion (36 percent of total revenues), an increase of 7 percent versus the $3.01 billion in the year-ago quarter. The translation impact of the relatively stronger European currencies had an approximate 9-percentage-point positive impact on comparisons to the prior year.
o Asia-Pacific sales were $1.50 billion (17 percent of total revenues) or an increase of 20 percent versus the $1.25 billion reported in year-ago quarter.
o Latin American sales were $444 million (5 percent of total revenues), an increase of 6 percent versus the $420 million in the year-ago quarter.
Gross Margin
Gross margin was 5.45 percent, a decrease of 16 basis points versus the prior-year quarter, but a sequential increase of five basis points. The decrease versus the prior year is due in large part to operational issues resulting from the conversion to a new warehouse management system in Germany, as well as competitive pricing in North America and Europe relative to the prior year period.
Operating Expenses
Total operating expenses were $340.7 million, or 3.85 percent of revenues, versus $314.4 million, or 3.95 percent of revenues, in the year-ago quarter. The current-quarter expenses included $6.7 million of the non-cash stock compensation described above and approximately $2.2 million in incremental technology enhancements, which were not included in the prior-year results. For comparison purposes, non-GAAP operating expenses in the year-ago period, excluding the $8.2 million in major-program and integration costs, were $306.2 million, or 3.85 percent of revenues.
Operating Income
Worldwide operating income was $141.7 million, or 1.60 percent of revenues. The aggregate impact of the non-cash stock compensation and technology enhancement expense items noted above was approximately 10 basis points.
Operating income in the prior-year quarter was $131.7 million or 1.66 percent of revenues. For comparison purposes, non-GAAP operating income in the year-ago period, excluding major-program and integration costs was $139.9 million, or 1.76 percent of revenues.
The stock-based compensation expense is presented as a separate reconciling amount in the company’s segment reporting; therefore, this expense is included in the worldwide operating results but not in the operating results of the regions.
o North American operating income was $64.6 million or 1.76 percent of revenues versus $55.1 million or 1.68 percent of revenues in the year-ago quarter. For comparison purposes, in the year-ago period, North American operating income on a non-GAAP basis, which excludes major-program costs, was $60.7 million or 1.85 percent of revenues.
o European operating income was $49.2 million or 1.52 percent of revenues versus $57.1 million or 1.90 percent of revenues in the year-ago quarter. For comparison purposes, in the year-ago period, European operating income on a non-GAAP basis was $57.1 million or 1.89 percent of revenues. The year-over-year decline in operating income is attributable to complications in migrating to the new warehouse management system in Germany, as well as competitive pricing pressures relative to the prior-year period.
o Asia-Pacific operating income was $22.8 million or 1.52 percent of revenues versus $8.9 million or 0.71 percent in the year-ago quarter. For comparison purposes, in the year-ago period, Asia-Pacific operating income on a non-GAAP basis, which excluded integration costs related to the acquisition of Tech Pacific, was $11.5 million or 0.92 percent of revenues.
o Latin American operating income was $11.8 million or 2.66 percent of revenues versus $10.6 million or 2.54 percent of revenues in the year-ago quarter.
Other income and expenses for the quarter increased to $16.0 million versus $10.8 million in the year-ago period primarily due to higher market interest rates and additional working capital associated with higher sales.
Total depreciation and amortization was $15.7 million.
Capital expenditures were approximately $11.0 million.
Balance Sheet
§ The cash balance at the end of the quarter was $333 million, a 3-percent increase from the $324 million balance at the end of 2005.
§ Total debt was $510 million, a decrease of $95 million from year-end 2005. At year end, the debt balance excludes $69 million of receivables that were sold under a factoring facility. Debt-to-capitalization was 15 percent, a decrease of five percentage points versus the end of 2005.
§ Inventory was $2.68 billion compared to $2.21 billion at the end of the prior year.
§ Working capital days were 22 compared to 21 at the end of the prior year.
“I’m pleased with the performance of our business units, particularly in light of the transition issues in Germany,” said William D. Humes, executive vice president and chief financial officer, Ingram Micro Inc. “Sales growth was strong in all parts of the world – from the U.S. to Mexico, Italy, India and China – with robust growth in the North American and Asia-Pacific regions driving sales above our guidance range and analysts’ expectations.”
Legal Matters
As previously disclosed in SEC filings, the company’s Brazilian subsidiary has been assessed for commercial taxes on its purchase of imported software for the period January to September 2002. The principal amount of the tax assessed for this period is $5.9 million. It has been management’s opinion, based upon existing law and the opinion of outside legal counsel, that the company has valid defenses to the assessment of these taxes for the 2002 assessed period, as well as any subsequent periods. Accordingly, no reserve has been established previously for such potential losses.
However, proposed changes to the tax law were approved by the Brazilian legislature on February 6, 2007, and submitted to the president for signature on February 9, 2007. If enacted, it is management’s opinion, based upon the opinion of outside legal counsel, that the company likely will be required to take a charge of approximately $33 million or $0.19 per diluted share, which represents $5.9 million of tax for the 2002 assessed period and $27.1 million of potential tax assessment for the period from October 2002 through December 2005. The pending statute provides that no tax is due on such software importation after Jan. 1, 2006.
While the tax authorities may seek to impose interest and penalties in addition to the tax assessed, the company continues to believe, based on the opinion of outside legal counsel, that it has valid defenses to the assessment of interest and penalties, which as of Dec. 30, 2006, potentially amount to approximately $41.6 million. Therefore, the company currently does not anticipate establishing an additional reserve for interest and penalties.
Management cannot assess the likelihood of the legislation in its current form being signed by the president. Therefore, the company anticipates that the $33 million charge relating to the commercial taxes will be recorded if and when the legislation is enacted. If the pending legislation is enacted prior to the filing of the company’s 2006 Form 10-K, the charge will be recorded in the fiscal quarter ended Dec. 30, 2006. If, however, the legislation is enacted after the filing of the company’s 2006 Form 10-K, the charge will be recorded in the period in which the legislation is enacted.
Fiscal Year Results
Fiscal 2006 sales and net income hit record levels. Of the $31.36 billion in worldwide sales for the year ended Dec. 30, 2006, North America generated 43 percent of revenues at
$13.58 billion (an 11-percent increase over the prior year); Europe generated 34 percent of revenues at $10.75 billion (a 3-percent increase over the prior year); Asia-Pacific generated
18 percent of revenues at $5.54 billion (a 14-percent increase over the prior year); and Latin America generated 5 percent of revenues at $1.48 billion (a 12-percent increase over the prior year). The full-year gross margin was 5.37 percent, a decrease of 10 basis points versus 2005.
Worldwide operating income for the full year was $422.4 million or 1.35 percent of revenues versus $362.2 million or 1.26 percent of revenues for 2005. The 2006 full-year results included $28.9 million of non-cash stock compensation expenses and approximately $10.3 million of incremental technology enhancement costs, which were not included in the prior-year results. The combined effect of these incremental items represents approximately 13 basis points of sales for the twelve-month period. For comparison purposes, operating income on a non-GAAP basis, excluding major-program costs of $39.2 million, was $401.4 million, or1.39 percent of revenues, in the prior-year period.
Net income was $265.8 million or $1.56 per diluted share versus $216.9 million or $1.32 per diluted share in 2005. For comparison purposes, full-year net income on a non-GAAP basis – which excludes major-program and integration costs and special items – was $248.4 million or $1.51 per diluted share in the prior year.
Capital expenditures for the full year were $39.2 million, while depreciation and amortization was $61.2 million.
Outlook for the First Quarter
The following statements are based on the company’s current expectations and internal forecasts. These statements are forward-looking and actual results may differ materially, as outlined in the company's periodic filings with the Securities and Exchange Commission.
The company’s expected results for the first quarter 2007, ending March 31, 2007, include:
· Revenue of $8.10 billion to $8.35 billion.
· Net income of $63 million to $70 million, or $0.36 to $0.40 per diluted share.
The expected results are based on approximately 175 million weighted average shares outstanding and a 28-percent effective tax rate, and excludes the potential impact of the Brazilian legal matter discussed above.
“Our first-quarter guidance reflects normal seasonality with a generally solid demand environment throughout the world,” said Spierkel. “The system issues relating to the German warehouse operations are largely behind us, with customer-service metrics back to normal levels. Now, the country’s focus will now be directed toward regaining market share and driving sales. The worldwide initiatives we developed and executed over the last 18 months provided the backbone for superior performance during 2006, and we expect these will serve us equally well into 2007. We are looking ahead, focused on growth, superior execution and innovation.”
