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Ingram Micro Reports Second Quarter 2009 Results

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Press release

Gross margins hit highest second-quarter level in 11 years
Record cash balance exceeds debt by nearly $1 billion

SANTA ANA, Calif., July 30 /PRNewswire-FirstCall/ -- Ingram Micro Inc. (NYSE: IM), the world's largest technology distributor, today announced financial results for the second quarter of 2009, ended July 4, 2009.

"The company's focus on return on invested capital, sustainable profitability and productivity has served us well," said Gregory Spierkel, chief executive officer. "We ended the quarter with a record cash balance and the highest second-quarter gross margin in 11 years, providing a solid foundation for the future."

Worldwide sales for the second quarter were $6.58 billion, a 25-percent decrease from $8.82 billion in the prior-year period, primarily attributable to weaker demand caused by the worldwide economic downturn. The translation impact of the relatively weaker foreign currencies had an approximate seven-percentage-point negative effect on the year-over-year comparison. Sequentially, sales declined two percent from the first quarter, which is relatively consistent with historical seasonal norms over the last several years.

Net income for the second quarter was $25.3 million, or $0.15 per diluted share, which includes costs of approximately $0.05 per diluted share related to expense-reduction programs and a goodwill impairment charge. In the 2008 second quarter, net income was $58.9 million, or $0.35 per diluted share, which also included costs related to expense-reduction programs totaling $0.03 per diluted share.

"I continue to be pleased with our performance in this difficult economic environment," added Spierkel. "Since we first experienced the effects of the downturn early last year, we have focused on operational improvements directly within our control - such as managing working capital and expenses, shedding underperforming operations and enhancing gross margins - which are generating visible results. With many of the improvements behind us, we are now in a position to leverage our strong balance sheet and improved infrastructure to begin driving towards pre-recession operating levels."

Additional Second 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:

  • North American sales were $2.74 billion (41 percent of total revenues), a decrease of 22 percent versus the $3.52 billion reported a year ago, reflecting the impact of the region's weakened economy and the company's focus on more profitable sales opportunities during the quarter.
  • Sales in the EMEA region were $2.01 billion (31 percent of total revenues), a decrease of 32 percent compared to the prior-year quarter. The translation impact of the relatively weaker European currencies had an approximate 12-percentage-point negative effect on comparisons to the $2.96 billion in sales reported in 2008. The year-over-year sales decline is primarily attributable to soft demand caused by the weakened European economies, the exit of unprofitable businesses during the prior 12 months and a focus on more profitable sales opportunities.
  • Asia-Pacific sales were $1.50 billion (23 percent of total revenues), a decrease of 21 percent versus the $1.90 billion reported in the second quarter of 2008. The translation impact of the relatively weaker regional currencies had an approximate 9-percentage-point negative effect on comparisons to the prior year. The year-over-year decline is primarily attributable to weaker demand caused by the softer regional economies.
  • Latin American sales were $322 million (5 percent of total revenues), a decrease of 27 percent compared to the $438 million reported a year ago. The translation impact of the relatively weaker regional currencies had an approximate 13-percentage-point negative effect on comparisons to 2008's second quarter. Weaker economies also dampened sales in most of the region's markets.

Gross margin

Gross margin was 5.87 percent, an improvement of 34 basis points compared to the prior-year quarter, driven by the company's recent efforts to shed underperforming businesses, pursue an improved mix of higher-margin accounts and products, control margin leakage and enhance its service-based revenues.

Operating expenses

Total operating expenses were $345.1 million or 5.25 percent of revenues, which included $7.4 million (0.11 percent of revenues) in severance and other costs associated with the company's expense-reduction programs and $2.5 million (or 0.04 percent of revenues) in impairment of goodwill associated with the company's acquisitions in Asia-Pacific during the second quarter. In the year-ago quarter, operating expenses were $394.2 million or 4.47 percent of revenues, which included $7.7 million (0.09 percent of revenues) in expense-reduction program costs. Contributing to the $49.1 million year-over-year decline is the translation effect of weaker foreign currencies, which had an approximate $27 million favorable impact on operating expenses relative to the prior year, as well as the benefit of the company's expense-reduction initiatives implemented over the past five quarters. The increase in operating expenses as a percent of revenues is primarily a result of sales declining at a more rapid pace than expense reductions.

Operating income

Worldwide operating income was $41.0 million or 0.62 percent of revenues, which included a combined charge of $9.9 million (0.15 percent of revenues) in expense-reduction program costs and goodwill impairment, as noted above. In the prior-year quarter, operating income was $93.2 million or 1.06 percent of revenues, which included $7.7 million (0.09 percent of revenues) in expense-reduction program costs.

  • North America operating income was $9.1 million or 0.33 percent of revenues, which included $5.3 million (0.19 percent of revenues) in expense-reduction program costs. In the year-ago quarter, operating income was $44.4 million or 1.26 percent of revenues, which included $0.9 million (0.03 percent of revenues) in expense-reduction program costs. The region's operating income was negatively impacted by revenue declining at a greater rate than expense reductions, as well as losses in the region's consumer electronics units.
  • EMEA operating income was $10.2 million or 0.51 percent of revenues, which included $1.5 million (0.07 percent of revenues) in expense-reduction program costs. In the year ago quarter, operating income was $15.7 million or 0.53 percent of revenues, which included $6.8 million (0.23 percent of revenues) in expense-reduction program costs. While weak European economies continue to dampen sales, the region has mitigated the impact on profitability through targeted cost reduction actions, pricing discipline and a focus on a more profitable business mix.
  • Asia-Pacific operating income was $22.8 million, or 1.52 percent of revenues, which included $0.5 million (0.04 percent of revenues) in expense-reduction program costs and goodwill impairment of $2.5 million (0.17 percent of revenues), compared to operating income of $32.7 million or 1.72 percent of revenues in the year-ago quarter. The region was able to reduce expenses in advance of the economic downturn, maintaining strong profitability.
  • Latin America operating income was $5.2 million, or 1.60 percent of revenues, which includes $0.1 million (0.02 percent of revenues) in expense-reduction program costs. In the year-ago quarter, operating income was $7.2 million or 1.65 percent of revenues. Like the Asia Pacific region, Latin America was able to maintain profitability by adjusting expenses before sales were affected by the weak economy.
  • Stock-based compensation expense, which amounted to $6.3 million in the current quarter and $6.7 million in the prior year quarter, is presented as a separate reconciling amount in the company's segment reporting in both periods. As such, these expenses are not included in the regional operating results, but are included in the worldwide operating results.
  • Other income and expense for the quarter was $6.7 million versus $10.8 million in the year-ago period, primarily driven by higher net cash levels (cash less debt outstanding) and lower average interest rates.
  • The effective tax rate for the quarter was 26 percent, compared to an effective tax rate of 28.5 percent in the year-ago quarter.
  • Total depreciation and amortization was $17.3 million.
  • Capital expenditures were $15.5 million.

Balance Sheet

  • The balance of cash and cash equivalents at the end of the quarter was slightly more than $1.3 billion, an increase of $553 million over the year-end balance.
  • Total debt was $335 million, a decrease of $144 million from year-end. Debt-to-capitalization was 11 percent versus 15 percent at the end of 2008.
  • Inventory was $1.86 billion or 27 days on hand compared to $2.31 billion or 28 days on hand at the end of the year.
  • Working capital days were 19, a 3-day improvement compared to year-end 2008 and a 4-day improvement versus the second quarter of last year.

"The continued discipline of our operating units in this environment is a priority," said William Humes, senior executive vice president and chief financial officer. "Despite weak demand, gross margin was at the highest second quarter level since the late 1990s. Our expense-reduction efforts are on track and we're beginning to see some of the benefits of these actions. All our regions remain profitable, with Latin America delivering operating margins close to last year's level. We managed working capital days to near-record low levels, which we expect will return to our normal range of 22 to 26 days in the coming quarters. Our record cash balance exceeds debt by nearly $1 billion, providing the flexibility to pursue a variety of opportunities in the months ahead."

Six-Month Period

For the six months ended July 4, 2009, worldwide sales were $13.32 billion, a 23-percent decrease from the $17.39 billion reported a year ago, reflecting the weaker economic environment and an approximate seven-percentage-point unfavorable translation impact of weaker foreign currencies. Regional sales were $5.51 billion for North America (a 19-percent decrease versus the prior-year period); $4.28 billion for Europe (a decrease of 29 percent); $2.89 billion for Asia-Pacific (a decrease of 22 percent); and $643 million for Latin America (a 24-percent decrease).

Worldwide operating income for the six-month period was $86.2 million, or 0.65 percent of revenues, which included expense-reduction program costs of $21.6 million (approximately 0.16 percent of revenues) and a goodwill impairment charge totaling of $2.5 million (approximately 0.02 percent of revenues). In the year-ago period, operating income was $192.5 million, or 1.11 percent of revenues, which included expense-reduction program costs of $7.7 million (approximately 0.04 percent of revenues).

Six-month net income was $52.8 million, or $0.32 per diluted share, which included expense-reduction program costs and a goodwill impairment charge totaling $17.6 million after tax or $0.11 per diluted share. In the year-ago period, net income was $123.0 million, or $0.71 per diluted share, which included expense-reduction program costs of $5.5 million after tax or $0.03 per diluted share.

Outlook

"Looking to the third quarter," said Spierkel, "we expect the overall demand environment to follow historical seasonal patterns. While we do not anticipate an economic rebound in the near term, our larger regions will begin to leverage some of the benefits of our recent cost-reduction and operational-improvement actions. Our efforts to protect return on invested capital and improve our business mix have delivered industry-leading balance sheet metrics and solid gross-margin performance but have also contributed to the sales decline in recent quarters. We now plan to place a greater emphasis on securing incremental sales while maintaining our focus on operational excellence and profitability.

"In addition, we will continue to see progress on our expense-reduction efforts. Last year's expense-reduction program is realizing benefits of approximately $5 million per quarter, while our current program, which began in the fourth quarter of 2008, has realized about half of the quarterly savings of $25 million to $30 million expected by year-end. Costs-to-date related to the current program are $28.4 million, and we expect total costs to be towards the low end of our previously announced range of $45 million to $65 million, with the remainder incurred by the end of the year.

"While the demand picture is not deteriorating, we believe that the road to recovery will be protracted over a number of quarters as unemployment weighs on the confidence levels of consumers and small businesses. Our customers are fundamentally sound, but they remain understandably cautious until more economic indicators turn positive. We believe we're making the right moves to navigate this recovery period successfully and create a foundation for a more prosperous future."