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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 1-12203
INGRAM MICRO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 62-1644402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 E. ST. ANDREW PLACE, SANTA ANA, CALIFORNIA 92799-5125
(Address of principal executive offices) (Zip code)
(714) 566-1000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
The Registrant had 28,080,554 shares of Class A Common Stock, par value $.01 per
share, and 107,066,882 shares of Class B Common Stock, par value $.01 per share,
outstanding at June 30, 1997.
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INGRAM MICRO INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Pages
Consolidated Balance Sheet at June 28, 1997 and December 28, 1996 3
Consolidated Statement of Income for the thirteen weeks and twenty-six
weeks ended June 28, 1997 and June 29, 1996 4
Consolidated Statement of Cash Flows for the twenty-six weeks
ended June 28, 1997 and June 29, 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INGRAM MICRO INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
JUNE 28, DECEMBER 28,
1997 1996
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 71,316 $ 48,279
Trade accounts receivable (less allowances of $45,398
in 1997 and $38,622 in 1996) 1,189,541 1,143,028
Inventories 1,825,520 1,818,047
Other current assets 142,490 145,964
----------- -----------
Total current assets 3,228,867 3,155,318
Property and equipment, net 169,105 161,172
Goodwill, net 24,345 25,918
Other 28,405 24,539
----------- -----------
Total assets $ 3,450,722 $ 3,366,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,797,703 $ 2,047,988
Accrued expenses 186,698 162,887
Current maturities of long-term debt 34,323 23,899
----------- -----------
Total current liabilities 2,018,724 2,234,774
Long-term debt 484,507 280,134
Other 19,528 6,190
----------- -----------
Total liabilities 2,522,759 2,521,098
Minority interest 4,103 3,476
Commitments and contingencies
Redeemable Class B Common Stock 16,873 17,223
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- --
Class A Common Stock, $0.01 par value, 265,000,000 shares
authorized; 26,155,091 and 25,047,696 shares issued
and outstanding in 1997 and 1996, respectively 261 250
Class B Common Stock, $0.01 par value, 135,000,000 shares
authorized; 108,951,882 and 109,043,762 shares issued
and outstanding in 1997 and 1996 (including redeemable
shares of 2,410,400 in 1997 and 2,460,400 in 1996) 1,066 1,066
Additional paid in capital 461,869 449,657
Retained earnings 453,146 372,801
Cumulative translation adjustment (8,976) 1,910
Unearned compensation (379) (534)
----------- -----------
Total stockholders' equity 906,987 825,150
----------- -----------
Total liabilities and stockholders' equity $ 3,450,722 $ 3,366,947
=========== ===========
See accompanying notes to these consolidated financial statements.
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INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $ 3,716,827 $ 2,790,432 $ 7,366,805 $ 5,543,167
Cost of sales 3,474,702 2,599,964 6,889,972 5,166,134
----------- ----------- ----------- -----------
Gross profit 242,125 190,468 476,833 377,033
Expenses:
Selling, general and administrative 161,221 129,348 315,366 252,652
Charges allocated from Ingram Industries -- 560 -- 2,143
Noncash compensation charge 1,734 1,057 3,547 7,802
----------- ----------- ----------- -----------
162,955 130,965 318,913 262,597
----------- ----------- ----------- -----------
Income from operations 79,170 59,503 157,920 114,436
Other (income) expense:
Interest income (1,238) (421) (2,052) (761)
Interest expense 9,096 3,600 16,404 7,526
Interest expense charged by Ingram Industries -- 10,537 -- 21,172
Net foreign currency exchange loss 91 166 154 392
Other 3,266 734 6,414 1,610
----------- ----------- ----------- -----------
11,215 14,616 20,920 29,939
----------- ----------- ----------- -----------
Income before income taxes and
minority interest 67,955 44,887 137,000 84,497
Provision for income taxes 27,575 18,002 56,028 33,856
----------- ----------- ----------- -----------
Income before minority interest 40,380 26,885 80,972 50,641
Minority interest 412 73 627 1
----------- ----------- ----------- -----------
Net income $ 39,968 $ 26,812 $ 80,345 $ 50,640
=========== =========== =========== ===========
Earnings per share $ 0.27 $ 0.22 $ 0.55 $ 0.42
=========== =========== =========== ===========
See accompanying notes to these consolidated financial statements.
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INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN 000S)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
JUNE 28, JUNE 29,
1997 1996
--------- ---------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 80,345 $ 50,640
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 21,207 15,700
Deferred income taxes (1,329) (2,190)
Minority interest 627 1
Noncash compensation charge 3,547 7,802
Changes in operating assets and liabilities:
Trade accounts receivable (83,506) 49,804
Inventories (35,060) 242,256
Other current assets 1,674 16
Accounts payable (214,959) (247,848)
Accrued expenses 40,316 2,443
--------- ---------
Cash (used) provided by operating activities (187,138) 118,624
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
Purchase of property & equipment (40,061) (33,026)
Proceeds from sale of property & equipment 10,249 --
Other (1,565) (1,394)
--------- ---------
Cash (used) by investing activities (31,377) (34,420)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Repurchase of Redeemable Class B Common Stock (350) --
Exercise of stock options including tax benefits 8,830 --
Decrease in borrowings from Ingram Industries -- (112,945)
Proceeds from debt 44,259 943
Net borrowings under revolving credit facilities 190,639 34,505
Distribution to Ingram Industries -- (20,000)
Minority interest investment -- 2,400
--------- ---------
Cash provided (used) by financing activities 243,378 (95,097)
Effect of exchange rate changes on cash (1,826) (851)
--------- ---------
Increase (decrease) in cash 23,037 (11,744)
Cash, beginning of period 48,279 56,916
--------- ---------
Cash, end of period $ 71,316 $ 45,172
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period:
Interest $ 15,702 $ 28,945
Income taxes 67,533 37,817
Cash payments include payments made to Ingram Industries for interest and U.S. income taxes.
See accompanying notes to these consolidated financial statements.
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Ingram Micro Inc. (the "Company" or "Ingram Micro") is primarily engaged
in wholesale distribution of computer-based technology products and services.
The Company conducts the majority of its operations in North America and Europe.
In November 1996, the Company's former parent, Ingram Industries Inc. ("Ingram
Industries"), consummated a split-off of the Company in a tax-free
reorganization (the "Split-Off"). In connection with the Split-Off, certain
stockholders of Ingram Industries exchanged all or some of their shares of
Ingram Industries Common Stock for 107,251,362 shares of Class B Common Stock of
the Company in specified ratios.
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position of the Company and its wholly-owned and
majority-owned subsidiaries as of June 28, 1997, their results of operations for
the thirteen and twenty-six weeks ended June 28, 1997 and June 29, 1996 and
their cash flows for the twenty-six weeks ended June 28, 1997 and June 29, 1996.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the twenty-six weeks ended June 28,
1997 may not be indicative of the results of operations that can be expected for
the entire fiscal year ended January 3, 1998.
NOTE 2 - EARNINGS PER SHARE
Historical earnings per share for the thirteen and twenty-six weeks ended
June 29, 1996 reflect the Company's capital structure as a result of the
Split-Off. Earnings per share is determined based on the number of shares
outstanding after giving effect to the Split-Off in addition to all dilutive
common stock and common stock equivalent shares. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins and Staff policy, such shares
issued within 12 months of the initial public offering (the "IPO") of the
Company's Class A Common Stock are treated as if they were outstanding for all
periods presented prior to the IPO using the treasury stock method. The number
of common and common equivalent shares outstanding used in the computation of
earnings per share for the thirteen and twenty-six weeks ended June 28, 1997 was
145,713,553 and 145,506,701, respectively, and for the thirteen and twenty-six
weeks ended June 29, 1996 was 121,406,591.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") which will become effective in the fourth quarter of 1997. FAS 128
replaces the presentation of earnings per share reflected on the Statement of
Income with a dual presentation of Basic Earnings per Share ("Basic EPS") and
Diluted Earnings per Share ("Diluted EPS"). Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised resulting in the issuance of common stock that then shared in the
earnings of the Company. FAS 128 does not permit early application; however, it
requires, when implemented in the fourth quarter, the restatement of previously
reported earnings per share for each income statement presented. Pro forma
disclosure of earnings per share information as if the Company implemented FAS
128 during the thirteen and twenty-six weeks ended June 28, 1997 and June 29,
1996 is as follows:
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
PRO FORMA EARNINGS PER SHARE: THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net income $ 39,968 $ 26,812 $ 80,345 $ 50,640
============ ============ ============ ============
Weighted average shares 134,999,003 107,251,362 134,886,284 107,251,362
============ ============ ============ ============
Basic earnings per share $ 0.30 $ 0.25 $ 0.60 $ 0.47
============ ============ ============ ============
Weighted average shares including the dilutive effect of stock options
(10,714,550 and 10,620,417 for the 13 and 26 weeks ended June 28, 1997,
respectively, and 14,155,229 for the
13 and 26 weeks ended June 29, 1996) 145,713,553 121,406,591 145,506,701 121,406,591
============ ============ ============ ============
Diluted earnings per share $ 0.27 $ 0.22 $ 0.55 $ 0.42
============ ============ ============ ============
NOTE 3 - COMMON STOCK
The Company has two classes of Common Stock, consisting of 265,000,000
authorized shares of $0.01 par value Class A Common Stock and 135,000,000
authorized shares of $0.01 par value Class B Common Stock, and 1,000,000
authorized shares of $0.01 par value Preferred Stock. Class A stockholders are
entitled to one vote on each matter to be voted on by the stockholders whereas
Class B stockholders are entitled to ten votes on each matter to be voted on by
the stockholders. The two classes of stock have the same rights in all other
respects. Each share of Class B Common Stock may at any time be converted to a
share of Class A Common Stock; however, conversion will occur automatically on
the earliest of (i) November 6, 2001; (ii) the sale or transfer of such share of
Class B Common Stock to any person not specifically authorized to hold such
shares by the Company's Certificate of Incorporation; or (iii) the date on which
the number of shares of Class B Common Stock then outstanding represents less
than 25% of the aggregate number of shares of Class A Common Stock and Class B
Common Stock then outstanding.
Initial Public Offering
On November 1, 1996, the Company sold 23,200,000 shares of Class A Common
Stock at $18.00 per share in an initial public offering. Proceeds of $393,844,
net of underwriters' commissions and expenses of the offering aggregating
$23,756, were received and used to repay indebtedness to Ingram Industries in
the amount of $366,340.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Ingram Micro is the leading wholesale distributor of computer-based
technology products and services worldwide. In November 1996, the Company was
split-off from Ingram Industries (the "Split-Off") and completed an initial
public offering (the "IPO") of its Class A Common Stock that raised $393.8
million, net of underwriters' discounts and expenses, of which approximately
$366.3 million was used to repay certain indebtedness to Ingram Industries.
Concurrently with the completion of the IPO, the Company entered into a $1
billion credit facility with a syndicate of banks for which NationsBank of Texas
N.A. and The Bank of Nova Scotia acted as agents. In addition, the Company
assumed an Ingram Industries accounts receivable securitization program under
which $160 million of fixed rate medium term certificates and $96.6 million in
trust certificate-backed commercial paper was outstanding at June 28, 1997. See
"-- Liquidity and Capital Resources."
In connection with the Split-Off, certain outstanding Ingram Industries
stock options, incentive stock units ("ISUs"), and stock appreciation rights
("SARs") held by certain employees of Ingram Industries, Ingram Entertainment
Inc., and Ingram Micro were converted to options to purchase up to an aggregate
of approximately 10,989,000 shares of Class A Common Stock ("Rollover Stock
Options"). The Company recorded a pre-tax noncash compensation charge of
approximately $1.7 million ($1.4 million net of tax) and $3.5 million ($2.9
million net of tax) in the thirteen and twenty-six week periods ended June 28,
1997, respectively. Noncash compensation charges for the comparable prior year
periods were $1.0 million ($0.6 million net of tax) and $7.8 million ($4.8
million net of tax) for the thirteen and twenty-six week periods ended June 29,
1996, respectively. Noncash compensation charges relate to the vested portion of
certain Rollover Stock Options based on the difference between the estimated
fair value of such options at the applicable measurement dates and the exercise
price of such options. The Company will record additional noncash compensation
charges over the remaining vesting periods of the Rollover Stock Options. These
additional charges are expected to be approximately $3.6 million ($2.9 million
net of tax) for the remainder of 1997, compared to $15.5 million ($14.7 million
net of tax) for the comparable prior year period, $4.8 million ($3.7 million
net of tax) for 1998 and $2.7 million ($1.9 million net of tax) for 1999.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by geographic region
(excluding intercompany sales), and the percentage of total net sales
represented thereby, for each of the periods indicated.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
NET SALES BY GEOGRAPHIC REGION (1): (DOLLARS IN MILLIONS)
United States $2,615 70.4% $1,928 69.1% $5,077 68.9% $3,711 66.9%
Europe 711 19.1% 554 19.9% 1,469 19.9% 1,186 21.4%
Other international 391 10.5% 308 11.0% 821 11.2% 646 11.7%
--------------- --------------- --------------- ---------------
Total $3,717 100.0% $2,790 100.0% $7,367 100.0% $5,543 100.0%
=============== =============== =============== ===============
- -----------------------
(1) Net sales are classified by location of the shipping destination of
products. Products sold through the U.S. Export Division are classified as
other international sales. This represents a change in presentation from
previous periods when the Company classified U.S. Export Division sales as
United States sales.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The following table sets forth certain items from the Company's
Consolidated Statement of Income as a percentage of net sales, for each of the
periods indicated.
PERCENTAGE OF NET SALES
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.5% 93.2% 93.5% 93.2%
--------- --------- --------- ---------
Gross profit 6.5% 6.8% 6.5% 6.8%
Expenses:
SG&A expenses and charges allocated
from Ingram Industries 4.3% 4.6% 4.3% 4.6%
Noncash compensation charge 0.1% 0.1% 0.1% 0.1%
--------- --------- --------- ---------
Income from operations 2.1% 2.1% 2.1% 2.1%
Other expense, net 0.3% 0.5% 0.3% 0.6%
--------- --------- --------- ---------
Income before income taxes and minority interest 1.8% 1.6% 1.8% 1.5%
Provision for income taxes 0.7% 0.6% 0.7% 0.6%
Minority interest 0.0% 0.0% 0.0% 0.0%
--------- --------- --------- ---------
Net income 1.1% 1.0% 1.1% 0.9%
========= ========= ========= =========
THIRTEEN WEEKS ENDED JUNE 28, 1997 AS COMPARED TO THE THIRTEEN WEEKS ENDED JUNE
29, 1996
Consolidated net sales increased 33.2% to $3.7 billion in the second
quarter of 1997 from $2.8 billion in the second quarter of 1996. The increase in
worldwide net sales was attributable to growth in the microcomputer products
industry in general, the addition of new customers, increased sales to the
existing customer base, improved product availability and expansion of the
Company's product offerings.
Net sales from U.S. operations increased 35.6% to $2.6 billion in the
second quarter of 1997 from $1.9 billion in the second quarter of 1996. In
addition to the factors above that impacted net sales worldwide, U.S. net sales
were positively impacted by the strong growth in Ingram Alliance. Ingram
Alliance sales grew 83.9% to $837.3 million in the second quarter of 1997 from
$455.4 million in the second quarter of 1996. See "-- Part II, Item 5. Other
Information" regarding the potential impact on U.S. net sales and shipping costs
of a nationwide strike against United Parcel Service in the third quarter of
1997. Net sales from European operations increased 28.5% to $711.0 million in
the second quarter of 1997 from $553.5 million in the second quarter of 1996.
The U.S. dollar was stronger against most European currencies during the second
quarter of 1997 relative to the second quarter of 1996. At constant exchange
rates, net sales from European operations would have increased 35.5% in the
second quarter of 1997 as compared to the second quarter of 1996. Other
international net sales (which include export sales from the United States)
increased 26.9% to $391.4 million in the second quarter of 1997 from $308.5
million in the second quarter of 1996. Growth in other international net sales
occurred principally due to growth in net sales from the Company's Canadian,
Mexican and export operations.
Cost of sales as a percentage of net sales increased to 93.5% in the second
quarter of 1997 from 93.2% in the second quarter of 1996. This increase was
largely attributable to the increase as a percentage of net sales of the
Ingram Alliance business, which has lower gross margins, as well as competitive
pricing pressures in Europe and Canada.
Total SG&A expenses (including charges allocated from Ingram Industries in
1996) increased 24.1% to $161.2 million in the second quarter of 1997 from
$129.9 million in the second quarter of 1996. However, total SG&A
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
expenses decreased as a percentage of net sales to 4.3% in the second quarter of
1997 from 4.6% in the second quarter of 1996. The increased level of spending
was attributable to expenses required to support expansion of the Company's
business, consisting primarily of incremental personnel and support costs, lease
payments relating to new operating facilities, and expenses associated with the
development and maintenance of information systems. The decrease in SG&A
expenses as a percentage of net sales was primarily attributable to the growth
of Ingram Alliance, which utilizes a lower cost business model, and economies of
scale from higher sales volumes.
Noncash compensation charges increased 64.0% to $1.7 million in the second
quarter of 1997 from $1.0 million in the second quarter of 1996. The amount of
noncash compensation charges varies from period to period due to the impact of
vesting and forfeitures related to the underlying stock options. The Company
expects to record additional noncash compensation charges of approximately $1.8
million in each of the third and fourth quarters of 1997.
Excluding noncash compensation charges, total income from operations
expressed as a percentage of net sales remained unchanged at 2.2% in the second
quarter of 1997 and 1996. Income from operations in the United States excluding
the noncash compensation charge, expressed as a percentage of U.S. net sales,
remained unchanged at 2.7% in the second quarter of 1997 and 1996. Excluding the
noncash compensation charge, income from operations in Europe increased as a
percentage of European net sales to 0.5% in the second quarter of 1997 from 0.3%
in the second quarter of 1996, largely as a result of lower SG&A expenses as a
percentage of European net sales. Excluding the noncash compensation charge,
income from operations as a percentage of net sales for other international
regions (which includes export operations) decreased to 2.0% in the second
quarter of 1997 from 2.1% in the second quarter of 1996 due to the impact of
higher cost of sales as a percentage of other international net sales.
For the reasons set forth above, income from operations, including noncash
compensation charges, increased 33.1% to $79.2 million in the second quarter of
1997 from $59.5 million in the second quarter of 1996. As a percentage of sales,
income from operations, including noncash compensation charges, remained
unchanged at 2.1% during the second quarter of 1997 and 1996.
Other expense, net, which consists primarily of net interest expense
(including interest expense charged by Ingram Industries in 1996), foreign
currency exchange losses, and miscellaneous non-operating expenses, decreased
23.3% to $11.2 million in the second quarter of 1997 from $14.6 million in the
second quarter of 1996. As a percentage of net sales, other expense, net,
decreased to 0.3% in the second quarter of 1997 from 0.5% in the second quarter
of 1996. The decrease in other expense was largely attributable to a
year-over-year decrease in interest expense to $9.1 million in the second
quarter of 1997 from $14.1 million in the second quarter of 1996. The decrease
in interest expense primarily related to lower levels of debt resulting from
repayment of indebtedness to Ingram Industries with proceeds from the IPO in the
fourth quarter of 1996. The decrease in interest expense was partially offset by
the increase in other expense to $3.3 million in the second quarter of 1997 from
$0.7 million in the second quarter of 1996, resulting from the reclassification
of $2.8 million of financing costs in the second quarter of 1997 relating to the
Company's accounts receivable securitization program. See "-- Liquidity and
Capital Resources." Such expenses were reflected as interest expense charged by
Ingram Industries in the second quarter of 1996.
The provision for income taxes increased 53.2% to $27.6 million in the
second quarter of 1997 from $18.0 million in the second quarter of 1996. The
increase in the provision for income taxes reflects the increase in the
Company's income before income taxes and minority interest of 51.4% in the
second quarter of 1997 over the comparable 1996 period. The Company's effective
tax rate was 40.6% in the second quarter of 1997 compared to 40.1% in the second
quarter of 1996. The increase in the effective tax rate was primarily due to the
effect of higher state taxes and the limited tax benefits of noncash
compensation charges. In 1996, the Company filed consolidated state tax returns
with Ingram Industries which allowed the Company to take advantage of certain
apportionment benefits among the states. In 1997, the Company will file its own
separate state tax returns. Approximately one-half of the noncash compensation
charge for the second quarter of 1997 is not deductible for income tax purposes.
The noncash compensation charge for the second quarter of 1996 was fully
deductible for income tax purposes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Excluding noncash compensation charges of $1.4 million (net of tax) for the
second quarter of 1997 and $0.6 million (net of tax) for the second quarter of
1996, net income increased 50.8% to $41.4 million in the second quarter of 1997
from $27.5 million in the second quarter of 1996 and, as a percentage of net
sales, increased to 1.1% in the second quarter of 1997 from 1.0% in the second
quarter of 1996. Pro forma earnings per share, excluding noncash compensation
charges, increased 21.7% to $0.28 in the second quarter of 1997 from $0.23 in
the second quarter of 1996. Net income, including noncash compensation charges,
increased 49.1% to $40.0 million in the second quarter of 1997 from $26.8
million in the second quarter of 1996. Earnings per share, including the noncash
compensation charge, increased 22.7% to $0.27 in the second quarter of 1997 from
$0.22 in the second quarter of 1996.
TWENTY-SIX WEEKS ENDED JUNE 28, 1997 AS COMPARED TO THE TWENTY-SIX WEEKS ENDED
JUNE 29, 1996
Consolidated net sales for the first half of 1997 increased 32.9% to $7.4
billion from $5.5 billion in the first half of 1996. The increase in worldwide
net sales was attributable to the same factors summarized in the discussion of
net sales for the thirteen weeks ended June 28, 1997 and June 29, 1996.
Net sales from U.S. operations increased 36.8% to $5.1 billion in the first
half of 1997 from $3.7 billion in the first half of 1996. In addition to the
factors above that impacted net sales worldwide, U.S. net sales were positively
impacted by the strong growth in Ingram Alliance. Ingram Alliance sales grew
83.3% to $1.5 billion in the first half of 1997 from $828 million in the first
half of 1996. See "-- Part II, Item 5. Other Information" regarding the
potential impact on U.S. net sales and shipping costs of a nationwide strike
against United Parcel Service in the third quarter of 1997. Net sales from
European operations increased 23.9% to $1.5 billion in the first half of 1997
from $1.2 billion in the first half of 1996. The U.S. dollar was stronger
against most European currencies during the first half of 1997 relative to the
first half of 1996. At constant exchange rates, net sales from European
operations would have increased 30.3% in the first half of 1997 as compared to
the first half of 1996. Other international net sales (which include export
sales from the United States) increased 27.1% to $821.1 million in the first
half of 1997 from $645.8 million in the first half of 1996. Growth in other
international net sales was attributable to the same factors summarized in the
discussion of other international net sales for the thirteen weeks ended June
28, 1997 and June 29, 1996.
Cost of sales as a percentage of net sales increased to 93.5% in the first
half of 1997 from 93.2% in the first half of 1996. This increase was largely
attributable to the increase as a percentage of net sales of the Ingram Alliance
business, which has lower gross margins, as well as competitive pricing
pressures in Europe and Canada.
Total SG&A expenses (including charges allocated from Ingram Industries in
1996) increased 23.8% to $315.4 million in the first half of 1997 from $254.8
million in the first half of 1996. However, total SG&A expenses decreased as a
percentage of net sales to 4.3% in the first half of 1997 from 4.6% in the first
half of 1996. The increased level of spending as well as the decrease in SG&A
expenses as a percentage of net sales was primarily attributable to the same
factors summarized in the discussion of total SG&A expenses for the thirteen
weeks ended June 28, 1997 and June 29, 1996.
Noncash compensation charges decreased 54.5% to $3.5 million in the first
half of 1997 from $7.8 million in the first half of 1996. The higher amount in
1996 was due to the initial noncash compensation charge recorded in the first
quarter of 1996 when the terms and grants of these stock options were
established.
Excluding noncash compensation charges, total income from operations
expressed as a percentage of net sales remained unchanged at 2.2% in the first
half of 1997 and 1996. Income from operations in the United States excluding the
noncash compensation charge, expressed as a percentage of U.S. net sales,
remained unchanged at 2.7% in the first half of 1997 and 1996. Excluding the
noncash compensation charge, income from operations in Europe as a percentage of
European net sales remained unchanged at 0.7% in the first half of 1997 and
1996. Excluding the noncash compensation charge, income from operations as a
percentage of other international net sales (which includes export operations)
decreased to 1.9% in the first half of 1997 from 2.2% in the first half of 1996
due to the impact of higher cost of sales as a percentage of other international
net sales.
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
For the reasons set forth above, income from operations increased 38.0% to
$157.9 million for the first half of 1997 from $114.4 million in the first half
of 1996. As a percentage of sales, income from operations, including noncash
compensation charges, remained unchanged at 2.1% during the first half of 1997
and 1996.
Other expense, net, which consists primarily of net interest expense
(including interest expense charged by Ingram Industries in 1996), foreign
currency exchange losses, and miscellaneous non-operating expenses decreased
30.1% to $20.9 million in the first half of 1997 from $29.9 million in the first
half of 1996. As a percentage of net sales, other expense, net, decreased to
0.3% in the first half of 1997 from 0.6% in the first half of 1996. The decrease
in other expense was largely attributable to a year-over-year decrease in
interest expense to $16.4 million in the first half of 1997 from $28.7 million
in the first half of 1996. The decrease in interest expense primarily related to
lower levels of debt resulting from repayment of indebtedness to Ingram
Industries with proceeds from the IPO in the fourth quarter of 1996. The
decrease in interest expense was partially offset by the increase in other
expense to $6.4 million in the first half of 1997 from $1.6 million in the first
half of 1996 resulting from the reclassification of $5.7 million of financing
costs in the first half of 1997 relating to the Company's accounts receivable
securitization program. See "--Liquidity and Capital Resources." Such expenses
were reflected as interest expense charged by Ingram Industries in the first
half of 1996.
The provision for income taxes increased 65.5% to $56.0 million in the
first half of 1997 from $33.9 million in the first half of 1996. The increase in
the provision for income taxes reflects the increase in the Company's income
before income taxes and minority interest of 62.1% in the first half of 1997
over the comparable 1996 period. The Company's effective tax rate was 40.9% in
the first half of 1997 compared to 40.1% in the first half of 1996. The increase
in the effective tax rate was primarily due to the effect of higher state taxes
and the limited tax benefits of noncash compensation charges. In 1996, the
Company filed consolidated state tax returns with Ingram Industries which
allowed the Company to take advantage of certain apportionment benefits among
the states. In 1997, the Company will file its own separate state tax returns.
Approximately one-half of the noncash compensation charge for the first half of
1997 is not deductible for income tax purposes. The noncash compensation charge
for the first half of 1996 was fully deductible for income tax purposes.
Excluding noncash compensation charges of $2.9 million (net of tax) for the
first half of 1997 and $4.8 million (net of tax) for the first half of 1996, net
income increased 50.3% to $83.2 million in the first half of 1997 from $55.4
million in the first half of 1996 and, as a percentage of net sales, increased
to 1.1% in the first half of 1997 from 1.0% in the first half of 1996. Pro forma
earnings per share, excluding noncash compensation charges, increased 23.9% to
$0.57 for the first half of 1997 from $0.46 in the first half of 1996. Net
income, including noncash compensation charges, increased 58.7% to $80.3 million
for the first half of 1997 from $50.6 million in the first half of 1996.
Earnings per share, including the noncash compensation charge, increased 31.0%
to $0.55 in the first half of 1997 from $0.42 in the first half of 1996.
QUARTERLY DATA; SEASONALITY
The Company's quarterly sales and operating results have varied in the past
and will likely continue to do so in the future as a result of seasonal
variations in the demand for the products and services offered by the Company,
the introduction of new hardware and software technologies and products offering
improved features and functionality, the introduction of new products and
services by the Company and its competitors, the loss or consolidation of a
significant supplier or customer, changes in the level of operating expenses,
inventory adjustments, product supply constraints, competitive conditions
including pricing, interest rate fluctuations, the impact of acquisitions,
currency fluctuations, and general economic conditions. The Company's narrow
operating margins may magnify such fluctuations, particularly on a quarterly
basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs largely through income
from operations and borrowings, trade and supplier credit and, more recently,
the public sale of 23,200,000 shares of its Class A Common Stock at $18.00 per
share in the IPO completed in November 1996.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Cash used by operating activities was $187.1 million in the twenty-six
weeks ended June 28, 1997 as compared to cash provided by operating activities
of $118.6 million in the twenty-six weeks ended June 29, 1996. The significant
increase in cash used by operating activities in the twenty-six weeks ended June
28, 1997 over the comparable 1996 period was largely due to the decrease in
accounts payable at June 28, 1997 from December 28, 1996 of $215.0 million which
was not offset by declines in trade accounts receivable and inventories. The
accounts payable balance at June 28, 1997 decreased from the December 28, 1996
balance as a result of a higher than normal ratio of accounts payable to
inventory at December 28, 1996.
Net cash used by investing activities was $31.3 million in the twenty-six
weeks ended June 28, 1997 as compared to $34.4 million in the twenty-six weeks
ended June 29, 1996. The decrease in net cash used by investing activities is
due to proceeds of $10.2 million realized on the sale and leaseback of a
distribution center in the twenty-six weeks ended June 28, 1997. Purchases of
property and equipment increased to $40.0 million during the twenty-six weeks
ended June 28, 1997 from $33.0 million in the twenty-six weeks ended June 29,
1996 resulting from the Company's expansion of warehouse and other facilities.
Net cash provided by financing activities was $243.4 million in the
twenty-six weeks ended June 28, 1997 as compared to cash used by financing
activities of $95.1 million in the twenty-six weeks ended June 29, 1996. The
increase in net cash provided by financing activities was caused primarily by
proceeds drawn under the revolving credit facility and long-term debt of $234.9
million in the twenty-six weeks ended June 28, 1997 as compared to the net
repayment of borrowings from Ingram Industries in the twenty-six weeks ended
June 29, 1996 as well as a distribution to Ingram Industries in connection with
the Split-Off of $20.0 million in the 1996 period. Borrowings under the
revolving credit facility and long-term debt were used, in part, to finance the
decrease in accounts payable at June 28, 1997. The Company's debt to
capitalization ratio was 36.4% at June 28, 1997, up from 26.9% at December 28,
1996 but down substantially from 69.4% at June 29, 1996.
Prior to the Split-Off, the Company's sources of capital were primarily
borrowings from Ingram Industries. Ingram Industries stopped providing financing
to the Company following the Split-Off. In November 1996, the Company entered
into a $1 billion credit facility (the "Credit Facility") with a syndicate of
banks for which NationsBank of Texas N.A. and The Bank of Nova Scotia acted as
agents. The Company is required to comply with certain financial covenants,
including minimum net worth, restrictions on funded debt, current ratio and
interest coverage, which will be tested as of the end of each fiscal quarter.
The Credit Facility also restricts the Company's ability to pay dividends.
Borrowings will be subject to the satisfaction of customary conditions,
including the absence of any material adverse change in the Company's business
or financial condition. At June 28, 1997, the Company was in compliance with
these financial covenants and had $361.5 million in outstanding borrowings under
the Credit Facility.
From February 1993 through the Split-Off, the Company had an agreement with
Ingram Industries whereby the Company sold all of its domestic trade accounts
receivable to Ingram Industries on an ongoing basis. Ingram Industries
transferred certain trade accounts receivable from the Company and other Ingram
Industries affiliates to a trust which sold certificates representing undivided
interests in the total pool of trade receivables without recourse. As of
November 1, 1996, Ingram Industries had sold $160 million of fixed rate medium
term certificates and established a commercial paper program, supported by a
variable rate certificate. The arrangement with the trust extends to December
31, 1999, renewable biannually under an evergreen provision up to a maximum term
of 20 years. In connection with the Split-Off, in partial satisfaction of
amounts due to Ingram Industries, the Ingram Industries accounts receivable
securitization program was assumed by the Company, which is now the sole seller
of receivables. Under the amended program, certain of the Company's domestic
receivables are transferred to the trust. The Company believes the amended
program contains sufficient trade accounts receivable to support the outstanding
fixed rate medium term certificates as well as an unspecified amount under the
variable rate certificate which supports the commercial paper program. At June
28, 1997, the amount of commercial paper outstanding totaled $96.6 million.
Assumption of the securitization program resulted in a $160 million reduction of
trade accounts receivable and long-term debt in the Company's consolidated
balance sheet at June 28, 1997 and December 28, 1996.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The Company announced on July 21, 1997 that it has completed the
acquisition of the Intelligent Electronics Inc. ("IE") indirect distribution
business, its Reseller Network Division ("RND"). See "-- Part II, Item 5. Other
Information." Under the terms of the agreement, Ingram Micro assumed $78
million, in liabilities in excess of current assets. The Company believes that
its existing cash and credit facilities are adequate to pay the purchase price
for RND and discharge its other obligations under the agreement, as well as
finance the increase in accounts receivable and inventories.
COMMENTS ON FORWARD-LOOKING INFORMATION
In connection with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company, in its Form 10-K for the year ended
December 28, 1996, outlined cautionary statements identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements made by, or on behalf of, the Company.
Such forward-looking statements, as made within this Form 10-Q, should be
considered in conjunction with the information included in the Company's Annual
Report on Form 10-K for the year ended December 28, 1996, including Exhibit
99.01 attached thereto.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which will become effective in the fourth quarter of 1997. FAS 128 replaces the
presentation of earnings per share reflected on the Statement of Income with a
dual presentation of Basic Earnings per Share ("Basic EPS") and Diluted Earnings
per Share ("Diluted EPS"). FAS 128 does not permit early application; however,
it requires, when implemented in the fourth quarter of 1997, restatement of
previously reported earnings per share for each income statement presented. The
Company does not expect the adoption of FAS 128 to have a material impact on its
financial condition or results of operations. However, pro forma disclosure of
earnings per share as computed under FAS 128 is presented in the notes to
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") which will become effective in fiscal 1998. The Company does not expect
the adoption of FAS 130 to have a material impact on its financial condition or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131") which will become effective in
fiscal 1998. FAS 131 establishes standards for the way publicly-held companies
report information about operating segments as well as disclosures about
products and services, geographic areas and major customers. However, the
Company does not expect the adoption of FAS 131 to have a material impact on its
consolidated financial condition or results of operations.
14
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareowners was held on May 7, 1997.
(b) The only matter submitted for a vote at the Annual Meeting was the
election of eight directors (constituting the entire Board of Directors).
The following table lists the individuals and the number of votes cast
for, against or withheld for each such individual elected to the Board of
Directors for a term to expire at the 1998 Annual Meeting of Shareowners.
Nominee No. of Votes
------- ------------
Don H. Davis, Jr. For 1,025,623,043
Against 0
Abstentions 1,463,783
David B. Ingram For 1,024,968,735
Against 0
Abstentions 2,118,091
John R. Ingram For 1,025,622,434
Against 0
Abstentions 1,464,392
Martha R. Ingram For 1,025,620,263
Against 0
Abstentions 1,466,563
Philip M. Pfeffer For 1,025,622,413
Against 0
Abstentions 1,464,413
J. Phillip Samper For 1,025,624,043
Against 0
Abstentions 1,462,783
Jerre L. Stead For 1,025,624,043
Against 0
Abstentions 1,461,983
Joe B. Wyatt For 1,025,622,938
Against 0
Abstentions 1,463,888
ITEM 5. OTHER INFORMATION
The Company announced on July 21, 1997 that it completed the acquisition of
IE's indirect distribution business, its RND. Under the terms of the agreement,
Ingram Micro assumed $78 million in liabilities in excess of current assets. The
RND business model -- also known as "wholesale aggregation" or "master reseller"
- -- is complementary to Ingram Alliance. The Company believes that the
acquisition will provide a new revenue source as well as strengthen the
Company's relationships with resellers through new programs, better
15
16
access to key manufacturers and improved operations. The Company also became the
primary wholesaler to IE's XLSource division, an authorized direct sales
organization and reseller for products of more than 80 technology manufacturers,
for an initial term of up to three years. As discussed in Exhibit 99.01 to the
Company's 1996 Annual Report on Form 10-K, acquisitions such as the IE RND
business involve a number of risks and difficulties for the Company. The
inability to successfully integrate IE's RND operations into the Company's
existing operations could have a material adverse effect on the Company's
financial condition and results of operations.
The Company relies almost entirely on arrangements with independent
shipping companies for the delivery of its products to reseller customers and
end-user customers. Currently, United Parcel Service ("UPS"), Federal Express
Corporation, Western Package Service, General Parcel Services, Roadway Parcel
Services, and Watkins Motor Lines deliver the substantial majority of the
Company's products to its customers within the United States. On August 4, 1997,
members of the International Brotherhood of Teamsters began a nationwide strike
against UPS. This strike has materially impaired UPS's ability to perform
shipping services required by the Company within the United States. The Company
has shifted all of its U.S. shipments to other carriers, although on less
favorable terms, in some cases. There can be no assurance that other carriers
will continue to be able to assume all of the shipping volume handled by UPS for
the Company on terms as favorable as those available from UPS. Only the
Company's shipments within the United States are impacted. A decline in the
reliability and timeliness of the Company's deliveries could have a material
impact on the Company's U.S. net sales, as could any attempt by the Company to
raise prices in response to increased shipping costs. A decline in U.S. net
sales could have a material adverse effect on the Company's business, financial
condition and results of operations.
A Registration Statement on Form S-1 (the "Form S-1") filed by the Company
with the Securities and Exchange Commission covering 3,383,369 shares of Class A
Common Stock was declared effective on June 27, 1997. The Form S-1 relates to
the offer and sale of up to 1,378,369 shares of Class A Common Stock by the
Company at various prices to holders of stock options issued (upon exercise of
such stock options) under the Ingram Micro Inc. 1996 Rollover Stock Option Plan
who are current or former employees or directors of Ingram Industries, Ingram
Entertainment, or their respective subsidiaries. The Form S-1 also relates to
the offer and sale by the Ingram Thrift Plan, the Ingram Micro Thrift Plan and
the Ingram Entertainment Thrift Plan (collectively, the "Thrift Plans"), of a
total of 2,005,000 shares of Class A Common Stock of the Company (resulting from
the conversion of shares of Class B Common Stock of the Company held by the
Thrift Plans) in order to meet their liquidity needs. The Company kept the
Prospectus filed in connection with the Form S-1 available until July 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
No. Description
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the thirteen weeks ended
June 28, 1997.
16
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INGRAM MICRO INC.
By: /s/ MICHAEL J. GRAINGER
-------------------------------
Name: Michael J. Grainger
Title: Executive Vice President and Worldwide Chief
Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
August 12, 1997
17
5
1,000
6-MOS
JAN-03-1998
DEC-29-1996
JUN-28-1997
71,316
0
1,234,939
45,398
1,825,520
3,228,867
275,910
106,805
3,450,722
2,018,724
0
0
0
1,327
905,660
3,450,722
7,366,805
7,366,805
6,889,972
7,208,885
6,568
0
16,404
137,000
56,028
80,345
0
0
0
80,345
0.55
0.55
