IM Ingram Micro Inc. (delisted)

Ingram Micro Inc. (IM) reported adjusted first-quarter 2011 earnings per share of 34 cents, failing to meet the Zacks Consensus Estimate of 46 cents. Management held transitional difficulties to a new enterprise system in Australia responsible for the underperformance. Shares slid 5.73% in after-market trade.

Revenues

Ingram Micro’s first quarter revenues of $8.72 billion increased 7.8% from $8.10 billion in the year-ago quarter. However, the quarter’s revenue fell short of the Zacks Consensus Estimate of $8.86 billion.

The year-over-year increase may be attributed to modest sales growth across all geographic regions and improving Information Technology (IT) spending. Foreign currency translation had a 2% positive impact on revenues.

Revenue contribution from North America increased 7.0% year over year to $3.51 billion. Europe, Middle East and Africa (EMEA) contributed $2.88 billion, up 8.0% from the year-ago quarter. European currency translation had a neutral impact on regional revenue.

The Asia-Pacific region generated $1.93 billion in sales, up 9.0% from $1.77 billion in the first quarter of 2010. Foreign currency translation had a 5% positive impact on revenues. Latin America sales grew 10.0% year over year to $407.0 million, benefiting from a positive translation impact of 5% from relatively stronger regional currencies.

Operating Results

Gross profit grew a modest 2.9% to $454.1 million in the first quarter from $441.5 million in the year-ago quarter. However, the gross margin dropped 30 basis points (bps) year over year to 5.2%. The difference could be traced to operational interruptions at the new enterprise system in Australia, competitive pricing in some Asian markets, subdued retail demand in Europe and a higher mix of emerging markets revenue that typically carry lower margins.

Selling, general and administrative expenses were $354.3 million, up 5.5% from $335.9 million in the year-ago quarter. The increase was due to investments in system enhancements and growth initiatives.

Excluding the impact of reorganization credits, adjusted operating profit was $99.8 million, compared to $105.5 million in the prior-year quarter. Operating margin in the quarter decreased 20 bps year over year to 1.1%.

Ingram Micro reported net income of $56.3 million, or 34 cents per share, compared to $70.3 million, or 42 cents in the year-ago quarter. Excluding the impact of reorganization credits, adjusted net income was $56.0 million or 34 cents, compared to $70.1 million or 42 cents in the prior-year quarter.

Balance Sheet and Cash Flow

Ingram Micro exited the first quarter with cash and cash equivalents of $1.02 billion, down from $1.16 billion in the previous quarter. Accounts receivables decreased 9.6% sequentially to $3.74 billion. Inventories were $3.03 billion, up from $2.91 billion in the prior quarter. Total debt balance was $657.0 million, up from $636.4 million in the previous quarter.

Ingram Micro paid $900,00 to buy back 46,000 shares.

Ingram Micro incurred total capital expenditure of $32.9 million, compared to $30.9 million in the previous quarter.

Guidance

Ingram Micro did not provide any specific guidance for the second quarter of 2011 but expects sales to be flat sequentially. The weak guidance reflects adverse impact from the ongoing transitional issues in Australia.

The company also expects the gross margin to decline sequentially following competitive pressure in the Asia-Pacific region and softer retail demand in Europe. Ingram Micro also stated that operating expenses may fluctuate, despite cost control measures, due to continuous strategic investments.

Based on the improving IT spending trend, increasing global demand for its products and the completion target of the ERP system implementation in Australia within the coming three years, Ingram Micro is confident about achieving operational excellence going ahead.

Conclusion

We find Ingram Micro’s first quarter results disappointing as both top and bottom lines missed Zacks Consensus Estimates. The company also provided a weak guidance due to higher operating expenses resulting from transitional disruptions.

However, despite the uneventful quarter, we remain fairly optimistic about Ingram Micro’s performance in the near future based on its positive commentary. We also find the company’s strategic relationship with network giant Juniper Inc. (JNPR), as well as tech giants, such as Hewlett-Packard Company (HPQ), International Business Machines Inc. (IBM) and Microsoft Corp. (MSFT) encouraging.

Ingram Micro’s high dependency on IT spending is a concern. Though we remain positive about corporate IT spending, which should see a slow but steady recovery through 2011, a slowing consumer spending cannot be ignored. The company’s significant European exposure and debt burden are also concerns.

Currently, Ingram Micro has a Zacks #3 Rank, implying a short-term Hold rating.

 
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