1
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 July 4, 1998
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, including zip code, of principal executive offices)
(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 40,331,321 shares of Class A Common Stock, par value $.01 per
share, and 99,281,252 shares of Class B Common Stock, par value $.01 per share,
outstanding at July 4, 1998.
2
INGRAM MICRO INC.
INDEX
PART I. FINANCIAL INFORMATION
Pages
-----
Item 1. Financial Statements
Consolidated Balance Sheet at July 4, 1998 and January 3, 1998 3
Consolidated Statement of Income for the thirteen weeks and twenty-six
weeks ended July 4, 1998 and June 28, 1997 4
Consolidated Statement of Cash Flows for the twenty-six weeks ended
July 4, 1998 and June 28, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13-14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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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)
JULY 4, JANUARY 3,
1998 1998
----------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 113,401 $ 92,212
Trade accounts receivable (less allowances of $54,643
and $48,541 at July 4, 1998 and January 3, 1998,
respectively) 1,842,512 1,635,728
Inventories 1,965,551 2,492,646
Other current assets 215,173 225,408
---------- ----------
Total current assets 4,136,637 4,445,994
Property and equipment, net 256,617 215,148
Goodwill, net 139,610 142,478
Other 139,586 128,531
---------- ----------
Total assets $4,672,450 $4,932,151
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,141,369 $2,415,001
Accrued expenses 257,138 292,515
Current maturities of long-term debt 14,825 21,869
---------- ----------
Total current liabilities 2,413,332 2,729,385
Long-term debt 1,018,498 1,119,262
Other 29,082 23,843
---------- ----------
Total liabilities 3,460,912 3,9872,490
Minority interest 5,234 4,862
Commitments and contingencies
Redeemable Class B Common Stock 8,129 16,593
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; 40,331,321 and 37,366,389 shares issued and
outstanding at July 4, 1998 and January 3, 1998,
respectively 403 374
Class B Common Stock, $0.01 par value, 135,000,000 shares
authorized; 99,281,252 and 99,714,672 shares issued and
outstanding (including 1,161,250 and 2,370,400
redeemable shares) at July 4, 1998 and January 3, 1998,
respectively) 981 973
Additional paid in capital 534,884 484,912
Retained earnings 678,602 566,441
Cumulative translation adjustment (16,522) (14,236)
Unearned compensation (173) (258)
---------- ----------
Total stockholder's equity 1,198,175 1,038,206
---------- ----------
Total liabilities and stockholders' equity $4,672,450 $4,932,151
========== ==========
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
------------------------ -------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
---------- ---------- ----------- ----------
Net sales $4,956,121 $3,716,827 $10,106,209 $7,366,805
Cost of sales 4,640,639 3,474,702 9,460,817 6,889,972
---------- ---------- ----------- ----------
Gross profit 315,482 242,125 645,392 476,833
Expenses:
Selling, general and administrative 203,533 161,221 416,144 315,366
Noncash compensation charge 1,146 1,734 2,294 3,547
---------- ---------- ----------- ----------
204,679 162,955 418,438 318,913
---------- ---------- ----------- ----------
Income from operations 110,803 79,170 226,954 157,920
Other (income) expense:
Interest income (1,393) (1,238) (2,806) (2,052)
Interest expense 15,896 9,096 35,136 16,404
Net foreign currency exchange loss 1,219 91 2,794 154
Other 2,259 3,266 4,971 6,414
---------- ---------- ----------- ----------
17,981 11,215 40,095 20,920
---------- ---------- ----------- ----------
Income before income taxes and minority interest 92,822 67,955 186,859 137,000
Provision for income taxes 36,992 27,575 74,466 56,028
---------- ---------- ----------- ----------
Income before minority interest 55,830 40,380 112,393 80,972
Minority interest 205 412 232 627
---------- ---------- ----------- ----------
Net income $ 55,625 $ 39,968 $ 112,161 $ 80,345
========== ========== =========== ==========
Basic earnings per share $ 0.40 $ 0.30 $ 0.81 $ 0.60
========== ========== =========== ==========
Diluted earnings per share $ 0.37 $ 0.27 $ 0.75 $ 0.55
========== ========== =========== ==========
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
----------------------
JULY 4, JUNE 28,
1998 1997
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 112,161 $ 80,345
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 30,283 21,207
Deferred income taxes 89 (1,329)
Minority interest 232 627
Noncash compensation charge 2,294 3,547
Changes in operating assets and liabilities:
Trade accounts receivable (216,068) (83,506)
Inventories 519,422 (35,060)
Other current assets 18,252 1,674
Accounts payable (266,536) (214,959)
Accrued expenses (45,989) 40,316
--------- ---------
Cash provided by (used in) operating activities 154,140 (187,138)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (59,967) (40,061)
Proceeds from sale of property and equipment -- 10,249
Acquisitions, net of cash acquired (8,085) --
Other (4,403) (1,565)
--------- ---------
Cash used by investing activities (72,455) (31,377)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Redemption of Redeemable Class B Stock (335) (350)
Exercise of stock options including tax benefits 39,673 8,830
Proceeds from issuance of convertible debenture 449,604 0
Proceeds of debt 10,816 44,259
Net borrowings under revolving credit facility (559,976) 190,639
--------- ---------
Cash provided (used) by financing activities (60,218) 243,378
Effect of exchange rate changes on cash (278) (1,826)
--------- ---------
Increase in cash 21,189 23,037
Cash, beginning of period 92,212 48,279
--------- ---------
Cash, end of period $ 113,401 $ 71,316
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period:
Interest $ 35,489 $ 15,702
Income taxes 69,539 67,533
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 worldwide. The Company conducts the majority of its operations in North
America, Europe, and Latin America. 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 material
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 July 4, 1998, their results of operations for
the thirteen and twenty-six weeks ended July 4, 1998 and June 28, 1997 and their
cash flows for the twenty-six weeks ended July 4, 1998 and June 28, 1997. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the twenty-six week period may not
be indicative of the results of operations that can be expected for the full
year.
NOTE 2 - EARNINGS PER SHARE
Effective in the fourth quarter of fiscal year 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128") and related interpretations. FAS 128 requires 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 reported period. Diluted EPS reflects the potential dilution that could
occur if stock options and other commitments to issue common stock were
exercised using the treasury stock method. Earnings per share for all prior
periods have been restated to reflect the adoption of FAS 128.
THE COMPOSITION OF BASIC EPS AND DILUTED EPS IS AS FOLLOWS:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------ ----------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net income $ 55,625 $ 39,968 $ 112,161 $ 80,345
=========== =========== =========== ===========
Weighted average shares 138,898,854 134,999,003 138,154,012 134,886,284
=========== =========== =========== ===========
Basic earnings per share $ 0.40 $ 0.30 $ 0.81 $ 0.60
=========== =========== =========== ===========
Weighted average shares
including the dilutive
effect of stock options
(11,021,954 and 10,714,550
for the 13 weeks ended
July 4, 1998 and June 28,
1997, respectively, and
10,902,854 and 10,620,417
for the 26 weeks ended
July 4, 1998 and June 28,
1997, respectively) 149,920,808 145,713,553 149,056,866 145,506,701
=========== =========== =========== ===========
Diluted earnings per share $ 0.37 $ 0.27 $ 0.75 $ 0.55
=========== =========== =========== ===========
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
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 to occur 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.
NOTE 4 - COMPREHENSIVE INCOME
Effective in the first quarter of fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting and displaying
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in FAS 130 as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Total comprehensive income
was $55,698 and $38,539 for the thirteen weeks ended July 4, 1998 and June 28,
1997, respectively, and $110,785 and $73,910 for the twenty-six weeks ended July
4, 1998 and June 28, 1997, respectively. The primary difference from net income
as reported is the tax effected change in cumulative translation adjustment.
NOTE 5 - LONG-TERM DEBT
On June 9, 1998, the Company sold $1.33 billion aggregate principal
amount at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in
a private placement. Gross proceeds from the offering were $460.4 million. The
debentures were sold at an issue price of $346.18 per $1,000 principal amount
at maturity (representing a yield to maturity of 5.375% per annum), and are
convertible into shares of the Company's Class A Common Stock at a rate of
5.495 shares per $1,000 principal amount at maturity, subject to adjustment
under certain circumstances. The debentures are currently convertible into
approximately 7.3 million shares of the Company's Class A Common Stock. The
debentures are redeemable at the option the Company on or after June 9, 2003 at
the issue price plus accrued original issue discount to the date of redemption.
Each debenture is subject to repurchase at the option of the holder, as of June
9, 2001, June 9, 2003, June 9, 2008 or June 9, 2013, or if there is a
Fundamental Change (as defined), at the issue price plus accrued original issue
discount to the date of redemption. In the event of a repurchase at the option
of a holder (other than upon a Fundamental Change) the Company may, at its
option, pay in cash or Class A Common Stock or any combination thereof. In the
case of any such repurchase as of June 9, 2001 the Company may elect, in lieu
of payment of cash or Class A Common Stock, to satisfy the redemption in new
Zero Coupon Convertible Senior Debentures due 2018.
NOTE 6 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"), which will become effective for
the Company's full year fiscal 1998 reporting. 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 reported consolidated financial condition or results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
-------------------------------- ---------------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
-------------- -------------- --------------- --------------
NET SALES BY GEOGRAPHIC REGION:
United States $3,479 70.2% $2,629 70.7% $6,935 68.6% $5,107 69.3%
Europe 1,011 20.4% 711 19.1% 2,186 21.6% 1,469 20.0%
Other international 466 9.4% 377 10.2% 985 9.8% 791 10.7%
-------------- -------------- --------------- --------------
Total $4,956 100.0% $3,717 100.0% $10,106 100.0% $7,367 100.0%
============== ============== =============== ==============
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.
PERCENTAGE OF NET SALES
---------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------ ------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
-------- -------- ------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.6% 93.5% 93.6% 93.5%
----- ------ ----- -----
Gross profit 6.4% 6.5% 6.4% 6.5%
Expenses:
SG&A expenses 4.1% 4.3% 4.1% 4.3%
Noncash compensation charge 0.0% 0.1% 0.0% 0.0%
Income from operations 2.3% 2.1% 2.3% 2.2%
----- ------ ----- -----
Other expense, net 0.4% 0.3% 0.4% 0.3%
----- ------ ----- -----
Income before income taxes and
minority interest 1.9% 1.8% 1.9% 1.9%
Provision for income taxes 0.8% 0.7% 0.8% 0.8%
Minority interest 0.0% 0.0% 0.0% 0.0%
----- ------ ----- -----
Net income 1.1% 1.1% 1.1% 1.1%
===== ====== ===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
THIRTEEN WEEKS ENDED JULY 4, 1998 COMPARED TO THIRTEEN WEEKS ENDED JUNE 28, 1997
Consolidated net sales increased 33.3% to $4.96 billion in the second
quarter of 1998 from $3.72 billion in the second quarter of 1997. The increase
in worldwide net sales was primarily 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 32.3% to $3.48 billion in the
second quarter of 1998 from $2.63 billion in the second quarter of 1997. Net
sales from European operations increased 42.2% to $1.01 billion in the second
quarter of 1998 from $711.1 million in the second quarter of 1997. Other
international net sales increased 23.7% to $466.0 million in the second quarter
of 1998 from $376.6 million in the second quarter of 1997, due to growth in net
sales of the Company's Latin American, Canadian and Export Division operations.
Cost of sales as a percentage of net sales increased to 93.6% in the
second quarter of 1998 compared to 93.5% in the second quarter of 1997. The
increase was largely attributable to the reduced margins in the U.S. and Canada.
Total SG&A expenses increased 26.2% to $203.5 million in the second
quarter of 1998 from $161.2 million in the second quarter of 1997, but decreased
as a percentage of net sales to 4.1% in the second quarter of 1998 from 4.3% in
the second quarter of 1997. 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.
Noncash compensation charges decreased 33.9% to $1.1 million in the
second quarter of 1998 from $1.7 million in the second quarter of 1997. The
amount of noncash compensation charges decreases from year to year due to the
impact of vesting and forfeitures related to the underlying stock options. The
Company expects to record additional noncash compensation charges of $1.1
million in each of the third and fourth quarters of 1998.
Income from operations increased 40.0% to $110.8 million in the second
quarter of 1998 from $79.2 million in the second quarter of 1997, and, as a
percentage of net sales, increased to 2.2% in the second quarter of 1998 from
2.1% in the second quarter of 1997. Income from operations in the United States
remained constant as a percentage of net sales at 2.7% in the second quarter of
1998 and the second quarter of 1997. Income from operations in Europe increased
as a percentage of European net sales to 1.1% in the second quarter of 1998 from
0.5% in the second quarter of 1997 due to sales increasing at a faster rate than
operating expenses. Income from operations for other international regions
decreased as a percentage of net sales to 1.6% in the second quarter of 1998
from 2.1% in the second quarter of 1997 due to the impact of higher cost of
sales as a percentage of other international net sales.
Other expense, net, which consists primarily of interest expense,
foreign currency exchange losses, and miscellaneous non-operating expenses,
increased 60.3% to $18.0 million in the second quarter of 1998 from $11.2
million in the second quarter of 1997, and increased as a percentage of net
sales to 0.4% in the second quarter of 1998 from 0.3% in the second quarter of
1997. The increase in other expense, net, is primarily attributable to increased
interest expense in the second quarter of 1998 as a result of increased
borrowings to finance acquisitions and the expansion of the Company's business.
The provision for income taxes increased 34.2% to $37.0 million in the
second quarter of 1998 from $27.6 million in the second quarter of 1997,
reflecting the 36.6% increase in the Company's income before income taxes and
minority interest. The Company's effective tax rate was 39.9% in the second
quarter of 1998 compared to 40.6% in the second quarter of 1997. The decrease in
the effective tax rate was primarily due to the reduction in the noncash
compensation charge, much of which is not deductible for tax purposes, as well
as certain international taxes in 1998.
Excluding noncash compensation charges, net of tax, net income
increased 36.5% to $56.5 million in the second quarter of 1998 from $41.4
million in the second quarter of 1997 and, as a percentage of net sales,
remained constant at 1.1% for the second quarter of 1998 and the second quarter
of 1997. Pro forma diluted earnings per share, excluding noncash compensation
charges, increased 35.7% to $0.38 in the second quarter of 1998 from $0.28 in
the second quarter of 1997. Net income, including noncash compensation charges,
increased 39.2% to $55.6 million in the second quarter of 1998 from $40.0
million in the second quarter of 1997. Diluted earnings per share, including the
noncash compensation charge, increased 37.0% to $0.37 in the second quarter of
1998 from $0.27 in the second quarter of 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
TWENTY-SIX WEEKS ENDED JULY 4, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28,
1997
Consolidated net sales for the first half of 1998 increased 37.2% to
$10.11 billion from $7.37 billion in the first half of 1997. The increase in
worldwide net sales was attributable to the same factors summarized in the
discussion of net sales for the thirteen weeks ended July 4, 1998 and June 28,
1997.
Net sales from U.S. operations increased 35.8% to $6.94 billion in the
first half of 1998 from $5.11 billion in the first half of 1997. Net sales from
European operations increased 48.9% to $2.19 billion in the first half of 1998
from $1.47 billion in the first half of 1997. Other international net sales
increased 24.5% to $985.0 million in the first half of 1998 from $791.0 million
in the first half of 1997, due to growth in net sales of the Company's Latin
American, Canadian and Export Division operations.
Cost of sales as a percentage of net sales increased to 93.6% in the
first half of 1998 from 93.5% in the first half of 1997. The increase was
largely attributable to the same factors summarized in the discussion of cost of
sales for the thirteen weeks ended July 4, 1998 and June 28, 1997.
Total SG&A expenses increased 32.0% to $416.1 million in the first half
of 1998 from $315.4 million in the first half of 1997, but decreased as a
percentage of net sales to 4.1% in the first half of 1998 from 4.3% in the first
half of 1997. The increased level of spending was largely attributable to the
same factors summarized in the discussion of SG&A expenses for the thirteen
weeks ended July 4, 1998 and June 28, 1997.
Noncash compensation charges decreased 35.3% to $2.3 million in the
first half of 1998 from $3.5 million in the first half of 1997. The amount of
noncash compensation charges decreases from year to year due to the impact of
vesting and forfeitures related to the underlying stock options.
Income from operations increased 43.7% to $227.0 million in the first
half of 1998 from $157.9 million in the first half of 1997, and, as a percentage
of net sales, increased to 2.3% in the first half of 1998 from 2.2% in the first
half of 1997. Income from operations in the U.S. remained constant as a
percentage of net sales at 2.7% in the first half of 1998 and the first half of
1997. Income from operations in Europe increased as a percentage of European net
sales to 1.4% in the first half of 1998 from 0.7% in the first half of 1997 due
to sales increasing at a faster rate than operating expenses. Income from
operations for other international regions decreased as a percentage of net
sales to 1.3% in the first half of 1998 from 1.9% in the first half of 1997 due
to the impact of higher cost of sales as a percentage of other international net
sales.
Other expense, net, which consists primarily of interest expense,
foreign currency exchange losses, and miscellaneous non-operating expenses,
increased 91.7% to $40.1 million in the first half of 1998 from $20.9 million in
the first half of 1997, and increased as a percentage of net sales to 0.4% in
the first half of 1998 from 0.3% in the first half of 1997. The increase in
other expense, net, is primarily attributable to the same factors summarized in
the discussion of other expense, net for the thirteen weeks ended July 4, 1998
and June 28, 1997.
The provision for income taxes increased 32.9% to $74.5 million in the
first half of 1998 from $56.0 million in the first half of 1997, reflecting the
36.4% increase in the Company's income before income taxes and minority
interest. The Company's effective tax rate was 39.9% in the first half of 1998
compared to 40.9% in the first half of 1997. The decrease in the effective tax
rate was primarily due to the reduction in the noncash compensation charge, much
of which is not deductible for tax purposes, as well as certain international
taxes in 1998.
Excluding noncash compensation charges, net income increased 37.0% to
$114.0 million in the first half of 1998 from $83.2 million in the first half of
1997 and, as a percentage of net sales, remained constant at 1.1% for the first
half of 1998 and the first half of 1997. Pro forma diluted earnings per share,
excluding noncash compensation charges, increased 35.0% to $0.77 in the first
half of 1998 from $0.57 in the first half of 1997. Net income, including noncash
compensation charges, increased 39.6% to $112.2 million in the first half of
1998 from $80.3 million in the first half of 1997. Diluted earnings per share,
including the noncash compensation charge, increased 36.4% to $0.75 in the first
half of 1998 from $0.55 in the first half of 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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, borrowings, trade and supplier credit, 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, and the issuance of zero coupon convertible senior
debentures in June 1998 which yielded $449.6 million in net proceeds.
Cash provided by operating activities was $154.1 million in the first
half of 1998 as compared to cash used by operating activities of $187.1 million
in the first half of 1997. The significant increase in cash provided by
operating activities in the first half of 1998 compared to the first half of
1997 was largely attributable to a greater decrease in inventories during the
first half of 1998 than in the first half of 1997, as well as the increase in
net income, partially offset by a greater decrease in accounts payable and a
greater increase in accounts receivable in the first half of 1998 than in the
first half of 1997.
Net cash used by investing activities was $72.5 million in the first
half of 1998 compared to $31.4 million in the first half of 1997. The increase
was due to the Company's expansion of warehouse and other facilities as well as
the acquisition of an assembly facility in The Netherlands.
Net cash used by financing activities was $60.2 million in the first
half of 1998 compared to net cash provided of $243.4 million in the first half
of 1997. The change was primarily a result of net repayments on the Company's
long-term indebtedness in the first half of 1998. In each of the first half of
1998 and the first half of 1997, the Company borrowed to finance the expansion
of its business, but in the first half of 1998, the cash provided by operating
activities (as discussed above) allowed the Company to repay borrowings under
the Company's revolving credit facilities. The issuance of the debentures in
June 1998 did not have a material impact on cash provided (used) by financing
activities, as the proceeds from the sale of the debentures were used to repay
outstanding indebtedness under the Company's revolving credit facilities.
The Company has three syndicated bank credit facilities with an
aggregate availability of $1.65 billion. Under the credit facilities, the
Company is required to comply with certain financial covenants, including
minimum tangible net worth, restrictions on funded debt, current ratio and
interest coverage. The credit facilities also restrict the Company's ability to
pay dividends. Borrowings are subject to the satisfaction of customary
conditions, including the absence of any material adverse change in the
Company's business or financial condition. At July 4, 1998, the Company had
$380.0 million in outstanding borrowings under the credit facilities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The Company has an arrangement with a trust pursuant to which certain
U.S. trade accounts receivable of the Company are transferred to the trust,
which in turn has sold certificates representing undivided interests in the
total pool of trade receivables without recourse. The trust has issued $160
million of fixed-rate medium-term certificates and a variable rate certificate,
which supports a commercial paper program. The Company believes that there are
sufficient trade accounts receivables to support the outstanding medium-term
certificates as well as the commercial paper program. At July 4, 1998, the
amount of medium-term certificates outstanding totaled $100 million and the
amount of commercial paper outstanding totaled $150 million.
On June 9, 1998, the Company sold $1.33 billion aggregate principal
amount at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in
a private placement. Gross proceeds from the offering were $460.4 million. The
debentures were sold at an issue price of $346.18 per $1,000 principal amount at
maturity (representing a yield to maturity of 5.375% per annum), and are
convertible into shares of the Company's Class A Common Stock at a rate of 5.495
shares per $1,000 principal amount at maturity, subject to adjustment under
certain circumstances. The debentures are currently convertible into
approximately 7.3 million shares of the Company's Class A Common Stock. The
debentures are redeemable at the option the Company on or after June 9, 2003 at
the issue price plus accrued original issue discount to the date of redemption.
Each debenture is subject to repurchase at the option of the holder, as of June
9, 2001, June 9, 2003, June 9, 2008 or June 9, 2013, or if there is a
Fundamental Change (as defined), at the issue price plus accrued original issue
discount to the date of redemption. In the event of a repurchase at the option
of a holder (other than upon a Fundamental Change) the Company may, at its
option, pay in cash or Class A Common Stock or any combination thereof. In the
case of any such repurchase as of June 9, 2001 the Company may elect, in lieu of
payment of cash or Class A Common Stock, to satisfy the redemption in new Zero
Coupon Convertible Senior Debentures due 2018.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"), which will become effective for
the Company's full year fiscal 1998 reporting. 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 reported consolidated financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which will become effective in
fiscal 1999. FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. However, the Company does not expect the adoption of FAS 133 to have
a material impact on its reported consolidated financial condition or results of
operations.
CAUTIONARY STATEMENTS FOR THE PURPOSE OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company, in its Annual Report on
Form 10-K for the year ended January 3, 1998, 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 January 3, 1998,
including Exhibit 99.01 attached thereto; other risks or uncertainties may be
detailed from time to time in the Company's future Securities and Exchange
Commission filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 9, 1998, the Company sold $1.33 billion aggregate principal
amount at maturity of its Zero Coupon Convertible Senior Debentures due 2018 to
qualified institutional buyers pursuant to the exemption from registration
provided by Rule 144A under the Securities Act of 1933. Morgan Stanley & Co.
Incorporated ("Morgan Stanley") acted as initial purchaser in connection with
the offering. Gross proceeds from the offering were $460.4 million. The Company
paid Morgan Stanley a fee of approximately 2.5% of the gross proceeds. The issue
price of $346.18 per $1,000 principal represented a yield to maturity of 5.375%
per annum. The debentures are convertible into shares of the Company's Class A
Common Stock at a rate of 5.495 shares per $1,000 principal amount at maturity,
subject to adjustment under certain circumstances. The debentures are subject to
redemption or repurchase at the option of the holders or the Company under
certain circumstances.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareowners was held on May 6, 1998.
(b) One 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 1999 Annual Meeting of Shareowners.
Nominee No. of Votes
------- ------------
Don H. Davis Jr. For 977,922,304
Against 0
Abstentions 6,292,617
David B. Ingram For 984,078,545
Against 0
Abstentions 136,376
John R. Ingram For 948,076,846
Against 0
Abstentions 138,075
Martha R. Ingram For 948,072,266
Against 0
Abstentions 142,655
Philip M. Pfeiffer For 984,077,212
Against 0
Abstentions 137,709
J. Phillip Samper For 984,083,433
Against 0
Abstentions 134,488
Jerre L. Stead For 984,079,169
Against 0
Abstentions 135,752
Joe B. Wyatt For 984,082,428
Against 0
Abstentions 132,493
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Also, at the 1998 Annual Meeting of Shareowners, shareowners approved
the adoption of (i) the Ingram Micro Inc. 1998 Equity Incentive Plan and (ii)
the Ingram Micro Inc. 1998 Employee Stock Purchase Plan.
ITEM 5. OTHER INFORMATION
The Company announced on July 28, 1998 that it had completed the
acquisition of Tech Data Corporation's majority interest in Munich,
Germany-based Macrotron AG for approximately $100 million in cash. The Company
believes that the acquisition will increase Ingram Micro's market position
within Europe. However, as discussed in Exhibit 99.01 to the Company's 1997
Annual Report on Form 10-K, acquisitions involve a number of risks and
difficulties for the Company. The inability to successfully integrate Macrotrons
operations into the Company's existing operations could have a material adverse
effect on the Company's financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
10.39 Retirement Agreement between the Company and
David P. Dukes
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the thirteen
weeks ended July 4, 1998.
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 18, 1998
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