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 3, 1999
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 69,864,853 shares of Class A Common Stock, par value $.01 per
share, and 73,098,364 shares of Class B Common Stock, par value $.01 per share,
outstanding at July 3, 1999.
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INGRAM MICRO INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pages
-----
Consolidated Balance Sheet at July 3, 1999 and January 2, 1999 3
Consolidated Statement of Income for the thirteen weeks and twenty-six weeks
ended July 3, 1999 and July 4, 1998 4
Consolidated Statement of Cash Flows for the twenty-six weeks ended
July 3, 1999 and July 4, 1998 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20-21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
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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 3, JANUARY 2,
1999 1999
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 142,500 $ 96,682
Trade accounts receivable (less allowances of $64,674 and
$55,904 at July 3, 1999 and January 2, 1999, respectively) 2,664,804 2,562,050
Inventories 2,848,583 3,094,227
Other current assets 309,267 278,591
----------- -----------
Total current assets 5,965,154 6,031,550
Property and equipment, net 280,533 254,718
Goodwill, net 439,265 232,112
Other 307,260 215,024
----------- -----------
Total assets $ 6,992,212 $ 6,733,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,589,572 $ 3,306,045
Accrued expenses 296,238 254,627
Current maturities of long-term debt 29,480 38,978
----------- -----------
Total current liabilities 3,915,290 3,599,650
Convertible debentures 428,639 473,475
Other long-term debt 926,006 1,208,003
Other 56,404 45,205
----------- -----------
Total liabilities 5,326,339 5,326,333
----------- -----------
Commitments and contingencies
Redeemable Class B Common Stock 3,837 7,814
----------- -----------
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; 69,864,853 and 66,520,715 shares issued
and outstanding at July 3, 1999 and January 2, 1999, respectively 699 665
Class B Common Stock, $0.01 par value, 135,000,000
shares authorized; 73,646,489 and 75,459,710 shares issued and
outstanding (including 548,125 and 1,116,250 redeemable shares)
at July 3, 1999 and January 2, 1999, respectively 731 743
Additional paid in capital 622,348 591,235
Retained earnings 904,209 811,616
Accumulated other comprehensive income (loss) 134,087 (4,914)
Unearned compensation (38) (88)
----------- -----------
Total stockholders' equity 1,662,036 1,399,257
----------- -----------
Total liabilities and stockholders' equity $ 6,992,212 $ 6,733,404
=========== ===========
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 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales $ 6,804,813 $ 4,956,121 $ 13,530,088 $ 10,106,209
Cost of sales 6,436,985 4,640,639 12,803,006 9,460,817
------------ ------------ ------------ ------------
Gross profit 367,828 315,482 727,082 645,392
Expenses:
Selling, general and administrative 258,175 204,884 525,684 418,670
Reorganization costs 2,050 -- 8,284 --
------------ ------------ ------------ ------------
260,225 204,884 533,968 418,670
------------ ------------ ------------ ------------
Income from operations 107,603 110,598 193,114 226,722
Other (income) expense:
Interest income (1,336) (1,393) (2,655) (2,806)
Interest expense 25,642 15,896 50,866 35,136
Net foreign currency exchange loss 948 1,219 624 2,794
Other 2,731 2,259 3,514 4,971
------------ ------------ ------------ ------------
27,985 17,981 52,349 40,095
------------ ------------ ------------ ------------
Income before income taxes 79,618 92,617 140,765 186,627
Provision for income taxes 29,279 36,992 51,950 74,466
------------ ------------ ------------ ------------
Income before extraordinary item 50,339 55,625 88,815 112,161
Extraordinary gain on repurchase
of debentures, net of $2,405 in income taxes -- -- 3,778 --
------------ ------------ ------------ ------------
Net income $ 50,339 $ 55,625 $ 92,593 $ 112,161
============ ============ ============ ============
Basic earnings per share:
Income before extraordinary item $ 0.35 $ 0.40 $ 0.62 $ 0.81
Extraordinary gain on repurchase of debentures -- -- 0.03 --
------------ ------------ ------------ ------------
Net income $ 0.35 $ 0.40 $ 0.65 $ 0.81
============ ============ ============ ============
Diluted earnings per share:
Income before extraordinary item $ 0.34 $ 0.37 $ 0.60 $ 0.75
Extraordinary gain on repurchase of debentures -- -- 0.03 --
------------ ------------ ------------ ------------
Net income $ 0.34 $ 0.37 $ 0.63 $ 0.75
============ ============ ============ ============
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 3, JULY 4,
1999 1998
--------- ---------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 92,593 $ 112,161
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 35,262 26,121
Amortization of goodwill 10,252 4,162
Deferred income taxes (9,456) 89
Gain on repurchase of debentures (3,778) --
Noncash interest charge 12,178 1,738
Noncash compensation charge 1,018 2,294
Changes in operating assets and liabilities,
net of effects of acquisitions:
Trade accounts receivable 140,855 (216,068)
Inventories 322,125 519,422
Other current assets (22,784) 18,252
Accounts payable 132,020 (266,536)
Accrued expenses 44,838 (47,495)
--------- ---------
Cash provided by operating activities 755,123 154,140
--------- ---------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment (57,819) (59,967)
Proceeds from sale of property and equipment 7,652 --
Acquisitions, net of cash acquired (227,019) (8,085)
Other (3,136) (4,403)
--------- ---------
Cash used by investing activities (280,322) (72,455)
--------- ---------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES:
Redemption of Redeemable Class B Common Stock (70) (335)
Exercise of stock options including tax benefits 12,187 39,673
Proceeds from issuance of convertible debentures -- 449,604
Repurchase of convertible debentures (50,321) --
(Repayments) proceeds of debt (5,821) 10,816
Net repayments under revolving credit facilities (379,323) (559,976)
--------- ---------
Cash used by financing activities (423,348) (60,218)
--------- ---------
Effect of exchange rate changes on cash (5,635) (278)
--------- ---------
Increase in cash 45,818 21,189
Cash, beginning of period 96,682 92,212
--------- ---------
Cash, end of period $ 142,500 $ 113,401
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period:
Interest $ 50,782 $ 35,489
Income taxes 42,422 69,539
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, Latin America, and Asia Pacific.
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 necessary to present fairly the financial position of the Company
and its wholly-owned and majority-owned subsidiaries as of July 3, 1999, their
results of operations for the thirteen and twenty-six weeks ended July 3, 1999
and July 4, 1998 and their cash flows for the twenty-six weeks ended July 3,
1999 and July 4, 1998. All significant intercompany accounts and transactions
have been eliminated in consolidation. The results of operations for the
thirteen and twenty-six week periods ended July 3, 1999 may not be indicative of
the results of operations that can be expected for the full year.
NOTE 2 - EARNINGS PER SHARE
The Company has 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 or the if-converted method,
where applicable.
The composition of Basic EPS and Diluted EPS is as follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- -----------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
----------- ----------- ----------- ------------
Net income before extraordinary item $ 50,339 $ 55,625 $ 88,815 $ 112,161
=========== =========== =========== ============
Weighted average shares 143,120,896 138,898,854 142,938,040 138,154,012
=========== =========== =========== ============
Basic earnings per share before extraordinary item $ 0.35 $ 0.40 $ 0.62 $ 0.81
=========== =========== =========== ============
Weighted average shares including the dilutive effect of
stock options (4,945,912 and 11,021,954 for the 13 weeks
ended July 3, 1999 and July 4, 1998, respectively, and
5,188,158 and 10,902,854 for the 26 weeks ended
July 3, 1999 and July 4, 1998, respectively) 148,066,808 149,920,808 148,126,198 149,056,866
=========== =========== =========== ============
Diluted earnings per share before extraordinary item $ 0.34 $ 0.37 $ 0.60 $ 0.75
=========== =========== =========== ============
At July 3, 1999, there was $428,639 in Zero Coupon Convertible Senior
Debentures that were convertible into 6,427,721 shares of Class A Common Stock.
For the thirteen and twenty-six weeks ended July 3, 1999 and July 4, 1998,
respectively, these potential shares were excluded from the computation of
Diluted EPS because their effect would be antidilutive. Additionally, there were
approximately 3,226,433 and 83,892 options for the thirteen and twenty-six weeks
ended
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
July 3, 1999 and July 4, 1998, respectively, that were not included in the
computation of Diluted EPS because the exercise price was greater than the
average market price of the Class A Common Stock, thereby resulting in an
antidilutive effect.
NOTE 3 - COMPREHENSIVE INCOME
The Company has 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.
The components of accumulated other comprehensive income (loss) are as
follows:
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAIN ON OTHER
TRANSLATION AVAILABLE FOR COMPREHENSIVE
ADJUSTMENT SALE SECURITIES INCOME (LOSS)
-------------- ------------------ -----------------
Balance at January 3, 1998 $ (14,236) $ - $ (14,236)
Thirteen week change (2,407) - (2,407)
-------------- ------------------ -----------------
Balance at April 4, 1998 (16,643) - (16,643)
Thirteen week change 121 - 121
-------------- ------------------ -----------------
Balance at July 4, 1998 (16,522) - (16,522)
Thirteen week change 5,359 - 5,359
-------------- ------------------ -----------------
Balance at October 3, 1998 (11,163) - (11,163)
Thirteen week change (417) 6,666 6,249
============== ================== =================
Balance at January 2, 1999 $ (11,580) $ 6,666 $ (4,914)
============== ================== =================
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAIN ON OTHER
TRANSLATION AVAILABLE FOR COMPREHENSIVE
ADJUSTMENT SALE SECURITIES INCOME (LOSS)
-------------- ------------------ -----------------
Balance at January 2, 1999 $ (11,580) $ 6,666 $ (4,914)
Thirteen week change (16,282) 61,664 45,382
-------------- ------------------ -----------------
Balance at April 3, 1999 (27,862) 68,330 40,468
Thirteen week change (9,099) 102,718 93,619
-------------- ------------------ -----------------
Balance at July 3, 1999 $ (36,961) $ 171,048 $ 134,087
============== ================== =================
Total comprehensive income for the thirteen weeks ended July 3, 1999 and
July 4, 1998 was $143,958 and $55,746, respectively. Total comprehensive income
for the twenty-six weeks ended July 3, 1999 and July 4, 1998 was $231,594 and
$109,875, respectively.
NOTE 4 - EXTRAORDINARY ITEM
In March 1999, the Company repurchased Zero Coupon Convertible Senior
Debentures with a carrying value of $56,504 as of the repurchase date for
approximately $50,321 in cash. The debenture repurchase resulted in an
extraordinary gain of $3,778 (net of $2,405 in income taxes).
NOTE 5 - ACQUISITION
In January 1999, the Company purchased 44,114,340 shares of Electronic
Resources Ltd. ("ERL") common stock from certain shareholders, which increased
the Company's ownership to 39.6% from the 21% ownership held in 1998. In
accordance with Singapore law, the Company was required to extend a tender offer
for the remaining
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
shares and warrants of ERL as a result of its increased
ownership. The Company offered to purchase the remaining outstanding shares and
warrants for approximately $1.20 and $0.65 per share and warrant, respectively,
during the tender offer period from January 4, 1999 to February 19, 1999. In
addition, during January and February 1999, the Company made open market
purchases of ERL shares and warrants. As a result of the open market purchases
and the tender offer, the Company's ownership in ERL increased to approximately
95%. The aggregate purchase price paid in 1999 for these ERL shares and warrants
was approximately $232,010. Prior to 1999, the Company accounted for its
investment in ERL under the equity method. Due to the purchase of ERL common
stock and warrants in 1999, the Company has accounted for the acquisition of ERL
under the purchase method; accordingly, the results of ERL's operations have
been combined with those of the Company for the thirteen and twenty-six weeks
ended July 3, 1999. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of the purchase price, including the $71,212 paid in
December 1997, over the net assets acquired is approximately $208,120 and is
being amortized on a straight-line basis over 30 years. The final allocation of
the purchase price may vary as additional information is obtained; accordingly,
the final allocations may differ from those used in the unaudited consolidated
financial statements included herein.
In July 1999, the Company purchased an additional 7,956,231 shares of the
common stock of Ingram Micro Asia Ltd. (formerly known as ERL) for approximately
$9,119 in cash, increasing the Company's ownership position to approximately
98.3%. In addition, the Company commenced an unconditional voluntary take-over
offer for the remaining Ingram Micro Asia Ltd. shares and warrants not already
owned by the Company.
NOTE 6 - SEGMENT INFORMATION
Effective in 1998, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). The Company's reportable
operating segments are based on geographic location, and the measure of segment
profit is income from operations.
The Company operates predominantly in a single industry segment as a
wholesale distributor of computer-based technology products and services.
Geographic areas in which the Company operates include the United States, Europe
(Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands,
Norway, Spain, Sweden, Switzerland, and the United Kingdom) and Other
(Australia, Brazil, Canada, Chile, China, India, Indonesia, Malaysia, Mexico,
New Zealand, Peru, Singapore, and Thailand). Inter-geographic sales primarily
represent intercompany sales which are accounted for based on established sales
prices between the related companies and are eliminated in consolidation.
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
Financial information by geographic segments is as follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------ ------------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------------ ------------ ------------ ------------
NET SALES:
United States
Sales to unaffiliated customers $ 4,294,687 $ 3,478,694 $ 8,432,101 $ 6,934,781
Transfers between geographic areas 37,043 36,708 74,460 77,508
Europe 1,600,263 1,011,439 3,347,552 2,186,428
Other 909,863 465,988 1,750,435 985,000
Eliminations (37,043) (36,708) (74,460) (77,508)
------------ ------------ ------------ ------------
Total $ 6,804,813 $ 4,956,121 $ 13,530,088 $ 10,106,209
============ ============ ============ ============
INCOME FROM OPERATIONS:
United States $ 90,280 $ 92,481 $ 155,897 $ 184,095
Europe 7,932 10,928 18,268 30,426
Other 9,391 7,189 18,949 12,201
------------ ------------ ------------ ------------
Total $ 107,603 $ 110,598 $ 193,114 $ 226,722
============ ============ ============ ============
IDENTIFIABLE ASSETS:
United States $ 4,295,742 $ 3,072,884 $ 4,295,742 $ 3,072,884
Europe 1,676,245 1,055,961 1,676,245 1,055,961
Other 1,020,225 543,605 1,020,225 543,605
------------ ------------ ------------ ------------
Total $ 6,992,212 $ 4,672,450 $ 6,992,212 $ 4,672,450
============ ============ ============ ============
CAPITAL EXPENDITURES:
United States $ 21,713 $ 29,104 $ 42,235 $ 52,618
Europe 10,996 2,903 12,156 5,201
Other 2,112 908 3,428 2,148
------------ ------------ ------------ ------------
Total $ 34,821 $ 32,915 $ 57,819 $ 59,967
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION:
United States $ 13,477 $ 10,293 $ 26,469 $ 20,726
Europe 5,714 2,601 10,318 5,520
Other 4,420 1,987 8,727 4,037
------------ ------------ ------------ ------------
Total $ 23,611 $ 14,881 $ 45,514 $ 30,283
============ ============ ============ ============
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
NOTE 7 - REORGANIZATION COSTS
In February 1999, the Company initiated a plan primarily in the United
States to streamline operations and reorganize resources to increase flexibility
and service and maximize cost savings and operational efficiencies. This
reorganization plan includes instituting several organizational and structural
changes, including the closing of the Company's California-based consolidation
center and certain other redundant locations, realignment of the Company's sales
force and the creation of a product management organization that integrates
purchasing, vendor sales, and product marketing functions, as well as a
realignment of administrative functions and processes throughout the U.S.
organization.
In connection with the reorganization plan, the Company recorded a charge
of $6,234 in the thirteen weeks ended April 3, 1999 related primarily to
reorganization efforts in the United States. This reorganization charge included
$4,269 in employee termination benefits for approximately 358 employees, $1,519
for closing and consolidation of redundant facilities relating primarily to
excess lease costs net of estimated sublease income, and $446 for other costs
associated with the reorganization. Additionally, the Company recorded a
reorganization charge of $2,050 during the thirteen weeks ended July 3, 1999, in
connection with the reorganization of certain of the Company's European
operations. This reorganization charge included $1,735 in employee termination
benefits for approximately 98 employees and $315 for other costs associated with
the reorganization. These initiatives are expected to be largely completed by
the end of 1999.
The reorganization charges and related activity for the twenty-six weeks
ended July 3, 1999 are summarized as follows:
AMOUNTS PAID
1999 AND CHARGED REMAINING
REORGANIZATION AGAINST THE LIABILITY AT
CHARGE LIABILITY ADJUSTMENTS JULY 3, 1999
--------------- ------------- ------------ -------------
Employee termination benefits $ 6,004 $ 5,245 $ - $ 759
Facility costs 1,519 86 - 1,433
Other costs 761 129 - 632
--------------- ------------- ------------ -------------
Total $ 8,284 $ 5,460 $ - $ 2,824
=============== ============= ============ =============
NOTE 8 - NEW ACCOUNTING STANDARDS
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 for the Company
in fiscal 2001. 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. 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.
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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 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---------------- ---------------- ---------------- -----------------
(DOLLARS IN MILLIONS)
Net sales by geographic region:
United States $ 4,295 63.1% $ 3,479 70.2% $ 8,432 62.3% $ 6,935 68.6%
Europe 1,600 23.5% 1,011 20.4% 3,348 24.7% 2,186 21.6%
Other international 910 13.4% 466 9.4% 1,750 13.0% 985 9.8%
------- ----- ------- ----- ------- ----- ------- -----
Total $ 6,805 100.0% $ 4,956 100.0% $13,530 100.0% $10,106 100.0%
======= ===== ======= ===== ======= ===== ======= =====
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 TWENTY-SIX WEEKS
ENDED ENDED
----------------- ------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.6% 93.6% 94.6% 93.6%
----- ----- ----- -----
Gross profit 5.4% 6.4% 5.4% 6.4%
Expenses:
SG&A expenses 3.8% 4.1% 3.9% 4.1%
Reorganization costs 0.0% -- 0.1% --
----- ----- ----- -----
Income from operations 1.6% 2.3% 1.4% 2.3%
Other expense, net 0.4% 0.4% 0.4% 0.4%
----- ----- ----- -----
Income before income taxes 1.2% 1.9% 1.0% 1.9%
Provision for income taxes 0.5% 0.8% 0.4% 0.8%
----- ----- ----- -----
Income before extraordinary item 0.7% 1.1% 0.6% 1.1%
Extraordinary gain on repurchase of debentures, net of income tax -- -- 0.0% --
----- ----- ----- -----
Net income 0.7% 1.1% 0.6% 1.1%
===== ===== ===== =====
THIRTEEN WEEKS ENDED JULY 3, 1999 COMPARED TO THIRTEEN WEEKS ENDED JULY 4, 1998
Consolidated net sales increased 37.3% to $6.80 billion in the second
quarter of 1999 from $4.96 billion in the second quarter of 1998. The increase
in worldwide net sales was primarily attributable to the addition of new
customers, increased sales to the existing customer base, expansion of the
Company's product offerings, growth in the computer-based technology products
and services industry in general, the July 1998 acquisition of Munich,
Germany-based Macrotron AG ("Macrotron"), and the consolidation of ERL resulting
from the Company's increased ownership position in ERL (the "ERL Acquisition" -
See Note 5 of Notes to Consolidated Financial Statements).
Net sales from U.S. operations increased 23.5% to $4.29 billion in the
second quarter of 1999 from $3.48 billion in the second quarter of 1998
primarily due to growth of the Company's ongoing business. Net sales from
European operations increased 58.2% to $1.60 billion in the second quarter of
1999 from $1.01 billion in the second quarter of 1998 primarily due to the July
1998 acquisition of Macrotron and the overall growth in the Company's
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
existing European operations. Other net sales increased 95.3% to $909.9 million
in the second quarter of 1999 from $466.0 million in the second quarter of 1998
primarily due to the ERL Acquisition in January 1999 as well as growth in the
Company's Canadian operations.
Gross profit, as a percentage of net sales, decreased to 5.4% in the second
quarter of 1999 from 6.4% in the second quarter of 1998. The decrease was
largely attributable to significant competitive pricing pressures experienced
primarily in the U.S. and larger countries in Europe combined with changes in
supplier terms and conditions. The Company expects this to continue for the
foreseeable future.
Total SG&A expenses, excluding reorganization costs, increased 26.0% to
$258.2 million in the second quarter of 1999 from $204.9 million in the second
quarter of 1998, but decreased as a percentage of net sales to 3.8% in the
second quarter of 1999 from 4.1% in the second quarter of 1998. The increase in
SG&A expenses was attributable to the acquisitions of ERL in January 1999 and
Macrotron in July 1998 as well as the increased expenses required to support the
expansion of the Company's business. Expenses related to expansion consists of
incremental personnel and support costs, lease expense related to new operating
facilities, and the expenses associated with the development and maintenance of
information systems. The overall decrease in SG&A expenses as a percentage of
net sales is attributable to economies of scale from greater sales volume, the
reorganization efforts during 1999 and continued cost-control measures.
In the second quarter of 1999, the Company recorded a reorganization
charge of approximately $2.0 million in connection with the reorganization of
certain of the Company's European operations. This reorganization charge
included approximately $1.7 million in employee termination benefits for
approximately 98 employees and $0.3 million for other costs associated with the
reorganization. Based upon the Company's reorganization efforts and continued
cost control measures, the Company expects its SG&A expenses to remain below
4.0% of consolidated net sales for the foreseeable future. However, any
significant decline in future sales growth rates or significant changes in the
business or industry in which the Company operates could impact this trend.
Income from operations, excluding reorganization costs, decreased as a
percentage of net sales to 1.6% in the second quarter of 1999 from 2.3% in the
second quarter of 1998. The decrease in income from operations, excluding
reorganization costs, as a percentage of net sales is primarily due to the
significant decrease in gross profit as a percentage of net sales as described
above. U.S. income from operations, excluding reorganization costs, as a
percentage of net sales decreased to 2.1% in the second quarter of 1999 from
2.7% in the second quarter of 1998. European income from operations, excluding
reorganization costs, as a percentage of net sales decreased to 0.6% in the
second quarter of 1999 from 1.1% in the second quarter of 1998. For geographic
regions outside the United States and Europe, income from operations, excluding
reorganization costs, as a percentage of net sales decreased to 1.0% in the
second quarter of 1999 from 1.5% in the second quarter of 1998. Income from
operations, including reorganization costs, as a percentage of net sales
decreased to 1.6% in the second quarter of 1999 from 2.3% in the second quarter
of 1998.
Other expense, net, which consists primarily of interest expense, foreign
currency exchange losses, and miscellaneous non-operating expenses, increased
55.6% to $28.0 million in the second quarter of 1999 from $18.0 million in the
second quarter of 1998. Other expense, net, remained constant as a percentage of
net sales at 0.4% for the second quarters of 1999 and 1998. Interest expense
grew as a result of increased borrowings to finance the ERL and Macrotron
acquisitions; the investment in SOFTBANK Corp ("Softbank"), Japan's largest
distributor of software, peripherals and networking products; expansion of the
Company's business; and ongoing sales growth. In 1999, the Company expects its
interest expense to increase over comparable periods in 1998 primarily due to
the factors described above. Foreign exchange losses decreased by $0.3 million
in the second quarter of 1999 compared to the second quarter of 1998 primarily
due to the strengthening of currencies in Latin America as compared to the U.S.
dollar.
The provision for income taxes decreased 20.9% to $29.3 million in the
second quarter of 1999 from $37.0 million in the second quarter of 1998,
reflecting the 14.0% decrease in the Company's income before income taxes. The
Company's effective tax rate was 36.8% in the second quarter of 1999 compared to
39.9% in the second quarter of 1998. The decrease in the effective tax rate was
primarily due to tax planning in certain countries as well as the
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
acquisition of ERL, which has a lower effective tax rate compared to the
Company's overall effective tax rate.
TWENTY-SIX WEEKS ENDED JULY 3, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 4,
1998
Consolidated net sales increased 33.9% to $13.53 billion in the first half
of 1999 from $10.11 billion in the first half of 1998. The increase in worldwide
net sales was primarily attributable to the same factors summarized in the
discussion of net sales for the thirteen weeks ended July 3, 1999 and July 4,
1998.
Net sales from U.S. operations increased 21.6% to $8.43 billion in the
first half of 1999 from $6.93 billion in the first half of 1998 primarily due to
growth of the Company's ongoing business. Net sales from European operations
increased 53.1% to $3.35 billion in the first half of 1999 from $2.19 billion in
the first half of 1998 primarily due to the July 1998 acquisition of Macrotron
and the overall growth in the Company's existing European operations. Other net
sales increased 77.7% to $1.75 billion in the first half of 1999 from $985.0
million in the first half of 1998 primarily due to the ERL Acquisition in
January 1999 as well as growth in the Company's Canadian operations.
Gross profit, as a percentage of net sales, decreased to 5.4% in the first
half of 1999 from 6.4% in the first half of 1998. The decrease was largely
attributable to the same factors summarized in the discussion of gross profit
for the thirteen weeks ended July 3, 1999 and July 4, 1998.
Total SG&A expenses, excluding reorganization costs, increased 25.6% to
$525.7 million in the first half of 1999 from $418.7 million in the first half
of 1998, but decreased as a percentage of net sales to 3.9% in the first half of
1999 from 4.1% in the first half of 1998. The change in SG&A expenses in dollar
terms and as a percentage of net sales was largely attributable to the same
factors summarized in the discussion of SG&A expenses for the thirteen weeks
ended July 3, 1999 and July 4, 1998.
In February 1999, the Company initiated a plan, primarily in the United
States, but also in Europe, to streamline operations and reorganize resources to
increase flexibility and service and maximize cost savings and operational
efficiencies. This reorganization plan included instituting several
organizational and structural changes, including the closing of the Company's
California-based consolidation center and certain other redundant locations,
realignment of the Company's sales force and the creation of a product
management organization that integrates purchasing, vendor sales, and product
marketing functions, as well as a realignment of administrative functions and
processes throughout the United States organization.
In connection with the reorganization plan, the Company recorded a charge
of approximately $8.3 million in the twenty-six weeks ended July 3, 1999. This
reorganization charge included approximately $6.0 million in employee
termination benefits for approximately 456 employees, $1.5 million for closing
and consolidation of redundant facilities primarily relating to excess lease
costs net of estimated sublease income, and $0.8 million for other costs
associated with the reorganization (See Note 7 to Notes to Consolidated
Financial Statements). These charges related primarily to the reorganization
efforts in the United States operations as well as certain countries within the
European operations. Based upon these changes and continued cost control
measures, the Company expects its SG&A expenses to remain below 4.0% of
consolidated net sales for the foreseeable future. However, any significant
decline in future sales growth rates or significant changes in the business or
industry in which the Company operates could impact this trend.
Income from operations, excluding reorganization costs, decreased as a
percentage of net sales to 1.5% in the first half of 1999 from 2.3% in the first
half of 1998. The decrease in income from operations, excluding reorganization
costs, as a percentage of net sales is primarily due to the significant decrease
in gross profit as a percentage of net sales as described above. U.S. income
from operations, excluding reorganization costs, as a percentage of net sales
decreased to 1.9% in the first half of 1999 from 2.7% in the first half of 1998.
European income from operations, excluding reorganization costs, as a percentage
of net sales decreased to 0.6% in the first half of 1999 from 1.4% in the first
half of 1998. For geographic regions outside the United States and Europe,
income from operations, excluding reorganization costs, as a percentage of net
sales decreased to 1.1% in the first half of 1999 from 1.2% in the first half of
1998. Income from operations, including reorganization costs, as a percentage of
net sales decreased to 1.4% in the first half of 1999 from 2.3% in the first
half of 1998.
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Other expense, net, which consists primarily of interest expense, foreign
currency exchange losses, and miscellaneous non-operating expenses, increased
30.6% to $52.3 million in the first half of 1999 from $40.1 million in the first
half of 1998. Other expense, net, remained constant as a percentage of net sales
at 0.4% for the first half of 1999 and 1998. Interest expense grew primarily due
to the same factors summarized in the discussion of other expense, net, for the
thirteen weeks ended July 3, 1999 and July 4, 1998. Foreign exchange losses
decreased by $2.2 million in the first half of 1999 compared to the first half
of 1998 primarily due to the strengthening of currencies in Latin America as
compared to the U.S. dollar.
The provision for income taxes decreased 30.2% to $52.0 million in the
first half of 1999 from $74.5 million in the first half of 1998, reflecting the
24.6% decrease in the Company's income before income taxes. The Company's
effective tax rate was 36.9% in the first half of 1999 compared to 39.9% in the
first half of 1998. The decrease in the effective tax rate was primarily due to
tax planning in certain countries as well as the acquisition of ERL, which has a
lower effective tax rate compared to the Company's overall effective tax rate.
In March 1999, the Company repurchased Zero Coupon Convertible Senior
Debentures with a carrying value of $56.5 million as of the repurchase date for
approximately $50.3 million in cash. The debenture repurchase resulted in an
extraordinary gain of $3.8 million (net of $2.4 million in income taxes).
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
Cash Flows
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 initial
public offering completed in November 1996, and the issuance of the Zero Coupon
Convertible Senior Debentures in June 1998.
Net cash provided by operating activities was $755.1 million in the first
six months of 1999 as compared to $154.1 million in the first six months of
1998. The increase in cash provided by operating activities was largely
attributable to the reduction of trade receivables, excluding acquisitions, for
the first six months of 1999 compared to the first six months of 1998, as well
as the increase in trade creditor financing of product through the increase in
accounts payable, excluding acquisitions, in the first six months of 1999
compared to the first six months of 1998.
Net cash used by investing activities was $280.3 million in the first six
months of 1999 compared to $72.5 million in the first six months of 1998. The
increase was primarily due to the Company's acquisition of ERL and the expansion
of warehouse and other facilities. In the first six months of 1999, the Company
used approximately $227.0 million in cash, net of cash acquired, primarily for
the purchase of common stock and warrants of ERL (see Note 5 of the Notes to
Consolidated Financial Statements).
Net cash used by financing activities was $423.3 million in the first six
months of 1999 compared to $60.2 million in the first six months of 1998. The
increase in cash used by financing activities was due to repayments of
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
debt under the revolving credit facilities through the management of trade
debtors and creditors, repayments of other debt and repurchases of convertible
debentures.
Acquisitions
In December 1997, the Company completed its purchase of approximately 21%
of the outstanding common stock and approximately 19% of an outstanding class of
warrants of ERL, a publicly traded electronic components distributor based in
Singapore, for approximately $71 million. In January 1999, the Company purchased
additional shares from specific shareholders, which brought the Company's total
ownership to approximately 39.6%. In January and February 1999, the Company made
open market purchases of ERL shares and warrants, and on February 19, 1999
completed a tender offer for the remaining outstanding shares and warrants of
ERL. These additional purchases resulted in a 95% ownership of the outstanding
common stock and a 95% ownership of the outstanding warrants of ERL. The total
cash paid for these purchases during 1999 was approximately $232 million.
In July 1999, the Company purchased an additional 7,956,231 shares of the
common stock of Ingram Micro Asia Ltd. (formerly known as ERL) for approximately
$9 million in cash, increasing the Company's ownership position to approximately
98.3%. On July 14, 1999, the Company commenced an unconditional voluntary
take-over offer for the remaining Ingram Micro Asia Ltd. shares and warrants not
already owned by the Company.
Capital Resources
The Company has three credit facilities with bank syndicates providing 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 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 3, 1999, the Company had $604.9 million in
outstanding borrowings under these credit facilities.
The Company has an arrangement pursuant to which certain U.S. trade
accounts receivable of the Company are transferred to a trust, which in turn has
sold certificates representing undivided interests in the total pool of trade
receivables without recourse. The trust has issued fixed-rate medium-term
certificates (which results in a reduction of trade accounts receivable and debt
on the Company's Consolidated Balance Sheet) and a variable rate certificate to
support a commercial paper program. At July 3, 1999 and January 2, 1999, the
amount of medium-term certificates outstanding totaled $75 million and $100
million, respectively, and the amount of commercial paper outstanding totaled
$130 million and $150 million, respectively. In addition, the Company has
certain other facilities relating to accounts receivable in Europe beginning in
1999. Under these programs, the Company has sold approximately $66 million of
receivables resulting in a reduction of trade accounts receivable and debt on
the Company's Consolidated Balance Sheet at July 3, 1999. The Company believes
that there are sufficient trade accounts receivable to support the outstanding
medium-term certificates as well as the commercial paper program and European
facilities.
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. The Company has subsequently registered the resale of these
debentures with the SEC. 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. In March 1999, the Company repurchased Zero Coupon
Convertible Senior Debentures with a carrying value of $56.5 million as of the
repurchase date for approximately $50.3 million in cash. The debenture
repurchase resulted in an extraordinary gain of $3.8 million (net of $2.4
million in income taxes).
The debentures are currently convertible into approximately 6.4 million
shares of the Company's Class A Common Stock. The debentures are redeemable at
the option of 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, and 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
the redemption. In the event of a repurchase at the option of the holder (other
than upon a Fundamental Change), the Company may, at its
15
16
Management's Discussion And Analysis Continued
option, satisfy the redemption 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 the payment of cash or Class A Common Stock, to
satisfy the redemption in new Zero Coupon Convertible Senior Debentures due
2018.
EURO CONVERSION
On January 1, 1999, a single currency called the euro was introduced in
Europe. Eleven of the 15 member countries of the European Union adopted the euro
as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002 (but not later than July 1, 2002). During this transition period, parties
may settle transactions using either the euro or a participating country's
legacy currency. Beginning in January 2002, new euro-denominated bills and coins
will be issued and legacy currencies will be withdrawn from circulation. The
Company has implemented plans to address the issues raised by the euro currency
conversion. These plans include, among others, the need to adapt computer
information systems and business processes and equipment to accommodate
euro-denominated transactions; the need to analyze the legal and contractual
implications on contracts; and the ability of the Company's customers and
vendors to accommodate euro-denominated transactions on a timely basis. Since
the implementation of the euro on January 1, 1999, the Company has experienced
improved efficiencies in its cash management program in Europe as all
intracompany transactions within participating countries are conducted in euros.
In addition, the Company has reduced hedging activities in Europe for
transactions conducted between euro participating countries. Since the Company's
information systems and processes generally accommodate multiple currencies, the
Company anticipates that modifications to its information systems, equipment and
processes will be made on a timely basis and does not expect any failures which
would have a material adverse effect on the Company's financial position or
results of operations or that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
The Company has not experienced any material adverse effects on its financial
position or results of operations in connection with the January 1, 1999 first
stage conversion.
YEAR 2000 MATTERS
Introduction. The Company's Year 2000 ("Y2K") readiness issues are broad
and complex. As is the case with many computer software systems, some of the
Company's systems use two-digit data fields that recognize dates using the
assumption that the first two digits are "19" (i.e., the number "99" is
recognized as the year "1999"). Therefore, the Company's date-critical functions
relating to the year 2000 and beyond, such as sales, distribution, purchasing,
inventory control, merchandise planning and replenishment, facilities, and
financial systems, may be severely affected unless changes are made to these
systems.
State of Readiness. With the assistance of an outside consultant, the
Company commenced a review of its internal information technology ("IT") systems
to identify applications that are not Y2K ready and to assess the impact of the
Y2K problem. The Company has developed an overall plan to modify its internal
systems to be Y2K ready. In addition, the Company formed a Y2K Global Project
Team to provide global oversight to the Company's Y2K readiness activities in
the IT and non-IT areas, the assessment of Y2K risks in connection with
third-party relationships and the development of contingency plans.
The Company's Y2K plan is divided into three major sections: IT systems,
non-IT systems ("Non-IT Systems"), and Y2K interfaces with material third
parties. The broad phases of the plan are generally common to all three
sections. The phases consist of: (1) inventorying potential Y2K sensitive items,
(2) assigning priorities to identified items, (3) assessing the Y2K readiness of
items determined to be material to the Company, (4) repairing or replacing
material items that are determined not to be Y2K ready ("remediation"), (5)
testing material items and/or certification of Y2K readiness, i.e., validation
and written confirmation that the process, activity or component can properly
process a date beyond December 31, 1999 as it does earlier dates and (6)
designing and implementing contingency and business continuation plans for the
Company.
Please refer to "--Contingency Planning and Risks" regarding the Company's
progress for its Y2K plan with
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
respect to ERL, which became a subsidiary of the Company in February 1999.
Information Technology Systems. The Company has completed an inventory and
technical assessment (with the exception of personal computers, which are
assessed and remediated in a single step) of all of its global hardware,
operating systems, software (including business applications, but excluding
desktop software such as office tools) and electronic interfaces that were in
operation by the end of December 1998 ("IT Systems") for Y2K remediation. With
the exception of the Company's recently acquired German subsidiary, Macrotron,
the Company has completed remediation and unit testing or upgrading/replacement
of its IT Systems in the second quarter of 1999. As a result of the Company's
continued integration and consolidation of the Macrotron facilities, the Company
anticipates that the second-quarter 1999 completion date for remediation and
unit testing or upgrading/replacement of Macrotron's IT Systems will be extended
by two months. With the exception of Macrotron and ERL, the Company has
completed system and century testing and certification of Y2K readiness of all
of its IT Systems in the second quarter of 1999. All systems or systems
enhancements implemented since December 1998 have been developed as Y2K ready
and do not require remediation. However, all are subjected to Y2K unit and
century testing.
The Company uses different test methodologies for different phases: (1)
unit testing is used to verify that the individually changed components function
properly at the unit level, (2) system/integration testing is used to verify
that all changed components function as a complete system, (3) regression
testing is used to verify that changes made for Y2K readiness do not impact any
other functions within the IT system, and (4) century testing, i.e., simulating
the transition to January 1, 2000, is used to validate that the entire IT system
will function on or after such date.
With respect to desktop software on the Company's personal computers, the
Company provided to its associates before the end of 1998 a list of Y2K ready
versions of software. Associates were advised that if they have non-Y2K ready
versions of software on their personal computers, they must request upgrades to
Y2K ready versions of software. The Company has provided the necessary IT
support to upgrade associates' personal computers and is periodically reminding
associates to assure that the necessary upgrades occur and to make appropriate
adjustments to date-sensitive databases or programs.
Non-Information Technology Systems. The Non-IT Systems consist of any
device which is able to store and report date-related information, such as
access control systems, elevators, escalators, conveyors and sensors; building
systems; and other items containing a microprocessor or an internal clock such
as hand-held computers used to assist with inventory control, electric power
distribution systems and vaults. The Company has completed a global inventory
and assessment of its Non-IT Systems. All Non-IT Systems that are deemed
business-critical either (a) have written certifications that they are Y2K ready
(e.g., confirmations from manufacturers that the product is not impacted by the
Y2K date transition or will continue to operate on and after January 1, 2000
just as it did prior to such date) or (b) have been replaced and/or modified to
be Y2K ready by the end of the second quarter of 1999.
Y2K Interfaces with Material Third Parties. The Company has completed an
inventory of third parties (including, among other things, domestic and
international suppliers and vendors, financial service providers and
transportation and other logistics providers) whose Y2K noncompliance could have
a material adverse effect on the Company's business, financial condition or
results of operations. In addition, the Company has sent questionnaires to all
such third parties in order to determine their current Y2K status, tracking
responses to these questionnaires and using such responses towards contingency
plan development. The Company has completed such assessment and inquiry. Follow
up inquiries, where appropriate, are planned throughout the remainder of 1999.
Costs to Address Y2K Readiness. The Company has incurred approximately
$6.5 million to date on Y2K readiness efforts (excluding compensation and
benefit costs for associates who do not work full time on the Y2K project and
costs of systems upgrades that would normally have been made on a similar
timetable) with respect to IT Systems and anticipates that its total
expenditures will not exceed $10 million. However, such amount does not reflect
costs for upgrades to servers, personal computers, communications equipment and
Non-IT Systems on a global basis as a result of potential new acquisitions
and/or business relationships throughout the remainder of 1999 as the scope of
this cost will not be known until the Company has completed technical assessment
of all of these areas. Although there are opportunity costs and some diversion
of human resources to the Company's Y2K
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
readiness efforts, management believes that no significant IT projects have been
deferred or accelerated due to this effort.
Contingency Planning and Risks. The Y2K Global Project Team is responsible
for the development of a global contingency plan to address the Company's
at-risk business functions as a result of Y2K issues. The Company completed its
global contingency plan in the second quarter of 1999. In the normal course of
business, the Company maintains and deploys contingency plans designed to
address various other potential business interruptions. For example, the Company
has the capability in the United States to automatically reroute incoming
telephone calls, such as from its Santa Ana (West Coast sales) facility to its
Buffalo (East Coast sales) facility, and the ability to reroute warehouse
shipping from one U.S. location to another location. Although these plans are
not Y2K-specific, they may be applicable to address limited Y2K failures or
interruption of support provided by some third parties resulting from their
failure to be Y2K ready.
The Company's global IT and Non-IT operations are highly centralized in
the United States. The Company's strategy with respect to Y2K readiness is to
resolve its Y2K issues from a global perspective first through its U.S.
operations. For example, the Company's core enterprise system, IMpulse, is based
in the U.S. but operates globally. Remediation of this system is effective
across the Company's entire operations. However, the Company may continue to
experience risks with respect to new acquisitions where new management may not
be as familiar with the Company's computer systems (although the Company strives
to convert newly acquired operations to IMpulse as soon as possible), or the
existing associates may not be familiar with the Company's Y2K plan. For
example, the Company completed an unconditional tender offer for ERL's shares
and warrants on February 19, 1999. The Company currently believes that it will
complete the various stages with respect to IT Systems, Non-IT Systems and Y2K
interfaces with material third parties in the ERL organization approximately two
months later than the target dates set forth above. A similar extension of
approximately two months of the target dates for the remediation and unit
testing or upgrading/replacement of IT Systems for the Company's recently
acquired Macrotron organization in Germany is anticipated.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
results of operations, liquidity and financial condition. In addition, the
Company's operating results could be materially adversely affected if it were to
be held responsible for the failure of any products sold by the Company to be
Y2K ready despite the Company's disclaimer of product warranties and the
limitation of liability contained in its sales terms and conditions.
NEW ACCOUNTING STANDARDS
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 for the Company
in fiscal year 2001. 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. 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
The matters in this Form 10-Q that are forward-looking statements are
based on current management expectations that involve certain risks, including
without limitation: the potential decline as well as seasonal variations in
demand for the Company's products; the potential termination of a supply
agreement with a major supplier; continued pricing and margin pressures; product
supply shortages; rapid product improvement and technological changes, and
resulting obsolescence risks; unavailability of adequate capital; the impact on
management of growth and acquisitions; foreign currency fluctuations; the
failure to achieve substantial Year 2000 readiness; and reliability of
information systems. For further discussion of these and other significant
factors to consider in connection with forward-looking statements concerning the
Company, reference is made to Exhibit 99.01 of the Company's Annual Report on
Form 10-K for fiscal year ended January 2, 1999; other risks or
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
uncertainties may be detailed from time to time in the
Company's future SEC filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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, 1999.
(b) The one matter submitted for a vote at the Annual Meeting was the
election of seven directors (constituting the entire Board of
Directors). The following table lists the individuals and the number
of votes cast for, against or withheld and abstention for each such
individual elected to the Board of Directors for a term to expire at
the 2000 Annual Meeting of Shareowners. There were no broker
non-votes.
Nominee No. of Votes
------- ------------
Don H. Davis, Jr. For 739,217,594
Withheld/Against 2,139,400
Abstention 48,840
John R. Ingram For 741,339,519
Withheld/Against 17,475
Abstention 48,840
Martha R. Ingram For 741,341,462
Withheld/Against 15,532
Abstention 48,840
Philip M. Pfeffer For 741,226,318
Withheld/Against 130,676
Abstention 48,840
J. Phillip Samper For 741,356,494
Withheld/Against 500
Abstention 48,840
20
21
Nominee (continued) No. of Votes
------------------- ------------
Jerre L. Stead For 741,344,631
Withheld/Against 12,363
Abstention 48,840
Joe B. Wyatt For 741,236,423
Withheld/Against 120,571
Abstention 48,840
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
--- -----------
10.44 Agreement with Douglas A. Antone dated June 23, 1999
10.45 Ingram Micro Supplemental Investment Savings Plan
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 3, 1999.
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 17, 1999
21