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 OCTOBER 2, 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 70,758,232 shares of Class A Common Stock, par value $.01 per
share, and 73,390,939 shares of Class B Common Stock, par value $.01 per share,
outstanding at October 2, 1999.
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INGRAM MICRO INC.
INDEX
Pages
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at October 2, 1999 and January 2, 1999 3
Consolidated Statement of Income for the thirteen weeks and thirty-nine weeks
ended October 2, 1999 and October 3, 1998 4
Consolidated Statement of Cash Flows for the thirty-nine weeks ended
October 2, 1999 and October 3, 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
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
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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)
OCTOBER 2, JANUARY 2,
1999 1999
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 134,963 $ 96,682
Trade accounts receivable (less allowances of $69,839 and
$55,904 at October 2, 1999 and January 2, 1999, respectively) 2,738,539 2,562,050
Inventories 2,735,175 3,094,227
Other current assets 351,949 278,591
----------- -----------
Total current assets 5,960,626 6,031,550
Property and equipment, net 298,792 254,718
Goodwill, net 455,732 232,112
Other 485,457 215,024
----------- -----------
Total assets $ 7,200,607 $ 6,733,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,419,738 $ 3,306,045
Accrued expenses 327,044 254,627
Current maturities of long-term debt 31,615 38,978
----------- -----------
Total current liabilities 3,778,397 3,599,650
Convertible debentures 434,433 473,475
Other long-term debt 1,037,616 1,208,003
Other 86,459 45,205
----------- -----------
Total liabilities 5,336,905 5,326,333
----------- -----------
Redeemable Class B Common Stock 3,800 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;
70,758,232 and 66,520,715 shares issued
and outstanding at October 2, 1999 and January 2, 1999, respectively 708 665
Class B Common Stock, $0.01 par value, 135,000,000 shares authorized;
73,390,939 and 75,459,710 shares issued and outstanding (including
542,855 and 1,116,250 redeemable shares)
at October 2, 1999 and January 2, 1999, respectively 728 743
Additional paid in capital 629,916 591,235
Retained earnings 920,047 811,616
Accumulated other comprehensive income (loss) 308,516 (4,914)
Unearned compensation (13) (88)
----------- -----------
Total stockholders' equity 1,859,902 1,399,257
----------- -----------
Total liabilities and stockholders' equity $ 7,200,607 $ 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 THIRTY-NINE WEEKS ENDED
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ----------- -----------
Net sales $6,710,093 $5,707,974 $20,240,181 $15,814,183
Cost of sales 6,388,205 5,350,176 19,191,211 14,810,993
---------- ---------- ----------- -----------
Gross profit 321,888 357,798 1,048,970 1,003,190
Expenses:
Selling, general and administrative 266,447 239,370 792,131 657,808
Reorganization costs 2,675 -- 10,959 --
---------- ---------- ----------- -----------
269,122 239,370 803,090 657,808
---------- ---------- ----------- -----------
Income from operations 52,766 118,428 245,880 345,382
Other (income) expense:
Interest income (635) (2,339) (3,290) (5,145)
Interest expense 23,000 16,532 73,866 51,700
Net foreign currency exchange loss 965 2,975 1,589 6,001
Other 4,685 1,938 8,199 6,877
---------- ---------- ----------- -----------
28,015 19,106 80,364 59,433
---------- ---------- ----------- -----------
Income before income taxes 24,751 99,322 165,516 285,949
Provision for income taxes 8,913 39,530 60,863 113,996
---------- ---------- ----------- -----------
Income before extraordinary item 15,838 59,792 104,653 171,953
Extraordinary gain on repurchase
of debentures, net of $2,405 in income taxes -- -- 3,778 --
---------- ---------- ----------- -----------
Net income $ 15,838 $ 59,792 $ 108,431 $ 171,953
========== ========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 0.11 $ 0.43 $ 0.73 $ 1.24
Extraordinary gain on repurchase of debentures -- -- 0.03 --
---------- ---------- ----------- -----------
Net income $ 0.11 $ 0.43 $ 0.76 $ 1.24
========== ========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.11 $ 0.40 $ 0.70 $ 1.15
Extraordinary gain on repurchase of debentures -- -- 0.03 --
---------- ---------- ----------- -----------
Net income $ 0.11 $ 0.40 $ 0.73 $ 1.15
========== ========== =========== ===========
See accompanying notes to these consolidated financial statements.
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INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN 000S)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 108,431 $ 171,953
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 54,800 40,300
Amortization of goodwill 16,367 7,620
Deferred income taxes (16,440) (3,429)
Gain on repurchase of debentures (3,778) --
Noncash interest charge 18,019 7,649
Noncash compensation charge 1,526 3,440
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable 46,733 (412,652)
Inventories 430,811 404,300
Other current assets (68,971) 20,875
Accounts payable (3,145) 56,556
Accrued expenses 70,956 (24,807)
--------- ---------
Cash provided by operating activities 655,309 271,805
--------- ---------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment (89,605) (105,038)
Proceeds from sale of property and equipment 7,652 --
Acquisitions, net of cash acquired (241,107) (85,802)
Other (2,856) (722)
--------- ---------
Cash used by investing activities (325,916) (191,562)
--------- ---------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES:
Redemption of Redeemable Class B Common Stock (107) (440)
Exercise of stock options including tax benefits 19,119 58,763
Proceeds from issuance of convertible debentures -- 449,604
Repurchase of convertible debentures (50,321) --
Proceeds (repayments) of debt 211,432 (130,909)
Net repayments under revolving credit facilities (468,046) (456,789)
--------- ---------
Cash used by financing activities (287,923) (79,771)
--------- ---------
Effect of exchange rate changes on cash (3,189) 1,792
--------- ---------
Increase in cash 38,281 2,264
Cash, beginning of period 96,682 92,212
--------- ---------
Cash, end of period $ 134,963 $ 94,476
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period:
Interest $ 68,554 $ 50,106
Income taxes $ 77,832 $ 78,362
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,
directly and through its majority- and wholly-owned subsidiaries, 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 include the accounts of Ingram Micro
Inc. and all majority- and wholly-owned subsidiaries. These financial statements
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 as of October
2, 1999, their results of operations for the thirteen and thirty-nine weeks
ended October 2, 1999 and October 3, 1998 and their cash flows for the
thirty-nine weeks ended October 2, 1999 and October 3, 1998. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the thirteen and thirty-nine week periods ended
October 2, 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 reports earnings per share in accordance with the provisions of
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 THIRTY-NINE WEEKS ENDED
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income before extraordinary item $ 15,838 $ 59,792 $ 104,653 $ 171,953
============ ============ ============ ============
Weighted average shares 143,737,247 140,018,639 143,204,442 138,775,555
============ ============ ============ ============
Basic earnings per share before extraordinary item $ 0.11 $ 0.43 $ 0.73 $ 1.24
============ ============ ============ ============
Weighted average shares including
the dilutive effect of stock options
(4,305,077 and 10,641,441 for the 13 weeks ended
October 2, 1999 and October 3, 1998,
respectively, and 4,893,798 and 10,815,716 for
the 39 weeks ended October 2, 1999 and
October 3, 1998, respectively) 148,042,324 150,660,080 148,098,240 149,591,271
============ ============ ============ ============
Diluted earnings per share before extraordinary item $ 0.11 $ 0.40 $ 0.70 $ 1.15
============ ============ ============ ============
At October 2, 1999, there were $434,433 in Zero Coupon Convertible Senior
Debentures that were convertible
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
into 6,427,721 shares of Class A Common Stock. For the thirteen and thirty-nine
weeks ended October 2, 1999 and October 3, 1998, respectively, these potential
shares were excluded from the computation of Diluted EPS because their effect
would be antidilutive. Additionally, there were approximately 3,364,596 and
91,014 stock options for the thirteen and thirty-nine weeks ended October 2,
1999 and October 3, 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
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("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
Thirteen week change 13,858 160,571 174,429
--------- --------- ---------
Balance at October 2, 1999 $ (23,103) $ 331,619 $ 308,516
========= ========= =========
During 1998, the Company purchased approximately $50,000 of the common
stock of SOFTBANK Corp. ("Softbank"), Japan's largest distributor of software,
peripherals and networking products. These securities had a gross unrealized
holding gain of $331,619 at October 2, 1999 and $6,666 as of January 2, 1999.
Income taxes have not been provided on the unrealized gain due to tax planning
strategies that the Company believes will reduce its tax consequences to an
immaterial amount.
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INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN 000S, EXCEPT PER SHARE DATA)
Total comprehensive income for the thirteen weeks ended October 2, 1999 and
October 3, 1998 was $190,267 and $65,151, respectively. Total comprehensive
income for the thirty-nine weeks ended October 2, 1999 and October 3, 1998 was
$421,861 and $175,026, 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 the common
stock of Ingram Micro Asia Ltd. (formerly known as Electronic Resources Ltd.,
"ERL") 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 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 for these ERL shares and warrants was approximately
$232,010. In the third quarter of 1999, the Company commenced a take-over offer
for the remaining ERL shares and warrants not already owned by Ingram Micro. As
a result of the takeover, the Company purchased an additional 12,151,748 shares
and 1,337,962 warrants of ERL for approximately $14,850 in cash, increasing the
Company's ownership position to 100% of the outstanding shares of ERL and
approximately 99% of the outstanding warrants.
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 thirty-nine weeks ended October 2, 1999. The
purchase price was allocated on a preliminary basis 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 was determined to be approximately
$225,153 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 these
unaudited consolidated financial statements.
NOTE 6 - SEGMENT INFORMATION
The Company operates predominantly in a single industry segment as a
wholesale distributor of computer-based technology products and services. The
Company's reportable operating segments are based on geographic location, and
the measure of segment profit is income from operations. Geographic areas in
which the Company operates include the United States, Europe (Austria, Belgium,
Denmark, Finland, France, Germany, Hungary, Italy, The Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, and the United Kingdom) and Other
(Argentina, 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 THIRTY-NINE WEEKS ENDED
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ----------- -----------
NET SALES:
United States
Sales to unaffiliated customers $4,033,406 $3,764,498 $12,465,508 $10,699,278
Transfers between geographic areas 50,441 43,777 124,901 121,285
Europe 1,639,624 1,452,672 4,987,176 3,639,100
Other 1,037,063 490,804 2,787,497 1,475,805
Eliminations (50,441) (43,777) (124,901) (121,285)
---------- ---------- ----------- -----------
Total $6,710,093 $5,707,974 $20,240,181 $15,814,183
========== ========== =========== ===========
INCOME (LOSS) FROM OPERATIONS:
United States $ 47,818 $ 106,293 $ 203,715 $ 291,340
Europe (5,109) 6,335 13,159 36,761
Other 10,057 5,800 29,006 17,281
---------- ---------- ----------- -----------
Total $ 52,766 $ 118,428 $ 245,880 $ 345,382
========== ========== =========== ===========
IDENTIFIABLE ASSETS:
United States $4,561,497 $3,417,427 $ 4,561,497 $ 3,417,427
Europe 1,801,470 1,576,135 1,801,470 1,576,135
Other 837,640 494,764 837,640 494,764
---------- ---------- ----------- -----------
Total $7,200,607 $5,488,326 $ 7,200,607 $ 5,488,326
========== ========== =========== ===========
CAPITAL EXPENDITURES:
United States $ 14,240 $ 36,647 $ 56,475 $ 89,265
Europe 13,198 7,581 25,354 12,782
Other 4,348 843 7,776 2,991
---------- ---------- ----------- -----------
Total $ 31,786 $ 45,071 $ 89,605 $ 105,038
========== ========== =========== ===========
DEPRECIATION AND AMORTIZATION:
United States $ 14,535 $ 10,722 $ 41,004 $ 31,494
Europe 6,687 4,962 17,006 10,482
Other 4,431 1,953 13,157 5,944
---------- ---------- ----------- -----------
Total $ 25,653 $ 17,637 $ 71,167 $ 47,920
========== ========== =========== ===========
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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 ("U.S."), 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 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 services, 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 U.S. 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. The Company recorded an additional
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. In the third quarter of 1999, the Company recorded an
additional charge of $2,675 related primarily to continued reorganization
efforts in the sales, product management, and information technology departments
in the U.S. operations. The reorganization charge of $2,675 represents employee
termination benefits for approximately 130 employees. These initiatives are
expected to be substantially completed by the end of 1999.
The reorganization charges and related activity for the thirty-nine weeks
ended October 2, 1999 are summarized as follows:
AMOUNTS PAID
1999 AND CHARGED REMAINING
REORGANIZATION AGAINST THE LIABILITY AT
CHARGE LIABILITY ADJUSTMENTS OCTOBER 2, 1999
-------------- ------------ ----------- ---------------
Employee termination benefits $ 8,679 $ 7,152 $ -- $ 1,527
Facility costs 1,519 598 -- 921
Other costs 761 349 -- 412
------- ------- ----- -------
Total $10,959 $ 8,099 $ -- $ 2,860
======= ======= ===== =======
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 THIRTY-NINE WEEKS ENDED
------------------------------------ -------------------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
--------------- --------------- ---------------- ----------------
Net sales by geographic region: (DOLLARS IN MILLIONS)
United States $4,033 60.1% $3,764 65.9% $12,465 61.6% $10,699 67.7%
Europe 1,640 24.4% 1,453 25.5% 4,987 24.6% 3,639 23.0%
Other international 1,037 15.5% 491 8.6% 2,788 13.8% 1,476 9.3%
--------------- --------------- ---------------- ----------------
Total $6,710 100.0% $5,708 100.0% $20,240 100.0% $15,814 100.0%
=============== =============== ================ ================
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 THIRTY-NINE WEEKS
ENDED ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 95.2% 93.7% 94.8% 93.7%
----- ----- ----- -----
Gross profit 4.8% 6.3% 5.2% 6.3%
Expenses:
SG&A expenses 4.0% 4.2% 3.9% 4.1%
Reorganization costs 0.0% -- 0.1% --
----- ----- ----- -----
Income from operations 0.8% 2.1% 1.2% 2.2%
Other expense, net 0.4% 0.4% 0.4% 0.4%
----- ----- ----- -----
Income before income taxes 0.4% 1.7% 0.8% 1.8%
Provision for income taxes 0.1% 0.7% 0.3% 0.7%
----- ----- ----- -----
Income before extraordinary item 0.3% 1.0% 0.5% 1.1%
Extraordinary gain on repurchase of debentures, net of income taxes -- -- 0.0% --
----- ----- ----- -----
Net income 0.3% 1.0% 0.5% 1.1%
===== ===== ===== =====
THIRTEEN WEEKS ENDED OCTOBER 2, 1999 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 3,
1998
Consolidated net sales increased 17.6% to $6.71 billion for the thirteen
weeks ended October 2, 1999 (or "third quarter of 1999") from $5.71 billion for
the thirteen weeks ended October 3, 1998 (or "third quarter of 1998"). The
increase in worldwide net sales was primarily attributable to the acquisition of
ERL (Note 5 of Notes to Consolidated Financial Statements), the addition of new
customers, increased sales to the existing customer base, expansion of the
Company's product and service offerings, and growth in the computer-based
technology products and services industry in general. Although consolidated net
sales increased 17.6%, the overall growth in net sales was tempered, primarily
in the U.S. and Europe, due to significant competitive pricing pressures, as
well as the overall difficult market conditions that are being experienced
throughout the industry. Sales growth for succeeding quarters may be hindered
due to continued competitive pricing pressures and difficult market conditions,
as well as the possible deferral in purchases of technology products by
resellers and end-users because of potential concerns surrounding end-user
Year 2000 matters (see discussion of Year 2000 matters under "Year 2000
Matters").
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Net sales from U.S. operations increased 7.1% to $4.03 billion in the third
quarter of 1999 from $3.76 billion in the third quarter of 1998 primarily due to
growth of the Company's ongoing business. Net sales from European operations
increased 12.9% to $1.64 billion in the third quarter of 1999 from $1.45 billion
in the third quarter of 1998 primarily due to the overall growth in the
Company's existing European operations. For geographic regions outside the U.S.
and Europe, net sales increased 111.3% to $1.04 billion in the third quarter of
1999 from $490.8 million in the third quarter of 1999 primarily due to the ERL
acquisition in January 1999 as well as growth in the Company's Canadian and
Latin American operations.
Gross profit, as a percentage of net sales, decreased to 4.8% in the third
quarter of 1999 from 6.3% in the third 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 significant reductions
in vendor rebates and incentives. The Company expects this to continue for the
foreseeable future.
Total SG&A expenses increased 11.3% to $266.4 million in the third quarter
of 1999 from $239.4 million in the third quarter of 1998, but decreased as a
percentage of net sales to 3.97% in the third quarter of 1999 from 4.19% in the
third quarter of 1998. The increase in SG&A expenses was attributable to the
acquisition of ERL in January 1999 as well as the increased expenses required to
support the expansion of the Company's business. Expenses related to expansion
consist 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 third quarter of 1999, the Company recorded a reorganization charge
of approximately $2.7 million related primarily to continued reorganization
efforts in the sales, product management, and information technology departments
in the U.S. operations. The reorganization charge of $2.7 million represents
employee termination benefits for approximately 130 employees. 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. In addition, the Company is currently
evaluating its methods of providing certain products and services through its
Frameworks(TM), Total Integration Services(TM) business ("Frameworks"). This
includes, among other items, assessing the allocation of its existing resources
between its custom-configuration services and the production of unbranded
systems. Several alternatives are currently being considered including the
possibility of outsourcing the production of unbranded systems with contract
manufacturers, while continuing to provide and develop the Company's
custom-configuration services capabilities. The Company is currently seeking and
evaluating proposals from potential outsourcing partners in this regard and
expects this process to continue for the next several months. As a result, the
Frameworks product and service offerings and/or the means of providing such
offerings may change from those currently being offered or employed. The impact
of these changes, which may include additional reorganization costs as well as
changes in the Frameworks business strategy, is not certain at this time because
the Company has not completed its evaluation.
Income from operations, excluding reorganization costs, decreased as a
percentage of net sales to 0.8% in the third quarter of 1999 from 2.1% in the
third 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 1.3% in the third quarter of 1999 from 2.8%
in the third quarter of 1998. European loss from operations, excluding
reorganization costs, as a percentage of net sales was (0.3%) in the third
quarter of 1999 compared to income from operations of 0.4% in the third 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 third quarter of 1999 from 1.2% in the third quarter of
1998. Income from operations, including reorganization costs, as a percentage of
net sales decreased to 0.8% in the third quarter of 1999 from 2.1% in the third
quarter of 1998.
Other expense, net, which consists primarily of interest expense, foreign
currency exchange losses, and miscellaneous non-operating expenses, increased
46.6% to $28.0 million in the third quarter of 1999 from $19.1 million in the
third quarter of 1998. However, other expense, net, remained constant as a
percentage of net sales at 0.4% for the third quarters of 1999 and 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Interest expense grew as a result of increased borrowings to finance the ERL
acquisition; the fourth quarter 1998 investment in Softbank, Japan's largest
distributor of software, peripherals and networking products; and expansion of
the Company's business. The increase was partially offset by a decrease in
average interest rates in the third quarter of 1999 as compared to the third
quarter of 1998. 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 $2.0 million in the third quarter of 1999
compared to the third 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 77.5% to $8.9 million in the
third quarter of 1999 from $39.5 million in the third quarter of 1998,
reflecting the 75.1% decrease in the Company's income before income taxes. The
Company's effective tax rate was 36.0% in the third quarter of 1999 compared to
39.8% in the third quarter 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.
THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 3, 1998
Consolidated net sales increased 28.0% to $20.24 billion for the
thirty-nine weeks ended October 2, 1999 (or "first nine months of 1999") from
$15.81 billion for the thirty-nine weeks ended October 3, 1998 (or "first
nine months of 1998"). The increase in worldwide net sales was primarily
attributable to the same factors summarized in the discussion of net sales for
the third quarters of 1999 and 1998 as well as the July 1998 acquisition of
Munich, Germany-based Macrotron AG ("Macrotron").
Net sales from U.S. operations increased 16.5% to $12.47 billion in the
first nine months of 1999 from $10.70 billion in the first nine months of 1998
primarily due to growth of the Company's ongoing business. Net sales from
European operations increased 37.0% to $4.99 billion in the first nine months of
1999 from $3.64 billion in the first nine months of 1998 primarily due to the
July 1998 acquisition of Macrotron and the overall growth in the Company's
existing European operations. For geographic regions outside the U.S. and
Europe, net sales increased 88.9% to $2.79 billion in the first nine months of
1999 from $1.48 billion in the first nine months of 1998 primarily due to the
ERL acquisition in January 1999 as well as growth in the Company's Canadian and
Latin American operations.
Gross profit, as a percentage of net sales, decreased to 5.2% in the first
nine months of 1999 from 6.3% in the first nine months of 1998. The decrease was
attributable to the same factors summarized in the discussion of gross profit
for the third quarters of 1999 and 1998.
Total SG&A expenses increased 20.4% to $792.1 million in the first nine
months of 1999 from $657.8 million in the first nine months of 1998, but
decreased as a percentage of net sales to 3.9% in the first nine months of 1999
from 4.1% in the first nine months 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 third
quarters of 1999 and 1998.
In February 1999, the Company initiated a plan, primarily in the U.S., 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 $11.0 million in the thirty-nine weeks ended October 2, 1999.
This reorganization charge included approximately $8.7 million in employee
termination benefits for approximately 586 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 of 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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. In addition, see information relating to the
Company's Frameworks business under discussion of reorganization costs for the
third quarters of 1999 and 1998.
Income from operations, excluding reorganization costs, decreased as a
percentage of net sales to 1.3% in the first nine months of 1999 from 2.2% in
the first nine months 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 1.7% in the first nine months of 1999 from
2.7% in the first nine months of 1998. European income from operations,
excluding reorganization costs, as a percentage of net sales decreased to 0.3%
in the first nine months of 1999 from 1.0% in the first nine months 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 first nine months of 1999 from 1.2% in the first nine months of 1998.
Income from operations, including reorganization costs, as a percentage of net
sales decreased to 1.2% in the first nine months of 1999 from 2.2% in the first
nine months of 1998.
Other expense, net, which consists primarily of interest expense, foreign
currency exchange losses, and miscellaneous non-operating expenses, increased
35.2% to $80.4 million in the first nine months of 1999 from $59.4 million in
the first nine months of 1998. Other expense, net, remained constant as a
percentage of net sales at 0.4% for the first nine months of 1999 and 1998.
Interest expense grew primarily due to the same factors summarized in the
discussion of other expense, net, for the third quarters of 1999 and 1998
combined with the acquisition of Macrotron in July 1998. Foreign exchange losses
decreased by $4.4 million in the first nine months of 1999 compared to the first
nine months 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 46.6% to $60.9 million in the
first nine months of 1999 from $114.0 million in the first nine months of 1998,
reflecting the 42.1% decrease in the Company's income before income taxes. The
Company's effective tax rate was 36.8% in the first nine months of 1999 compared
to 39.9% in the first nine months 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,
asset valuation 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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 its Zero Coupon
Convertible Senior Debentures in June 1998.
Net cash provided by operating activities was $655.3 million in the first
nine months of 1999 as compared to $271.8 million in the first nine 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 nine months of 1999 compared to the first nine months of 1998.
Net cash used by investing activities was $325.9 million in the first nine
months of 1999 compared to $191.6 million in the first nine 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 nine months of 1999, the Company
used approximately $241.0 million in cash, net of cash acquired, primarily for
the purchase of common stock and warrants of ERL (see Note 5 of Notes to
Consolidated Financial Statements).
Net cash used by financing activities was $287.9 million in the first nine
months of 1999 compared to $79.8 million in the first nine months of 1998. The
increase in cash used by financing activities was due to repayments of debt
under the revolving credit facilities through the management of trade debtors
and creditors, and repurchases of convertible debentures partially offset by net
proceeds from other debt and a reduction in proceeds from stock option
exercises.
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 of ERL 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 ownership of
approximately 95% of both the outstanding common stock and warrants of ERL. The
total cash paid for these purchases in the first half of 1999 was approximately
$232.0 million.
In the third quarter of 1999, the Company commenced a take-over offer for
the remaining ERL shares and warrants not already owned by Ingram Micro. As a
result of the takeover offer, the Company purchased an additional 12,151,748
shares and 1,337,962 warrants of ERL for approximately $14.9 million in cash,
increasing the Company's ownership position to 100% of the outstanding shares of
ERL and approximately 99% of the outstanding warrants.
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 October 2, 1999, the Company had $536.0 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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 October 2, 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
$150 million at both dates. The amortization period for this commercial paper
program began October 1, 1999 and will terminate effective December 31, 1999,
resulting in increased borrowings under the credit facilities referred to above.
In addition, the Company has established certain other facilities relating to
accounts receivable in Europe and Canada beginning in 1999. Under these
programs, the Company has sold approximately $94 million of trade accounts
receivable in the aggregate resulting in a further reduction of trade accounts
receivable and debt on the Company's Consolidated Balance Sheet at October 2,
1999. The Company believes that there are sufficient trade accounts receivable
to support the outstanding medium-term certificates and commercial paper program
as well as the European and Canadian 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 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.
The Company and its foreign subsidiaries have additional lines of credit,
commercial paper, and short-term overdraft facilities with various banks
worldwide, which provide for borrowings aggregating $740 million at October 2,
1999. Most of these arrangements are on an uncommitted basis and are reviewed
periodically for renewal. At October 2, 1999, the Company had $383 million
outstanding under these facilities.
The Company believes that cash provided by operating activities,
supplemented as necessary with funds available under credit arrangements
(including the $1.65 billion in credit facilities and the June 1998 sale of the
Company's convertible debentures), will provide sufficient resources to meet its
present and future working capital and cash requirements for at least the next
12 months, or earlier if the Company were to engage in significant, material
corporate transactions not currently anticipated, in which event the Company
anticipates that additional financing may be required.
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,
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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. The Company applies these phases of the Y2K plan when it integrates new
acquisitions into existing Y2K ready systems and operations and strives to
incorporate newly acquired operations into such existing Y2K ready environment
as soon as possible.
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 (1) certain personal computers deemed not mission-critical to
the operations of the Company located at a few locations in Asia and (2) certain
systems and personal computers that are not fully Y2K remediated at the
Company's recently acquired Hungary operations, which will be remediated and
certified Y2K ready before the end of 1999, the Company has completed
remediation and unit testing or upgrading/replacement of its IT systems and has
also completed system and century testing and certification of Y2K readiness of
all of its IT Systems. 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.,
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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) were replaced and/or modified to be
Y2K ready.
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 in developing
contingency plans. 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 expenses of
approximately $7.1 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 $10.0 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 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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 Y2K 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 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.
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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
Not applicable.
ITEM 5. OTHER INFORMATION
The Company announced on September 8, 1999 that Ingram Micro has
initiated a search for its next chief executive officer to succeed
Jerre L. Stead, that Mr. Stead will remain chairman of the board and
chief executive officer until his successor is in place, and then will
continue to serve as chairman of the board.
Also, during the third quarter of 1999, the Company added two new
directors -- Orrin H. Ingram II and Gerhard Schulmeyer -- bringing the
board to nine members.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
No. Description
--- -----------
10.46 Agreement with Philip D. Ellett dated September 9, 1999
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 October 2, 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)
November 16, 1999
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