Ingram Micro Inc. (IM) has reported second-quarter 2011 earnings per share of 37 cents, just matching the Zacks Consensus Estimate. However, the quarter’s results were 9.8% below the year-ago level. Management held transitional difficulties to a new enterprise system in Australia responsible for the lackluster performance. But shares jumped 12.79% in after-market trade, which could be due to management’s commentary that it has already resolved the Australian issue to some extent during the quarter.
Revenues
Ingram Micro’s second quarter revenues of $8.75 billion increased 7.3% from $8.16 billion in the year-ago quarter. The improvement may be attributed to modest sales growth across all geographic regions and improving Information Technology (IT) spending. Foreign currency translation had a 6% positive impact on revenues.
Revenue contribution from North America increased 5.7% year over year to $3.76 billion. Europe, Middle East and Africa (EMEA) contributed $2.64 billion, up 11.3% from the year-ago quarter. European currency translation had a positive impact on regional revenue.
The Asia-Pacific region generated $1.96 billion in sales, up 5.1% from $1.87 billion in the second quarter of 2010. Foreign currency translation had an 8% positive impact on revenues. Latin America sales grew 7.4% year over year to $386.6 million, benefiting from a positive translation impact of 6% from relatively stronger regional currencies.
Operating Results
Gross profit grew a modest 5.0% to $459.2 million in the reported quarter from $437.4 million in the year-ago quarter. However, the gross margin dropped 20 basis points (bps) year over year to 5.2%. The difference could be traced back to operational interruptions at the new enterprise system in Australia, competitive pricing in some Asian markets, subdued retail demand in Europe and Asia-Pacific, and a higher mix of emerging markets revenue that typically carry lower margins.
Selling, general and administrative expenses were $362.1 million, up 8.7% from $333.1 million in the year-ago quarter. The increase was due to higher compensation expenses, investments in system enhancements and growth initiatives. Moreover, translation of stronger foreign currencies had an adverse effect on operating expenses.
Operating profit was $97.1 million, compared to $104.5 million in the prior-year quarter. Operating margin in the quarter decreased 20 bps year over year to 1.1%.
Ingram Micro reported a net income of $59.7 million, or 37 cents per share, compared to $67.7 million, or 41 cents in the year-ago quarter. There was no one-time item recorded during the quarter.
Balance Sheet and Share Repurchase
Ingram Micro exited the second quarter with cash and cash equivalents of $1.38 billion, up from $1.02 billion in the previous quarter. Accounts receivable decreased 4.0% sequentially to $3.59 billion. Inventories were $3.08 billion, up from $3.03 billion in the prior quarter. Total debt balance was $642.6 million, down from $657.0 million in the previous quarter.
Ingram Micro paid $75.0 million to buy back 4.0 million shares during the quarter. Ingram also purchased an additional 4.2 million shares for $75.0 million during this month.
Guidance
Ingram Micro did not provide any specific guidance for the third quarter of 2011 but expects sales to grow sequentially based on historical trends. However, sales could grow on a year-over-year basis, given consistent demand trends. Management expects the transitional issue to be over by the next quarter, which could lead to a market share gain in Australia. But, the company would take time to regain the full momentum in its Australian business.
The company also expects the gross margin to decline sequentially following competitive pressure in the Asia-Pacific region and softer retail demand in Europe. Ingram Micro also stated that operating expenses may fluctuate, despite cost control measures, due to continuous strategic investments.
Based on the improving IT spending trend, increasing global demand for its products and the completion target of the ERP (enterprise resource planning) system implementation in Australia within the coming three years, Ingram Micro is confident about achieving operational excellence going ahead.
Conclusion
We find Ingram Micro’s second quarter results unimpressive as the bottom line was just in line with the Zacks Consensus Estimate. Ongoing softness in the retail sector in Europe and Asia-Pacific regions as well as the transition issue has constrained Ingram from providing an encouraging guidance. Though management is quite positive about having resolved most of the issues in this quarter and has assured that it will regain market share in Australia, we would prefer to take a cautious stance on the stock.
Despite the uneventful quarter, we remain fairly optimistic about Ingram Micro’s strategic relationship with network giant Juniper Networks Inc. (JNPR), as well as tech giants, such as Hewlett-Packard Company (HPQ), International Business Machines Inc. (IBM) and Microsoft Corp. (MSFT).
Ingram Micro’s high dependency on IT spending is a concern. Though we remain positive about corporate IT spending, which should see a slow but steady recovery through 2011, a slowing consumer spending cannot be ignored. The company’s significant European exposure and debt burden are also concerns.
Currently, Ingram Micro has a Zacks #4 Rank, implying a short-term Sell rating.
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