Ingram Micro Inc. (IM) has reported fourth-quarter 2011 earnings per share of 70 cents, surpassing the Zacks Consensus Estimate of 55 cents. However, the results were slightly down from 72 cents reported in the earlier-year quarter.
Revenues
Ingram Micro’s fourth quarter revenue of $9.95 billion increased 0.7% from $9.88 billion in the year-ago quarter. Weaker-than-expected revenues in Asia Pacific and Europe were offset by the strength in North America and Latin America.
Revenue contribution from North America increased 4.0% year over year to $4.21 billion, mainly on higher hard disk drive pricing. Europe, Middle East and Africa (EMEA) contributed $3.20 billion, down 4.6% from the year-ago quarter. The decline was primarily due to the difficult macro environment and competitive pressures.
The Asia-Pacific region generated $1.96 billion in sales, down 0.8% from $1.98 billion in the fourth quarter of 2010. The weakness was mainly due to lower sales in Australia resulting from the ERP (Enterprise Resource Planning) system transition issue there. Latin America sales grew 15.3% year over year to $572.5 million, benefiting from a negative translation impact of 7% from relatively stronger regional currencies.
Operating Results
Gross profit dropped 1.0% to $554.3 million in the reported quarter from $559.9 million in the year-ago quarter. Despite the company’s sound revenue, gross margin dropped 10 basis points (bps) year over year to 5.6% mostly due to higher procurement costs.
Other things that affected the gross margin were operational interruptions at the new enterprise system in Australia, competitive pricing in some Asian markets, subdued retail demand in Europe and the Asia-Pacific, and a higher mix of emerging markets revenue that typically carry lower margins. But the higher pricing of hard disk drives due to supply disruption caused by Thailand flood, posed some cushion.
Selling, general and administrative expenses were $373.9 million, down 4.4% from $391.1 million in the year-ago quarter. The cost reduction led to an operating profit growth of 5.3% from the year-ago quarter. Operating margin increased 10 bps year over year to 1.8%.
Ingram Micro reported net income of $104.9 million, or 68 cents per share, compared to $115.0 million, or 71 cents in the year-ago quarter. Excluding reorganization costs, adjusted net income was $109.1 million or 70 cents per share, compared with $116.5 million or 72 cents per share in the year-ago quarter.
Balance Sheet and Share Repurchase
Ingram Micro exited the fourth quarter with cash and cash equivalents of $891.0 million, down from $1.00 billion in the previous quarter. Accounts receivable increased 19.5% sequentially to $4.47 billion. Inventories were $2.94 billion, up from $3.10 billion in the prior quarter. Total debt balance was $392.4 million, down from $439.5 million in the previous quarter.
Ingram Micro paid $75.0 million to buy back 4.2 million shares during the quarter.
Guidance
For fiscal 2012, Ingram expects overall revenue growth to match the current IT spending trend (expected to grow in low-to-mid single digits). For the first quarter of 2012, the IT distributor expects revenue to be flat to slightly down year over year on concerns related to the European economy and a decline in revenues from Australia. Ingram also expects gross margin to decline sequentially on seasonality as the benefits from HDD pricing subside.
Based on the improving IT spending trend, increasing global demand for its products and the completion target of the ERP system implementation in Australia within the coming three years, Ingram Micro is confident about achieving operational excellence ahead.
Conclusion
We find Ingram Micro’s fourth quarter results impressive as the bottom line was well ahead of the Zacks Consensus Estimate. Ongoing softness in the retail sector in Europe and the 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.
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 Corp. (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 #3 Rank, implying a short-term Hold rating.
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