Ingram Micro Inc. (IM) has reported third-quarter 2011 earnings per share of 35 cents, just matching the Zacks Consensus Estimate.
Ingram Micro’s third quarter revenue of $8.90 billion increased 5.3% from $8.45 billion in the year-ago quarter. The improvement may be attributed to modest sales growth across all geographic regions and improved Information Technology (IT) spending. Foreign currency translation had a 4% positive impact on revenue.
Revenue contribution from North America increased 3.3% year over year to $3.77 billion. Europe, Middle East and Africa (EMEA) contributed $2.65 billion, up 7.0% from the year-ago quarter. European currency translation had a positive impact of 9.0% on regional revenue.
The Asia-Pacific region generated $2.06 billion in sales, up 5.4% from $1.95 billion in the third quarter of 2010. Foreign currency translation had a 6% positive impact on revenue. Latin America sales grew 13.1% year over year to $420.3 million, benefiting from a positive translation impact of 3% from relatively stronger regional currencies.
Operating Results
Gross profit dropped 2.8% to $440.7 million in the reported quarter from $453.5 million in the year-ago quarter. The gross margin dropped 40 basis points (bps) year over year to 5.0%.
The difference can 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 the Asia-Pacific, and a higher mix of emerging markets revenue that typically carry lower margins.
Selling, general and administrative expenses were $354.2 million, up 2.2% from $346.6 million in the year-ago quarter.
Operating profit was $85.4 million, compared to $106.9 million in the prior-year quarter. Operating margin in the quarter decreased 30 bps year over year to 1.0%.
Ingram Micro reported net income of $23.3 million, or 15 cents per share, compared to $65.0 million, or 41 cents in the year-ago quarter. Excluding reorganization costs, net foreign currency exchange gain, loss from settlement of interest rate swap and senior unsecured term loan, other non-operating expenses and tax adjustments, adjusted net income was $54.4 million or 35 cents per share.
Balance Sheet and Share Repurchase
Ingram Micro exited the third quarter with cash and cash equivalents of $1.00 billion, down from $1.38 billion in the previous quarter. Accounts receivable increased 4.2% sequentially to $3.74 billion. Inventories were $3.10 billion, up from $3.08 billion in the prior quarter. Total debt balance was $439.5 million, down from $642.6 million in the previous quarter.
Ingram Micro paid $75.0 million to buy back 4.2 million shares during the quarter. The company also purchased an additional 4.2 million shares for $75.0 million during October.
Guidance
Ingram Micro did not provide any specific guidance for the fourth 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 increase sequentially following a historical trend.
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 third quarter results unimpressive as the bottom line was just at par with 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.
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 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 #4 Rank, implying a short-term Sell rating.
