Ingram Micro Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2008
OR
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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)
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| Delaware
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62-1644402 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
1600 E. St. Andrew Place, Santa Ana, California 92705-4931
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The Registrant had 168,306,395 shares of Class A Common Stock, par value $0.01 per share,
outstanding at March 29, 2008.
INGRAM MICRO INC.
INDEX
2
Part I. Financial Information
Item 1. Financial Statements
INGRAM MICRO INC.
CONSOLIDATED BALANCE SHEET
(Dollars in 000s, except per share data)
(Unaudited)
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March 29, |
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December 29, |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
567,344 |
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$ |
579,626 |
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Trade accounts receivable (less allowances of $85,055 and $83,155) |
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3,639,654 |
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4,054,824 |
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Inventories |
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2,891,699 |
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2,766,148 |
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Other current assets |
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531,087 |
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520,069 |
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Total current assets |
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7,629,784 |
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7,920,667 |
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Property and equipment, net |
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184,114 |
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181,416 |
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Goodwill |
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745,939 |
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733,481 |
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Other assets |
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140,386 |
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139,437 |
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Total assets |
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$ |
8,700,223 |
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$ |
8,975,001 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,984,771 |
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$ |
4,349,700 |
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Accrued expenses |
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545,141 |
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602,295 |
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Current maturities of long-term debt |
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181,339 |
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135,616 |
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Total current liabilities |
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4,711,251 |
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5,087,611 |
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Long-term debt, less current maturities |
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428,000 |
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387,500 |
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Other liabilities |
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68,756 |
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72,948 |
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Total liabilities |
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5,208,007 |
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5,548,059 |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity: |
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Preferred Stock, $0.01 par value, 25,000,000 shares
authorized; no shares issued and outstanding |
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— |
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— |
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Class A Common Stock, $0.01 par value, 500,000,000 shares
authorized; 174,905,386 and 174,243,838 shares issued and
168,306,395 and 172,942,347 shares outstanding
in 2008 and 2007, respectively |
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1,749 |
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1,742 |
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Class B Common Stock, $0.01 par value, 135,000,000 shares
authorized; no shares issued and outstanding |
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— |
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— |
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Additional paid-in capital |
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1,125,300 |
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1,114,031 |
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Treasury stock, 6,598,991 and 1,301,491 shares
in 2008 and 2007, respectively |
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(111,655 |
) |
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(25,061 |
) |
Retained earnings |
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2,139,533 |
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2,075,478 |
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Accumulated other comprehensive income |
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337,289 |
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260,752 |
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Total stockholders’ equity |
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3,492,216 |
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3,426,942 |
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Total liabilities and stockholders’ equity |
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$ |
8,700,223 |
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$ |
8,975,001 |
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See accompanying notes to these consolidated financial statements.
3
INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in 000s, except per share data)
(Unaudited)
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Thirteen Weeks Ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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Net sales |
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$ |
8,577,318 |
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$ |
8,245,704 |
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Cost of sales |
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8,091,810 |
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7,836,932 |
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Gross profit |
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485,508 |
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408,772 |
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Operating expenses: |
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Selling, general and administrative |
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386,224 |
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335,742 |
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Reorganization credits |
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— |
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(684 |
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386,224 |
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335,058 |
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Income from operations |
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99,284 |
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73,714 |
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Other expense (income): |
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Interest income |
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(4,013 |
) |
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(3,332 |
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Interest expense |
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17,006 |
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16,092 |
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Net foreign exchange gain |
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(1,111 |
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(51 |
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Other |
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842 |
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2,686 |
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12,724 |
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15,395 |
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Income before income taxes |
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86,560 |
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58,319 |
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Provision for income taxes |
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22,505 |
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21,339 |
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Net income |
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$ |
64,055 |
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$ |
36,980 |
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Basic earnings per share |
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$ |
0.37 |
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$ |
0.22 |
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Diluted earnings per share |
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$ |
0.37 |
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$ |
0.21 |
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See accompanying notes to these consolidated financial statements.
4
INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in 000s)
(Unaudited)
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Thirteen Weeks Ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
64,055 |
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$ |
36,980 |
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Adjustments to reconcile net income to cash provided (used)
by operating activities: |
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Depreciation and amortization |
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16,891 |
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15,201 |
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Stock-based compensation expense |
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8,448 |
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9,584 |
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Excess tax benefit from stock-based compensation |
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(170 |
) |
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(965 |
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Noncash charges for interest and compensation |
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76 |
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106 |
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Deferred income taxes |
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6,572 |
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(3,461 |
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Changes in operating assets and liabilities, net of effects
of acquisitions: |
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Changes in amounts sold under accounts receivable programs |
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— |
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(68,505 |
) |
Accounts receivable |
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434,558 |
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(49,676 |
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Inventories |
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(112,356 |
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193,323 |
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Other current assets |
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(18,137 |
) |
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(38,075 |
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Accounts payable |
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(314,098 |
) |
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(292,595 |
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Accrued expenses |
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(42,462 |
) |
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97,590 |
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Cash provided (used) by operating activities |
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43,377 |
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(100,493 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(10,923 |
) |
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(16,354 |
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Reduction in investments in available-for-sale marketable securities |
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(455 |
) |
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— |
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Acquisitions, net of cash acquired |
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(2,665 |
) |
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(25,406 |
) |
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Cash used by investing activities |
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(14,043 |
) |
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(41,760 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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5,240 |
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10,556 |
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Repurchase of Class A Common Stock |
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(86,594 |
) |
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— |
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Excess tax benefit from stock-based compensation |
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170 |
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|
965 |
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Change in book overdrafts |
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(68,749 |
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(180 |
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Net proceeds from debt |
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85,446 |
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97,545 |
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Cash provided (used) by financing activities |
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(64,487 |
) |
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108,886 |
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Effect of exchange rate changes on cash and cash equivalents |
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22,871 |
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501 |
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Decrease in cash and cash equivalents |
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(12,282 |
) |
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(32,866 |
) |
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Cash and cash equivalents, beginning of period |
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579,626 |
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333,339 |
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Cash and cash equivalents, end of period |
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$ |
567,344 |
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$ |
300,473 |
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See accompanying notes to these consolidated financial statements.
5
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
Note 1 — Organization and Basis of Presentation
Ingram Micro Inc. (“Ingram Micro”) and its subsidiaries are primarily engaged in the
distribution of information technology (“IT”) products and supply chain solutions worldwide.
Ingram Micro operates in North America, Europe, Middle East and Africa (“EMEA”), Asia-Pacific and
Latin America.
The consolidated financial statements include the accounts of Ingram Micro and its
subsidiaries (collectively referred to herein as the “Company”). These consolidated financial
statements have been prepared by the Company, without audit, pursuant to the rules and regulations
of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management,
the accompanying unaudited consolidated financial statements contain all material adjustments
(consisting of only normal, recurring adjustments) necessary to fairly state the financial position
of the Company as of March 29, 2008, and its results of operations and cash flows for the thirteen
weeks ended March 29, 2008 and March 31, 2007. All significant intercompany accounts and
transactions have been eliminated in consolidation. As permitted under the applicable rules and
regulations of the SEC, these consolidated financial statements do not include all disclosures and
footnotes normally included with annual consolidated financial statements and, accordingly, should
be read in conjunction with the consolidated financial statements and the notes thereto, included
in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 29,
2007. The results of operations for the thirteen weeks ended March 29, 2008 may not be indicative
of the results of operations that can be expected for the full year.
Note 2 — Share Repurchases
In November 2007, the Company’s Board of Directors authorized a share repurchase program,
through which the Company may purchase up to $300,000 of its outstanding shares of common stock,
over a three-year period. Under the program, the Company may repurchase shares in the open market
and through privately negotiated transactions. The repurchases will be funded with available
borrowing capacity and cash. The timing and amount of specific repurchase transactions will depend
upon market conditions, corporate considerations and applicable legal and regulatory requirements.
The Company accounts for repurchased shares of common stock as treasury stock. Treasury
shares are recorded at cost and are included as a component of stockholders’ equity in the
Company’s consolidated balance sheet. The stock repurchase activity during the thirteen weeks
ended March 29, 2008 is summarized as follows:
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Weighted |
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Shares |
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Average |
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Amount |
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Repurchased |
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Price Per Share |
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Repurchased |
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Cumulative balance at December 29, 2007 |
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1,301,491 |
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$ |
19.26 |
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$ |
25,061 |
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Repurchase of shares of common stock |
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5,297,500 |
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16.35 |
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86,594 |
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Cumulative balance at March 29, 2008 |
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6,598,991 |
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16.92 |
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$ |
111,655 |
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Note 3 — Earnings Per Share
The Company reports a 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 awards and other commitments
to issue common stock were exercised using the treasury stock method or the if-converted method,
where applicable.
6
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
The computation of Basic EPS and Diluted EPS is as follows:
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Thirteen Weeks Ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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Net income |
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$ |
64,055 |
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$ |
36,980 |
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Weighted average shares |
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171,219,255 |
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169,906,243 |
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Basic earnings per share |
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$ |
0.37 |
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$ |
0.22 |
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Weighted average shares including the dilutive effect of stock
awards (3,185,747 and 5,168,496 for the thirteen weeks ended
March 29, 2008 and March 31, 2007, respectively) |
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174,405,002 |
|
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175,074,739 |
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Diluted earnings per share |
|
$ |
0.37 |
|
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$ |
0.21 |
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|
There were approximately 9,394,000 and 1,494,000 stock awards for the thirteen weeks ended
March 29, 2008 and March 31, 2007, 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 during the respective periods, thereby resulting in an antidilutive effect.
Note 4 — Stock-Based Compensation
The Company has a single stock incentive plan approved by its stockholders, the 2003 Equity
Incentive Plan, for the granting of stock-based incentive awards including incentive stock options,
non-qualified stock options, restricted stock, restricted stock units and stock appreciation
rights, among others, to key employees and members of the Company’s Board of Directors. Options
granted generally vest over a period of three years and have expiration dates not longer than 10
years from the dates of grant. A portion of the restricted stock and restricted stock units vests
over a time period of one to three years. The remainder of the restricted stock and restricted
stock units vests upon achievement of certain performance measures based on earnings growth and
return on invested capital over a three-year period. Stock options granted during the thirteen
weeks ended March 29, 2008 and March 31, 2007 were 1,318,000 and 1,256,000, respectively, and
restricted stock and restricted stock units granted were 632,000 and 1,475,000, respectively. As
of March 29, 2008, approximately 7,200,000 shares were available for grant. Stock-based
compensation expense for the thirteen weeks ended March 29, 2008 and March 31, 2007 was $8,448 and
$9,584, respectively, and the related income tax benefit was approximately $2,200 and $2,500,
respectively.
During the thirteen weeks ended March 29, 2008 and March 31, 2007, a total of 300,000 and
705,000 stock options, respectively, were exercised, and 473,000 and 286,000 restricted stock and
restricted stock units, respectively, vested.
Note 5 — Comprehensive Income
Comprehensive income consists of the following:
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Thirteen Weeks Ended |
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March 29, |
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March 31, |
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| |
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2008 |
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|
2007 |
|
Net income |
|
$ |
64,055 |
|
|
$ |
36,980 |
|
Changes in foreign currency translation adjustments |
|
|
76,537 |
|
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|
15,183 |
|
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Comprehensive income |
|
$ |
140,592 |
|
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$ |
52,163 |
|
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|
Accumulated other comprehensive income included in stockholders’ equity totaled $337,289 and
$260,752 at March 29, 2008 and December 29, 2007, respectively, and consisted solely of foreign
currency translation adjustments.
7
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
Note 6 — Fair Value Measurements
Effective December 30, 2007, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value measurements. In February 2008, the Financial
Accounting Standards Board issued Staff Position Nos. 157-1 and 157-2, which partially deferred the
effective date of FAS 157 for one year for certain nonfinancial assets and liabilities and removed
certain leasing transactions from its scope.
FAS 157 requires that assets and liabilities carried at fair value be classified and disclosed
in one of the following three categories: Level 1- quoted market prices in active markets for
identical assets and liabilities; Level 2 — observable market-based inputs or unobservable inputs
that are corroborated by market data and Level 3 — unobservable inputs that are not corroborated by
market data.
At March 29, 2008, the Company’s assets and liabilities measured at fair value on a recurring
basis included available-for-sale securities of $41,919 determined based on Level 1 criteria, as
defined above, and a derivative liability of $39,305 determined based on Level 2 criteria. The
change in the fair value of derivative instruments for the thirteen weeks ended March 29, 2008 was
a loss of $26,440, which is essentially offset by the change in fair value of the
underlying hedge assets or liabilities. The change in the fair value of available-for-sale
marketable securities was not material during the period.
Note 7 — Goodwill and Intangible Assets
The changes in goodwill for the thirteen weeks ended March 29, 2008 and March 31, 2007 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North |
|
|
|
|
|
|
Asia- |
|
|
Latin |
|
|
|
|
| |
|
America |
|
|
EMEA |
|
|
Pacific |
|
|
America |
|
|
Total |
|
Balance at December 29, 2007 |
|
$ |
235,493 |
|
|
$ |
15,759 |
|
|
$ |
482,229 |
|
|
$ |
— |
|
|
$ |
733,481 |
|
Acquisitions |
|
|
2,762 |
|
|
|
94 |
|
|
|
— |
|
|
|
— |
|
|
|
2,856 |
|
Foreign currency translation |
|
|
(39 |
) |
|
|
1,192 |
|
|
|
8,449 |
|
|
|
— |
|
|
|
9,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2008 |
|
$ |
238,216 |
|
|
$ |
17,045 |
|
|
$ |
490,678 |
|
|
$ |
— |
|
|
$ |
745,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006 |
|
$ |
156,732 |
|
|
$ |
14,168 |
|
|
$ |
472,814 |
|
|
$ |
— |
|
|
$ |
643,714 |
|
Acquisitions |
|
|
18,338 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,338 |
|
Foreign currency translation |
|
|
8 |
|
|
|
127 |
|
|
|
2,890 |
|
|
|
— |
|
|
|
3,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
175,078 |
|
|
$ |
14,295 |
|
|
$ |
475,704 |
|
|
$ |
— |
|
|
$ |
665,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2008, the Company acquired the assets of privately held Paradigm Distribution Ltd.
(“Paradigm”), a key distributor in the United Kingdom of mobile data and automatic identification
and data capture/point-of-sale (“DC/POS”) technologies to solution providers and system
integrators. The acquisition expanded the Company’s value-added distribution of mobile data and
DC/POS solutions in EMEA. Paradigm was acquired for an initial purchase price of $2,665, which has
been preliminarily allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the transaction date, resulting in goodwill of $94 and intangible assets
of $1,968, primarily related to vendor and customer relationships with estimated useful lives of 10
years.
In the first quarter of 2008, the Company made an adjustment to the purchase price allocation
associated with the June 2007 acquisition of DBL Distributing Inc., primarily resulting from an increase in the
balance of certain preacquisition liabilities by $2,819. This adjustment yielded an increase of
goodwill for the same amount.
8
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
In March 2007, the Company acquired all the outstanding shares of VPN Dynamics and a minority
interest of 49% in a related company, Securematics. VPN Dynamics offers specialized network
security education using vendor-authorized courseware and lab settings through online, on-site and
classroom training. Securematics provides products and services to a large number of global system
integrators, service providers and value-added resellers. The Company’s interests in these related
entities were acquired for an initial aggregate purchase price of $24,991, including related
acquisition costs. The Company has an option to acquire the remaining 51% interest held by the
shareholders of Securematics at a purchase price of $1,000, which has been recorded in accrued
expenses in the Company’s consolidated balance sheet at March 29, 2008 and December 29, 2007. The
holders of the remaining 51% interests in Securematics also have the option to require the Company
to purchase their interests for the same amount, after two years from the transaction date. The
results of Securematics have been consolidated in accordance with Financial Accounting Standards
Board Interpretation No. 46 “Consolidation of Variable Interest Entities.”
The purchase price has been allocated to the assets acquired and liabilities assumed based on
their estimated fair values on the transaction date, resulting in goodwill of $18,338, trade names
of $3,800 with estimated useful lives of 20 years, other intangible assets of $4,000, primarily
related to customer relationships and non-compete agreements with estimated useful lives of up to
five years, and a deferred tax liability of $3,178 related to the intangible assets, none of which
are deductible for tax purposes. In the first quarter of 2008, the Company made an adjustment to
the purchase price allocation associated with these acquisitions to reflect a reduction in
tax-related liabilities at the date of purchase totaling $57 and a decrease of goodwill for the
same amount. A strong management team, industry expertise and enhancement in the Company’s value
as a one-stop shop for network security solution and service providers were among the factors that
contributed to the purchase price in excess of the value of net assets acquired. In connection
with the Company’s acquisition of VPN Dynamics and minority investment in Securematics, the parties
agreed that $4,100 of the purchase price shall be held in an escrow account to cover any contingent
liabilities under the purchase agreement. The funds held in escrow are scheduled to be released to
the sellers in three installments over a period of two years following the transaction date, if no
claims are made. In accordance with the purchase agreement, in the third quarter of 2007, the
Company paid the sellers $1,800 in contingent consideration for the achievement of a milestone,
which was an adjustment to the initial purchase price above. The purchase agreement also provides
for the Company to pay the sellers additional contingent consideration of up to $3,200, if certain
performance levels are achieved, over the two-year period following the date of acquisition. Such
payment, if any, will be recorded as additional adjustments to the initial purchase price.
The aggregate gross carrying amounts of finite-lived identifiable intangible assets of
$153,586 and $151,069 at March 29, 2008 and December 29, 2007, respectively, are amortized over
their remaining estimated lives ranging from 3 to 20 years. The net carrying amount was $102,395
and $104,125 at March 29, 2008 and December 29, 2007, respectively. Amortization expense was
$4,041 and $2,956 for the thirteen weeks ended March 29, 2008 and March 31, 2007, respectively.
The net identifiable intangible assets are recorded in other assets in the accompanying
consolidated balance sheet.
Note 8 — Reorganization Costs
Prior to 2006, the Company had launched an outsourcing and optimization plan to improve
operating efficiencies within its North American region. The plan included an outsourcing
arrangement that moved transaction-oriented service and support functions — including certain
North America positions in finance and shared services, customer service, vendor management and
certain U.S. positions in technical support and inside sales (excluding field sales and management
positions) — to a leading global business process outsource provider. As part of the plan, the
Company also had restructured and consolidated other job functions within the North American
region. The Company had also implemented a detailed plan to integrate with the Company the
operations of Techpac Holdings Limited, which was acquired in November 2004.
9
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
Also, prior to 2006, the Company implemented other actions designed to improve operating
income through reductions of selling, general and administrative expenses and enhancements in gross
margins. Key components of those initiatives included workforce reductions and facility
consolidations worldwide as well as outsourcing of certain IT infrastructure functions. Facility
consolidations primarily included consolidation, closing or downsizing of office facilities,
distribution centers, returns processing centers and configuration centers throughout North
America, consolidation and/or exit of warehouse and office facilities in EMEA, Latin America and
Asia-Pacific, and other costs primarily comprised of contract termination expenses associated with
outsourcing certain IT infrastructure functions as well as other costs associated with the
reorganization activities.
The above reorganization actions are complete; however, future cash outlays are required
primarily for future lease payments related to exited facilities. The remaining liabilities and
payment activities in 2008 are summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding |
|
|
Amounts Paid |
|
|
|
|
|
|
Remaining |
|
| |
|
Liability at |
|
|
and Charged |
|
|
|
|
|
|
Liability at |
|
| |
|
December 29, |
|
|
Against the |
|
|
|
|
|
|
March 29, |
|
| |
|
2007 |
|
|
Liability |
|
|
Adjustments |
|
|
2008 |
|
Facility costs |
|
$ |
3,911 |
|
|
$ |
(55 |
) |
|
$ |
— |
|
|
$ |
3,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects the remaining liability for facility costs to be fully utilized by the
third quarter of 2015.
The credit adjustment to reorganization costs of $684 for the thirteen weeks ended March 31,
2007 consisted of $659 in North America for lower than expected costs associated with employee
termination benefits and facility consolidations related to actions taken in prior years and $25 in
EMEA for lower than expected costs associated with employee termination benefits related to actions
taken in prior years.
Note 9 — Long-Term Debt
The Company’s debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 29, |
|
|
December 29, |
|
| |
|
2008 |
|
|
2007 |
|
North American revolving trade accounts receivable-backed
financing facilities |
|
$ |
428,000 |
|
|
$ |
387,500 |
|
Asia-Pacific revolving trade accounts receivable-backed
financing facilities |
|
|
27,909 |
|
|
|
— |
|
Revolving unsecured credit facilities and other debt |
|
|
153,430 |
|
|
|
135,616 |
|
|
|
|
|
|
|
|
|
|
|
609,339 |
|
|
|
523,116 |
|
Current maturities of long-term debt |
|
|
(181,339 |
) |
|
|
(135,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
428,000 |
|
|
$ |
387,500 |
|
|
|
|
|
|
|
|
Note
10 — Income Taxes
Beginning in 2007, the Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109” (“FIN 48”). The adoption of FIN 48 resulted in an increase of $4,957 in the
Company’s liability for unrecognized tax benefits, which was accounted for as a reduction to its
consolidated retained earnings as of the beginning of 2007. At March 29, 2008, the Company had
gross unrecognized tax benefits of $20,913 compared to $20,168 at December 29, 2007, representing
an increase of $745 during first quarter of 2008. Substantially all of the gross unrecognized tax
benefits, if recognized, would impact the Company’s effective tax rate in the period of
recognition. The Company recognizes interest and penalties related to unrecognized tax benefits in
income tax expense. In addition to gross unrecognized tax benefits identified above, the interest
and penalties recorded by the Company totaled $3,753 and $3,119 in the first quarters of 2008 and
2007, respectively.
10
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
The Company conducts business globally and, as a result, the Company and/or one or more of its
subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. During 2007, the IRS concluded its audit of the Company’s federal income tax return
for the tax years 2001 through 2003. In addition, the IRS initiated an examination of the
Company’s federal income tax return for the tax years 2004 and 2005. This examination is still
ongoing. Additionally, a number of state and foreign examinations are also currently ongoing. It is
possible that these examinations may be resolved within twelve months. However, the Company does
not expect its unrecognized tax benefits to change significantly over the next 12 months.
Note 11 — Segment Information
The Company operates predominantly in a single industry segment as a distributor of IT
products and supply chain solutions worldwide. The Company’s operating segments are based on
geographic location, and the measure of segment profit is income from operations. The Company does
not allocate stock-based compensation expense (discussed in Note 4 to the Company’s consolidated
financial statements) to its operating units; therefore the Company is reporting this as a separate
amount.
Geographic areas in which the Company operates currently include North America (United States
and Canada), EMEA (Austria, Belgium, Denmark, Finland, France, Germany, Hungary, Italy, The
Netherlands, Norway, South Africa, Spain, Sweden, Switzerland, and the United Kingdom),
Asia-Pacific (Australia, The People’s Republic of China including Hong Kong, India, Malaysia, New
Zealand, Singapore, Sri Lanka, and Thailand), and Latin America (Argentina, Brazil, Chile, Mexico,
and the Company’s Latin American export operations in Miami). Intergeographic sales primarily
represent intercompany sales that are accounted for based on established sales prices between the
related companies and are eliminated in consolidation.
Financial information by geographic segment is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
| |
|
March 29, |
|
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Net sales: |
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
3,290,181 |
|
|
$ |
3,283,438 |
|
Intergeographic sales |
|
|
66,938 |
|
|
|
57,695 |
|
EMEA |
|
|
3,066,370 |
|
|
|
3,047,297 |
|
Asia-Pacific |
|
|
1,813,429 |
|
|
|
1,569,165 |
|
Latin America |
|
|
407,338 |
|
|
|
345,804 |
|
Eliminations of intergeographic sales |
|
|
(66,938 |
) |
|
|
(57,695 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
8,577,318 |
|
|
$ |
8,245,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
North America |
|
$ |
40,589 |
|
|
$ |
57,014 |
|
EMEA |
|
|
26,778 |
|
|
|
34,954 |
|
Asia-Pacific |
|
|
32,541 |
|
|
|
19,689 |
|
Latin America |
|
|
7,824 |
|
|
|
(28,359 |
) |
Stock-based compensation expense |
|
|
(8,448 |
) |
|
|
(9,584 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
99,284 |
|
|
$ |
73,714 |
|
|
|
|
|
|
|
|
11
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
| |
|
March 29, |
|
|
March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
North America |
|
$ |
7,314 |
|
|
$ |
13,777 |
|
EMEA |
|
|
2,246 |
|
|
|
1,381 |
|
Asia-Pacific |
|
|
1,313 |
|
|
|
1,126 |
|
Latin America |
|
|
50 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,923 |
|
|
$ |
16,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
North America |
|
$ |
8,749 |
|
|
$ |
7,824 |
|
EMEA |
|
|
4,212 |
|
|
|
3,708 |
|
Asia-Pacific |
|
|
3,377 |
|
|
|
3,105 |
|
Latin America |
|
|
553 |
|
|
|
564 |
|
|
|
|
|
|
|
|
Total |
|
$ |
16,891 |
|
|
$ |
15,201 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
March 29, |
|
|
December 29, |
|
| |
|
2008 |
|
|
2007 |
|
Identifiable assets: |
|
|
|
|
|
|
|
|
North America |
|
$ |
4,649,753 |
|
|
$ |
4,867,383 |
|
EMEA |
|
|
2,607,500 |
|
|
|
2,691,046 |
|
Asia-Pacific |
|
|
991,238 |
|
|
|
947,873 |
|
Latin America |
|
|
451,732 |
|
|
|
468,699 |
|
|
|
|
|
|
|
|
Total |
|
$ |
8,700,223 |
|
|
$ |
8,975,001 |
|
|
|
|
|
|
|
|
The loss from operations recorded in Latin America for the thirteen weeks ended March 31, 2007
includes the $33,754 commercial tax charge further discussed in Note 12 to the Company’s
consolidated financial statements.
Note 12 — Commitments and Contingencies
As is customary in the IT distribution industry, the Company has arrangements with certain
finance companies that provide inventory-financing facilities for its customers. In conjunction
with certain of these arrangements, the Company has agreements with the finance companies that
would require it to repurchase certain inventory, which might be repossessed from the customers by
the finance companies. Due to various reasons, including among other items, the lack of
information regarding the amount of saleable inventory purchased from the Company still on hand
with the customer at any point in time, the Company’s repurchase obligations relating to inventory
cannot be reasonably estimated. Repurchases of inventory by the Company under these arrangements
have been insignificant to date.
12
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
In 2003, the Company’s Brazilian subsidiary was assessed for commercial taxes on its purchases
of imported software for the period January to September 2002. The principal amount of the tax
assessed for this period was 12.7 million Brazilian reais. Prior to February 28, 2007, and after
consultation with counsel, it had been the Company’s opinion that it had valid defenses to the
payment of these taxes and it was not probable that any amounts would be due for the 2002 assessed
period, as well as any subsequent periods. Accordingly, no reserve had been established previously
for such potential losses. However, on February 28, 2007 changes to the Brazilian tax law were
enacted. As a result of these changes, and after further consultation with counsel, it is now the
Company’s opinion that it has a probable risk of loss and may be required to pay all or some of these taxes. Accordingly, in the first
quarter of 2007, the Company recorded a charge to cost of sales of $33,754, consisting of $6,077
for commercial taxes assessed for the period January 2002 to September 2002, and $27,677 for such
taxes that could be assessed for the period October 2002 to December 2005. The subject legislation
provides that such taxes are not assessable on software imports after January 1, 2006. The sums
expressed are based on an exchange rate of 2.092 Brazilian reais to the U.S. dollar, which was
applicable when the charge was recorded. In the fourth quarter of 2007, the Company released a
portion of the commercial tax reserve recorded in the first quarter of 2007 amounting to $3,620
(6.5 million Brazilian reais at a December 2007 exchange rate of 1.792 Brazilian reais to the U.S.
dollar). The partial reserve release was related to the unassessed period from October through
December 2002, for which it is the Company’s opinion that the statute of limitations for an
assessment from Brazilian tax authorities has expired.
While the tax authorities may seek to impose interest and penalties in addition to the tax as
discussed above, the Company continues to believe that it has valid defenses to the assessment of
interest and penalties, which as of March 29, 2008 potentially amount to approximately $23,200 and
$27,800, respectively, based on the exchange rate prevailing on that date of 1.746 Brazilian reais
to the U.S. dollar. Therefore, the Company currently does not anticipate establishing an
additional reserve for interest and penalties. The Company will continue to vigorously pursue
administrative and judicial action to challenge the current, and any subsequent assessments.
However, the Company can make no assurances that it will ultimately be successful in defending any
such assessments, if made.
In December 2007, the Sao Paulo Municipal Tax Authorities assessed the Company’s Brazilian
subsidiary a commercial service tax based upon its sales and licensing of software. The assessment
covers the years 2002 through 2006 and totaled 57.2 million Brazilian reais ($32,772 based upon a
March 29, 2008 exchange rate of 1.746 Brazilian reais to the U.S. dollar). The assessment included
taxes claimed to be due as well as penalties for the years in question. The authorities could make
adjustments to the initial assessment including assessments for the period after 2006, as well as
additional penalties and interest, which may be material. It is management’s opinion, after
consulting with counsel, that the Company’s subsidiary has valid defenses against the assessment of
these taxes and penalties, or any subsequent adjustments or additional assessments related to this
matter. Although the Company intends to vigorously pursue administrative and judicial action to
challenge the current assessment and any subsequent adjustments or assessments, the Company can
make no assurances that it will ultimately be successful in its defense of this matter.
In May 2007, the Company received a “Wells Notice” from the SEC, which indicated that the SEC
staff intends to recommend an administrative proceeding against the Company seeking disgorgement
and prejudgment interest, though no dollar amounts were specified in the notice. The staff
contends that the Company failed to maintain adequate books and records relating to certain of its
transactions with McAfee Inc. (formerly Network Associates, Inc.), and was a cause of McAfee’s own
securities-laws violations relating to the filing of reports and maintenance of books and records.
During the second quarter of 2007, the Company recorded a reserve of $15,000 for the current best
estimate of the probable loss associated with this matter based on discussions with the SEC staff
concerning the issues raised in the Wells Notice. No resolution with the SEC has been reached at
this point, however, and there can be no assurance that such discussions will result in a
resolution of these issues. When the matter is resolved, the final disposition and the related
cash payment may exceed the current accrual for the best estimate of probable loss. At this time,
it is also not possible to accurately predict the timing of a resolution. The Company has
responded to the Wells Notice and continues to cooperate fully with the SEC on this matter, which
was first disclosed during the third quarter of 2004.
13
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
There are various other claims, lawsuits and pending actions against the Company incidental to
its operations. It is the opinion of management that the ultimate resolution of these matters will
not have a material adverse effect on the Company’s consolidated financial position, results of
operations or cash flows.
Note 13 — New Accounting Standards
In March 2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an
amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby seeks to improves the transparency of
financial reporting. Under FAS 161, entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. FAS 161 will be effective for the Company beginning January 4, 2009
(the first day of fiscal 2009). Early application is encouraged. FAS 161 also encourages, but
does not require, comparative disclosures for earlier periods at initial adoption. The Company is
currently in the process of evaluating what impact FAS 161 may have on the disclosures in its
consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 141(R), “Business Combinations” (“FAS 141R”). FAS 141R supercedes
Statement of Financial Accounting Standards No. 141, “Business Combinations,” and establishes
principles and requirements as to how an acquirer in a business combination recognizes and measures
in its financial statements: the identifiable assets acquired, the liabilities assumed and any
controlling interest; goodwill acquired in the business combination; or a gain from a bargain
purchase. FAS 141R requires the acquirer to record contingent consideration at the estimated fair
value at the time of purchase and establishes principles for treating subsequent changes in such
estimates which could affect earnings in those periods. This statement also calls for additional
disclosure regarding the nature and financial effects of the business combination. FAS 141R is to
be applied prospectively by the Company to business combinations beginning January 4, 2009 (the
first day of fiscal 2009). Early adoption is prohibited. The Company will assess the impact of
FAS 141R if and when a future acquisition occurs.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“FAS 160”). FAS 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS
160 also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling financial interest
and requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. The gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. Moreover, FAS 160 includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. FAS 160 is
effective for the Company beginning January 4, 2009 (the first day of fiscal 2009). Early adoption
is prohibited, but upon adoption FAS 160 requires the retroactive presentation and disclosure
related to existing minority interests. The Company is currently in the process of assessing what
impact FAS 160 may have on its consolidated financial position, results of operations or cash
flows.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“FAS
159”). FAS 159 permits companies to make an election to carry certain eligible financial assets
and liabilities at fair value, even if fair value measurement has not historically been required
for such assets and liabilities under U.S. GAAP. FAS 159 became effective for the Company
beginning December 30, 2007 (the first day of fiscal 2008). The Company did not elect the fair
value option to measure certain financial instruments. The adoption of the provisions of FAS159
did not have a material impact on the Company’s consolidated financial position, results of
operations or cash flows.
14
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in 000s, except per share data)
(Unaudited)
In November 2007, the Emerging Issues Task Force released Issue No. 07-01 “Accounting for
Collaborative Arrangements” (“EITF 07-01”). EITF 07-01 requires collaborators to present the
results of activities for which they act as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable GAAP or, in the absence of
other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable,
rational, and consistently applied accounting policy election. EITF 07-01 also clarified the
determination of whether transactions within a collaborative arrangement are part of a
vendor-customer (or analogous) relationship that are subject to EITF Issue No. 01-9 “Accounting for
Consideration Given by a Vendor to a Customer.” EITF 07-01 is effective for the Company beginning
January 4, 2009 (the first day of fiscal 2009). The Company is currently in the process of
evaluating what impact EITF No. 07-01 may have on its consolidated financial position, results of
operations or cash flows.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes forward-looking statements, including but not limited to,
management’s expectations for: competition; revenues, margin, expenses and other operating results
or ratios; operating efficiencies; reorganization plans; economic conditions; effective income tax
rates; capital expenditures; liquidity and capital requirements; acquisitions; contingencies;
operating models; and exchange rate fluctuations. In evaluating our business, readers should
carefully consider the important factors included in Item 1A “Risk Factors” of our Annual Report on
Form 10-K for the fiscal year ended December 29, 2007, as filed with the SEC. We disclaim any duty
to update any forward-looking statements.
Overview of Our Business
We are the largest distributor of information technology, or IT, products and solutions
worldwide based on revenues. We offer a broad range of IT products and supply chain solutions and
help generate demand and create efficiencies for our customers and suppliers around the world. The
IT distribution industry in which we operate is characterized by narrow gross profit as a
percentage of net sales, or gross margin, and narrow income from operations as a percentage of net
sales, or operating margin. Historically, our margins have been impacted by pressures from price
competition and declining average selling prices, as well as changes in vendor terms and
conditions, including, but not limited to, variations in vendor rebates and incentives, our ability
to return inventory to vendors, and time periods qualifying for price protection. We expect these
competitive pricing pressures and restrictive vendor terms and conditions to continue in the
foreseeable future. To mitigate these factors, we have implemented changes to and continue to
refine our pricing strategies, inventory management processes and vendor program processes. In
addition, we continuously monitor and change, as appropriate, certain terms and conditions offered
to our customers to reflect those being imposed by our vendors. We have also strived to improve
our profitability through our diversification of product offerings, including our entry into
adjacent product segments such as consumer electronics and automatic identification/data capture
and point-of-sale, or DC/POS. Our business also requires significant levels of working capital
primarily to finance accounts receivable. We have historically relied on, and continue to rely
heavily on available cash, debt and trade credit from vendors for our working capital needs.
In January 2008, we acquired the assets of privately held Paradigm Distribution Ltd., or
Paradigm, a key distributor in the United Kingdom of mobile data and DC/POS technologies to
solution providers and system integrators. This acquisition expanded our value-added distribution
of mobile data and DC/POS solutions in EMEA. Paradigm was acquired for an initial purchase price
of $2.7 million (see Note 7 to our consolidated financial statements).
In June 2007, we acquired certain assets and liabilities of DBL Distributing Inc., or DBL, a
leading distributor of consumer electronics accessories and related products in the U.S. DBL
offers a comprehensive mix of more than 17,000 consumer electronics products to thousands of
independent retailers across the U.S. DBL also publishes the most comprehensive consumer
electronics wholesale catalog in the industry. DBL was acquired for $102.2 million, which includes
related acquisition costs, plus an estimated working capital adjustment of $5.7 million, which is
subject to a final true-up to be agreed to by the two parties. The initial purchase price was
funded through our existing borrowing capacity and cash. In connection with the acquisition of
DBL, the parties agreed that $10.0 million of the purchase price shall be held in escrow to cover
any contingent liabilities under the purchase agreement. The funds held in escrow are scheduled to
be released to the sellers in June 2008 to the extent claims are not made or have been resolved.
In March 2007, we acquired all the outstanding shares of VPN Dynamics and a minority
investment of 49% in a related company, Securematics. VPN Dynamics offers specialized network
security education using vendor-authorized courseware and lab settings through online, on-site and
classroom training. Securematics provides products and services to a large number of global system
integrators, service providers and value-added resellers. We acquired our interests in these
related entities for an initial aggregate purchase price of $25.0 million, including related
acquisition costs. We have an option to acquire the remaining 51% interest held by the
shareholders of Securematics at a purchase price of $1.0 million, which has been recorded in
accrued expenses in the Company’s consolidated balance sheet at March 29, 2008 and December 29,
2007. The holders of the remaining 51% interests in Securematics also have the option to require
us to purchase their interests for the same amount, after two years from the transaction date. In
accordance with the purchase agreement, during the third quarter of 2007, we paid the sellers $1.8
million in contingent consideration for the achievement of a milestone, which was an adjustment to
the initial purchase price. The purchase agreement also provides that we pay the sellers
additional contingent consideration of up to $3.2 million, if certain performance levels are
achieved, over the two-year period following the date of acquisition (see Note 7 to our
consolidated financial statements). The initial purchase price was funded through our existing
borrowing capacity and cash.
16
Management’s Discussion and Analysis Continued
Operations
The following tables set forth our net sales by geographic region (excluding intercompany
sales) and the percentage of total net sales represented thereby, as well as operating income
(loss) and operating margin (loss) by geographic region for each of the thirteen weeks indicated
(in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
| |
|
March 29, 2008 |
|
|
March 31, 2007 |
|
Net sales by geographic region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
3,290 |
|
|
|
38.4 |
% |
|
$ |
3,284 |
|
|
|
39.8 |
% |
Europe, Middle East and Africa, or EMEA |
|
|
3,066 |
|
|
|
35.8 |
|
|
|
3,047 |
|
|
|
37.0 |
|
Asia-Pacific |
|
|
1,814 |
|
|
|
21.1 |
|
|
|
1,569 |
|
|
|
19.0 |
|
Latin America |
|
|
407 |
|
|
|
4.7 |
|
|
|
346 |
|
|
|
4.2 |
|
| |
|
|
|
|
Total |
|
$ |
8,577 |
|
|
|
100.0 |
% |
|
$ |
8,246 |
|
|
|
100.0 |
% |
| |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
| |
|
March 29, 2008 |
|
|
March 31, 2007 |
|
Operating income (loss) and operating
margin (loss) by geographic region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
40.6 |
|
|
|
1.2 |
% |
|
$ |
57.0 |
|
|
|
1.7 |
% |
EMEA |
|
|
26.8 |
|
|
|
0.9 |
|
|
|
35.0 |
|
|
|
1.1 |
|
Asia-Pacific |
|
|
32.5 |
|
|
|
1.8 |
|
|
|
19.7 |
|
|
|
1.3 |
|
Latin America |
|
|
7.8 |
|
|
|
1.9 |
|
|
|
(28.4 |
) |
|
|
(8.2 |
) |
Stock-based compensation expense |
|
|
(8.4 |
) |
|
|
— |
|
|
|
(9.6 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99.3 |
|
|
|
1.2 |
% |
|
$ |
73.7 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loss from operations recorded in Latin America for the thirteen weeks ended March 31, 2007
includes the first quarter commercial tax charge of $33.8 million in Brazil, also discussed in Note
12 to our consolidated financial statements.
We sell products purchased from many vendors, but generated approximately 25% and 24% of our
net sales for the thirteen weeks ended March 29, 2008 and March 31, 2007, respectively, from
products purchased from Hewlett-Packard Company. There were no other vendors that represented 10%
or more of our net sales in each of the periods presented.
The following table sets forth certain items from our consolidated statement of income as a
percentage of net sales, for each of the periods indicated.
| |
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
| |
|
March 29, 2008 |
|
March 31, 2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
94.3 |
|
|
|
95.0 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5.7 |
|
|
|
5.0 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative, or SG&A |
|
|
4.5 |
|
|
|
4.1 |
|
Reorganization credits |
|
|
— |
|
|
|
(0.0 |
) |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1.2 |
|
|
|
0.9 |
|
Other expense, net |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1.0 |
|
|
|
0.7 |
|
Provision for income taxes |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
0.7 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
17
Management’s Discussion and Analysis Continued
Results of Operations for the Thirteen Weeks Ended March 29, 2008 Compared to
Thirteen Weeks Ended March 31, 2007
Our consolidated net sales increased 4.0% to $8.58 billion for the thirteen weeks ended March
29, 2008, or first quarter of 2008, from $8.25 billion for the thirteen weeks ended March 31, 2007,
or first quarter of 2007. The increase in net sales was primarily attributable to the translation
impact of the strengthening foreign currencies compared to the U.S. dollar, which contributed
approximately six percentage-points of the worldwide growth, and continued strong growth in our
Asia-Pacific and Latin American regions. These positive trends were partially offset by the
reduced demand for IT products and services in North America and EMEA as a result of the softness
in the economic environment in both regions. The earlier Easter holiday in 2008 also generated, on
average, two less business days in the first quarter of 2008 when compared to the prior year. The
impact of this holiday timing is most pronounced in the EMEA and Latin American regions. Net sales
from our North American operations were essentially flat at $3.29 billion in the first quarter of
2008 compared to the first quarter of 2007, primarily reflecting tempered demand for IT products
and services as a result of the economic softness in the region. Net sales from our EMEA
operations increased 0.6% to $3.07 billion in the first quarter of 2008 from $3.05 billion in the
first quarter of 2007. However, the appreciation of European currencies compared to the U.S.
dollar contributed approximately 11 percentage-points of the EMEA sales growth, which was offset by
the weakening demand for IT products and services in most markets in the region. Net sales from
our Asia-Pacific operations increased 15.6% to $1.81 billion in the first quarter of 2008 from
$1.57 billion in the first quarter of 2007. The growth reflects strengthening currencies in the
region, which contributed approximately 10 percentage-points of growth, and continued strong demand
for IT products and services in most countries across the region. Net sales from our Latin
American operations increased by 17.8% to $407 million in the first quarter of 2008 from $346
million in the first quarter of 2007, primarily due to the solid demand environment throughout the
region.
Gross margin was 5.7% in the first quarter of 2008, an increase of 0.7% compared to 5.0% gross
margin in the first quarter of 2007, driven by business improvements, including product mix, focus
on profitable business with better margin dynamics and stronger customer loyalty programs in every
region. In addition, in the first quarter of 2007, a charge of $33.8 million related to Brazilian
commercial taxes adversely affected the prior-year period gross margin by approximately 0.4%. We
continuously evaluate and modify our pricing policies and certain terms and conditions offered to
our customers to reflect those being imposed by our vendors and general market conditions. As we
continue to evaluate our existing pricing policies and make future changes, if any, we may
experience moderated or negative sales growth in the near term. In addition, increased competition
and any retractions or prolonged softness in the major economies throughout the world may also
affect our net sales and hinder our ability to maintain and/or improve gross margins from the
levels realized historically.
Total SG&A expenses increased 15.0% to $386.2 million in the first quarter of 2008 from $335.7
million in the first quarter of 2007 and increased, as a percentage of net sales, to 4.5% in the
first quarter of 2008 compared to 4.1% in the first quarter of 2007. These increases were
primarily attributable to additional investments in people and infrastructure to support our
strategic initiatives, growth in our fee-for-services business, and the softer demand environment,
which has created a higher ratio of operating expenses to sales. Strengthening foreign currencies
also contributed significantly to the year-over-year growth in SG&A dollars by approximately $20.0
million, or six percentage-points. As a result of the current economic softness discussed above,
we are restructuring our EMEA operations, primarily in the regional headquarters. During the early
second quarter of 2008, we have also made targeted reductions of primarily administrative positions
in North America. We expect to generate modest savings on these planned actions beginning in the
second and third quarters of 2008 with annualized savings ramping up to $18 million to $24 million
by the end of the year when these actions are fully implemented. Costs associated with these
actions are expected to be approximately $11 million to $13 million, the majority of which are
estimated to be incurred during the second and third quarters of 2008. We believe that these
actions, and any future actions, will improve productivity and operational effectiveness without
sacrificing customer service or vendor relationships, or inhibiting profitable growth. We will
continue to pursue and implement business process improvements and organizational changes,
including the restructuring actions discussed above, to create sustained business improvements
without sacrificing customer service over the long-term.
For the first quarter of 2007, the credit to reorganization costs of $0.7 million consisted
primarily of adjustments for lower than expected costs associated with facility consolidations in
North America related to actions taken in prior years.
18
Management’s Discussion and Analysis Continued
Operating margin increased to 1.2% in the first quarter of 2008 compared to 0.9% in the first
quarter of 2007. The first quarter of 2007 included the charge for commercial taxes in Brazil,
which negatively impacted the prior-year period operating margin by approximately 0.4%, as
discussed above. Our North American operating margin decreased to 1.2% in the first quarter of
2008 from 1.7% in the first quarter of 2007, primarily as a result of the investments in strategic
initiatives and infrastructure and the soft economic environment discussed above. Our EMEA
operating margin decreased to 0.9% in the first quarter of 2008 from 1.1% in the first quarter of
2007. The soft economic environment had a negative impact on this region, with sales declining at
a quicker pace than operating expenses. Our Asia-Pacific operating margin increased to 1.8% in the
first quarter of 2008 from 1.3% in the first quarter of 2007, reflecting gross margin improvement,
economies of scale from the higher volume of business and ongoing cost containment efforts. Our
Latin American operating margin was 1.9% in the first quarter of 2008 compared to an operating loss
margin of 8.2% in the first quarter of 2007. The increase was primarily due to the prior-year
commercial tax charge in Brazil, which was approximately 9.8% of Latin American net sales, as well
as gross margin improvement and ongoing cost containment efforts. We continue to implement process
improvements and other changes to improve profitability over the long-term, including the
previously discussed reorganization actions expected to occur in the second and third quarters of
2008. As a result, operating margins and/or sales may fluctuate significantly from quarter to
quarter.
Other expense (income) consisted primarily of interest, foreign currency exchange gains and
losses and other non-operating gains and losses. We incurred net other expense of $12.7 million in
the first quarter of 2008 compared to $15.4 million in the first quarter of 2007, primarily due to
lower interest rates on U.S. borrowings, higher cash balances generating higher interest income and
higher foreign exchange gains, partially offset by higher average borrowings.
The provision for income taxes was $22.5 million, or an effective tax rate of 26.0%, in the
first quarter of 2008, which includes a favorable two-percentage-point discrete impact resulting
from a tax-rate change in China. In the first quarter of 2007, the provision for income taxes was
$21.3 million, or an effective tax rate of 36.6%, which was negatively impacted by the $33.8
million Brazilian commercial tax charge, for which we did not recognize an income tax benefit,
partially offset by the positive impact resulting from our reversal of certain income tax reserves
following the resolution of a U.S. tax audit.
Quarterly Data; Seasonality
Our quarterly operating results have fluctuated significantly in the past and will likely
continue to do so in the future as a result of:
| • |
|
general deterioration in economic or geopolitical conditions, including changes in
legislation or regulatory environments in which we operate; |
| • |
|
competitive conditions in our industry, which may impact the prices charged and terms and
conditions imposed by our suppliers and/or competitors and the prices we charge our customers,
which in turn may negatively impact our revenues and/or gross margins; |
| • |
|
seasonal variations in the demand for our products and services, such as lower demand in
Europe during the summer months, worldwide pre-holiday stocking in the retail channel during
the September-to-December period and the seasonal increase in demand for our North American
fee-based logistics related services in the fourth quarter, which affects our operating
expenses and margins; |
| • |
|
changes in product mix, including impacts of targeted expansion in certain adjacent
markets; |
| • |
|
currency fluctuations in countries in which we operate; |
| • |
|
variations in our levels of excess inventory and doubtful accounts, and changes in the
terms of vendor-sponsored programs such as price protection and return rights; |
| • |
|
changes in the level of our operating expenses; |
| • |
|
the impact of acquisitions we may make; |
| • |
|
the impact of and possible disruption caused by reorganization actions and efforts to
improve our IT capabilities, as well as the related expenses and/or charges; |
| • |
|
the loss or consolidation of one or more of our major suppliers or customers; |
| • |
|
product supply constraints; and |
| • |
|
interest rate fluctuations, which may increase our borrowing costs and may influence the
willingness of customers and end-users to purchase products and services. |
These historical variations may not be indicative of future trends. Our narrow operating
margins may magnify the impact of the foregoing factors on our operating results.
19
Management’s Discussion and Analysis Continued
Liquidity and Capital Resources
Cash Flows
We have financed working capital needs largely through income from operations, available cash,
trade and supplier credit, and borrowings under revolving credit and other facilities. The
following is a detailed discussion of our cash flows for the first quarters of 2008 and 2007.
Our cash and cash equivalents totaled $567.3 million and $579.6 million at March 29, 2008 and
December 29, 2007, respectively.
Net cash provided by operating activities was $43.4 million in the first quarter of 2008
compared to cash used by operating activities of $100.5 million in the first quarter of 2007. The
net cash provided by operating activities in the first quarter of 2008 principally reflects our net
income and decrease in accounts receivable, partially offset by an increase in our inventories and
reduction in accounts payable. The increase in inventories since the end of 2007 is a function of
a softer economic environment as we are actively working to align inventory levels to lower than
expected sales volume. The reduction in accounts receivable and accounts payable reflects the
lower volume of business as a result of softening economies in the North America and EMEA regions.
The net cash used by operating activities in the first quarter of 2007 principally reflects
reductions in accounts payable and amounts sold under accounts receivable programs, partially
offset by reductions in inventories and increases in accrued expenses. The reductions of accounts
payable and inventories largely reflect the normal seasonal decline in sales during the quarter, as
well as the timing of vendor payments, while the increase of accrued expenses primarily relates to
timing of payments for value added taxes in certain countries and the accrual of the previously
discussed commercial tax liability in Brazil.
Net cash used by investing activities was $14.0 million in the first quarter of 2008 compared
to $41.8 million in the first quarter of 2007. The net cash used by investing activities in the
first quarter of 2008 was primarily due to capital expenditures. The net cash used by investing
activities in the first quarter of 2007 was primarily due to the VPN Dynamics and Securematics
acquisitions and capital expenditures.
Net cash used by financing activities was $64.5 million in the first quarter of 2008 compared
to net cash provided by financing activities of $108.9 million in the first quarter of 2007. The
net cash used by financing activities in the first quarter of 2008 primarily reflects our
repurchase of Class A common stock of $86.6 million under our $300 million stock repurchase program
and a decrease in our book overdrafts, partially offset by the net proceeds of $85.4 million from
our debt facilities. The net cash provided by financing activities in the first quarter of 2007
primarily reflects net proceeds of $97.5 million from our debt facilities and proceeds of $10.6
million from the exercise of stock options.
Our debt level is highly influenced by our working capital needs. As such, our borrowings
fluctuate from period-to-period and may also fluctuate significantly within a quarter. The
fluctuation is the result of the concentration of payments received from customers toward the end
of each month, as well as the timing of payments made to our vendors. Accordingly, our period-end debt balance may not be reflective of our average debt level or maximum debt level during
the period presented or at any point in time.
Capital Resources
We believe that our existing sources of liquidity, including cash resources and cash provided
by operating activities, supplemented as necessary with funds available under our credit
arrangements, will provide sufficient resources to meet our present and future working capital and
cash requirements for at least the next twelve months.
We have a revolving accounts receivable-backed financing program in the U.S., which provides
for up to $600 million in borrowing capacity secured by substantially all U.S.-based receivables.
At our option, the program may be increased to as much as $650 million at any time prior to its
maturity date of July 2010. The interest rate on this facility is dependent on the designated
commercial paper rates plus a predetermined margin. At March 29, 2008 and December 29, 2007, we
had borrowings of $428.0 million and $387.5 million, respectively, under this U.S. revolving
accounts receivable-backed financing program.
20
Management’s Discussion and Analysis Continued
We also have a revolving accounts receivable-backed financing program in Canada, which matures
on August 31, 2008, and provides for borrowing capacity of up to 150 million Canadian dollars, or
approximately $147 million at March 29, 2008. The interest rate on this facility is dependent on
the designated commercial paper rates plus a predetermined margin at the drawdown date. At March
29, 2008 and December 29, 2007, we had no borrowings under this Canadian revolving accounts
receivable-backed financing program.
We have two revolving accounts receivable-backed financing facilities in Europe, which
individually provide for borrowing capacity of up to Euro 107 million, or approximately $169
million, and Euro 230 million, or approximately $363 million, at March 29, 2008. These facilities
mature in July 2010 and January 2009, respectively. Both facilities are with a financial
institution that has an arrangement with a related issuer of third-party commercial paper. These
European facilities require certain commitment fees, and borrowings under both facilities incur
financing costs at rates indexed to EURIBOR. At March 29, 2008 and December 29, 2007, we had no
borrowings under these European revolving accounts receivable-backed financing facilities.
We also have two revolving accounts receivable factoring facilities in Europe maturing in
March 2010, which individually provide for a maximum borrowing capacity of 60 million British pound
sterling, or approximately $120 million, and Euro 90 million, or approximately $142 million,
respectively, at March 29, 2008. Actual capacity will depend upon the level of trade accounts
receivable eligible to be transferred or sold into the accounts receivable financing programs. At
March 29, 2008 and December 29, 2007, we had no borrowings outstanding under these European
factoring facilities.
We have a multi-currency revolving trade accounts receivable-backed financing facility in
Asia-Pacific, which provides for up to 250 million Australian dollars of borrowing capacity, or
approximately $229 million at March 29, 2008, with a financial institution that has an arrangement
with a related issuer of third-party commercial paper. This facility expires in June 2008. The
interest rate is dependent upon the currency in which the drawing is made and is related to the
local short-term bank indicator rate for such currency. At March 29, 2008 and December 29, 2007,
we had borrowings of $27.9 million and $0, respectively, under this Asia-Pacific multi-currency
revolving accounts receivable-backed financing facility.
Our ability to access financing under our North American, EMEA and Asia-Pacific facilities, as
discussed above, is dependent upon the level of eligible trade accounts receivable, the level of
market demand for commercial paper and covenant compliance discussed below. At March 29, 2008, our
actual aggregate available capacity under these programs was approximately $1.6 billion based on
eligible trade accounts receivable available, of which approximately $455.9 million of such
capacity was outstanding. We could, however, lose access to all or part of our financing under
these facilities under certain circumstances, including: (a) a reduction in credit ratings of the
third-party issuer of commercial paper or the back-up liquidity providers, if not replaced, or (b)
failure to meet certain defined eligibility criteria for the trade accounts receivable, such as
receivables remaining assignable and free of liens and dispute or set-off rights. In addition, in
certain situations, we could lose access to all or part of our financing with respect to the
European facility that matures in January 2009 as a result of the rescission of our authorization
to collect the receivables by the relevant supplier under applicable local law. Based on our
assessment of the duration of these programs, the history and strength of the financial partners
involved, other historical data, various remedies available to us under these programs, and the
remoteness of such contingencies, we believe that it is unlikely that any of these risks will
materialize in the near term.
We have a $275 million revolving senior unsecured credit facility with a bank syndicate in
North America that matures in August 2012. Subject to approval by the bank syndicate, this
facility may be increased up to $450 million at any time prior its maturity date. The interest
rate on the revolving senior unsecured credit facility is based on LIBOR, plus a predetermined
margin that is based on our debt ratings and our leverage ratio. At March 29, 2008 and December
29, 2007, we had no borrowings under this North American revolving senior unsecured credit
facility. This credit facility may also be used to support letters of credit. At March 29, 2008
and December 29, 2007, letters of credit of $40.9 million and $41.2 million, respectively, were
issued to certain vendors and financial institutions to support purchases by our subsidiaries,
payment of insurance premiums and flooring arrangements. Our available capacity under the
agreement is reduced by the amount of any issued and outstanding letters of credit.
21
Management’s Discussion and Analysis Continued
We have a 100 million Australian dollar, or approximately $92 million at March 29, 2008,
senior unsecured credit facility with a bank syndicate that matures in December 2008. The interest
rate on this credit facility is based on Australian or New Zealand short-term bank indicator rates,
depending on the funding currency, plus a predetermined margin that is based on our debt ratings
and our leverage ratio. At March 29, 2008, we had no borrowings, while at December 29, 2007, we
had borrowings $0.9 million under this senior unsecured credit facility. This credit facility may
also be used to support letters of credit. Our available capacity under the agreement is reduced
by the amount of any issued and outstanding letters of credit. At March 29, 2008 and December 29,
2007, no letters of credit were issued.
We also have additional lines of credit, short-term overdraft facilities and other credit
facilities with various financial institutions worldwide, which provide for borrowing capacity
aggregating approximately $933 million at March 29, 2008. Most of these arrangements are on an
uncommitted basis and are reviewed periodically for renewal. At March 29, 2008 and December 29,
2007, we had approximately $153.4 million and $134.7 million, respectively, outstanding under these
facilities. Certain borrowings under these facilities are secured by collateral deposits of $35.0
million at March 29, 2008 and December 29, 2007, which are both included in other current assets.
At March 29, 2008 and December 29, 2007, letters of credit totaling approximately $34.7 million and
$30.2 million, respectively, were issued principally to certain vendors to support purchases by our
subsidiaries. The issuance of these letters of credit reduces our available capacity under these
agreements by the same amount. The weighted average interest rate on the outstanding borrowings
under these facilities, which may fluctuate depending on geographic mix, was 6.8% and 6.4% per
annum at March 29, 2008 and December 29, 2007, respectively.
There has been no significant change in our contractual obligations during the first quarter
of 2008 from those disclosed in our Annual Report on Form 10-K for the year ended December 29,
2007.
Covenant Compliance
We are required to comply with certain financial covenants under some of our financing
facilities, including minimum tangible net worth, restrictions on funded debt and interest coverage
and trade accounts receivable portfolio performance covenants, including metrics related to
receivables and payables. We are also restricted in the amount of additional indebtedness we can
incur, dividends we can pay, and the amount of common stock that we can repurchase annually. At
March 29, 2008, we were in compliance with all material covenants or other material requirements
set forth in our accounts receivable financing programs and credit agreements or other agreements
with our creditors as discussed above.
Other Matters
See Note 12 to our consolidated financial statements and Item 1. “Legal Proceedings” under
Part II “Other Information” for discussion of other matters.
Capital Expenditures
We presently expect our capital expenditures to approximate $80 million in 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in our quantitative and qualitative disclosures about market
risk for the first quarter ended March 29, 2008 from those disclosed in our Annual Report on Form
10-K for the year ended December 29, 2007. For further discussion of quantitative and qualitative
disclosures about market risk, reference is made to our Annual Report on Form 10-K for the year
ended December 29, 2007.
Item 4. Controls and Procedures
The Company’s management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this report. There has been no
change in the Company’s internal control over financial reporting that occurred during the last
fiscal quarter covered by this report that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
22
Part II. Other Information
Item 1. Legal Proceedings
In 2003, our Brazilian subsidiary was assessed for commercial taxes on its purchases of
imported software for the period January to September 2002. The principal amount of the tax
assessed for this period was 12.7 million Brazilian reais. Prior to February 28, 2007, and after
consultation with counsel, it had been our opinion that we had valid defenses to the payment of
these taxes and it was not probable that any amounts would be due for the 2002 assessed period, as
well as any subsequent periods. Accordingly, no reserve had been established previously for such
potential losses. However, on February 28, 2007 changes to the Brazilian tax law were enacted. As
a result of these changes, and after further consultation with counsel, it is now our opinion that
we have a probable risk of loss and may be required to pay all or some of these taxes. Accordingly, in the first quarter of 2007, we
recorded a charge to cost of sales of $33.8 million, consisting of $6.1 million for commercial
taxes assessed for the period January 2002 to September 2002, and $27.7 million for such taxes that
could be assessed for the period October 2002 to December 2005. The subject legislation provides
that such taxes are not assessable on software imports after January 1, 2006. The sums expressed
are based on an exchange rate of 2.092 Brazilian reais to the U.S. dollar which was applicable when
the charge was recorded. In the fourth quarter of 2007, we released a portion of the commercial
tax reserve recorded in the first quarter of 2007 amounting to $3.6 million (6.5 million Brazilian
reais at a December 2007 exchange rate of 1.792 Brazilian reais to the U.S. dollar). The partial
reserve release was related to the unassessed period from October through December 2002, for which
it is management’s opinion that the statute of limitations for an assessment from Brazilian tax
authorities has expired.
While the tax authorities may seek to impose interest and penalties in addition to the tax as
discussed above, we continue to believe that we have valid defenses to the assessment of interest
and penalties, which as of March 29, 2008 potentially amount to approximately $23.2 million and
$27.8 million, respectively, based on the exchange rate prevailing on that date of 1.746 Brazilian
reais to the U.S. dollar. Therefore, we currently do not anticipate establishing an additional
reserve for interest and penalties. We will continue to vigorously pursue administrative and
judicial action to challenge the current, and any subsequent assessments. However, we can make no
assurances that we will ultimately be successful in defending any such assessments, if made.
In December 2007, the Sao Paulo Municipal Tax Authorities assessed our Brazilian subsidiary a
commercial service tax based upon our sales and licensing of software. The assessment covers the
years 2002 through 2006 and totaled 57.2 million Brazilian reais ($32.8 million based upon a March
29, 2008 exchange rate of 1.746 Brazilian reais to the U.S. dollar). The assessment included taxes
claimed to be due as well as penalties for the years in question. The authorities could make
adjustments to the initial assessment including assessments for the period after 2006, as well as
additional penalties and interest, which may be material. It is our opinion, after consulting with
counsel, that our subsidiary has valid defenses against the assessment of these taxes and
penalties, or any subsequent adjustments or additional assessments
related to this matter. Although we
intend to vigorously pursue administrative and judicial action to challenge the current assessment
and any subsequent adjustments or assessments, we can make no assurances that we will ultimately be
successful in our defense of this matter.
In May 2007, we received a “Wells Notice” from the SEC, which indicated that the SEC staff
intends to recommend an administrative proceeding against the company seeking disgorgement and
prejudgment interest, though no dollar amounts were specified in the notice. The staff contends
that the company failed to maintain adequate books and records relating to certain of our
transactions with McAfee Inc. (formerly Network Associates, Inc.), and was a cause of McAfee’s own
securities-laws violations relating to the filing of reports and maintenance of books and records.
During the second quarter of 2007, we recorded a reserve of $15.0 million for the current best
estimate of the probable loss associated with this matter based on discussions with the SEC staff
concerning the issues raised in the Wells Notice. No resolution with the SEC has been reached at
this point, however, and there can be no assurance that such discussions will result in a
resolution of these issues. When the matter is resolved, the final disposition and the related
cash payment may exceed the current accrual for the best estimate of probable loss. At this time,
it is also not possible to accurately predict the timing of a resolution. We have responded to the
Wells Notice and continue to cooperate fully with the SEC on this matter, which was first disclosed
during the third quarter of 2004.
23
We and one of our subsidiaries are defendants in two separate lawsuits arising out of the
bankruptcy of Refco, Inc., and its subsidiaries and affiliates (collectively, “Refco”). Both
actions are currently pending in the U.S. District Court for the Southern District of New York.
The trustee of the Refco Litigation Trust has filed suit against Grant Thornton LLP, Mayer Brown
Rowe & Maw, LLP, Phillip Bennett, and numerous other individuals and entities (the “Kirschner
action”), claiming damage to the bankrupt Refco entities in the amount of $2 billion. Of its
forty-four claims for relief, the Kirschner action contains a single claim against us and our
subsidiary, alleging that loan transactions between the subsidiary and Refco in early 2000 and
early 2001 aided and abetted the common law fraud of Bennett and other defendants, resulting in
damage to Refco in August 2004 when it effected a leveraged buyout in which it incurred substantial
new debt while distributing assets to Refco insiders. The liquidators of numerous Cayman
Island-based hedge funds filed suit in New York state court (the “Krys action”) against many of the
same defendants named in the Kirschner action, as well as others. The Krys action alleges that we
and our subsidiary conspired with and aided and abetted the fraud of Refco insiders and others by
participating in the above two loan transactions, causing damage to the hedge funds in an
unspecified amount. We intend to vigorously defend these cases and do not expect the final
disposition of either to have a material adverse effect on our consolidated financial position,
results of operations, or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 29, 2007, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item 2. Unregistered Sales of Equity 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
Not applicable.
Item 6. Exhibits
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| No. |
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Description |
31.1
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Certification by Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (“SOX”) |
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31.2
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Certification by Principal Financial Officer pursuant to Section 302 of SOX |
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32.1
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Certification by Principal Executive Officer pursuant to Section 906 of SOX |
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32.2
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Certification by Principal Financial Officer pursuant to Section 906 of SOX |
24
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.
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INGRAM MICRO INC. |
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By:
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/s/ William D. Humes |
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Name:
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William D. Humes |
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Title:
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Executive Vice President and |
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Chief Financial Officer |
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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May 8, 2008
25
EXHIBIT INDEX
| |
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| No. |
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Description |
31.1
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Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (“SOX”) |
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31.2
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Certification by Principal Financial Officer pursuant to Section 302 of SOX |
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32.1
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Certification by Principal Executive Officer pursuant to Section 906 of SOX |
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32.2
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Certification by Principal Financial Officer pursuant to Section 906 of SOX |
26