Ingram Beats, Outlook Cautious

Zacks

Ingram Micro Inc. (IM) has reported third-quarter 2012 earnings per share of 40 cents that beat the Zacks Consensus Estimate by 2 cents. The results were 21.2% higher than 33 cents reported in the year-earlier quarter.

Revenues

Ingram Micro’s third quarter revenue of $9.03 billion increased 1.5% from $8.90 billion in the year-ago quarter and was above the Zacks Consensus Estimate of $8.79 billion. The quarter’s result was affected by a 5.0% negative impact of currency translation. Geographical contributions were solid barring Europe.

Revenue contribution from North America increased 5.4% year over year to $3.97 billion on the back of solid growth in the U.S. broad line business and double-digit growth in high margin Specialty and Logistics divisions. But this was slightly offset by a soft Canadian business. Europe, Middle East and Africa (:EMEA) contributed $2.42 billion, down 8.8% from the year-ago quarter. The decline was primarily due to the difficult macro environment and competitive pressures, which were partially offset by favorable performances in Germany and the U.K.

The Asia-Pacific region generated $2.17 billion in sales, up 5.6% from $2.06 billion in the year-ago quarter. The slight improvement was attributed to strong regional performances in India and China. Latin America sales grew 11.1% year over year to $467.1 million. Currency translation had an 8.0% negative impact.

Operating Results

Gross profit increased 3.0% to $453.9 million in the reported quarter from $440.7 million in the year-ago quarter. The improvement was mainly attributable to solid performances in the Specialty business and Logistics business in North America. But this was offset by high volume sales of tablets and other personal devices, which carry a low margin due to pricing pressure. Hence, gross margin remained unchanged year over year at 5.0%.

Selling, general and administrative expenses increased 0.5% year over year to $356.0 million. Operating margin was flat year over year at 1.0%.

Ingram Micro reported net income of $53.3 million, or 35 cents per share, compared with  $23.3 million or 15 cents in the year-ago quarter. Excluding certain pre-tax one-time items, adjusted net income was 40 cents per share, compared with 33 cents in the year-ago quarter.

Balance Sheet and Share Repurchase

Ingram Micro exited the third quarter with cash and cash equivalents of $1.16 billion, up from $981.2 million in the previous quarter. Accounts receivable increased 2.4% sequentially to $3.78 billion. Inventories were $3.34 billion, up from $3.19 billion in the prior quarter. Total debt balance was $770.7 million, up from $463.9 million in the previous quarter.

Guidance

For the fourth quarter of 2012, the IT distributor expects revenue to be flat year over year. The company expects gross margin to increase sequentially, although benefits arising from higher hard disk drive pricing will be missing.

The company also expects BrightPoint to contribute around $900.0 million toward revenue and to be breakeven to slightly accretive to earnings per share in the fourth quarter. It also expects to record roughly $9 million for amortization of intangibles related to the BrightPoint acquisition.

Conclusion

We find Ingram Micro’s third quarter results decent with both the top and bottom lines beating the Zacks Consensus Estimates. The company has provided a cautious fourth quarter outlook. But we believe that the improving IT spending trend will help Ingram to post better results ahead. Moreover, management’s commentary of focusing more on the high-margin market and on strategic acquisitions to grow market share is encouraging.

We remain fairly optimistic about Ingram Micro’s strategic relationship with network giant Juniper Networks Inc. (JNPR), as well as tech giants such as Hewlett-Packard Company (HPQ), IBM Corp. (IBM) and Microsoft Corp. (MSFT).

However, the company’s significant European exposure, debt burden, concerns relating to Brightpoint’s major customer loss and its high debt burden forces us to have a bearish view on the stock.

Currently, Ingram Micro has a Zacks #4 Rank, implying a short-term “Sell” rating.

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