Ingram Micro Inc. (IM)

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Ingram Micro (IM)

Q2 2013 Earnings Call

July 24, 2013 5:00 pm ET

Executives

Damon S. Wright - Senior Director of Investor Relations

William D. Humes - Chief Operating & Financial Officer and Principal Accounting Officer

Alain MoniƩ - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Louis R. Miscioscia - Credit Agricole Securities (USA) Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Keith M. Housum - Northcoast Research

Osten Bernardez - Cross Research LLC

Ananda Baruah - Brean Capital LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Ingram Micro Second Quarter Fiscal Year 2013 Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Damon Wright, Head of Investor Relations. Please go ahead, sir.

Damon S. Wright

Thank you, and good afternoon. Joining me today, Alain MoniƩ, our President and Chief Executive Officer; and Bill Humes, our Chief Operating and Financial Officer, both of whom will make initial remarks. After which, the call will be open for a question-and-answer session.

We've also prepared presentation slides to highlight key aspects of our financial performance, which may be found with today's news release at the Investor Relations section of Ingram Micro's website. During today's discussion, we will make statements that are forward looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today's news release and documents filed with the Securities and Exchange Commission, specifically the Risk Factors listed in Item 1A of our Form 10-K for the fiscal year ended December 29, 2012, for more information on the risks that could cause actual results to differ materially. Additionally, throughout this call, we will be discussing certain non-GAAP or adjusted financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the 2 for the periods reported in the release.

Please also see the Investors section of our website for our slide deck that includes additional information disclosed in accordance with SEC Regulation G. I also want to remind you, this conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. Presentation slides and a replay of the call will be available for 1 week on the company's website or by calling (888) 203-1112 and using passcode 5113706.

I'd now like to turn the call over to Bill. Bill?

William D. Humes

Thank you, Damon, and good afternoon, everyone. We executed well this quarter with a double-digit increase in worldwide revenue, led by strong contribution from our acquired mobility business and solid revenue contribution from the Americas, which helped offset revenue declines in Europe and China.

Gross profit, operating income and earnings per share also increased by double digits over the 2012 second quarter, and we drove strong cash flow from operations as we improved margins while bringing working capital days back within our targeted range. Each of these financial metrics also improved sequentially from the first quarter as a result of an increase in gross margin in our IT distribution business, further strength in the mobility business and continued focus on productivity and efficiencies across the globe.

Worldwide revenue increased by 17% or 2% organically to $10.3 billion with operating and adjusted operating margin of 1.10% and 1.32%, respectively. Our 2012 fourth quarter acquisitions of Brightpoint and Aptec contributed 14 and 1 percentage points, respectively, to the quarter's revenue growth. Earnings per diluted share was $0.45 with adjusted earnings per share of $0.55, both of which benefited by $0.03 from discrete tax benefits recognized in the respective quarter.

Second quarter gross margin of 5.78% was up significantly from last year, as the addition of higher gross margin mobility revenue from Brightpoint was accretive by 58 basis points. Gross margin in our IT distribution business increased 4 basis points year-over-year and 13 basis points sequentially, despite headwinds from a continued competitive selling environment, particularly in North America and Europe. The sequential increase was driven in part by lower sales of tablets and steady pricing discipline as we appropriately managed growth.

We were also benefiting from early returns from our strategic investments. Total SG&A expense increased year-over-year by $114 million to 4.51% of sales versus 4.0% of sales in the second quarter of 2012, $100 million or 47 basis points of the increase was associated with our acquired mobility business and related integration costs. SG&A expense was also impacted by continued investments in key strategic areas across all regions. In the 2012 second quarter, SG&A expense was impacted by $6 million in acquisition-related cost and facility closure expense.

As I cover some regional highlights, I will only be referring to adjusted financial measures, which exclude the amortization of intangible assets and charges associated with restructuring, integration and transition costs and other expense reduction programs. Reconciliations to GAAP financial measures appear in the financial statement portion of today's earnings press release and in the presentation slides.

North America was the largest contributor with revenues of $4 billion growing 5% over last year and 4% sequentially. We experienced strength in our key SMB market in the region, Specialty Division grew double digits with particular strength in consumer electronics. We also had solid contribution from higher margin advanced solutions led by strength in storage, networking and security. The pricing environment remained competitive as certain companies tried to win back share. Canada maintained share with top vendors and return to growth mode with a double-digit increase in revenue, underscored by strong sales into the retail market, as well as solid sales of advanced solutions. North America adjusted operating margin was 1.71%, down year-over-year from 1.94%, primarily due to continued strategic investments, as well as slower growth in services revenue due in part to the loss of a customer in Canada.

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