Ingram Micro Passes HP Costs To Customers

The new T&Cs will directly affect the distributor's gross margins, but Foster wouldn't elaborate. "We've been clear that we cannot absorb these costs," he said during the call.

Ingram Micro will watch its gross margins closely and take a quarter-by-quarter look at their overall impact. In the meantime,quite possibly as a result of the pricing issues,Ingram Micro is seeing increased business for similar products it sells from other manufacturers, such as IBM and Sony.

"This is where you have to look at where the benefits are of working with HP," says Bicky Singh, CEO of Yorba Linda, Calif.-based VAR Future Computing Solutions.

While large VAR accounts may end up purchasing directly from HP, Ingram Micro says HP has made it clear that it will depend on its distributor partners to reach the SMB market. "You can't beat the efficiency of that channel," Ingram Micro COO Mike Grainger said during the call.

Ingram Micro is also still cleaning house with its $45 million profit- enhancement plan to drive improvements and operating efficiency, executives announced during the call. The company is completing plans to consolidate warehouse and corporate facilities and reduce its workforce, which numbered 13,000 worldwide last quarter, down 500 from the second quarter, executives on the call confirmed. And the distributor's recent product management reorganization played a key role in its financial performance, executives said.

Already, Ingram Micro has reorganized its credit department by establishing field credit teams that are located near the distributor's largest customers. Ingram Micro has also begun leasing corporate office space in Buffalo, N.Y., and Santa Ana, Calif. In Buffalo, the distributor has consolidated its operations from two buildings into one.

"I'm pleased with the [cost reduction results so far, but they are not enough," Foster said. The company will continue to focus on profitable growth as it looks for more cost-reduction opportunities. For example, a reorganization is under way at Ingram Micro's Latin American operation, and the company closed a Frameworks facility in the Netherlands.

Ingram Micro's profit-enhancement program is expected to generate $160 million of annualized operating income improvements by Q1 2004, executives say. Major program costs are expected to total about $140 million, of which about two-thirds will be recorded in the second half of 2002. Last quarter, major program costs charged to operating income were $45.1 million, before taxes.

On the Mend

Including the program costs, Ingram Micro posted a net loss of $8.3 million, or 6 cents per share, for Q3 2002, compared with a net loss of $13.3 million, or 9 cents per share, during the same quarter last year. Excluding the program costs, net income was $20.1 million, or 13 cents per share, vs. $5.4 million, or 4 cents per share, excluding reorganization costs and special items, during the comparable period last year. Q3 2002 sales totaled $5.60 billion, a 4 percent decline compared with $5.83 billion one year ago, but a 4.6 percent increase sequentially.

Also excluding program costs, gross margin increased 18 basis points, operating margin increased 32 basis points and operating expenses as a percent of revenue improved 14 basis points, compared with last year.

For this quarter, Ingram Micro expects sales to range from $5.75 billion to $5.90 billion, with net income,before any major program expenses and other special items,ranging from $26 million to $29 million, or 17 cents to 19 cents per diluted share, the company says.

Mike Cruz is a freelance writer specializing in distribution issues. He can be reached at [email protected].