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EX-31.1 - EXHIBIT 31.1 - INGRAM MICRO INCim-exx311xfy16q2.htm
EX-32.2 - EXHIBIT 32.2 - INGRAM MICRO INCim-exx321xfy16q2.htm
EX-31.2 - EXHIBIT 31.2 - INGRAM MICRO INCim-exx312xfy16q2.htm
EX-10.1 - EXHIBIT 10.1 - INGRAM MICRO INCexhibit-101.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________
FORM 10-Q
  _______________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2016
OR
¨
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)
  _______________________________________
Delaware
 
62-1644402
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3351 Michelson Drive, Suite 100
Irvine, California 92612-0697
(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  x    No  ¨
Indicate by check mark whether the registrant had submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x   No  ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
x
Accelerated Filer
 
¨
Non-Accelerated Filer
 
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The Registrant had 149,659,526 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 2, 2016.
 

1


INGRAM MICRO INC.
INDEX
 
Part I.
Financial Information
 
 
 
Pages
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheet at July 2, 2016 and January 2, 2016
 
Consolidated Statement of Income for the thirteen and twenty-six weeks ended July 2, 2016 and July 4, 2015
 
Consolidated Statement of Comprehensive Income (Loss) for the thirteen and twenty-six weeks ended July 2, 2016 and July 4, 2015
 
Consolidated Statement of Cash Flows for the twenty-six weeks ended July 2, 2016 and July 4, 2015
 
Item 2.
Item 3.
Item 4.
Part II.
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 5.
Other Information
Item 6.
Signatures
Exhibit Index

2


Part I. Financial Information
Item 1. Financial Statements
INGRAM MICRO INC.
CONSOLIDATED BALANCE SHEET
(In 000s, except par value)
(Unaudited)
 
 
July 2,
2016
 
January 2,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
878,881

 
$
935,267

Trade accounts receivable (less allowances of $66,747 and $59,437 at July 2, 2016 and January 2, 2016, respectively)
5,131,473

 
5,663,754

Inventory
3,731,176

 
3,457,016

Other current assets
578,703

 
475,813

Total current assets
10,320,233

 
10,531,850

Property and equipment, net
381,884

 
381,414

Goodwill
952,254

 
843,001

Intangible assets, net
435,873

 
374,674

Other assets
169,437

 
169,750

Total assets
$
12,259,681

 
$
12,300,689

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,066,228

 
$
6,353,511

Accrued expenses
652,992

 
620,501

Short-term debt and current maturities of long-term debt
223,422

 
134,103

Total current liabilities
6,942,642

 
7,108,115

Long-term debt, less current maturities
1,091,437

 
1,090,702

Other liabilities
161,633

 
134,086

Total liabilities
8,195,712

 
8,332,903

Commitments and contingencies (Note 13)

 

Stockholders’ equity:
 
 
 
Preferred Stock, $0.01 par value, 25,000 shares authorized; no shares issued and outstanding

 

Class A Common Stock, $0.01 par value, 500,000 shares authorized; 196,449 and 195,320 shares issued and 149,660 and 148,362 shares outstanding at July 2, 2016 and January 2, 2016, respectively
1,965

 
1,954

Class B Common Stock, $0.01 par value, 135,000 shares authorized; no shares issued and outstanding

 

Additional paid-in capital
1,508,703

 
1,503,043

Treasury stock, 46,789 and 46,958 shares at July 2, 2016 and January 2, 2016, respectively
(890,096
)
 
(892,925
)
Retained earnings
3,569,652

 
3,513,101

Accumulated other comprehensive loss
(126,255
)
 
(157,387
)
Total stockholders’ equity
4,063,969

 
3,967,786

Total liabilities and stockholders’ equity
$
12,259,681

 
$
12,300,689

See accompanying notes to these consolidated financial statements.

3


INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF INCOME
(In 000s, except per share data)
(Unaudited)
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Net sales
$
10,122,606

 
$
10,553,278

 
$
19,459,207

 
$
21,197,704

Cost of sales
9,403,660

 
9,896,453

 
18,108,565

 
19,923,418

Gross profit
718,946

 
656,825

 
1,350,642

 
1,274,286

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
573,307

 
515,575

 
1,123,009

 
1,015,350

Amortization of intangible assets
25,621

 
17,089

 
52,646

 
33,020

Reorganization costs
7,690

 
6,236

 
24,256

 
10,276

Impairment of internally developed software

 
115,856

 

 
115,856

Loss on sale of affiliate
14,878

 

 
14,878

 

 
621,496

 
654,756

 
1,214,789

 
1,174,502

Income from operations
97,450

 
2,069

 
135,853

 
99,784

Other expense (income):
 
 
 
 
 
 
 
Interest income
(2,117
)
 
(1,201
)
 
(3,258
)
 
(1,659
)
Interest expense
18,152

 
21,212

 
38,624

 
43,370

Net foreign currency exchange loss
587

 
6,738

 
9,114

 
14,276

Other
4,116

 
3,481

 
7,198

 
6,943

 
20,738

 
30,230

 
51,678

 
62,930

Income (loss) before income taxes
76,712

 
(28,161
)
 
84,175

 
36,854

Provision for income taxes
22,060

 
6,132

 
27,624

 
27,872

Net income (loss)
$
54,652

 
$
(34,293
)
 
$
56,551

 
$
8,982

Basic earnings per share
$
0.37

 
$
(0.22
)
 
$
0.38

 
$
0.06

Diluted earnings per share
$
0.36

 
$
(0.22
)
 
$
0.37

 
$
0.06

See accompanying notes to these consolidated financial statements.


4


INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In 000s)
(Unaudited)
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Net income (loss)
$
54,652

 
$
(34,293
)
 
$
56,551

 
$
8,982

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(10,666
)
 
(24,143
)
 
31,132

 
(65,257
)
Other comprehensive income (loss), net of tax
(10,666
)
 
(24,143
)
 
31,132

 
(65,257
)
Comprehensive income (loss)
$
43,986

 
$
(58,436
)
 
$
87,683

 
$
(56,275
)
See accompanying notes to these consolidated financial statements.


5


INGRAM MICRO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In 000s)
(Unaudited)
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
Cash flows from operating activities:
 
 
 
Net income
$
56,551

 
$
8,982

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
104,318

 
76,499

Stock-based compensation
19,908

 
17,529

Excess tax benefit from stock-based compensation
(8,351
)
 
(4,149
)
Gain on sale of property and equipment
(1,115
)
 
(146
)
Impairment of internally developed software

 
115,856

Loss on sale of affiliate
14,878

 

Noncash charges for interest and bond discount amortization
1,409

 
1,510

Deferred income taxes
10,494

 
6,117

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Trade accounts receivable
653,914

 
1,173,852

Inventory
(247,578
)
 
328,530

Other current assets
(87,108
)
 
(129,910
)
Accounts payable
(235,962
)
 
(860,437
)
Change in book overdrafts
(166,027
)
 
(84,010
)
Accrued expenses
(86,032
)
 
(23,299
)
Cash provided by operating activities
29,299

 
626,924

Cash flows from investing activities:
 
 
 
Capital expenditures
(50,476
)
 
(56,573
)
Sale of marketable securities, net
4,700

 

Proceeds from sale of property and equipment
590

 
359

Proceeds from sale of affiliate
27,847

 

Acquisitions, net of cash acquired
(173,406
)
 
(94,255
)
Cash used by investing activities
(190,745
)
 
(150,469
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
3,538

 
6,267

Repurchase of Class A Common Stock

 
(44,208
)
Excess tax benefit from stock-based compensation
8,351

 
4,149

Other consideration for acquisitions
(2,091
)
 
(2,358
)
Net proceeds from (repayments of) revolving and other credit facilities
78,969

 
(353,784
)
Cash provided (used) by financing activities
88,767

 
(389,934
)
Effect of exchange rate changes on cash and cash equivalents
16,293

 
(12,806
)
Increase (decrease) in cash and cash equivalents
(56,386
)
 
73,715

Cash and cash equivalents, beginning of period
935,267

 
692,777

Cash and cash equivalents, end of period
$
878,881

 
$
766,492

See accompanying notes to these consolidated financial statements.


6


INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)
(Unaudited)

Note 1 – Organization and Basis of Presentation
Ingram Micro Inc. and its subsidiaries are primarily engaged in the distribution of information technology (“IT”) products, commerce and fulfillment services and mobile device lifecycle services worldwide. Ingram Micro Inc. and its subsidiaries operate in North America; Europe; Asia-Pacific (which includes Middle East and Africa); and Latin America.
The consolidated financial statements include the accounts of Ingram Micro Inc. and its subsidiaries. Unless the context otherwise requires, the use of the terms “Ingram Micro,” “we,” “us” and “our” in these notes to the consolidated financial statements refers to Ingram Micro Inc. and its subsidiaries. These consolidated financial statements have been prepared by us, 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 our consolidated financial position as of July 2, 2016, our consolidated results of operations and comprehensive income (loss) for the thirteen and twenty-six weeks ended July 2, 2016 and July 4, 2015 and our consolidated cash flows for the twenty-six weeks ended July 2, 2016 and July 4, 2015. 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 our Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2016. The consolidated results of operations for the thirteen and twenty-six weeks ended July 2, 2016 may not be indicative of the consolidated results of operations that can be expected for the full year.
Book Overdrafts
Book overdrafts of $262,601 and $428,628 as of July 2, 2016 and January 2, 2016, respectively, represent checks issued on disbursement bank accounts but not yet paid by such banks. These amounts are classified as accounts payable in our consolidated balance sheet. We typically fund these overdrafts through normal collections of funds or transfers from other bank balances at other financial institutions. Under the terms of our facilities with the banks, the respective financial institutions are not legally obligated to honor the book overdraft balances as of July 2, 2016 and January 2, 2016, or any balance on any given date.    
Trade Accounts Receivable Factoring Programs
We have several uncommitted factoring programs under which trade accounts receivable of several large customers may be sold, without recourse, to financial institutions. Available capacity under these programs is dependent on the amount of trade accounts receivable already sold into these programs and the financial institutions’ willingness to purchase such receivables. At July 2, 2016 and January 2, 2016, we had a total of $303,625, and $388,358, respectively, of trade accounts receivable sold to and held by financial institutions under these programs. Factoring fees of $1,584 and $995 incurred for the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, and $2,913 and $2,315 incurred for the twenty-six weeks ended July 2, 2016 and July 4, 2015, respectively, related to the sale of trade accounts receivable under these facilities are included in “other” in the other expense (income) section of our consolidated statement of income.
Impairment of Internally Developed Software
We began our program to deploy a new global ERP system in 2008. Since that period, the business has significantly diversified and new technologies allow legacy systems and diverse applications to easily be connected in a modular way, which allows these legacy systems to be part of a flexible, powerful and efficient solution. After careful evaluation, we concluded that this combined systems strategy is better aligned with our evolving business model and currently is more flexible and economical than implementation of a single global system. Accordingly, we stopped our global ERP deployment and recorded a non-cash, pre-tax charge related to the impairment of internally developed software of $115,856 during the second quarter of 2015. We recognized a tax benefit on the impairment at the applicable rates, partially offset by an increase in the valuation allowance on foreign tax credits of $14,580 as a result of the decision to stop deployments.
Loss on the Sale of an Affiliate
During the thirteen weeks ended July 2, 2016, we sold our AVAD subsidiary for cash proceeds of $27,847 as the niche operations were not deemed core to our current strategies and we believe that our operational focus and capital resources could be more effectively deployed elsewhere. As a result, we recorded a loss on the sale of affiliate of $14,878, which included the write-off a previously acquired trade name of $12,525. There were no additional impairments to our other intangible assets.

7

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

Change in Accounting Principle and Reclassification
During the six months ended July 2, 2016, we adopted the provisions of Accounting Standards Update ("ASU") 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. Additionally, we also adopted ASU 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-Of-Credit Arrangements and Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting". ASU 2015-15 allows debt issuance costs to be presented as an asset and amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. As a result of the adoption of these ASUs, our consolidated balance sheet as of January 2, 2016 reflects a $6,571 reduction of other long-term assets and long-term debt, respectively, to conform to the current year presentation.

Note 2 – Plan of Merger

On February 17, 2016, we announced that we entered into an agreement and plan of merger (the “Merger Agreement”) with Tianjin Tianhai Investment Company, Ltd. (“Tianjin Tianhai”) a joint stock company existing under the laws of the People’s Republic of China (the “PRC”) and listed on the Shanghai Stock Exchange, and GCL Acquisition, Inc., a Delaware corporation and an indirect subsidiary of Tianjin Tianhai (“Merger Subsidiary”), pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, Merger Subsidiary will be merged with and into Ingram Micro Inc. (the “Merger”), with Ingram Micro Inc. surviving as a subsidiary of Tianjin Tianhai. Concurrently with the execution of the Merger Agreement, HNA Group Co., Ltd., a limited company existing under the laws of the PRC (“HNA Group” or the “Guarantor”), an affiliate of Parent and Merger Subsidiary, has executed and delivered a guarantee (the “Guarantee”) in favor of the Company. Pursuant to the Guarantee, the Guarantor has agreed to (i) guarantee Tianjin Tianhai’s obligation to pay the Merger Consideration (as defined below) and any reverse termination fee in accordance with the terms of the Merger Agreement and (ii) assume the rights and obligations under the Merger Agreement in the event that the approval of Tianjin Tianhai’s shareholders is not obtained in accordance with the terms of the Guarantee. The consummation of the Merger is subject to the satisfaction or permitted waiver of closing conditions set forth in the Merger Agreement and is expected to occur in the second half of 2016. Upon closing, we will become a part of HNA Group and will operate as a subsidiary of Tianjin Tianhai. We expect to continue to have our headquarters in Irvine, California and expect that our executive management team will remain in place, with Alain Monié continuing to lead as CEO.

At the effective time of the Merger, each share of Ingram Micro’s Class A common stock issued and outstanding immediately before the closing, other than certain excluded shares, will be converted to the right to receive $38.90 in cash, without interest (the “Merger Consideration”). Shares of Class A common stock held by Ingram Micro (other than shares in an employee stock plan of Ingram Micro) or any of its subsidiaries and shares owned by Tianjin Tianhai or any of its subsidiaries, and shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law will not be entitled to receive the Merger Consideration.
The Merger Agreement requires that the Merger be approved by the holders of a majority of the outstanding shares of the Company’s common stock as well as the vote of at least two-thirds of the voting stock held by the shareholders present at a meeting of Tianjin Tianhai’s shareholders, excluding any shares held by HNA Group. If Tianjin Tianhai’s shareholders do not approve the Merger, HNA Group will assume Tianjin Tianhai’s rights and obligations under the Merger Agreement. In connection with the Merger process, the Merger Agreement was presented to and approved by Ingram Micro’s shareholders at a special meeting on June 21, 2016. We are anticipating the Merger to be closed in the second half of 2016.
Consummation of the Merger is subject to other customary closing conditions and contains customary representations, warranties and covenants by each party. During the period between the signing of the Merger Agreement and the effective time of the Merger, Ingram Micro is required to operate its business in the ordinary course and consistent with past practice. Under the Merger Agreement, Ingram Micro shall not declare dividends or repurchase shares of its common stock and shall maintain an average of month-end cash and cash equivalents for the three month period prior to the closing in excess of US $424,000. The Merger Agreement also requires that Ingram Micro abide by customary “no-shop” restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide non-public information to and enter into discussions with third parties regarding alternative acquisition proposals. The Merger Agreement provides that Ingram Micro may not without the consent of Tianjin Tianhai (which consent shall not be unreasonably withheld) incur new debt or make new loans, except for (a) any indebtedness or guarantee incurred in the ordinary course of business consistent with past practice pursuant to Ingram Micro’s existing credit or banking facilities, trade accounts receivable backed financing programs or trade accounts receivable factoring

8

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

programs, (b) any refinancings, renewals or amendments in the ordinary course of business consistent with past practice of Ingram Micro’s existing credit or banking facilities, trade accounts receivable backed financing programs or trade accounts receivable factoring programs, and (c) entering into any long-term committed facilities less than US $100,000.

Note 3 – Stock Repurchase and Dividends

Share Repurchase Program
In July 2015, our Board of Directors authorized a new three-year, $300,000 share repurchase program, which supplemented our previously authorized $400,000 share repurchase program which was completely utilized in 2015. Our new $300,000 share repurchase program expires on July 29, 2018, and had $165,068 remaining for repurchase at July 2, 2016. Pursuant to the Merger Agreement, our share repurchase program has been discontinued effective February 17, 2016.
Under these programs, we may repurchase shares in the open market and through privately negotiated transactions. Our repurchases are 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. We account 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 our consolidated balance sheet. We have issued shares of common stock out of our cumulative balance of treasury shares. Such shares are issued to certain of our associates upon the exercise of their options or vesting of their equity awards under the Ingram Micro Inc. 2011 Incentive Plan, as amended (the "2011 Incentive Plan") (see Note 5, "Stock-Based Compensation").
Our treasury stock issuance activity for the twenty-six weeks ended July 2, 2016 is summarized in the table below: 
 
Shares
 
Weighted
Average Price
Per Share
 
Amount
Cumulative balance of treasury stock at January 2, 2016
46,958

 
$
19.02

 
$
892,925

Issuance of Class A Common Stock
(169
)
 
16.74

 
(2,829
)
Cumulative balance of treasury stock at July 2, 2016
46,789

 
$
19.02

 
$
890,096


Note 4 – Earnings Per Share
We report 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 uses the treasury stock method to compute the potential dilution that could occur if stock-based awards and other commitments to issue common stock were exercised. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards from the diluted loss per share calculation, as their inclusion would have an anti-dilutive effect.
The computation of Basic and Diluted EPS is as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2, 2016
 
July 4, 2015
 
July 2, 2016
 
July 4, 2015
Net income (loss)
$
54,652

 
$
(34,293
)
 
$
56,551

 
$
8,982

Weighted average shares
148,904

 
156,329

 
148,659

 
156,292

Basic EPS
$
0.37

 
$
(0.22
)
 
$
0.38

 
$
0.06

Weighted average shares, including the dilutive effect of stock-based awards (3,056 and 0 for the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, and 3,074 and 3,257 for the twenty-six weeks ended July 2, 2016, and July 4, 2015, respectively)
151,960

 
156,329

 
151,733

 
159,549

Diluted EPS
$
0.36

 
$
(0.22
)
 
$
0.37

 
$
0.06

    
There were 0 and 2,755 stock-based awards for the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, and 5 and 2,431 stock based awards for the twenty-six weeks ended July 2, 2016, and July 4, 2015, 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 having an antidilutive effect. During the thirteen weeks ended July 4, 2015, there were 3,181 stock-based awards that were excluded from the computation of Diluted EPS as we recognized a net loss.

9

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

Note 5 – Stock-Based Compensation
We currently have a single stock incentive plan, the 2011 Incentive Plan, amended during the second quarter of 2013, and again in the second quarter of 2016, for the granting of equity and cash-settled incentive awards. During the second quarter of 2016, our stockholders approved a second amendment of the 2011 Incentive Plan, which increased the number of shares that we may issue by 10,000. The authorized pool of shares available for grant is a fungible pool. The authorized share limit is reduced by one share for every share subject to a stock option or stock appreciation right granted and 2.37 shares for every share granted after June 8, 2011 (2.29 shares after June 7, 2013) under any award other than an option or stock appreciation right for awards. We grant time- and/or performance-vested restricted stock and/or restricted stock units, in addition to stock options, to key employees and members of our Board of Directors. The performance measures for vesting of restricted stock and restricted stock units for grants to management for the periods presented are based on earnings growth, return on invested capital, total shareholder return, income from operations as a percent of revenue and income before tax. As of July 2, 2016, approximately 20,435 shares were available for grant under the 2011 Incentive Plan, taking into account granted options, time-vested restricted stock units/awards and performance-vested restricted stock units assuming maximum achievement.
Equity Awards
Equity awards granted under the 2011 Incentive Plan were as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Stock options granted

 
839

 
5

 
839

Restricted stock and restricted stock units granted
405

 
1,329

 
493

 
1,347

 
 
 
 
 


 
 
Stock-based compensation expense
$
11,264

 
$
11,015

 
$
19,297

 
$
17,529

Related income tax benefit
$
3,657

 
$
3,632

 
$
6,445

 
$
5,813

 
 
 
 
 
 
 
 
Exercised stock options
18

 
332

 
162

 
370

Vested restricted stock and/or restricted stock units (a)
1,779

 
1,393

 
1,799

 
1,408


(a) Includes 412 and 1,015 shares, for the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, and 412 and 1,015 shares, for the twenty-six weeks ended July 2, 2016 and July 4, 2015, respectively, which were issued based on performance-based grants previously approved by the Human Resources Committee of the Board of Directors. The remainder of the shares are time-based grants.
Cash Awards
On June 1, 2016 we granted 24,569 cash awards of which 12,285 and 12,284 are time-vested and performance-vested, respectively. Our time-vested cash awards vest over a time period of 3 years, and the performance-vested cash awards vest upon the achievement of a certain performance measure over a time period of 3 years. The performance measure for the cash awards for grants to management is based on earnings growth. Cash awards differ from the Company’s other awards in that no shares will be issued and cumulative compensation expense is recognized as a liability rather than equity. For cash awards, total compensation costs is based on the fair value of the award on the date the award is granted and is remeasured at each reporting date until settlement. As of July 2, 2016, the unrecognized compensation costs related to the cash awards was $18,501. We expect this cost to be recognized over a remaining weighted-average period of approximately 2.9 years. Cash awards granted under the 2011 Incentive Plan were as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Cash awards granted
24,569

 

 
24,569

 

 
 
 
 
 
 
 
 
Compensation expense-cash awards
$
611

 
$

 
$
611

 
$


10

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

Note 6 – Derivative Financial Instruments
We use foreign currency forward contracts that are not designated as hedges primarily to manage currency risk associated with foreign currency-denominated trade accounts receivable, accounts payable and intercompany loans.
The notional amounts and fair values of derivative instruments in our consolidated balance sheet were as follows: 
 
Notional Amounts (1)
 
Fair Value
 
July 2,
2016
 
January 2,
2016
 
July 2,
2016
 
January 2,
2016
Derivatives not receiving hedge accounting treatment recorded in:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
Foreign exchange contracts
$
988,899

 
$
1,669,296

 
$
6,508

 
$
54,133

Accrued expenses
 
 
 
 
 
 
 
Foreign exchange contracts
1,125,976

 
618,961

 
(14,468
)
 
(8,217
)
              Total
$
2,114,875

 
$
2,288,257

 
$
(7,960
)
 
$
45,916

 
(1) Notional amounts represent the gross amount of foreign currency bought or sold at maturity for foreign exchange contracts.

The amount recognized in earnings from our derivative instruments not receiving hedge accounting treatment, including ineffectiveness, is recorded in net foreign exchange gain (loss) as follows and was largely offset by the change in fair value of the underlying hedged assets or liabilities:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2, 2016
 
July 4, 2015
 
July 2, 2016
 
July 4, 2015
 
 
 
 
 
 
 
 
Net gain (loss) recognized in earnings
$
30,818

 
$
(11,829
)
 
$
(26,152
)
 
$
91,894

Note 7 – Fair Value Measurements
Our assets and liabilities carried at fair value are 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.
As of July 2, 2016, our assets and liabilities measured at fair value on a recurring basis are categorized in the table below:
 
July 2, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash equivalents, consisting primarily of money market accounts and short-term certificates of deposit
$
359,901

 
$
359,901

 
$

 
$

Marketable trading securities (a)
47,772

 
47,772

 

 

Derivative assets
6,508

 

 
6,508

 

Total assets at fair value
$
414,181

 
$
407,673

 
$
6,508

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
14,468

 
$

 
$
14,468

 
$

       Contingent consideration
27,400

 

 

 
27,400

Total liabilities at fair value
$
41,868

 
$

 
$
14,468

 
$
27,400

(a)
Included in other current assets in our consolidated balance sheet.


11

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

As of January 2, 2016, our assets and liabilities measured at fair value on a recurring basis are categorized in the table below:
 
January 2, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash equivalents, consisting primarily of money market accounts and short-term certificates of deposit
$
201,051

 
$
201,051

 
$

 
$

Marketable trading securities (a)
51,720

 
51,720

 

 

Derivative assets
54,133

 

 
54,133

 

Total assets at fair value
$
306,904

 
$
252,771

 
$
54,133

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
8,217

 
$

 
$
8,217

 
$

Contingent consideration
3,371

 

 

 
3,371

Total liabilities at fair value
$
11,588

 
$

 
$
8,217

 
$
3,371

(a)
Included in other current assets in our consolidated balance sheet.

The fair value of the cash equivalents approximated cost and the change in the fair value of the marketable trading securities was recognized in the consolidated statement of income to reflect these investments at fair value.    
    
Our senior unsecured notes due in 2024, 2022 and 2017 are stated at amortized cost, and their respective fair values were determined based on Level 2 criteria. The fair values and carrying values of these notes are shown in the table below:
 
July 2, 2016
 
 
 
Fair Value
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior unsecured notes, 5.25% due 2017
$
311,289

 
$

 
$
311,289

 
$

 
$
299,514

Senior unsecured notes, 5.00% due 2022
307,090

 

 
307,090

 

 
297,160

Senior unsecured notes, 4.95% due 2024
500,200

 

 
500,200

 

 
494,743

 
$
1,118,579

 
$

 
$
1,118,579

 
$

 
$
1,091,417

 
January 2, 2016
 
 
 
Fair Value
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior unsecured notes, 5.25% due 2017
$
313,039

 
$

 
$
313,039

 
$

 
$
299,313

Senior unsecured notes, 5.00% due 2022
301,867

 

 
301,867

 

 
296,928

Senior unsecured notes, 4.95% due 2024
501,515

 

 
501,515

 

 
494,432

 
$
1,116,421

 
$

 
$
1,116,421

 
$

 
$
1,090,673


12

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)


Note 8 – Acquisitions, Goodwill and Intangible Assets

On June 14, 2016, we acquired all of the outstanding shares of RRC Poland Spolka Z.o.o ("RRC"), a Polish-based leading value-added distributor in Central and Eastern Europe specializing in IT enterprise solutions, for a payment of $47,445, net of cash acquired. The purchase price is subject to a true-up, if necessary, relating to the final closing balance sheet. The major classes of assets and liabilities to which we preliminarily allocated the excess purchase price were $34,843 to goodwill. The goodwill recognized in connection with this acquisition is primarily attributable to assembled workforce and the enhancement to our IT enterprise solutions business in Central and Eastern Europe.

On May 31, 2016, we acquired all of the outstanding shares of Ensim Corporation ("Ensim"), a leader in enabling the distribution of cloud applications headquartered in San Jose, California, for a payment of $12,092, net of cash acquired, and a hold-back of $3,629. The major classes of assets and liabilities to which we preliminarily allocated the excess purchase price were $14,960 to goodwill and $5,700 to identifiable intangible assets. The identifiable intangible assets primarily consist of customer relationships, developed technology, and trade name with estimated useful lives that range from three to ten years. The goodwill recognized in connection with this acquisition is primarily attributable to assembled workforce and the enhancement to our cloud solutions business primarily in North America.

On May 17, 2016, we acquired all of the outstanding shares of Discan Limited ("Comms-care"), a leading provider of technical services to the information technology channel in the United Kingdom and Ireland, for a payment of $53,316, net of cash acquired of $19,356, and an estimated future earn-out of $10,631. The major classes of assets and liabilities to which we preliminarily allocated the excess purchase price were $77,281 to goodwill. The goodwill recognized in connection with this acquisition is primarily attributable to assembled workforce and the enhancement to our advanced solutions business in the United Kingdom and Ireland.

During the first quarter of 2016, we completed three strategic acquisitions for cash aggregating $66,284, net of cash acquired, and estimated future earn-outs of $14,159. The major classes of assets and liabilities to which we preliminarily allocated the excess purchase price were $36,609 to identifiable intangible assets, and $31,198 to goodwill. The identifiable intangible assets primarily consist of customer relationships, developed technology, backlog, and trade name with estimated useful lives that range from one to twelve years. The goodwill recognized in connection with these acquisitions is primarily attributable to the assembled workforce and the enhancement of our distribution business in North America, Australia, New Zealand and Europe.

During 2015, we acquired the assets of Odin Service Automation from Parallels Holdings Ltd. ("Odin"), for a cash payment of $163,906, net of cash acquired, which will enhance our cloud management platform technologies. The major classes of assets and liabilities to which we preliminarily allocated the excess purchase price were $65,240 to identifiable intangible assets and $109,768 to goodwill. The identifiable intangible assets primarily consist of customer relationships, trade name and developed technology with estimated useful lives that range from three to six years. The goodwill recognized in connection with this acquisition is primarily attributable to the assembled workforce and the enhancement of our cloud strategy. During the twenty-six weeks ended July 2, 2016, we updated our preliminary purchase price allocation and recorded $66,138 to identifiable intangible assets and $107,857 to goodwill.

During 2015, we acquired all the outstanding shares of Grupo Acâo ("Acâo"), a Latin American leading provider of value-add IT solutions, for a cash payment of $68,654, net of cash acquired. The major class of assets and liabilities to which we preliminarily allocated the excess purchase price was $58,043 to goodwill. The goodwill recognized in connection with this acquisition is primarily attributable to the assembled workforce and the enhancement of value-add IT solutions to our distribution business in Latin America. During the twenty-six weeks ended July 2, 2016, we made additional cash payments of $1,336 and updated our preliminary purchase price allocation and recorded $31,800 to intangible assets and $31,252 to goodwill. The identifiable intangible assets primarily consist of customer relationships, a non-compete agreement, and a trade name with estimated useful lives that range from two to eleven years.


13

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

During 2015, we acquired all the outstanding shares of DocData, for a cash payment of $144,752, net of cash acquired. DocData is a European provider of order fulfillment, returns logistics and on-line payment services that also provides commerce solutions to major retailers, brands and promising start-ups. The major class of assets and liabilities to which we preliminarily allocated the excess purchase price was $133,538 to goodwill. The goodwill recognized in connection with this acquisition is primarily attributable to the assembled workforce and the enhancement of our commerce and fulfillment services business. During the twenty-six weeks ended July 2, 2016, we updated our preliminary purchase price allocation and recorded $42,552 to intangible assets and $103,244 to goodwill. The identifiable intangible assets primarily consist of customer relationships and software with estimated useful lives that range from three to ten years.

These entities have been included in our consolidated results of operations since their respective acquisition dates.

Pro forma results of operations have not been presented for the 2016 and 2015 acquisitions because the effects of the business combinations for these acquisitions, individually and in aggregate, were not material to our consolidated financial statements. For our recent acquisitions, asset valuations are still in progress and the amounts preliminarily allocated to goodwill and intangible assets will be finalized in the near future.

Finite-lived identifiable intangible assets are amortized over their remaining estimated lives ranging up to 13 years with the predominant amounts having lives of 2 to 12 years. The gross and net carrying amounts of finite-lived identifiable intangible assets are as follows:
 
July 2,
2016
 
January 2,
2016
Gross carrying amount of finite-lived intangible assets
$
667,424

 
$
537,308

Net carrying amount of finite-lived intangible assets
$
435,873

 
$
374,674

During the first quarter of 2016, we wrote-off a previously acquired customer relationship of $5,832, as the result of the integration of certain operations into our existing facilities.
During the second quarter of 2016, we wrote-off a previously acquired trade name of $12,525 as a result of our sale of AVAD as discussed above in Note 1, "Organization and Basis of Presentation". There were no additional impairments to our other intangible assets.

Note 9 – Reorganization Costs
Reorganization Actions
On February 13, 2014 we announced a plan to proceed with a global organizational effectiveness program that involved aligning and leveraging our infrastructure globally with our evolving businesses, opportunities and resources, and de-layering and simplifying the organization. On May 4, 2015, we announced our intention to take certain global actions to further streamline our cost structure.
In addition, during the second quarter of 2016 we implemented additional actions to further align our cost structure in certain markets in Europe, incurring one-time costs of $7,147. We will continue to monitor our cost profiles on a tactical basis and enact further programs opportunistically.
As a result of these actions, we recognized total net reorganization charges of $7,690 and $6,236, net of adjustments, during the thirteen weeks ended July 2, 2016 and July 4, 2015, respectively, which primarily related to employee termination benefits of $9,076 and $8,390, respectively. During the twenty-six weeks ended July 2, 2016 and July 4, 2015, we recognized net reorganization charges of $24,256 and $10,276, respectively, which primarily related to employee termination benefits of $25,728 and $11,677, respectively.

14

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

A summary of the reorganization and expense-reduction program costs incurred in the thirteen weeks ended July 2, 2016 and July 4, 2015, are as follows:
 
 
Reorganization Costs
 
 
Headcount Reduction
 
Employee Termination Benefits
 
Facility and Other Costs
 
Total Reorganization Costs
 
Adjustments to Prior Year Costs
 
Total Costs
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen weeks ended July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
$
1,977

 
$
480

 
$
2,457

 
$
(1,244
)
 
$
1,213

Europe
 
 
 
6,506

 
641

 
7,147

 
(1,627
)
 
5,520

Asia-Pacific
 
 
 
90

 
2

 
92

 

 
92

Latin America
 
 
 
503

 
454

 
957

 
(92
)
 
865

Total
 
113
 
$
9,076

 
$
1,577

 
$
10,653

 
$
(2,963
)
 
$
7,690

 
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen weeks ended July 4, 2015
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
$
3,828

 
$
23

 
$
3,851

 
$
(962
)
 
$
2,889

Europe
 
 
 
4,270

 
539

 
4,809

 
(1,719
)
 
3,090

Asia-Pacific
 
 
 
158

 

 
158

 

 
158

Latin America
 
 
 
134

 
(35
)
 
99

 

 
99

Total
 
116
 
$
8,390

 
$
527

 
$
8,917

 
$
(2,681
)
 
$
6,236

A summary of the reorganization and expense-reduction program costs incurred in the twenty-six weeks ended July 2, 2016 and July 4, 2015, are as follows:
 
 
Reorganization Costs
 
 
Headcount Reduction
 
Employee Termination Benefits
 
Facility and Other Costs
 
Total Reorganization Costs
 
Adjustments to Prior Year Costs
 
Total Costs
 
 
 
 
 
 
 
 
 
 
 
 
 
Twenty-six Weeks Ended July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
$
5,182

 
$
679

 
$
5,861

 
$
(1,783
)
 
$
4,078

Europe
 
 
 
18,328

 
1,111

 
19,439

 
(1,627
)
 
17,812

Asia-Pacific
 
 
 
1,153

 
215

 
1,368

 
(429
)
 
939

Latin America
 
 
 
1,065

 
454

 
1,519

 
(92
)
 
1,427

Total
 
471
 
$
25,728

 
$
2,459

 
$
28,187

 
$
(3,931
)
 
$
24,256

 
 
 
 
 
 
 
 
 
 
 
 
 
Twenty-six Weeks Ended July 4, 2015
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
$
4,617

 
$
56

 
$
4,673

 
$
(962
)
 
$
3,711

Europe
 
 
 
6,228

 
760

 
6,988

 
(1,719
)
 
5,269

Asia-Pacific
 
 
 
669

 

 
669

 

 
669

Latin America
 
 
 
163

 
464

 
627

 

 
627

Total
 
187
 
$
11,677

 
$
1,280

 
$
12,957

 
$
(2,681
)
 
$
10,276


15

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

The remaining liabilities and 2016 activities associated with the aforementioned actions are summarized in the table below:
 
 
Reorganization Liability
 
 
Remaining Liability at January 2, 2016
 
Expenses (Income), Net
 
Amounts Paid
and Charged
Against the
Liability
 
Foreign Currency Translation
 
Remaining Liability at July 2, 2016 (a)
Reorganization actions
 
 
 
 
 
 
 
 
 
 
Employee termination benefits
 
$
15,429

 
$
23,853

(b)
$
(17,969
)
 
$
(93
)
 
$
21,220

Facility and other costs
 
804

 
403

(c)
(1,207
)
 

 

 
 
$
16,233

 
$
24,256

 
$
(19,176
)
 
$
(93
)
 
$
21,220


(a)
We expect the remaining liabilities to be substantially utilized by the end of 2016.
(b)
Adjustments reflected in the table above include reductions of $1,783 and $92 to 2015 and 2014 reorganization plan liabilities recorded in the prior year in North America and Latin America for lower than expected employee termination benefits, respectively.
(c)
Adjustments reflected in the table above include a reduction of $429 and $1,627 to reorganization liabilities recorded in the prior year in Asia-Pacific and Europe for lower than expected facility and other costs, respectively.

Note 10 – Debt
The carrying value of our outstanding debt consists of the following:
 
July 2, 2016
 
January 2, 2016
Senior unsecured notes, 4.95% due 2024, net of unamortized discount of $1,482 and $1,569, respectively, and net of unamortized deferred financing costs of $3,775 and $3,999, respectively.
$
494,743

 
$
494,432

Senior unsecured notes, 5.00% due 2022, net of unamortized discount of $1,097 and $1,187, respectively, and net of unamortized deferred financing costs of $1,743 and $1,885, respectively.
297,160

 
296,928

Senior unsecured notes, 5.25% due 2017, net of unamortized deferred financing costs of $486 and $687, respectively.
299,514

 
299,313

Lines of credit and other debt
223,442

 
134,132

 
1,314,859

 
1,224,805

Short-term debt and current maturities of long-term debt
(223,422
)
 
(134,103
)
 
$
1,091,437

 
$
1,090,702

Note 11 – Income Taxes

Our effective tax rate for the thirteen weeks ended July 2, 2016 was 28.8% compared to (21.8)% for the thirteen weeks ended July 4, 2015. For the twenty-six weeks ended July 2, 2016 and July 4, 2015, our effective tax rate was 32.8% and 75.6%, respectively. Under U.S. accounting rules for income taxes, quarterly effective tax rates may vary significantly depending on the actual operating results in the various tax jurisdictions, as well as changes in the valuation allowance related to the expected recovery of deferred tax assets.
The thirteen weeks ended July 2, 2016 included net discrete benefits of approximately $2,294, or 3.0 percentage points of the effective tax rate, primarily driven by a net change in valuation allowances against the deferred tax assets of two of our foreign operating units as well as the release of unrealized tax benefits due to the expiration of statute of limitations in various jurisdictions. The thirteen weeks ended July 4, 2015 included net discrete expenses of approximately $12,134, or (43.1) percentage points of the effective tax rate, which primarily related to a $14,580 increase to the valuation allowance on foreign tax credits. The additional valuation allowance recognized in 2015 was a result of a decrease in projected foreign source income, primarily lower royalties from foreign affiliates, due to the decision to cancel future deployments of SAP, partially offset by net discrete benefit of $2,446 primarily driven by the release of unrealized tax benefits due to the expiration of the statute of limitations in various tax jurisdictions. See Note 1 - "Impairment of Internally Developed Software" for additional information on the cancellation of the global SAP deployment.

16

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

The twenty-six weeks ended July 2, 2016 included net discrete benefits of approximately $2,388, or 2.8 percentage points of the effective tax rate. The twenty-six weeks ended July 4, 2015 included net discrete expenses of approximately $11,525, or(31.3) percentage points of the effective tax rate.
Our effective tax rate differed from the U.S. federal statutory rate of 35% during these periods primarily due to the items noted above, as well as the relative mix of earnings or losses within the tax jurisdictions in which we operate, such as: (a) earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States; (b) losses in certain jurisdictions in which we are not able to record a tax benefit; and (c) changes in the valuation allowance on deferred tax assets.
At July 2, 2016, we had gross unrecognized tax benefits of $23,415 compared to $23,445 at January 2, 2016, representing a net decrease of $30 during the twenty-six weeks ended July 2, 2016. Substantially all of the gross unrecognized tax benefits, if recognized, would impact our effective tax rate in the period of recognition.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the gross unrecognized tax benefits identified above, the interest and penalties recorded to date by us totaled $6,296 and $6,652 at July 2, 2016 and January 2, 2016, respectively.
Our future effective tax rate will continue to be affected by changes in the relative mix of taxable income and losses in the tax jurisdictions in which we operate, changes in the valuation of deferred tax assets, or changes in tax laws or interpretations thereof. In addition, our income tax returns are subject to continuous examination by the IRS and other tax authorities. The IRS has concluded its examinations of tax years prior to 2012. It is possible that within the next twelve months, ongoing tax examinations in the United States and several of our foreign jurisdictions may be resolved, that new tax exams may commence and that other issues may be effectively settled. However, we do not expect our assessment of unrecognized tax benefits to change significantly over that time.

Note 12 – Segment Information
    
Our reporting units coincide with the geographic operating segments which include North America, Europe, Asia-Pacific, and Latin America. The measure of segment profit is income from operations.
Geographic areas in which we operated our reporting segments during 2016 include North America (the United States and Canada), Europe (Albania, Austria, Belgium, Croatia, Czech Republic, Denmark, France, Finland, Germany, Hungary, Italy, Macedonia, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Slovenia, Slovakia, Spain, Sweden, Switzerland and the United Kingdom), Asia-Pacific (Australia, the People’s Republic of China including Hong Kong, Egypt, India, Indonesia, Israel, Lebanon, Malaysia, Morocco, New Zealand, Pakistan, Saudi Arabia, Singapore, South Africa, Thailand, Turkey, and United Arab Emirates), and Latin America (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and our Latin American export operations in Miami).
We do not allocate stock-based compensation recognized to our operating segments; therefore, we are reporting this as a separate amount (See Note 5, "Stock-Based Compensation").

17

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

Financial information by reporting segment is as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
North America
$
4,433,252

 
$
4,618,535

 
$
8,315,634

 
$
9,060,141

Europe
2,779,974

 
2,854,948

 
5,441,416

 
5,929,245

Asia-Pacific
2,258,480

 
2,481,539

 
4,451,486

 
5,025,749

Latin America
650,900

 
598,256

 
1,250,671

 
1,182,569

Total
$
10,122,606

 
$
10,553,278

 
$
19,459,207

 
$
21,197,704

Income (loss) from operations
 
 
 
 
 
 
 
North America
$
91,174

 
$
80,554

 
$
127,372

 
$
134,854

Europe
(5,268
)
 
11,416

 
(23,695
)
 
18,336

Asia-Pacific
31,662

 
30,915

 
53,928

 
62,542

Latin America
6,635

 
6,055

 
13,034

 
17,437

Stock-based compensation expense
(11,875
)
 
(11,015
)
 
(19,908
)
 
(17,529
)
Impairment of internally developed software

 
(115,856
)
 

 
(115,856
)
Loss on sale of affiliate
(14,878
)
 

 
(14,878
)
 

Total
$
97,450

 
$
2,069

 
$
135,853

 
$
99,784

Capital expenditures
 
 
 
 
 
 
 
North America
$
15,073

 
$
26,008

 
$
30,486

 
$
42,194

Europe
2,484

 
4,966

 
5,253

 
7,652

Asia-Pacific
3,687

 
3,112

 
7,801

 
5,451

Latin America
5,512

 
720

 
6,936

 
1,276

Total
$
26,756

 
$
34,806

 
$
50,476

 
$
56,573

Depreciation
 
 
 
 
 
 
 
North America
$
17,560

 
$
16,019

 
$
34,684

 
$
31,514

Europe
5,398

 
2,789

 
9,975

 
5,548

Asia-Pacific
2,887

 
2,722

 
5,609

 
5,438

Latin America
946

 
554

 
1,404

 
979

Total
$
26,791

 
$
22,084

 
$
51,672

 
$
43,479

Amortization of intangible assets
 
 
 
 
 
 
 
North America
$
11,715

 
$
10,260

 
$
25,664

 
$
20,732

Europe
9,992

 
4,840

 
19,362

 
8,139

Asia-Pacific
1,997

 
1,788

 
3,926

 
3,746

Latin America
1,917

 
201

 
3,694

 
403

Total
$
25,621

 
$
17,089

 
$
52,646

 
$
33,020


18

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

The integration, transition and other costs included in income from operations by reporting segment are as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Integration, transition and other costs (a)
 
 
 
 
 
 
 
North America
$
8,316

 
$
5,810

 
$
26,109

 
$
10,644

Europe
1,786

 
1,566

 
3,264

 
2,852

Asia-Pacific
238

 
268

 
243

 
1,637

Latin America
1,205

 
1,627

 
1,257

 
1,627

Total
$
11,545

 
$
9,271

 
$
30,873

 
$
16,760

(a)
Costs are primarily related to (i) professional, consulting and integration costs associated with our acquisitions and impending merger, (ii) consulting, retention and transition costs associated with our reorganization programs charged to selling, general and administrative, or SG&A, expenses and (iii) a gain of $3,790 related to the final settlement of a class action lawsuit, which was recorded as a reduction of SG&A expenses in North America in the second quarter of 2016.
Our reorganization costs by reportable segment are disclosed within Note 9, "Reorganization Costs".
 
As of
 
July 2,
2016
 
January 2, 2016
Identifiable assets
 
 
 
North America
$
5,488,742

 
$
5,243,878

Europe
3,405,206

 
3,547,495

Asia-Pacific
2,475,518

 
2,476,243

Latin America
890,215

 
1,033,073

Total
$
12,259,681

 
$
12,300,689

Long-lived assets
 
 
 
North America
$
417,259

 
$
427,180

Europe
271,392

 
234,672

Asia-Pacific
74,151

 
71,602

Latin America
54,955

 
22,634

Total
$
817,757

 
$
756,088


Net sales and long-lived assets for the United States, which is our country of domicile, are as follows:

19

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

 
Thirteen Weeks Ended
 
July 2, 2016
 
July 4, 2015
Net sales:
 
 
 
 
 
 
 
United States
$
4,192,920

 
41
%
 
$
4,315,698

 
41
%
Outside of the United States
5,929,686

 
59

 
6,237,580

 
59

Total
$
10,122,606

 
100
%
 
$
10,553,278

 
100
%
 
 
 
 
 
 
 
 
 
Twenty-six Weeks Ended
 
July 2, 2016
 
July 4, 2015
Net sales:
 
 
 
 
 
 
 
United States
$
7,780,166

 
40
%
 
$
8,427,826

 
40
%
Outside of the United States
11,679,041

 
60

 
12,769,878

 
60

Total
$
19,459,207

 
100
%
 
$
21,197,704

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
 
July 2,
2016
 
January 2, 2016
Long-lived assets:
 
 
 
 
 
 
 
United States
 
 
 
 
$
398,333

 
$
406,195

Outside of the United States
 
 
 
 
419,424

 
349,893

Total
 
 
 
 
$
817,757

 
$
756,088

 

Note 13 – Commitments and Contingencies
Our Brazilian subsidiary received a 2005 Federal import tax assessment claiming certain commercial taxes totaling Brazilian Reais 12,714 ($3,937 at July 2, 2016 exchange rates) were due on the import of software acquired from international vendors for the period January through September of 2002. While we will continue to vigorously pursue administrative and, if applicable, judicial action in defending against this matter, we continue to maintain a reserve for the full tax amount assessed at July 2, 2016.
Our Brazilian subsidiary has also received a number of additional tax assessments, including the following that have a reasonable possibility of a loss: (1) a 2007 Sao Paulo Municipal tax assessment claiming service taxes were due on the resale of acquired software covering years 2002 through 2006, for a total amount of Brazilian Reais 55,083 ($17,055 at July 2, 2016 exchange rates) in principal and associated penalties; (2) a 2011 Federal income tax assessment, a portion of which claims statutory penalties totaling Brazilian Reais 15,947 ($4,938 at July 2, 2016 exchange rates) for delays in providing certain electronic files during the audit of tax years 2008 and 2009; (3) a 2012 Sao Paulo municipal tax assessment claiming service taxes due on the importation of software covering the year 2007 for a total amount of Brazilian Reais 2,263 ($701 at July 2, 2016 exchange rates) in principal and associated penalties; and (4) a 2013 Sao Paulo municipal tax assessment claiming service taxes due on the importation of software covering the years 2008, 2009, 2010 and January through May 2011 for a total amount of Brazilian Reais 8,100 ($2,508 at July 2, 2016 exchange rates) in principal and associated penalties. After working with our advisors, we believe the other matters noted above do not represent a probable loss.
In addition to the amounts described above, it is reasonably possible that incremental charges for penalties, interest and inflationary adjustments could be imposed in an amount up to Brazilian Reais 290,081 ($89,815 at July 2, 2016 exchange rates) for these matters. We believe we have good defenses against each matter and do not believe it is probable that we will suffer a material loss for these matters.

20

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

In connection with the due diligence performed during the acquisition of Acâo, we also identified a Sao Paulo Municipal Tax assessment claiming service taxes on the resale of acquired software and professional services covering years 2003 through 2008, for a total amount of Brazilian Reais 67,200 ($20,806 at July 2, 2016 exchange rates) in principal and associated interest and penalties. In working with our advisers, we concluded that the portion of the assessment associated with the resale of professional services has a probable risk of loss under existing Brazilian law, while also concluding, consistent with the assessment noted in (1) above that the risk of loss associated with the resale of software is not probable. In structuring our acquisition, Brazilian Reais 76,204 ($23,594 at July 2, 2016 exchange rates) of the purchase price was placed into an escrow account pending conclusion of litigation on this matter. Based on the terms of the escrow, we have accrued Brazilian Reais 7,500 ($2,322 at July 2, 2016 exchange rates), which is the negotiated amount of liability we agreed to cover should the Brazilian courts ultimately conclude Acâo was required to pay this service tax.
There are various other claims, lawsuits and pending actions against us incidental to our operations. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, we can make no assurances that we will ultimately be successful in our defense of any of these matters.
As is customary in the IT distribution industry, we have arrangements with certain finance companies that provide inventory-financing facilities for their customers. In conjunction with certain of these arrangements, we have agreements with the finance companies that would require us to repurchase certain inventory, which might be repossessed from the customers by the finance companies. Due to various reasons, including among other factors, the lack of information regarding the amount of saleable inventory purchased from us still on hand with the customer at any point in time, repurchase obligations relating to inventory cannot be reasonably estimated. Repurchases of inventory by us under these arrangements have been insignificant to date.
We have guarantees to third parties that provide financing to a limited number of our customers. Net sales under these arrangements accounted for less than one percent of our consolidated net sales for each of the periods presented. The guarantees require us to reimburse the third party for defaults by these customers up to an aggregate of $7,611. The fair value of these guarantees has been recognized as cost of sales to these customers and is included in accrued expenses.

Note 14 - New Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. We are currently in the process of assessing what impact this new standard may have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments in this update are effective for annual periods beginning after December 16, 2016, and interim periods within those fiscal years. We are currently in the process of assessing what impact this new standard may have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)". The amendments in this update relate to when another party, along with the company, are involved in providing a good or service to a customer and are intended to improve the operability and understandability of the implementation guidance on principal versus agent. Revenue recognition guidance requires companies to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the company is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the company is an agent). The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including the interim periods within those fiscal years. We are currently in the process of assessing what impact this new update may have on our consolidated financial statements.

21

INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 000s, except per share data)

In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)". This update will increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date (i) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged, and it simplified the accounting for sale and leaseback transactions. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of assessing what impact this new standard may have on our consolidated financial statements.
In May 2014, the FASB issued an accounting standard that will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods and services. During the second quarter of 2016, the FASB issued updates to the new revenue standard that are intended to address and simplify implementation issues for the following topics: (i) collectability, (ii) noncash consideration, (iii) presentation of sales taxes, (iv) completed contracts, and (v) identifying performance obligations, (vi) licensing, and (vii) transition for contracts modified prior to adopting the new standard. The accounting standard and related updates are effective for us in the first quarter of fiscal year 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard, and management is currently evaluating which transition approach to use. Early adoption is permitted in the first quarter of fiscal year 2017. We are currently in the process of assessing what impact this new standard may have on our consolidated financial statements and evaluating our potential adoption method.


22



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise stated, all currency amounts, other than per share information, contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands.

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Exchange Act, as amended. Statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements, and may include, but are not limited to, management’s expectations of our pending acquisition by Tianjin Tianhai, competition; market share; revenues, margin, expenses and other operating results or ratios; economic conditions; vendor terms and conditions; pricing strategies and customer terms and conditions; reorganization programs and related restructuring, integration and other reorganization costs; additional cost reduction measures and related restructuring costs; process and efficiency enhancements; cost savings; cash flows; working capital levels and days; capital expenditures; liquidity; capital requirements; effective tax rates; acquisitions and integration costs and benefits to our business; operating models; exchange rate fluctuations and related currency gains and losses; resolution of contingencies; seasonality; interest rates and expenses; and rates of return. In evaluating our business, readers should carefully consider the important factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2016, as filed with the Securities and Exchange Commission. These factors could cause our actual results and conditions to differ materially from our historical performance or those projected in our forward-looking statements. We disclaim any duty to update any forward-looking statements.

Pending Acquisition by Tianjin Tianhai

On February 17, 2016, we announced that we entered into the Merger Agreement with Tianjin Tianhai and Merger Subsidiary, pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, Merger Subsidiary will be merged with and into Ingram Micro Inc., with Ingram Micro Inc. surviving as a subsidiary of Tianjin Tianhai. The consummation of the Merger is subject to the satisfaction or permitted waiver of closing conditions set forth in the Merger Agreement and is expected to occur in the second half of 2016.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of our Class A common stock (other than shares held by us (other than shares in our employee plans) or owned by Tianjin Tianhai or any of its subsidiaries, or held by any of our subsidiaries, and shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be converted into the right to receive $38.90 in cash, without interest. For additional information regarding the pending acquisition, see (i) Part I, Item 1, “Note 2-Plan of Merger”, (ii) the Merger Agreement filed as Exhibit 2.1 to our current report on Form 8-K filed on February 17, 2016, (iii) the Guarantee filed as Exhibit 10.1 to our current report on Form 8-K filed on February 17, 2016 and (iv) Part II, Item 1, "Legal Proceedings".

Overview of Our Business
Ingram Micro helps businesses realize the promise of technology by delivering a full spectrum of global technology and commerce and fulfillment services to businesses around the world. Ingram Micro's global infrastructure and deep expertise in technology solutions, mobility lifecycle services, commerce and fulfillment solutions and cloud services help to enable its business partners to operate efficiently and successfully in the markets they serve. We are the largest wholesale technology distributor based on revenues and a global leader in supply chain management/commerce and fulfillment and device lifecycle services. Our results of operations have been, and will continue to be, directly affected by the conditions in the economy in general. 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 competitive pricing pressures and restrictive vendor terms and conditions to continue in the foreseeable future. In addition, our margins have and may continue to be impacted by our inventory levels, which are based on projections of future demand, product availability, product acceptance and marketability, and market conditions. Any sudden decline in demand and/or rapid technological changes in products could cause us to have a charge for excess and/or obsolete inventory. We continue to monitor and refine our pricing strategies, inventory management processes and vendor program processes to respond to and mitigate the impact of these factors. In addition, we continuously monitor and work to change, as appropriate, certain terms, conditions and credit offered to our customers to reflect those being imposed by our vendors, to recover costs and/or to facilitate sales opportunities. Our business also requires significant levels of working capital primarily to finance trade accounts receivable and inventory. We have historically relied on, and continue to rely heavily on, trade credit from vendors, available cash, debt and factoring of trade accounts receivable for our working capital needs.

23





Management's Discussion and Analysis Continued

While the primary 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, we strive to improve our profitability through diversification of product offerings, including our presence in adjacent product categories, such as automatic identification/data capture and point-of-sale, or AIDC/POS, enterprise computing and data center. Additionally, we are expanding our capabilities in what we believe are faster growing and higher margin service oriented businesses such as mobility device life cycle services, commerce and fulfillment services and cloud. Over the past few years, we have complemented our internal growth initiatives with strategic business acquisitions. Although we expect that these acquisitions and our organic investments will expand our capabilities in these areas, service revenues currently represent less than 10% of total net sales for all periods presented.
We sell finished products purchased from many vendors but generated approximately 14%, 11% and 11% of our consolidated net sales for the thirteen weeks ended July 2, 2016 from products purchased from HP Inc. and Hewlett-Packard Enterprise combined, Apple Inc. and Cisco Systems, Inc., respectively. We generated approximately 15%, and 11% of our consolidated net sales for the thirteen weeks ended July 4, 2015 from products purchased from HP Inc. and Hewlett-Packard Enterprise combined, and Apple Inc., respectively.
For the twenty-six weeks ended July 2, 2016, we generated approximately 14%, 11% and 11% of our consolidated net sales from products purchased from HP Inc. and Hewlett-Packard Enterprise combined, Apple Inc. and Cisco Systems, Inc., respectively. We generated approximately 15%, and 11% of our consolidated net sales for the twenty-six weeks ended July 4, 2015 from products purchased from HP Inc. and Hewlett-Packard Enterprise combined, and Apple Inc., respectively.
We manage our business through continuous cost controls and process and efficiency enhancements. This may also include, from time to time, reorganization actions to further enhance productivity and profitability and could result in the recognition of reorganization costs or impairment of assets.
Reorganization Programs

To further enhance our ability to innovate and respond to market needs with greater speed and efficiency, on February 13, 2014 we announced a plan to proceed with a global organizational effectiveness program (the "2014 Program") that involved aligning and leveraging our infrastructure globally with our evolving businesses, opportunities and resources, and de-layering and simplifying the organization.

The 2014 Program is complete and has generated in excess of $80,000 in annual cost savings compared to the 2013 fiscal year. We incurred reorganization as well as transition and other related costs aggregating $10,069 for the twenty-six weeks ended July 4, 2015, which includes $6,130 related to employee termination benefits associated with this program and $3,939 of transition and integration costs.

In May 2015, we announced our intention to take additional actions globally to further streamline our cost structure. These actions are expected to result in annualized savings of approximately $100,000 while one-time costs associated with these actions were expected to be between $50,000 to $60,000. During the thirteen weeks ended July 2, 2016, we realized savings of approximately $23,000 and achieved the full annualized run rate of approximately $100,000 during the second quarter of 2016. During the twenty-six weeks ended July 2, 2016, we recognized $18,240 of reorganization as well as transition and other related costs, which includes $16,707 related to employee termination benefits, $1,130 of transition and integration costs and $403 of facility costs.  We have recognized approximately $54,000 of life-to-date reorganization as well as transition and other related costs with respect to this program.
In addition, during the second quarter of 2016 we implemented additional actions to further align our cost structure in certain markets in Europe, incurring one-time costs of $7,147 and $925 of transition and integration costs. We will continue to monitor our cost profiles on a tactical basis and enact further programs opportunistically.

Share Repurchase Program

In July 2015, our Board of Directors authorized a new three-year, $300,000 share repurchase program, which supplemented our previously authorized $400,000 share repurchase program which was completely utilized in 2015. Our new $300,000 share repurchase program expires on July 29, 2018, and had $165,068 remaining for repurchase at July 2, 2016. We have discontinued this program due to the Merger Agreement with Tianjin Tianhai. In the event that the merger is not consummated for any reason, resumption of the share repurchase program will be at the discretion of the Board of Directors.

24





Management's Discussion and Analysis Continued

Results of Operations for the Thirteen Weeks Ended July 2, 2016 Compared to the Thirteen Weeks Ended July 4, 2015
 
Thirteen Weeks Ended
 
Change - Increase (Decrease)
 
July 2, 2016
 
July 4, 2015
 
Amount
 
Percentage
Net sales by reporting segment
 
 
 
 
 
 
 
 
 
 
 
North America
$
4,433,252

 
44
 %
 
$
4,618,535

 
44
%
 
$
(185,283
)
 
(4.0
)%
Europe
2,779,974

 
28

 
2,854,948

 
27

 
(74,974
)
 
(2.6
)
Asia-Pacific
2,258,480

 
22

 
2,481,539

 
24

 
(223,059
)
 
(9.0
)
Latin America
650,900

 
6

 
598,256

 
6

 
52,644

 
8.8

Total
$
10,122,606

 
100
 %
 
$
10,553,278

 
100
%
 
$
(430,672
)
 
(4.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Change - Increase (Decrease)
 
July 2, 2016
 
July 4, 2015
 
Amount
 
Percentage
Operating income and operating margin by reporting segment
 
 
 
 
 
 
 
 
 
 
 
North America
$
91,174

 
2.06
 %
 
$
80,554

 
1.74
%
 
$
10,620

 
0.32
 %
Europe
(5,268
)
 
(0.19
)
 
11,416

 
0.40

 
(16,684
)
 
(0.59
)
Asia-Pacific
31,662

 
1.40

 
30,915

 
1.25

 
747

 
0.15

Latin America
6,635

 
1.02

 
6,055

 
1.01

 
580

 
0.01

Stock-based compensation expense
(11,875
)
 

 
(11,015
)
 

 
(860
)
 

Impairment of internally developed software

 

 
(115,856
)
 

 
115,856

 

Loss on sale of affiliate
(14,878
)
 

 

 

 
(14,878
)
 

Total
$
97,450

 
0.96
 %
 
$
2,069

 
0.02
%
 
$
95,381

 
0.94
 %

 
Thirteen Weeks Ended
 
July 2, 2016
 
July 4, 2015
Net sales
100.00
%
 
100.00
 %
Cost of sales
92.90

 
93.78

Gross profit
7.10

 
6.22

Operating expenses:
 
 
 
Selling, general and administrative
5.66

 
4.89

Amortization of intangible assets
0.25

 
0.16

Reorganization costs
0.08

 
0.06

Impairment of internally developed software

 
1.10

Loss on sale of affiliate
0.15

 

Income from operations
0.96

 
0.02

Other expense, net
0.20

 
0.29

Income (loss) before income taxes
0.76

 
(0.27
)
Provision for income taxes
0.22

 
0.06

Net income (loss)
0.54
%
 
(0.32
)%


25





Management's Discussion and Analysis Continued

The 4.1% decrease in our consolidated net sales for the thirteen weeks ended July 2, 2016, or second quarter of 2016, compared to the thirteen weeks ended July 4, 2015, or second quarter of 2015, partially reflected the translation of foreign currencies relative to the U.S. dollar which had a negative impact on our consolidated net sales of approximately two percentage points. Our revenue decline in local currencies reflects declines in North America, Europe and Asia-Pacific, partially offset by growth in Latin America. The decline in North America was driven in part by our decision to exit portions of our mobility distribution business in the region that did not meet our profitability requirements. Our decline in Europe was driven by changes in contract terms for some of our high volume European distribution business, which led to recognizing the revenue on a net basis versus a gross basis resulting in a reduction of net sales but with no impact on gross profit. We also experienced softness in smartphone demand in most regions. Our acquisitions partially offset the decline and contributed approximately