Ingram Micro, Inc. F2Q09 (Qtr End 07/04/09) Earnings Call Transcript

Ingram Micro, Inc. (IM)

F2Q09 Earnings Call

July 30, 2009 5:00 pm ET

Executives

Ria Carlson – Chief Strategy and Communications Officer

Gregory Spierkel – Chief Executive Officer

Alain Monie – Chief Operating Officer

William D. Humes – Chief Financial Officer

Analysts

Matthew Sheerin - Thomas Weisel Partners

Brian Alexander - Raymond James

William Fearnley - FTN Equity Capital Markets

Craig Hettenbach – Goldman Sachs

Richard Gardner - Citigroup

Presentation

Operator

Welcome to the Ingram Micro second quarter earnings report conference call. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Ria Carlson, Chief Strategy and Communications Officer.

Ria Carlson

Thank you and good afternoon. Joining me today are Greg Spierkel, our Chief Executive Officer and Bill Humes, our Chief Financial Officer. Alain Monie, our Chief Operating Officer, is travelling today and he won’t be joining us. Greg will provide an overview of the second quarter followed by Bill with the financial review. Greg will then provide his thoughts about the future before taking your questions.

The financial portion of this call is accompanied by presentation slides which can be found with today’s news release at the Investor Relations section of the Ingram Micro website at ingrammicro.com or by calling 714-382-2015.

Before we get started I have a Safe Harbor announcement. 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 1-A of the Form 10-K for the fiscal year ended January 3, 2009 for more information on the risks that could cause actual results to differ materially.

This conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of the call will be available for one week on the company’s website at ingrammicro.com or by calling 800-678-3180.

Now I’d like to introduce Greg Spierkel, our Chief Executive Officer. Greg?

Gregory Spierkel

Thank you and good afternoon everyone. In the second quarter the benefits of our operational improvements became increasingly visible. Gross margins hit the highest second quarter level in 11 years, due in part to our efforts to enhance our business mix over the last several quarters. Working capital days were at the lowest level since 2004. Expenses were reduced by nearly $50 million compared to the year-ago quarter. Our cash balance was at a record high, giving us greater flexibility to pursue new opportunities.

We drove these improvements amid an economic environment that has been weak for more than a year. Demand continued at its tepid level during the second quarter but it is not deteriorating. Sales for the quarter followed a seasonal pattern, declining 2% sequentially. On a year-over-year basis, sales continued to decline at a double digit pace, exceeding the rate of expense reductions. This had a negative impact on profitability in the quarter and remains our top challenge.

Our focus on return on invested capital and improving the business mix which resulted in the quarter’s most noteworthy achievements also contriibted to the year-over-year sales decline. We plan to balance this emphasis in the months ahead as I will explain later in the call.

The gross margin was again the quarter’s bright spot. Our strict pricing discipline, good management of vendor incentives and margin leakage and focus on higher margin products and services drove the gross margin to 5.87%. Our strong balance sheet emphasis remains best in class. We continue to be disciplined in managing working capital and with a cash conversion cycle at 19 days.

Cash on hand exceeded debt by nearly $1 billion. With a cash balance surpassing $1.3 billion we have the security to address our financing needs and the flexibility to invest in areas that will fortify our competitive and profitability position in the quarters ahead.

As I look back at the first half of 2009 I am generally pleased. We tackled the operational improvements we set out to accomplish. As a result, gross margins are up, expenses are down and we have a stronger mix of higher margin accounts, geographies and products and service offerings. These actions, along with a weak demand, took a bite out of our sales growth. While many of our vendors and competitors have experienced similar sales declines I am not satisfied with our revenue performance.

In the months ahead we intend to improve our sales intelligently, maintaining our philosophy of profitable growth by leveraging the strength of our balance sheet and the more agile cost structure that we have created over the last several quarters. I will now pass the call to Bill for more detail on our financial performance. Bill?

William Humes

Thanks Greg. I will start with sales which were $6.58 billion as indicated on slide three. The year-over-year decline was approximately 25% with foreign currency translation creating about a 7 percentage point negative impact. As Greg mentioned, most of the decline was due to the effects of weak economies throughout the world but a portion is also attributable to our own deliberate actions to protect the balance sheet and our profitability and ultimately maintain acceptable levels of return on investment capital.

Year-over-year comparisons were also affected by the Easter holidays which were in the second quarter this year but in the first quarter of 2008. On a regional basis, in North America sales were 41% of the total revenues or $2.74 billion, a 22% decrease from the prior year due to the weaker demand environment and the region’s focus on more profitable sales opportunities.

EMEA sales were $2.01 billion or 31% of total revenues. Sales decreased 32% compared to the prior year with 12 percentage points due to the negative translation impact of weaker currencies. The timing of the Easter holiday had an impact on some European countries resulting in on average three fewer selling days compared to the year-ago quarter. Sales were also affected by the restructuring of our Nordic operations with our classic distribution business exiting three countries during the quarter.

Asia Pacific sales were 23% of total revenue or $1.5 billion, a year-over-year decrease of 21% with currency translation having a 9 percentage point negative impact. The economic downturn did not begin to have its toll on the impact in Asia Pacific until the second half of 2008 which generated substantially the entire year-over-year decline in sales.

Latin America generated 5% of total revenues or $322 million, down 27% versus the prior year with currency translation having approximately 13 percentage point negative impact upon comparison to the prior year. Latin America also experienced the downturn later than the larger regions, making direct comparisons with the prior year quarter difficult.

As depicted on slide four, gross profit was $386 million or 5.87% of sales. As Greg described, we were able to drive gross margin improvement through good pricing discipline and operational improvements. Operating expenses reduced by nearly $50 million compared to a year ago driven by our cost reduction programs as well as the effect of foreign currency translation which favorably impacted operating expenses by approximately $27 million compared to the prior year.

As shown on slide five, expenses were $345 million or 5.25% of sales which included $7.4 million or 11 basis points of sales for costs related to expense reduction programs and $2.5 million or four basis points for goodwill impairment charge on the acquisitions of Vantex and Value Added Distributors in Asia Pacific which closed in the second quarter.

In the year-ago period, operating expenses were $394 million or 4.47% of sales which included $7.7 million or 9 basis points of sales in expense reduction program costs. On slide six you will see that operating income was $41 million or 62 basis points of sales which included combined costs of $9.9 million or 15 basis points of sales related to expense reduction program costs and the goodwill impairment charge as I previously mentioned. This compared to prior year operating income of $93.2 million or 106 basis points of sales which included $7.7 million or 9 basis points of costs related to expense reduction programs.

The decline in operating margin is primarily due to negative leverage from reduced sales levels in North America and EMEA. In North America, operating income was $9.1 million or 33 basis points of sales which includes expense reduction program costs of approximately $5.3 million or 19 basis points of sales. In the prior year quarter operating income was $44.4 million or 126 basis points which included $900,000 or 3 basis points in expense reduction program costs.

EMEA has remained profitable despite the significant sales decline. In the second quarter the region’s operating income was $10.2 million or 51 basis points of sales which includes expense reduction program costs of $1.5 million or 7 basis points. In the prior year period operating income was $15.7 million or 53 basis points which includes $6.8 million or 23 basis points in expense reduction program costs.

Asia Pacific once again generated very solid operating margins. It’s operating income was $22.8 million or 152 basis points which includes $500,000 or four basis points in expense reduction program costs and $2.5 million or 17 basis points in goodwill impairment charges. In the prior year quarter operating income was $32.7 million or 172 basis points of sales. The region’s proactive cost reduction initiatives have helped it maintain strong operating margin levels.

Latin America operating income was $5.2 million or 160 basis points which includes approximately 50,000 or two basis points in expense reduction program costs. In the prior year period operating income was $7.2 million or 165 basis points of sales.

Other expense for the quarter were $6.7 million compared to $10.8 million in the prior year period. The decrease was primarily driven by improved debt and cash levels and a lower average interest rate in the current year. The effective tax rate for the quarter was 26% compared to an effective tax rate of 28.5% in the year-ago quarter.

Net income was $25.3 million or $0.15 per share. The after-tax impact of our expense reduction programs and the goodwill impairment charge was approximately $0.05 per share. In the prior-year period net income was $58.9 million or $0.35 per share which includes an approximate $0.03 impact of expense reduction program costs.

Please turn now to slide seven for a discussion of the balance sheet which continues to excel in this environment. As Greg mentioned, cash reached a new record, just over $1.3 billion reflecting the team’s diligent management of working capital and cash flow within the countercyclical nature of our balance sheet.

Debt levels declined $144 million from the end of 2008 to $335 million. If you turn to slide eight you will find the related working capital metrics at quarter end. Days of sales were 39, two days higher than a year ago. Days of inventory were 27, a one day improvement versus a year ago. Days payable were 47 versus 42 a year ago. This brought working capital days to 19 days, a four day improvement compared to a year ago. We consider this level to be extraordinarily low, below our target range of 22-26 days and do not expect it to be sustainable.

Our debt to capitalization ratio was 11% versus 15% at the end of 2008.

That concludes my financial overview. I will turn it back to Greg for a discussion of regional highlights and closing comments. Greg?

Gregory Spierkel

Thank you Bill. I will start my regional review with EMEA which continues to be the hardest hit by the economic environment and therefore offers several opportunities for improvement. The region has made a lot of progress in the past six quarters. We have streamlined our regional headquarters, we have restructured key customer accounts to improve profitability, sold one country operation and closed two others and acquired two data capture point of sale companies. These efforts have improved our overall cost structure and gross margin profile.

As I described earlier, however, these improvement efforts have also contributed to the sales decline. Year-over-year sales in every country decreased in local currencies with the U.K. faring the worst outside of the Nordics. While the economic environment has dampened demand in every country it is clear that our sales have declined more than the overall market. With much of our expense reduction efforts behind us, we intend to reverse this trend.

We plan to improve our sales performance in a profitable way, recapturing share while maintaining our focus on cost control and solid gross margins. We will also continue to hone our expertise in new areas such as data capture and point of sale in which we recently signed a new vendor agreement with Intermec and in the enterprise space. Guiding the region through the next stage of success is Alain Maquet, who recently was named the region’s new President. Alain returned to EMEA last month after leading our Latin America region for four years. Under his leadership Latin America has been the company’s most profitable region for two of the last three years.

Joining Alain from Latin America is Pablo Suarez who was recently appointed general manager of our U.K. business after successfully running our Miami export operation. These two experienced and proven professionals complement an excellent management team that is committed to market leadership and achievement.

In North America, the team is facing many of the same challenges as EMEA. The market softened considerably since the start of the year and our priority to preserve return on invested capital and enhance gross margins has had a negative impact on sales growth. While the market appears to have stabilized and our expense reduction program continues to gain traction, there has been a lag in aligning expenses with the level of sales.

As a result, operating margins remain under pressure. In the second quarter nearly all of the businesses experienced year-over-year sales declines. Securematics, our small networking specialty unit and the data capturing division fared best followed by Ingram Micro Logistics and our classic distribution business. Our consumer electronics units, Avid and [DBL] are having the toughest time in this environment hit by both the weak economy and a lifeless housing market.

We appointed new management at both Avid and [DBL] during the quarter. Avid also streamlined its operations, closing underperforming branches and key office functions. [DBL] is migrating to Ingram Micro systems and processes which should improve automation and decision making. We expect these changes to result in financial improvements within the coming quarters.

The region is also pursuing new actions to drive sales. A significant initiative is related to the U.S. Economic Stimulus Plan or the American Recovery and Reinvestment Act which includes $60-80 billion of potential IT expenditures. We are taking a proactive approach to help VAR capture stimulus dollars, providing lead generation and grant identification opportunities for IT projects receiving government funding.

We have combined our sophisticated data and analytics capabilities with the services of a respected grants intelligence firm to help VARs drive sales in a variety of verticals from healthcare and energy to education and public safety. The initial response from the VAR community has been very encouraging.

The region also broadened its support and expertise in the data center space. Earlier this month we partnered with EMC and VMware to create a training and demonstration center where resellers can test drive data center solutions in a real world environment. Demonstrations, technical training and educational classes regarding backup, recovery, archive and virtualization are offered on site in Buffalo or remotely through the Internet. This helps our customers become better prepared to sell data center solutions, improve their relationships with these important vendors and positions Ingram Micro as the provider of choice for these new generations of products. These growth oriented actions coupled with further leverage from our expense reduction programs will drive improved profitability within the coming quarters.

Moving to Latin America we see a region that is performing well in a softer sales environment. The region delivered operating margins of 160 basis points despite softening economies throughout the region and an average of two fewer sales days due to the timing of Easter holiday compared to last year. The Mexico operations also experienced a partial halt due to the government mandated closing of all businesses for five days during the swine flu outbreak. This had a moderate impact on our second quarter sales in Mexico.

Sales in the Miami export division and Brazil were down year-over-year. Much of the decline in Brazil was in response to a value added tax initiative introduced in June which froze decision making for weeks as companies adjusted for the impact of the tax changes.

Chile, on the other hand, performed better than expected growing in double digits in local currency while the local market industry declined. With Alain Maquet’s transfer to EMEA during the quarter we have assigned transitional leadership to the region’s highly capable Chief Financial Officer, David Schoenberger. David and Alain have worked closely over the last four years and we have an outstanding set of leaders at the country level so we are fully confident that the region will continue its track record of success.

An equally impressive performance was delivered by Asia Pacific. The region generated a remarkable 152 basis points of operating income despite a double digit sales decline caused by the weak economic environment and a combined 21 basis point negative impact of expense reduction program costs and goodwill impairment. The management team did an outstanding job in preparing for the downturn which hit Asia Pacific a couple of quarters later than the larger regions.

New Zealand was the region’s only country that did not experience a year-over-year sales decline during the second quarter. The improving New Zealand retail market along with the acquisitions of Value Added Distributor, a small enterprise focused company and Vantex, the region’s largest data capture point of sale distributor, helped the country deliver modest sales growth in local currencies during the quarter.

Among the region’s cornerstone countries, China sales were relatively flat aided by the government’s stimulus program and a more stable credit environment. Australia also benefited from local government stimulus with sales in the retail and government markets improving slightly. We also improved profitability by streamlining operations and adjusting our portfolio, reducing a selection of communication products while acquiring a data capture point of sale firm, Vantex. The Australian market has been soft for several quarters but our improvements in the country are helping to drive profitability.

The economy is also having an impact on India which was one of the world’s hottest markets in the years preceding the recession. All products and customer groups have been affected. Hardest hit were the consumer electronics group due to weak retail demand and consumer sentiment and resellers serving local governments which curtailed spending in the weeks surrounding the political elections in May.

Despite these challenges, regional management executed exceedingly well on improving gross margins, managing costs and maintaining operating margins relatively close to prior year levels. This region continues to be a valuable strategic asset from which we expect long-term benefits.

As we look ahead we see the economic downdraft abating but no significant rebound in sight. We expect the overall market in the third quarter to behave in a historical seasonal pattern. As you may recall, the third quarter is typically one of our seasonally weaker quarters with many businesses slowing down for the summer months.

As I mentioned in my earlier remarks, our focus on return on invested capital has driven achievements in working capital, expenses and gross margin but it impacted the year-over-year sales decline. We are at a point where we can leverage the benefits of our operational improvements and place a greater emphasis on sales leadership. Supported by a leaner infrastructure and a stronger gross margin base that allows us to grow profitably.

Our expense reduction program will continue to gain traction. Last year’s program is generating approximately $5 million of savings per quarter and we have realized about half of the expected $25-30 million in quarterly savings from the program announced this year. Costs associated with the more recent program have been approximately $28.4 million so far with total costs expected to be near the low end of the original estimated range of $45-65 million.

This recession has affected all industry and customer groups. It has served as a catalyst for us to make changes in our business processes which we feel will serve us well. We have remained profitable through these trying times and our financial flexibility has improved measurably over the last year. Assuming the environment does not further deteriorate, and we hear from many vendors and customers that the worst may be behind us, we believe we are in a strong position to deliver leverage that will ultimately allow us to be more competitive, more agile and more profitable as we enter the coming new decade.

We will now take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

My first question is regarding your guidance and expectations for seasonal trends. Correct me if I am wrong but I believe normally in North America you are sort of flattish, give or take a percent, you are normally down a little bit in Europe and then Asia is flat to up. Is that right?

Gregory Spierkel

That is about right. We typically over the last few years have seen a slight decline in revenues of a couple percent to a slight increase in revenues, being a mix of exactly what you say. North America tends to have a fairly normal pattern of sales through the year. We have had this step down in the first quarter and we have seen that continue in the normal pattern for North America. Europe definitely is in a quieter period. The months of July and August are definitely the two quietest by far for us on a European basis with usually a typical strong come back in September as everybody comes back off of holidays.

We anticipate the same and we see the same pattern happening there. Asia usually has a slight upside because again some of the winter months being down under we are in the middle of right now which is the full on school season and working season for that geography.

Matthew Sheerin - Thomas Weisel Partners

On the expense side I know you have another half of that $25-30 million a quarter to come out. Should we see some of that next quarter? In other words should we expect the actual SG&A to be down sequentially?

William Humes

Overall we expect our expense reduction program savings to be realized approximately ratably. So Q1 we realized about 25% of our program we announced which was overall annual run rate of $100-125 million. Q2 we realized roughly half of that and we expect that to go up another fourth in the third quarter with full run rate in the fourth quarter essentially.

Matthew Sheerin - Thomas Weisel Partners

Regarding the very strong gross margin performance against your strategy to try to win back market share. Specifically in Europe, we have seen some pressure or pricing competition among distributors in the past and it has never ended very pretty. The question is how do you weigh the market share versus margins? If you could guide us a little bit as to where you would expect gross margin to fall out over the next couple of three quarters?

Gregory Spierkel

Let me touch on the last piece first. On the gross margin profile we have done a very good job, I feel, over the last 6-10 quarters where we have tended to drift with every passing year over the last two years to slightly higher gross margins. Again, that has been partly a conscious decision as you know and we have been signaling and stepped away from some businesses that were not as healthy. We closed some operations that were frankly not as healthy overall for the business. What that has basically brought us is two things; an improving gross margin profile and a situation where we have maybe a little less variability in our business but also, as we have touched on in the call here, some degree for share loss for certain lines or definitely in certain geographies.

As we go forward here we feel we have a lot of the noise out of the system from an Ingram point of view with all the changes we have gone through over the last 3-4 quarters with most of that happening in Europe over the last year and now most of the changes in North America taking place, that we set our sights now on being much more externally focused. The sense is we have a healthy margin profile from which to leverage so that may mean the gross margins may come down slightly over the next 2-3 quarters but we are not going to get into a situation where we are going to go for sales for sales sake.

The team, we are very disciplined. Profitability and return on invested capital will still drive our decision making. So by and large what we are looking at is trying to grab some incremental sales that we might have seen get away on us while we were making other changes, structural changes. So we are pretty cognizant that we are not going to get into a situation where we are going to go into a major win back mode. This is all about just some incremental sales we feel will make quite a difference now that we have some levers which to pull both balance sheet and margin back into the marketplace.

Operator

The next question comes from the line of Brian Alexander - Raymond James.

Brian Alexander - Raymond James

Your expenses were up sequentially 4% despite declining sales and the benefit of restructuring. I know option expense ticked back up in the second quarter but what else drove the sequential increase in OpEx? I’m just wondering if there were some one-time costs associated with exiting some of these European countries or anything else unique that happened in the quarter on the expense side?

William Humes

Obviously it is a little bit challenging bridging from quarter to quarter but the largest individual driver was the strengthening of the currencies from Q1 to Q2. So overall that had the largest single amount. Second, you already mentioned the expected increase in non-cash stock compensation expense from Q1 to Q2. That had, as you know, a good piece of that increase overall. The rest is a combination of many different things; slightly higher bad debt expense, not a material amount. We had two new smaller acquisitions in Asia Pacific which added some stuff offset with some savings and other things. The first two are the larger of the drivers.

Brian Alexander - Raymond James

A follow-up, I know your largest vendor made some changes to their payment structure through the whole channel in Europe around the May timeframe. I’m wondering if that is having an impact on your margins there? Do you expect that to have any effect going forward?

Gregory Spierkel

As you highlighted, HP made some channel changes and adjusted their programs effectively May 1 so mid-way through the quarter. We worked pretty closely with HP on those changes. We had some visibility of a few weeks in advance of them coming forward. As you are probably aware the new plan they put in place puts a greater emphasis on front end margins. Essentially HP has decided to take some of the variability of back-end margin dynamics out of the market place, putting a greater emphasis on the front end margins that need to go out to the market.

What we ended up doing and I believe we have seen the market behave in a similar pattern is to remain whole in the overall relationship from a gross margin perspective we increased our prices throughout Europe as a result of HP’s changes. We have seen those price increases stick fairly well and at this stage I would say two months into the program no noticeable deterioration of margins in the overall market place around that key vendor. I think again most players HP represents such a large share of their overall revenues in that market place that it would be very difficult to take, I think, any other approach to a key relationship. So I think the market is behaving as it should.

Brian Alexander - Raymond James

Just to clarify you don’t see competitors taking on too much inventory as a result of those front end incentives?

Gregory Spierkel

There might have been a little bit of for a week or two but I think again the channel has been very disciplined over the last few years. Much more so than it might have been in the 2001 or 2002 period where I think a lot of people got caught flat footed. If you look at a lot of other data points there may be one or two individual vendors where things happened at an odd level. By and large, I think there has been good discipline. I know from an Ingram Micro point of view you can see from our overall results that we are 27 days, a day down on last year. We definitely have not sat on any extra inventory. Our working capital dynamics and cash flow conversion show that in spades.

From where we sit, no exposure from that regard and I don’t believe too many people were sitting on too much inventory for fear of getting caught with pricing changes and other dynamics that could be in place with the market place.

Operator

The next question comes from the line of William Fearnley - FTN Equity Capital Markets.

William Fearnley - FTN Equity Capital Markets

A question on gross margins for the quarter. Can you rank or weight what the factors were that helped gross margin here during the quarter? As a follow-up to the previous question, how much did soft dollar programs help gross margins in the quarter?

William Humes

Overall, it is a balance of many different factors. We managed pricing very, very strong and were disciplined in that process so that is a key dynamic. The evolving mix of our business and trying to improve the quality and high margin levels of our business was also a key factor and I would say lastly two other items; we continue to have fairly good results out of our IM Logistics business which continues to contribute and we are managing leakage and inventory fairly well. Overall it is a combination of those factors as well as other factors that come into play. In the sense of back end margins or back end soft dollars I don’t think it was anything out of the ordinary in the sense of achievement or negative results. I would say right along par.

Gregory Spierkel

I would just add a little more color. Clearly our exiting certain countries and certain customers which has been a conscious effort over the last 2-3 quarters has been a factor here. We do have some lower margin business behind and we did execute actually fairly well in certain vendors that helped the overall profile where there was slightly better margin opportunity on the back end. So some of that factored into the quarter for sure.

William Fearnley - FTN Equity Capital Markets

On the product side, can you go through some of the gives and takes on the biggest product categories? The gives and takes on the PC side, key peripheral categories like printers, things like that for the quarter. Then I’ll sneak one in as well on what was HP’s percentage of revenue for the quarter?

Gregory Spierkel

Maybe I will just give an overall view of the sales for the quarter. First and foremost, linearity for us was close to normal quarter characteristics. April and May just a little softer than probably what we would like to see. Not unlike Q1 the last month of the quarter was a bit more robust. I think again quarter end push by customers and the vendors and frankly I think people seeing the market with a bit of light at the end of the tunnel feeling a little bit better about June. I would say June was a solid month for us.

From a product point of view on the sales front we stayed within our normal ranges of percentages in the mix with peripherals between 40-45%, systems 25-30%, software 15-20% and networking 10-15%. So those broad categories have held true. But I would say networking and software fared better overall relative to the drops we had in the other two key categories. I think systems and peripherals frankly were down more largely because the declining ASP’s in those more commoditized space. You have also had Netbooks factoring in a little bit to the question you are asking.

Netbook demand remained pretty solid although it is not a big part of our business but it definitely impacts the overall ASP profile. There was a little bit of weakness in corporate and consumer spending. So those areas kind of pushed the ASP side on the systems and peripherals front. That is how the quarter shook out.

As far as HP we don’t usually single it out on a quarterly basis. I know through all of last year and I don’t think we are much different this year it tends to be in the 23% range overall on a global basis for the company. Again, quarterly I’m not exactly sure of the exact amount but I don’t think it is much off that.

Operator

The next question comes from the line of Craig Hettenbach – Goldman Sachs.

Craig Hettenbach – Goldman Sachs

With the comments about the strong balance sheet providing some opportunities, two questions there. First, do you think the current environment is stable enough to go on offense? Second, valuation for the target companies. Is that something that companies you are going to start to see warm up to potentially take out, because I know that has been an issue in the past in terms of the targets, what they want from a valuation standpoint?

William Humes

Overall, I would say in a sense of our capital and our cash we are very pleased in our balance sheet. We have done an exceptional job in controlling working capital and managing our cash and cash flows. I would say at this point in time given our capital resources, cash balances and our ability to access capital we feel fairly comfortable that we can pursue alternative options and opportunities in a lot of different ways.

In the sense of valuations, valuations are all dependent upon what we think the companies’ overall are worth. We look at the discounted cash flow based upon cash flow streams and then also other factors trying to bench those in with benchmarks on multiples and other things. We are not going to pay what we don’t think is a reasonable and appropriate value. Valuations are coming down, which they have over the last 5-6 quarters. They are coming down for a reason. It is because their cash flow generation is lower. We are going to pay what we think is an appropriate price for the expected future cash flows and what it means to us strategically.

Gregory Spierkel

We do have the flexibility. Without question it is part of what we feel comfortable with that again we don’t have to go draw on a banking facilities in a large way. We are operating very tightly here so it does give us some ability to again support our overall strategy and where we think there is some long-term opportunity for the company.

Craig Hettenbach – Goldman Sachs

If I could follow-up on the increased emphasis on pushing sales and that trade off on margins. Any particular applications or end markets you think you haven ‘t emphasized enough that you would expect to put increased focus on?

Gregory Spierkel

There will be a bias, as I think there already has been within the company, to get a little bit more share capture if you may around products or customers but mostly products that have better margin characteristics to begin with. Sectors we think are strong and we think have better capabilities than maybe some of our competitors. Frankly areas that we think show promise for growth as well. A combination of those things. We put a lot of emphasis, and part of the reason why the gross margins have improved, point of sale becomes a bigger part of the business with every passing quarter as a percentage of the total.

IM logistics becomes a bigger part of the business with every passing quarter as well. So those things have been helping us. We are clearly dealing with a lot of volume commoditized product, which we will probably put less emphasis on that in terms of where we go and get a little aggressive. Again, we don’t want to destroy the margin profile. We have been pretty clear about that. The objective here is some degree of incremental sales and we have the flexibility to do that with a slightly better margin and what we feel is a market set of conditions where the weakness in the market is largely behind us.

At this stage the market is sort of treading water from the beginning of the year to this big step down and if everything continues as is and hopefully improves a little bit in the coming quarters we feel we are in a really good position to move forward.

Operator

That concludes the question and answer portion of today’s conference. I would now like to turn the call over to Greg for closing remarks.

Gregory Spierkel

I would like to close the call with these points to remember. Our operational improvements drove strong results in working capital management, gross margin enhancement and expense reductions. The gross margin was at our highest second level quarter in 11 years. Cash on hand exceeded debt by nearly $1 billion, providing greater flexibility for financing the business or investing in our future here. Our recent operational improvements and strong balance sheet provide us with an opportunity to place a greater emphasis, as I said, on sales leadership and in some degree of market share gain going forward.

As always, we will follow a measured approach though to capture revenues that are profitable and sustainable for the company. Thank you.

Ria Carlson

Thanks everyone. A replay of the call will be available for one week at 800-678-3180 or at ingrammicro.com. Thank you for joining us today.

Operator

This concludes today’s conference. You may disconnect your phone lines at this time.

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