INGRAM MICRO INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Unless otherwise stated, all currency amounts, other than per share
information, contained in this Management's Discussion and Analysis of Financial
Conditions and Results of Operations are stated in thousands.
The following discussion contains forward-looking statements, including, but
not limited to, management's expectations of competition; market share;
revenues, margin, expenses and other operating results and ratios; economic
conditions; vendor terms and conditions; deployment of enterprise systems;
process and efficiency enhancements; cost-savings; cash flows; inventory levels;
working capital days; capital expenditures; liquidity; capital requirements;
acquisitions and integration costs; operating models; exchange rate fluctuations
and related currency gains or losses; resolution of contingencies; seasonality;
interest rates and expenses; and rates of return. In evaluating our business,
readers should carefully consider the important factors included in Item 1A
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2011, as filed with the Securities and Exchange Commission. We disclaim any duty
to update any forward-looking statements.
Overview of Our Business
We are the largest wholesale distributor of information technology, or IT,
products and supply chain solutions worldwide based on revenues. We offer a
broad range of IT products and supply chain solutions and help generate demand
and create efficiencies for our customers and suppliers around the world. Our
results of operations have been, and will continue to be, directly affected by
the conditions in the economy in general. The IT distribution 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. Historically, our margins have also 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.
To mitigate these factors, we have implemented changes to and continue to refine
our pricing strategies, inventory management processes and vendor program
processes. 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. We have also strived 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, cloud computing,
consumer electronics and fee-for-service logistics offerings. 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.
We have complemented our internal growth initiatives with strategic business
acquisitions. We have expanded our value-added distribution of mobile data and
AIDC/POS solutions over the past few years through acquisitions of the
distribution businesses of Eurequat SA, Intertrade A.F. AG, Paradigm
Distribution Ltd. and Symtech Nordic AS in Europe, and Vantex Technology
Distribution Limited and the Cantechs Group in Asia-Pacific. We have also
expanded our presence in the mid-range enterprise market through the
acquisitions of Computacenter Distribution, Albora Soluciones SL, interAct BVBA
and Aretê Sistemas S.A., or Aretê, in Europe, and Value Added Distributors
Limited and Asiasoft Hong Kong Limited in Asia-Pacific.
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.
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We are currently in the process of migrating our operations from our legacy
proprietary system that was developed in the late-1980s to SAP systems in a
phased, country-by-country approach over the next several years. We completed
our first deployment in Singapore in 2009. In the period since, we have deployed
SAP in New Zealand, Indonesia, Chile, Belgium and the Netherlands, and have also
deployed the SAP financial modules in North America. In February 2011, we also
deployed the new system in Australia, one of our largest operations. This
deployment was somewhat unique in that Australia had operated on a different
legacy enterprise system than all of our other operations and had recently
implemented Ingram Micro's warehouse management system, designed for our
largest, most sophisticated distribution centers. Australia was the first
country with this warehouse management system to deploy SAP. These features made
the Australian conversion more complex than those we had previously undertaken
in other countries. Connectivity between the new system and those of our
warehouse and partners, and the ramp-up of effective order processing, did not
run as planned. In addition, the customer experience with the new system is not
as robust as what we were providing with our legacy systems. As a result of
these challenges, our sales and profitability in Australia were significantly
negatively impacted. We believe we have addressed the customer-service and order
management functionality of the new system and are currently deploying these
upgrades to better meet our customers' needs. The pace of recovery of revenues
and profitability in Australia remained subdued in the first quarter of 2012,
and we expect the year-over-year improvement to be somewhat tempered at least
through the middle of 2012 as we continue the improvement efforts noted above
while also implementing more aggressive marketing and pricing strategies to try
to address the share loss since the system implementation. We are adjusting our
system deployment schedule to allow for the deployment of the enhanced customer
functionality. However, we can make no assurances that we will not have
disruptions, delays and/or negative business impacts from forthcoming
deployments.
Operations
The following tables set forth our net sales by geographic region, excluding
intercompany sales, and the percentage of total net sales represented thereby,
as well as operating income and operating margin by geographic region, for each
of the thirteen week periods indicated:
Thirteen Weeks Ended
March 31, April 2,
2012 2011 Net sales by geographic region:
North America $ 3,606,947 41.8 % $ 3,506,433 40.2 %
Europe 2,647,056 30.6 2,876,233 33.0
Asia-Pacific 1,949,752 22.6 1,933,996 22.1
Latin America 431,626 5.0 407,050 4.7
Total $ 8,635,381 100.0 % $ 8,723,712 100.0 %
Thirteen Weeks Ended
March 31, April 2,
2012 2011
Operating income and operating margin by
geographic region:
North America $ 69,649 1.93 % $ 59,148 1.69 %
Europe 22,000 0.83 32,082 1.12
Asia-Pacific 14,420 0.74 8,214 0.42
Latin America 7,428 1.72 6,267 1.54
Stock-based compensation expense (9,446 ) – (5,657 ) -
Total $ 104,051 1.20 % $ 100,054 1.15 %
We sell finished products purchased from many vendors but generated
approximately 20% and 22% of our consolidated net sales for the thirteen weeks
ended March 31, 2012 and April 2, 2011, respectively, from products purchased
from Hewlett-Packard Company and 10% for the thirteen weeks ended April 2, 2011
from products purchased from Cisco Systems, Inc. There were no other vendors or
any customers that represented 10% or more of our consolidated net sales in
either of the periods presented.
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Management's Discussion and Analysis Continued
The following table sets forth certain items from our consolidated statement
of income as a percentage of net sales, for each of the periods indicated
(percentages below may not total due to rounding).
Thirteen Weeks Ended
March 31, April 2,
2012 2011
Net sales 100.00 % 100.00 %
Cost of sales 94.59 94.79
Gross profit 5.41 5.21
Operating expenses: Selling, general and administrative 4.20 4.06
Reorganization costs (credits) 0.01 (0.00 )
Income from operations 1.20 1.15
Other expense, net 0.18 0.21
Income before income taxes 1.03 0.93
Provision for (benefit from) income taxes (0.02 ) 0.29
Net income 1.04 % 0.65 %
Results of Operations for the Thirteen Weeks Ended March 31, 2012 Compared to
the Thirteen Weeks Ended April 2, 2011
Our consolidated net sales decreased 1.0% to $8,635,381 for the thirteen weeks
ended March 31, 2012, or first quarter of 2012, from $8,723,712 for the thirteen
weeks ended April 2, 2011, or first quarter of 2011. Net sales from our North
American, Asia-Pacific and Latin American operations increased by 2.9%, 0.8% and
6.0%, respectively, in the first quarter of 2012 compared to the first quarter
of 2011. In our European operations, net sales declined by 8.0% in the first
quarter of 2012 compared to the prior year quarter. The translation impacts of
relatively weaker European and Latin American currencies relative to the U.S.
dollar had a negative impact of approximately four and five percentage points,
respectively, in the respective regions' net sales, while the translation impact
of Asia-Pacific currencies did not have a material impact on the region's
year-over-year sales growth. The combined translation impacts of these foreign
currencies had a negative effect of approximately one percentage point on our
consolidated net sales. The year-over-year decrease in our European net sales
was primarily due to weak demand for technology products and services in the
region, as challenging macro-economic conditions persist throughout the
continent, but particularly in Southern Europe and Benelux, decreasing the size
of the addressable market and creating a more competitive environment. The weak
demand in Europe more than offset the generally more stable demand for
technology products and services in North America, Asia-Pacific and Latin
America. Our Asia-Pacific net sales also continued to be negatively affected by
the impact of our system deployment in Australia in February of 2011, which
negatively affected the consolidated and region's revenue growth by one and six
percentage points, respectively.
Gross margin increased 20 basis points to 5.41% in the first quarter of 2012
from 5.21% in the first quarter of 2011. The increase year-over-year is
primarily attributable to some continuation of higher hard disk drive pricing
from the 2011 fourth quarter, predominately in North America, which benefited
gross margins by approximately 10 basis points, globally. Strong contribution
from our specialty businesses and improved performance in our fee-for-service
logistics business, complemented the solid gross margin performance in our
traditional broadline business, particularly in North America. We continuously
evaluate and modify our pricing policies and certain terms, conditions and
credit offered to our customers on a transaction-by-transaction basis to reflect
general market conditions, available vendor support and strategic opportunities
to grow market share and to optimize our profitability and return on capital.
These modifications may result in some volatility in our gross margin. Increased
competition or any weakening of economies throughout the world may hinder our
ability to maintain and/or improve gross margins from the levels realized in
recent periods.
Total selling, general and administrative expenses, or SG&A expenses,
increased $8,662, or 2.4%, in the first quarter of 2012 compared to the first
quarter of 2011, and increased 14 basis points, as a percentage of consolidated
net sales, to 4.20% in the first quarter of 2012 from 4.06% in the first quarter
of 2011. The year-over-year increases in SG&A expenses was primarily
attributable to an increase in stock-based compensation expense of $3,789
associated with our long-term incentive plans, costs of $2,500 associated with
the transition of our chief executive officer and investments in growth
initiatives and system and process improvements, partially offset by the
translation impacts of foreign currencies, which yielded an approximate $3,000
reduction year-over-year, and our continued cost control management. In
addition, the prior year quarter SG&A expenses included a benefit of
approximately $5,000 related to a reduction of certain bad debt reserves in
North America based upon our estimates of collectibility and historical
write-off experience.
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Management's Discussion and Analysis Continued
During the first quarter of 2012, we incurred reorganization costs of $557
consisting primarily of employee termination benefits for workforce reductions
in our Australian operations in Asia-Pacific and the closure of our in-country
Argentina operations in Latin America (see Note 8 to consolidated financial
statements). In the first quarter of 2011, we recorded reorganization credits in
Europe of $269 to reflect lower than expected costs associated with facility
consolidations for which the initial charge was recorded in a prior period.
Operating margin increased to 1.20% in the first quarter of 2012 from 1.15% in
the first quarter of 2011. The increase in our consolidated operating margin
primarily reflects the increase in our gross margin, partially offset by the
lower leverage on SG&A expenses, as discussed above. Our North American
operating margin increased to 1.93% in the first quarter of 2012 from 1.69% in
the first quarter of 2011. The year-over-year increase in our North America
operating margin is primarily driven by benefit from continued favorable pricing
on hard disk drives early in the quarter and a greater mix of specialty and
other higher margin business. The North American results for the first quarter
of 2012 also include the previously noted CEO transition costs of $2,500, or 7
basis-points of the region's net sales. The operating margin of North America
for first quarter of 2011 included an approximate 15-basis-point benefit from
the lower bad-debt charge discussed above. Our European operating margin
decreased to 0.83% in the first quarter of 2012 from 1.12% in the first quarter
of 2011. The year-over-year decline in our European operating margin reflects
the impacts of challenging macro-economic conditions throughout the region and a
more competitive environment, which yielded reduced sales and negative operating
leverage. Our Asia-Pacific operating margin increased to 0.74% in the first
quarter of 2012 from 0.42% in the first quarter of 2011. The year-over-year
increase in our Asia-Pacific operating margin is a result of better performance
in our higher margin products and solutions. Furthermore, our Asia-Pacific
performance benefited from continued organic investments in enterprise
technology and specialty markets. Our Australian operations have also improved
relative to the prior year, but continue to generate an operating loss, which
negatively impacted the region's operating margin by 73 basis-points in the
first quarter of 2012, compared to a 106 basis-point impact in the first quarter
of 2011. Our Latin American operating margin increased to 1.72% in the first
quarter of 2012 from 1.54% in the first quarter of 2011. The year-over-year
increase is primarily attributable to strong growth in our Miami export
operations, relative improvements in our Brazilian business unit, although it is
still generating an operating loss, and continued solid execution in other
operations. We continuously evaluate and may implement further process
improvements and other changes in order to enhance profitability over the
long-term. Such changes, if any, along with normal seasonal variations in net
sales, may cause operating margins to fluctuate from quarter to quarter.
Other expense, net, consisted primarily of interest expense and income,
foreign currency exchange losses and other non-operating gains and losses. We
incurred other expenses of $15,461 in the first quarter of 2012 compared to
$18,649 in the first quarter of 2011. The year-over-year decrease is primarily
attributable to lower net interest expense as a result of the repayment of our
senior unsecured term loan in September 2011 and the resulting overall reduction
in average debt outstanding in the current quarter. The net foreign currency
exchange losses related primarily to the foreign-currency translation impact on
Euro-based inventory purchases in our pan-European entity, which designates the
U.S. dollar as its functional currency, and totaled approximately $4,800 in the
first quarter of 2012 compared to approximately $4,900 in the first quarter of
2011.
We recorded an income tax benefit of $1,383, or an effective tax benefit rate
of 1.6%, in the first quarter of 2012 compared to a provision for income taxes
of $25,095, or an effective tax provision rate of 30.8%, in the first quarter of
2011. The first quarter of 2012 included net discrete tax benefits of
approximately $28,500, or 32.2 percentage points of the effective tax rate,
which was primarily a result of the write-off of the historical tax basis of the
investment we have maintained in one of our Latin American subsidiary holding
companies realized in the current period (see Note 10 to our consolidated
financial statements). The remaining year-over-year change in the effective tax
rate primarily reflects the change in mix of profit among different tax
jurisdictions and losses in other tax jurisdictions in which we are not able to
record a tax benefit. 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 our deferred tax assets.
Quarterly Data; Seasonality
Our quarterly operating results have fluctuated significantly in the past and
will likely continue to do so in the future as a result of:
• the impact of and possible disruption caused by efforts to improve our IT
capabilities, integrate acquisitions, or implement reorganization actions, as
well as the related expenses and/or charges;
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Management's Discussion and Analysis Continued
• competitive conditions in our industry, which may impact the prices charged
and terms and conditions imposed by our suppliers and/or competitors and the
prices we charge our customers, which in turn may negatively impact our
revenues and/or gross margins;
• general changes in economic or geopolitical conditions, including changes in
legislation or regulatory environments in which we operate;
• seasonal variations in the demand for our products and services, which
historically have included lower demand in Europe during the summer months,
worldwide pre-holiday stocking in the retail channel during the
September-to-December period and the seasonal increase in demand for our North
American fee-based logistics services in the fourth quarter, which affect our
operating expenses and gross margins;
• changes in product mix, including entry or expansion into new markets, as well
as the exit or retraction of certain business;
• currency fluctuations in countries in which we operate;
• variations in our levels of excess inventory and doubtful accounts, and changes in the terms of vendor-sponsored programs such as price protection and
return rights;
• changes in the level of our operating expenses;
• changes in our provision for taxes due to the mix of taxable earnings and losses across our operations, including losses in certain tax jurisdictions in
which we are not able to record a tax benefit, as well as the resolution of
uncertain tax positions or changes in the valuation allowance related to the
expected recovery of our deferred tax assets;
• the impact of acquisitions and divestitures;
• the occurrence of unexpected events or the resolution of existing uncertainties, including, but not limited to, litigation, or regulatory
matters;
• the loss or consolidation of one or more of our major suppliers or customers;
• product supply constraints; and
• interest rate fluctuations and/or credit market volatility, which may increase
our borrowing costs and may influence the willingness or ability of customers
and end-users to purchase products and services.
Historical variations in our business may not be indicative of future trends.
In addition, our narrow operating margins may magnify the impact of the
foregoing factors on our operating results.
Liquidity and Capital Resources
Cash Flows
We finance our working capital needs and investments in the business largely
through net income before noncash items, available cash, trade and supplier
credit, and various financing facilities. As a distributor, our business
requires significant investments in working capital, particularly trade accounts
receivable and inventory, which is partially financed by vendor trade accounts
payable. As a general rule, when sales volumes are increasing, our net
investment in working capital dollars typically increases, which generally
results in decreased cash flow generated from operating activities. Conversely,
when sales volume decreases, our net investment in working capital decreases,
which generally results in increases in cash flows generated from operating
activities. The following is a detailed discussion of our cash flows.
Our cash and cash equivalents totaled $991,159 and $891,403 at March 31, 2012
and December 31, 2011, respectively. We normally have a seasonal decline in
sales from the fourth quarter to the first quarter of the subsequent fiscal
year. For example, this seasonal drop was more than 13% in the first quarter of
2012 compared to the fourth quarter of 2011. As noted above, this trend will
typically yield a decrease in our net investment in working capital. While still
within our normal range of 22 to 26 working capital days, our working capital
days at the end of the first quarter of 2012 increased by three days from
year-end 2011, primarily because of the impact of slower retail demand and other
seasonal buildup of inventory levels, which essentially offset the impact of the
sequential decline in sales.
Operating activities provided net cash of $91,341 in the first quarter of 2012
and used net cash of $173,847 in the first quarter of 2011. As noted above, our
cash flows from operations are significantly affected by net working capital
which is in turn impacted by fluctuations in volume of sales, as well as normal
period-to-period
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Management's Discussion and Analysis Continued
variations in days of working capital outstanding due to the timing of
collections from customers, movement of inventory and payments to vendors. The
net cash provided by operating activities in the first quarter of 2012
principally reflects our net income before noncash charges and the working
capital trends noted above – most notably the collection of accounts receivable
on our balance sheet at the close of 2011; partially offset by the impact of
slower retail demand on inventory levels and the timing of payment of vendor
payables. The net cash used by operating activities in the first quarter of 2011
is driven by similar trends but our level of net working capital days was higher
throughout the first quarter of 2011 and we generated a lower level of net
income, which resulted in the net use of cash for the quarter.
Investing activities used net cash of $24,823 in the first quarter of 2012
compared to $34,351 in the first quarter of 2011. The net cash used by investing
activities was primarily driven by capital expenditures in both periods, with a
higher level of capital expenditures in the previous year based on timing of
investments in our previously discussed enterprise system deployment, and some
incremental investment in a new warehouse facility in our Asia-Pacific region in
the first quarter of 2011.
Financing activities provided net cash of $19,038 and $50,826 in the first
quarters of 2012 and 2011, respectively. The net cash provided by financing
activities in the first quarter of 2012 primarily reflects the proceeds from
exercise of stock options of $20,252; partially offset by repayment of debt of
$6,322. The net cash provided by financing activities in the first quarter of
2011 primarily reflects a higher level of proceeds from exercise of stock
options, which totaled $27,918, and net proceeds from debt of $24,851, partially
offset by a regular quarterly repayment of $3,125 on the senior unsecured term
loan, which we repaid in full in the third quarter of 2011.
Our levels of debt and cash and cash equivalents are highly influenced by our
working capital needs. As such, our cash and cash equivalents balances and
borrowings fluctuate from period-to-period and may also fluctuate significantly
within a quarter. The fluctuation is the result of the concentration of payments
received from customers toward the end of each month, as well as the timing of
payments made to our vendors. Accordingly, our period-end debt and cash balances
may not be reflective of our average levels or maximum debt and/or minimum cash
levels during the periods presented or at any point in time.
Capital Resources
We have a range of financing facilities which are diversified by type,
maturity and geographic region with various financial institutions worldwide
with a total capacity of approximately $2,801,000, of which $388,286 was
outstanding, at March 31, 2012. These facilities have staggered maturities
through 2017. Our cash and cash equivalents totaled $991,159 and $891,403 at
March 31, 2012 and December 31, 2011, respectively, of which $652,740 and
$773,816, respectively, resided in operations outside of the U.S. Our ability to
repatriate these funds to the U.S. in an economical manner may be limited. Our
cash balances are deposited and/or invested with various financial institutions
globally that we endeavor to monitor regularly for credit quality. However, we
are exposed to risk of loss on funds deposited with the various financial
institutions and money market mutual funds and we may experience significant
disruptions in our liquidity needs if one or more of these financial
institutions were to suffer bankruptcy or similar restructuring. As of March 31,
2012 and December 31, 2011, we had book overdrafts of $480,687 and $511,172,
respectively, representing 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 and are typically paid by the banks in a relatively
short period of time. We believe that our existing sources of liquidity provide
sufficient resources to meet our capital requirements, including the potential
need to post cash collateral for identified contingencies (see Note 12 to our
consolidated financial statements and Item 1. "Legal Proceedings" under Part II.
"Other Information" for further discussion of identified contingencies), for at
least the next twelve months. Nevertheless, depending on capital and credit
market conditions, we may from time to time seek to increase our available
capital resources through additional debt or other financing facilities.
Finally, since the capital and credit markets can be volatile, we may be limited
in our ability to replace in a timely manner maturing credit facilities and
other indebtedness on terms acceptable to us, or at all, or to access committed
capacities due to the inability of our finance partners to meet their
commitments to us. The following is a detailed discussion of our various
financing facilities.
We have $300,000 of 5.25% senior unsecured notes due 2017. Interest on the
notes is payable semiannually in arrears on March 1 and September 1. We may
redeem the notes in whole at any time or in part from time to time, at our
option, at redemption prices that are designated in the terms and conditions of
the notes.
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Management's Discussion and Analysis Continued
We have a revolving trade accounts receivable-backed financing program in
North America that matures in April 2014 and provides for up to $500,000 in
borrowing capacity. This financing program may, subject to the financial
institutions' approval and availability of eligible receivables, be increased to
$700,000 in accordance with the terms of the program. The interest rate of this
program is dependent on designated commercial paper rates (or, in certain
circumstances, an alternate rate) plus a predetermined margin. We had no
borrowings at March 31, 2012 and December 31, 2011 under this North American
financing program.
We have a revolving trade accounts receivable-backed financing program in
Europe that matures in January 2014 and provides for a borrowing capacity of up
to €100,000, or approximately $133,000 at March 31, 2012 exchange rates. The
current program requires certain commitment fees, and borrowings under this
program incur financing costs based on EURIBOR plus a predetermined margin. We
had no borrowings at March 31, 2012 and December 31, 2011 under this European
financing program.
We have two other revolving trade accounts receivable-backed financing
programs in Europe, which mature in May 2013, and respectively provide for a
maximum borrowing capacity of £60,000, or approximately $96,000, and €90,000, or
approximately $120,000, at March 31, 2012 exchange rates. These programs require
certain commitment fees, and borrowings under the programs incur financing
costs, based on LIBOR and EURIBOR, respectively, plus a predetermined margin. We
had no borrowings at March 31, 2012 and December 31, 2011 under these European
financing programs.
We have a multi-currency revolving trade accounts receivable-backed financing
program in Asia-Pacific that matures in May 2014 and provides for a borrowing
capacity of up to 160,000 Australian dollars, or approximately $166,000 at
March 31, 2012 exchange rates. The interest rate for this financing program is
dependent upon the currency in which the drawing is made and is related to the
local short-term bank indicator rate for such currency plus a predetermined
margin. We had no borrowings at March 31, 2012 and December 31, 2011 under this
Asia-Pacific financing program.
Our ability to access financing under all our trade accounts receivable-backed
financing programs in North America, Europe and Asia-Pacific, as discussed
above, is dependent upon the level of eligible trade accounts receivable as well
as continued covenant compliance. We may lose access to all or part of our
financing under these programs under certain circumstances, including: (a) a
reduction in sales volumes leading to related lower levels of eligible trade
accounts receivable; (b) failure to meet certain defined eligibility criteria
for the trade accounts receivable, such as receivables remaining assignable and
free of liens and dispute or set-off rights; (c) performance of our trade
accounts receivable; and/or (d) loss of credit insurance coverage for our
European and Asia-Pacific facilities. At March 31, 2012, our actual aggregate
capacity under these programs was approximately $965,000 based on eligible trade
accounts receivable available, of which no amount of such capacity was used.
Even if we do not borrow, or choose not to borrow to the full available capacity
of certain programs, most of our trade accounts receivable-backed financing
programs prohibit us from assigning, transferring or pledging the underlying
eligible receivables as collateral for other financing programs. At March 31,
2012, the amount of trade accounts receivable which would be restricted in this
regard totaled approximately $1,237,000.
In September 2011, we terminated our senior unsecured term loan credit
facility with a bank syndicate in North America. We repaid our outstanding
balance of $225,000 with our available cash. Concurrently with the termination
of our senior unsecured term loan facility, we settled our interest rate swap
agreement with a notional amount of $175,000 of the term loan principal amount
at that date, which had been accounted for as a cash flow hedge.
We have a $750,000 revolving senior unsecured credit facility from a syndicate
of multinational banks, which matures in September 2016. The interest rate on
this facility is based on LIBOR, plus a predetermined margin that is based on
our debt ratings and leverage ratio. We had no borrowings at March 31, 2012 and
December 31, 2011 under this credit facility. This credit facility may also be
used to issue letters of credit. At both March 31, 2012 and December 31, 2011,
letters of credit of $4,700 were issued to certain vendors and financial
institutions to support purchases by our subsidiaries, payment of insurance
premiums and flooring arrangements. Our available capacity under the agreement
is reduced by the amount of any outstanding letters of credit.
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Management's Discussion and Analysis Continued
We also have additional lines of credit, short-term overdraft facilities and
other credit facilities with various financial institutions worldwide, which
provide for borrowing capacity aggregating approximately $736,000 at March 31,
2012. Most of these arrangements are on an uncommitted basis and are reviewed
periodically for renewal. At March 31, 2012 and December 31, 2011, respectively,
we had $88,286 and $92,428 outstanding under these facilities. The weighted
average interest rate on the outstanding borrowings under these facilities,
which may fluctuate depending on geographic mix, was 9.1% and 8.1% per annum at
March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 and
December 31, 2011, letters of credit totaling $25,170 and $31,405, respectively,
were issued to various customs agencies and landlords to support our
subsidiaries. The issuance of these letters of credit reduces our available
capacity under these agreements by the same amount.
There have been no significant changes in our contractual obligations from
those disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2011 other than those noted in this "Capital Resources" section.
Covenant Compliance
We are required to comply with certain financial covenants under the terms of
certain of our financing facilities, including restrictions on funded debt and
liens and covenants related to tangible net worth, leverage and interest
coverage ratios and trade accounts receivable portfolio performance including
metrics related to receivables and payables. We are also restricted by other
covenants, including, but not limited to, restrictions on the amount of
additional indebtedness we can incur, dividends we can pay, and the amount of
common stock that we can repurchase annually. At March 31, 2012, we were in
compliance with all material covenants or other material requirements set forth
in our trade accounts receivable-backed programs and credit agreements, as
discussed above.
Trade Accounts Receivable Factoring Programs
We have an uncommitted factoring program in North America under which trade
accounts receivable of one large customer may be sold, without recourse, to a
financial institution. The total amount of receivables factored under this
program, at any point in time, cannot exceed $150,000. We also have an
uncommitted factoring program in Europe under which trade accounts receivable of
another large customer may be sold, without recourse, to a financial
institution. The total amount of receivables factored under this program, at any
point in time, cannot exceed €31,000, or approximately $41,000, at March 31,
2012 exchange rates. Available capacity under these programs is dependent on the
amount of trade accounts receivable already sold to and held by the financial
institutions, the level of our trade accounts receivable eligible to be sold
into these programs and the financial institutions' willingness to purchase such
receivables. At March 31, 2012 and December 31, 2011, we had a total of $139,649
and $165,744, respectively, of trade accounts receivable sold to and held by the
financial institutions under these programs.
Other Matters
See Note 12 to our consolidated financial statements and Item 1. "Legal
Proceedings" under Part II "Other Information" for discussion of other matters.
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