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INTCOMEX, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This Quarterly Report on Form 10-Q, or Quarterly Report, including this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding future events and our
future results that are subject to the safe harbors created under the Securities
Act of 1933 and the Securities Exchange Act of 1934. All statements other than
statements of historical facts are statements that could be deemed
forward-looking statements. These statements are based on current expectations,
beliefs, estimates, forecasts, projections and management's assumptions about
our company, our future performance, our liquidity and the Information
Technology, or IT, products distribution industry in which we operate. Words
such as "anticipate," "assume," "believe," "estimate," "expect," "intend,"
"goal," "plan," "seek," "project," "target" and variations of such words and
similar expressions are intended to identify such forward-looking statements. In
addition, any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our businesses, and other
characterizations of future events or circumstances including but are not
limited to, management's expectations for competition, revenues, margin,
expenses and other operating results, capital expenditures, liquidity, capital
requirements, acquisitions and exchange rate fluctuations, each of which
involves numerous risks and uncertainties are forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. Forward-looking statements should, therefore, be
considered in light of various factors, including those identified below,
elsewhere herein and under "Part II-Other Information, Item 1A. Risk Factors" in
our Annual Report on Form 10-K filed with the SEC on March 14, 2012, or Annual
Report, under "Part I. Item 1A. Risk Factors." These risks and uncertainties
include, but are not limited to the following:
• adverse changes in general economic, political, social and health
conditions and developments in the global environment and throughout Latin
America and the Caribbean in the markets in which we operate or plan to
operate, which may lead to a decline in our business and our results of
operations;
• business interruptions due to natural or manmade disasters, extreme weather conditions including earthquakes, fires, floods, hurricanes,
medical epidemics, power and/or water shortages, telecommunication
failures, tsunamis;
• competitive conditions and fluctuations in the foreign currency in the
markets in which we operate or plan to operate;
• market acceptance of the products we distribute, adverse changes in our relationships with vendors and customers or declines in our inventory
values;
• credit exposure to our customers' financial condition and creditworthiness;
• operating and financial restrictions of our creditors and sufficiency of
trade credit from our vendors;
• dependency on accounting and financial reporting, IT and
telecommunications management and systems;
• difficulties in maintaining and enhancing internal controls and management
and financial reporting systems;
• compliance with accounting rules and standards, and corporate governance
and disclosure requirements; and,
• difficulties in staffing and managing our foreign operations or departures
of our key executive officers.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative but not exhaustive. In addition, new
risks and uncertainties may arise from time to time. Accordingly, all
forward-looking statements should be evaluated with an understanding of their
inherent uncertainty. We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date they were made. We
do not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this Quarterly Report. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by this
cautionary statement.
Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statement because of certain factors discussed
below or elsewhere in this Quarterly Report or included in our Annual Report.
The following discussion and analysis of our financial condition and results of
operations should be read together with the audited consolidated financial
statements and notes thereto, which are included in our Annual Report, and our
unaudited condensed consolidated financial statements for the fiscal quarter and
year to date period ended September 30, 2012, which are included in this
Quarterly Report.
Overview
We believe we are the largest pure play value-added distributor of computer IT
products focused solely on serving Latin America and the Caribbean, or the
Region. We believe the continued convergence of IT, consumer electronics and
mobile 'smart' device technology extends our products offerings beyond
traditional computer based IT products into complimentary products that address
consumer demand for mobile computing devices, such as smart phones and tablets,
throughout the Region. We distribute computer equipment components, peripherals,
software, computer systems, accessories, networking products, digital consumer
electronics and mobile devices to more than 47,000 customers in 40 countries. We
offer single source purchasing to our customers by providing an in-stock
selection of more than 13,000 products from over 140 vendors, including the
world's leading IT product manufacturers. From our headquarters and main
distribution center in Miami, we support a network of 25 sales and distribution
operations in 12 Latin American and Caribbean countries, or our In-country
Operations.
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Our results for the three months ended September 30, 2012, reflect a decrease in
revenue, primarily resulting from the decline in sales of mobile devices. Our
results for the nine months ended September 30, 2012, reflect an increase in
revenue across most of our product lines and our customer markets, with mobile
devices representing the most significant portion of the revenue growth, as
compared to the corresponding period in 2011. Revenue decreased $7.6 million, or
2.2% to $330.3 million for the three months ended September 30, 2012, as
compared to $337.9 million for the three months ended September 30, 2011.
Revenue increased $184.1 million, or 20.8% to $1,068.2 million for the nine
months ended September 30, 2012, as compared to $884.1 million for the nine
months ended September 30, 2011. Gross profit decreased $4.1 million, or 13.2%
to $27.0 million for the three months ended September 30, 2012, as compared to
$31.1 million for the three months ended September 30, 2011. The decline in
gross profit was primarily the result of the lower sales volumes coupled with
the lower average selling price on our core products, most notably mobile
devices. Gross profit increased $4.9 million, or 5.6% to $90.8 million for the
nine months ended September 30, 2012, as compared to $85.9 million for the nine
months ended September 30, 2011. The improvement in gross profit was primarily
the result of the higher sales volume.
Total operating expenses increased $1.9 million, or 8.4% to $24.9 million for
the three months ended September 30, 2012, as compared to $23.0 million for the
three months ended September 30, 2011. Total operating expenses increased $7.9
million, or 11.8% to $74.6 million for the nine months ended September 30, 2012,
as compared to $66.7 million for the nine months ended September 30, 2011. The
increase in operating expenses resulted primarily from the additional salary and
payroll-related expenses, including severance costs incurred during the period.
Other expense, net decreased $6.5 million, or 63.5% to $3.7 million during the
three months ended September 30, 2012, as compared to $10.2 million during the
three months ended September 30, 2011. The decrease was primarily driven by
foreign exchange gains realized during the three months ended September 30,
2012, as compared to foreign exchange losses realized during the same period in
2011. Other expense, net decreased $7.5 million, or 40.3% to $11.0 million
during the nine months ended September 30, 2012, as compared to $18.5 million
during the nine months ended September 30, 2011. The decrease was primarily
driven by the $4.3 million gain recognized on the termination of the mutual
non-compete agreement with Brightpoint, Inc. and foreign exchange gains realized
during the nine months ended September 30, 2012, as compared to foreign exchange
losses realized during the same period in 2011.
Net loss was $1.6 million for the three months ended September 30, 2012, as
compared to $1.7 million for the three months ended September 30, 2011. Net
income was $3.8 million for the nine months ended September 30, 2012, as
compared to net loss of $1.0 million for the nine months ended September 30,
2011.
Factors Affecting Our Results of Operations
The following events and developments have in the past, or are expected in the
future to have, a significant impact on our financial condition and results of
operations:
• Impact of price competition, vendor terms and conditions. Historically,
our gross profit margins have been impacted by price competition, changes
to vendor terms and conditions, including but not limited to, reductions
in product rebates and incentives, our ability to return inventory to
manufacturers, and time periods during which vendors provide price
protection. We expect these competitive pricing pressures and
modifications to vendor terms and conditions to continue into the
foreseeable future.
• Sale of Mobile Devices. Due to the continued convergence of IT products
and mobile devices, we launched our initial foray into the mobile devices
market in the latter half of 2010. In April 2011, we completed our
strategic transaction with Brightpoint, Inc., which facilitated our
further expansion into the wireless mobile devices distribution market.
Additionally, we have entered into contracts with certain mobile devices
manufacturers for the distribution of their products throughout Latin
America and the Caribbean. We expect to enter into more contracts with other mobile devices manufacturers, which may result in the increase in
revenues related to these products and services. In addition, we expect
the growth of our revenues to continue to be significantly driven by
growth in the sales of mobile devices.
• Shift in revenue to In-country Operations. One of our growth strategies is
to expand the geographic presence of our In-country Operations into areas
in which we believe we can achieve higher gross margins than our Miami
Operations. Miami gross margins are generally lower than gross margins
from our In-country Operations because the Miami export market is more
competitive due to the high concentration of other Miami-based IT
distributors who compete for the export business of resellers and
retailers located in Latin America or the Caribbean. In addition, these resellers and retailers generally have larger average order quantities
than customers of our In-country Operations segment, and as a result,
benefit from lower average prices. Revenue from our In-country Operations
grew by an average of 18.4% annually between 2001 and 2011, as compared to
growth in revenue from our Miami Operations of an average of 13.0%
annually over the same period. Revenue from our In-country Operations
accounted for 71.8% and 67.6% of consolidated revenue for the three months
ended September 30, 2012 and 2011, respectively. Revenue from our
In-country Operations accounted for 70.7% and 71.9% of consolidated
revenue for the nine months ended September 30, 2012 and 2011,
respectively. While the recent increase in sales related to mobile devices
has resulted in a greater increase in revenue from our Miami Operations
than our In-country Operations for the nine months ended September 30,
2012, we expect the expansion of our In-country Operations to grow at a
faster rate than our Miami Operations over the long term.
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• Exposure to fluctuations in foreign currency. A significant portion of the
revenues from our In-country Operations is invoiced in currencies other
than the United States, or U.S., dollar and a significant amount of the
operating expenses from our In-country Operations are denominated in
currencies other than U.S. dollar. In markets where we invoice in local
currency, including Argentina, Chile, Colombia, Costa Rica, Guatemala,
Jamaica, Mexico, Peru and Uruguay, appreciation of a local currency could
have a marginal impact on our gross profit and gross margins in U.S.
dollar terms. In markets where our books and records are prepared in
currencies other than the U.S. dollar, the appreciation of the local currency will increase our operating expenses and decrease our operating
margins in U.S. dollar terms. Our unaudited, condensed consolidated
statements of operations and comprehensive income (loss) include foreign
exchange gains of $1.4 million for the three months ended September 30,
2012, and foreign exchange losses of $5.3 million for the three months
ended September 30, 2011. Our consolidated statements of operations
include foreign exchange gains of $0.8 million for the nine months ended
September 30, 2012, and foreign exchange losses of $3.7 million for the
nine months ended September 30, 2011. We periodically engage in foreign
currency forward contracts when available and when doing so is not cost prohibitive. In periods when we do not, foreign currency fluctuations may
adversely affect our results of operations, including our gross margins
and operating margins.
• Trade credit. All of our key vendors and many of our other vendors provide
us with trade credit, an important source of liquidity to finance our
growth. Although our overall available trade credit has increased
significantly over time, from time to time the trade credit available from
certain vendors has not kept pace with the growth of our business with
them. During periods of economic downturn, our vendors may reduce the
level of available trade credit extended to us as a result of our
liquidity at the time.
It is necessary for us to increase our use of available cash or borrowings under
our credit facility to the extent available to pay certain vendors for their
products, which adversely affects our liquidity and can adversely affect our
results of operations and opportunities for growth. We purchase credit insurance
to support trade credit lines extended to our customers which has been
restricted due to regional or global economic events or disruptions in the
credit markets. Periodically, credit insurers may tighten the requirements for
extending credit insurance coverage thereby limiting our capacity to extend
trade credit to our customers and the growth of our business throughout the
Region.
• Increased levels of indebtedness. During December 2009, we completed a
cash tender offer for $96.9 million aggregate principal amount of our
prior 11 3/4% Senior Notes outstanding. We financed the tender offer with
the net cash proceeds of $120.0 million aggregate principal amount of the
Original 13 1/4% Second Priority Senior Notes, due December 15, 2014, or
the Original 13 1/4% Senior Notes, that were sold in a private placement
transaction and closed on December 22, 2009, with an interest rate of
13.25% per year, payable semi-annually on June 15 and December 15 of each
year, commencing on June 15, 2010. We used the proceeds from the sale of the Original 13 1/4% Senior Notes to repay our borrowings under, and renew
our senior secured revolving credit facility, repurchase, redeem or
otherwise discharge our Prior 11 3/4% Senior Notes and the balance for general corporate purposes. For the three months ended September 30, 2012
and 2011, interest expense was $5.3 million and $5.1 million,
respectively. For the nine months ended September 30, 2012 and 2011,
interest expense was $16.2 million and $15.2 million, respectively.
Additionally, on January 25, 2012, SBA together with its consolidated
subsidiaries executed an amendment to the PNC Credit Facility, or the PNC Credit
Facility Amendment, increasing the maximum amount available for borrowing under
the facility from $30.0 million to $50.0 million, including standby letters of
credit commitments in an aggregate undrawn face amount of up to $3.0 million.
• Goodwill impairment. Goodwill represents the excess of the purchase price
over the fair value of the net assets. We perform our impairment test of
our goodwill and other intangible assets on an annual basis. The goodwill
impairment charge represents the extent to which the carrying values
exceeded the fair value attributable to our goodwill. Fair values are
determined based upon market conditions and the income approach which
utilizes cash flow projections and other factors. Our future results of
operations may be impacted by the prolonged weakness in the economic
environment, which may result in a further impairment of any existing
goodwill or goodwill and/or other long-lived assets recorded in the
future.
• Deferred tax assets. Deferred income tax represents the tax effect of the
differences between the book and tax bases of assets and liabilities.
Deferred tax assets, which also include NOL carryforwards for entities
that have generated or continue to generate operating losses, are assessed
periodically by management to determine if their future benefit will be
fully realized. If it is more likely than not that the deferred income tax
asset will not be realized, then a valuation allowance must be established
with a corresponding charge to net income (loss). Such charges could have
a material adverse effect on our results of operations or financial
condition.
As of September 30, 2012 and December 31, 2011, our U.S. and state of Florida
NOLs resulted in $22.4 million and $20.7 million, respectively, of deferred tax
assets, which will begin to expire in 2026. As of September 30, 2012 and
December 31, 2011, Intcomex Argentina, S.R.L. had $7.5 million and $5.4 million,
respectively, in NOLs resulting in $2.6 million and $1.9 million, respectively,
of deferred tax assets, which began to expire in 2011. As of September 30, 2012
and December 31, 2011, Intcomex Mexico had $1.3 million in NOLs resulting in
$0.4 million of deferred tax assets, which will expire in 2018.
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We periodically analyze the available evidence related to the realization of the
deferred tax assets, considered the current negative economic environment and
determined it is now more likely than not that we will not recognize a portion
of our deferred tax assets associated with the NOL carryforwards. Factors in
management's determination include the performance of the business and the
feasibility of ongoing tax planning strategies. As of September 30, 2012 and
December 31, 2011, we had a valuation allowance of $12.5 million and $10.6
million, respectively, related to our U.S. and state of Florida NOLs and $3.0
million and $2.3 million, respectively, related to our foreign NOLs, as
management does not believe it will realize the full benefit of these NOLs. Our
future results of operations may be impacted by a prolonged weakness in the
economic environment, which may result in further valuation allowances on our
deferred tax assets and adversely affect our results of operations or financial
condition.
• Restructuring Charges. For the three and nine months ended September 30,
2012 we recorded $0 and $0.6 million, respectively, related to the
restructuring actions that we implemented to significantly reduce our
In-country Operations in Argentina. The restructuring included involuntary
workforce reductions and employee benefits and other costs incurred in
connection with vacating leased facilities. The charges were recorded in
our unaudited, condensed consolidated statements of operations and
comprehensive income (loss) as an increase to our operating expenses. For
the three and nine months ended September 30, 2011, we did not incur any
restructuring charges.
Brightpoint Transaction
From time to time, we evaluate opportunities to pursue business transactions
that we view as strategic and complementary to our current business and align
with our global strategy to expand our services and our supply chain solution
capabilities to customers and vendors throughout Latin America and the
Caribbean.
On April 19, 2011, we and two of our subsidiaries, Intcomex Colombia LTDA, or
Intcomex Colombia, and Intcomex de Guatemala, S.A., or Intcomex Guatemala,
completed an investment agreement, the Brightpoint Transaction, with two
subsidiaries of Brightpoint, Inc., Brightpoint Latin America and Brightpoint
International Ltd, collectively Brightpoint, a global leader in providing supply
chain solutions to the wireless industry. Pursuant to such agreement, we issued
an aggregate 38,769 shares of our Common Stock to Brightpoint Latin America.
Effectively, the Brightpoint Transaction was comprised of two transactions:
(1) the sale of 25,846 shares of Common Stock for $15.0 million in cash; and,
(2) the acquisition of certain assets and liabilities of the Brightpoint Latin
America operations and the equity associated with its operations in Colombia and
Guatemala, collectively Brightpoint Latin America Operations, in exchange for
12,923 shares of Common Stock valued at $7.5 million plus $0.2 million cash,
net, at closing.
Additionally, the acquisition of the Brightpoint Latin America Operations
provided for a working capital adjustment to be settled in cash. In September
2011, together with Brightpoint, we finalized the working capital adjustment
resulting in an additional payable by Brightpoint to us of $0.9 million, which
we received in October 2011.
The expected benefits from this business transaction depend upon a number of
factors, including retaining management personnel to run the operations,
successfully integrating the operations, IT systems, customers, vendors and
partner relationships of the acquired companies and devoting sufficient capital
and management attention to the newly acquired companies.
The comparability of our operating results for the three and nine months ended
September 30, 2012, as compared to the same period of 2011, is impacted by the
Brightpoint Transaction. In our discussion of the comparison of the three and
nine months ended September 30, 2012, as compared to the same period of 2011 in
our results of operations, the incremental contribution of the Brightpoint
Transaction to our business is presented as if the acquisition was not
separately identifiable, as the integration was made directly into our existing
operations and was insignificant to our results of operations during the periods
presented.
On June 29, 2012, in a separate transaction related to Brightpoint entering into
a merger agreement with a global IT wholesale distributor, we entered into an
agreement with Brightpoint to, among other things, eliminate the mutual
non-competition covenants included in the purchase agreement dated March 16,
2011 underlying the Brightpoint Transaction and our shareholders' agreement, and
terminate the license agreement dated April 19, 2011, or the License Agreement,
with immediate effect, provided that we retained the right to use the
Brightpoint names and logos as set forth in the License Agreement in accordance
with its terms for a period of 90 days from June 29, 2012. Additionally,
Brightpoint agreed to pay $5.0 million to us, which we received in July 2012. As
a result of this transaction, we recognized a gain of $4.3 million, which was
recorded in other income in the unaudited, condensed consolidated statement of
operations and comprehensive income (loss).
On June 29, 2012, we entered into a separate agreement with Brightpoint pursuant
to which Brightpoint granted to us an option to purchase our 38,769 shares of
common stock held by Brightpoint for $3.0 million, less any dividends paid on
such shares to Brightpoint. The option became exercisable upon the closing of a
change of control of Brightpoint on October 15, 2012, and is exercisable for
five years from the date of that event. We are currently precluded from
exercising the option pursuant to the terms of the indenture governing our
13 1/4% Senior Notes.
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Results of Operations
We report our business in two operating segments based upon the geographic
location of where we originate the sale: Miami and In-country. Our Miami
segment, or Miami Operations, includes revenue from our Miami, Florida
headquarters, including sales from Miami to our in-country sales and
distribution centers and sales directly to resellers, retailers and distributors
that are located in countries in which we have in-country sales and distribution
operations or in which we do not have any in-country operations. Our in-country
segment, or In-country Operations, includes revenue from our in-country sales
and distribution centers, which have been aggregated because of their similar
economic characteristics. Most of our vendor rebates, incentives and allowances
are reflected in the results of our Miami segment. When we consolidate our
results, we eliminate revenue and cost of revenue attributable to inter-segment
sales, and the financial results of our Miami segment discussed below reflect
these eliminations.
Comparison of the quarter ended September 30, 2012 versus the quarter ended
September 30, 2011
The following table sets forth selected financial data and percentages of
revenue for the periods presented:
Three Months Ended Three Months Ended
September 30, 2012 September 30, 2011
Dollars Percentage Dollars Percentage
(in thousands) of Revenue (in thousands) of Revenue
Revenue $ 330,317 100.0 % $ 337,917 100.0 %
Cost of revenue 303,288 91.8 % 306,780 90.8 %
Gross profit 27,029 8.2 % 31,137 9.2 %
Selling, general and
administrative 23,844 7.2 % 21,811 6.4 %
Depreciation and amortization 1,096 0.3 % 1,204 0.4 %
Total operating expenses 24,940 7.5 % 23,015 6.8 %
Operating income 2,089 0.6 % 8,122 2.4 %
Other expense, net 3,746 1.1 % 10,262 3.0 %
(Loss) income before
provision (benefit) for
income taxes (1,657 ) (0.5 )% (2,140 ) (0.6 )%
(Benefit) provision for
income taxes (12 ) - (424 ) (0.1 )%
Net loss $ (1,645 ) (0.5 )% $ (1,716 ) (0.5 )%
Revenue. Revenue decreased $7.6 million, or 2.2%, to $330.3 million for the
three months ended September 30, 2012, from $337.9 million for the three months
ended September 30, 2011. The decline in revenue was driven primarily by the
decrease in sales of mobile devices of $13.7 million, memory products of $6.8
million, notebook computers of $6.5 million and central processing units, or
CPUs, of $4.6 million, offset by the increase in sales of hard disk drives of
$9.5 million, software of $7.1 million and printers of $5.1 million. We
experienced a 12.2% decrease in unit shipments across our core product lines,
which include mobile devices, for the three months ended September 30, 2012, as
compared to the same period in 2011. During the three months ended September 30,
2012, we continued lapping over the effects of the Brightpoint Transaction
(which was completed in April 2011) and our expansion into the mobile devices
market. We experienced an 8.6% increase in average sales prices across the same
core products for the three months ended September 30, 2012, as compared to the
same period in 2011, due to the impact of pricing on basic "white-box" systems,
printers and hard disk drives. Revenue derived from our In-country Operations
increased $8.4 million, or 3.7%, to $237.0 million for the three months ended
September 30, 2012, from $228.6 million for the three months ended September 30,
2011. Revenue derived from our In-country Operations accounted for 71.8% and
67.6% of our total revenue for the three months ended September 30, 2012 and
2011, respectively. The growth in revenue from our In-country Operations was
mainly driven by the overall increase in sales in Peru, and, to a lesser extent,
also driven by the increase in sales in Colombia, Chile, Mexico, Costa Rica and
Panama. This growth was driven by the increased sales volume of software, mobile
devices, notebook computers, hard disk drives, basic "white-box" systems and
printers. Revenue derived from our Miami Operations decreased $16.0 million, or
14.7%, to $93.3 million for the three months ended September 30, 2012 (net of
$71.3 million of revenue derived from sales to our In-country Operations) from
$109.3 million for the three months ended September 30, 2011 (net of $88.2
million of revenue derived from sales to our In-country Operations). The decline
in revenue from our Miami Operations reflected the decreased sales volume of
mobile devices, memory products and CPUs, partially offset by the increased
sales volume of hard disk drives and printers.
For the three months ended September 30, 2012, we realized a negative impact on
sales of mobile devices due to the softening demand, increased competition and
excess availability of certain models in the market. This resulted in reduced
gross margins and increased obsolescence expense. Although we continue to
experience the dilutive effect of mobile device sales on our gross margins, we
continue to focus our efforts on broadening our product offerings to counteract
these market conditions.
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Gross profit. Gross profit decreased $4.1 million, or 13.2%, to $27.0 million
for the three months ended September 30, 2012, from $31.1 million for the three
months ended September 30, 2011. The decrease was primarily driven by lower
sales volume in our Miami Operations and the additional inventory obsolescence
provision of $1.2 million. Gross profit from our In-country Operations decreased
$0.6 million, or 3.3%, to $18.8 million for the three months ended September 30,
2012, from $19.4 million for the three months ended September 30, 2011. The
decline in gross profit from our In-country Operations was driven by changes in
product mix and the increase in inventory obsolescence provision. Gross profit
from our In-country Operations accounted for 69.6% of our consolidated gross
profit for the three months ended September 30, 2012, as compared to 62.4% for
the three months ended September 30, 2011. Gross profit from our Miami
Operations decreased $3.5 million, or 29.7%, to $8.2 million for the three
months ended September 30, 2012, as compared to $11.7 million for the three
months ended September 30, 2011. The decline in gross profit from our Miami
Operations was driven by the decrease in revenue and gross margin on the sales
of mobile devices and the increase in inventory obsolescence provision. As a
percentage of revenue, gross margin was 8.2% for the three months ended
September 30, 2012, as compared to 9.2% for the three months ended September 30,
2011. The decrease in gross margin of 1.0% was primarily driven by the dilutive
impact of mobile device sales and the loss of 40 basis points due to additional
inventory obsolescence provision recognized during the three months ended
September 30, 2012, as compared to the same period in 2011.
Operating expenses. Total operating expenses increased $1.9 million, or 8.4% to
$24.9 million for the three months ended September 30, 2012, as compared to
$23.0 million for the three months ended September 30, 2011. Excluding the
effects of weakening foreign currencies, the increase in operating expenses
resulted from higher salary and payroll-related expenses of $2.5 million,
partially offset by lower marketing and advertising expenses of $0.4 million.
The increase in operating expenses reflects our expansion of product offerings
and the need to support the incremental business. As a percentage of revenue,
operating expenses increased to 7.6% for the three months ended September 30,
2012, as compared to 6.8% for the three months ended September 30, 2011. As a
percentage of total operating expenses, salary and payroll-related expenses
increased to 56.4% of total operating expenses for the three months ended
September 30, 2012, as compared to 51.0% for the three months ended
September 30, 2011. Operating expenses from our In-country Operations increased
$2.0 million, or 13.1% to $17.5 million for the three months ended September 30,
2012, as compared to $15.5 million for the three months ended September 30,
2011. Excluding the effects of weakening foreign currencies, the increase
resulted from higher salary and payroll-related expenses of $1.8 million, bad
debt expense of $0.3 million, facilities expenses of $0.2 million, partially
offset by lower marketing and advertising expenses of $0.4 million. Operating
expenses from our In-country Operations benefited from the effects of weakening
foreign currencies of $0.3 million primarily in Chile, Mexico and Uruguay.
Operating expenses from our Miami Operations decreased $0.1 million, or 1.4%, to
$7.4 million for the three months ended September 30, 2012, as compared to $7.5
million for the three months ended September 30, 2011, due to the lower bad debt
expense of $0.2 million and the lower facilities-related expenses of $0.2
million, partially offset by higher salary and payroll-related expenses.
Operating income. Operating income decreased $6.0 million to $2.1 million for
the three months ended September 30, 2012, from $8.1 million for the three
months ended September 30, 2011, due to the higher operating expenses in our
In-country Operations and the lower sales and margins on the sale of mobile
devices in our Miami Operations. Operating income from our In-country Operations
decreased $2.6 million, or 67.5% to $1.3 million for the three months ended
September 30, 2012, from $3.9 million for the three months ended September 30,
2011. Operating income from our Miami Operations decreased $3.4 million to
$0.8 million for the three months ended September 30, 2012, from $4.2 million
for the three months ended September 30, 2011.
Other expense, net. Other expense, net decreased $6.5 million, or 63.5%, to
$3.7 million for the three months ended September 30, 2012, from $10.2 million
for the three months ended September 30, 2011. The decrease in other expense,
net was primarily attributable to foreign exchange gains of $1.4 million,
primarily in Chile, during the three months ended September 30, 2012, as
compared to the foreign exchange losses of $5.3 million, primarily in Chile and
Colombia, during the same period in 2011.
Benefit for income taxes. Benefit for income taxes decreased $0.4 million, to
$12 thousand for the three months ended September 30, 2012, from $0.4 million
for the three months ended September 30, 2011. The decrease was due to the
higher taxable earnings in our In-country Operations, partially offset by the
additional tax benefit from our Miami Operations.
Net loss. Net loss was $1.6 million for the three months ended September 30,
2012, as compared to $1.7 million for the three months ended September 30, 2011.
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Comparison of the nine months ended September 30, 2012 versus the nine months
ended September 30, 2011
The following table sets forth selected financial data and percentages of
revenue for the periods presented:
Nine Months Ended Nine Months Ended
September 30, 2012 September 30, 2011
Dollars Percentage Dollars Percentage
(in thousands) of Revenue (in thousands) of Revenue
Revenue $ 1,068,152 100.0 % $ 884,058 100.0 %
Cost of revenue 977,402 91.5 % 798,160 90.3 %
Gross profit 90,750 8.5 % 85,898 9.7 %
Selling, general and
administrative 71,124 6.7 % 63,196 7.1 %
Depreciation and amortization 3,457 0.3 % 3,485 0.4 %
Total operating expenses 74,581 7.0 % 66,681 7.5 %
Operating income 16,169 1.5 % 19,217 2.2 %
Other expense, net 11,050 1.0 % 18,507 2.1 %
Income before provision for
income taxes 5,119 0.5 % 710 0.1 %
Provision for income taxes 1,323 0.1 % 1,662 0.2 %
Net income (loss) $ 3,796 0.4 % $ (952 ) (0.1 )%
Revenue. Revenue increased $184.1 million, or 20.8%, to $1,068.2 million for the
nine months ended September 30, 2012, from $884.1 million for the nine months
ended September 30, 2011. Our revenue growth was driven by the increased demand
for our products throughout Latin America and the Caribbean combined with our
efforts to grow and diversify our product offerings. Revenue growth was driven
primarily by the increase in sales of mobile devices of $79.9 million, notebook
computers of $23.3 million, software of $22.8 million, basic "white-box" systems
of $18.7 million, hard disk drives of $15.3 million and printers of $10.8
million, offset by the decrease in sales of memory products. We experienced a
7.4% increase in unit shipments across our core product lines, which include
mobile devices, for the nine months ended September 30, 2012, as compared to the
same period in 2011. During the nine months ended September 30, 2012, we began
lapping over the effects of the Brightpoint Transaction and our expansion into
the mobile devices market. We experienced a 13.5% increase in average sales
prices across the same core products for the nine months ended September 30,
2012, as compared to the same period in 2011, due to the impact of pricing on
hard disk drives. Revenue derived from our In-country Operations increased
$119.8 million, or 18.9%, to $755.1 million for the nine months ended
September 30, 2012, from $635.3 million for the nine months ended September 30,
2011. Revenue derived from our In-country Operations accounted for 70.7% of our
total revenue for the nine months ended September 30, 2012, as compared to 71.9%
of our total revenue for the nine months ended September 30, 2011. The growth in
revenue from our In-country Operations was mainly driven by the overall increase
in sales in Peru, Chile, Colombia, Panama and Mexico, and, to a lesser extent,
also driven by the increase in sales in El Salvador, Costa Rica and Ecuador.
This growth was driven by the increased sales volume of mobile devices, notebook
computers, software, basic "white-box" systems, printers and hard disk drives.
Revenue derived from our Miami Operations increased $64.3 million, or 25.9% to
$313.0 million for the nine months ended September 30, 2012 (net of $236.8
million of revenue derived from sales to our In-country Operations) from $248.7
million for the nine months ended September 30, 2011 (net of $244.0 million of
revenue derived from sales to our In-country Operations). The growth in revenue
derived from our Miami Operations reflected the increased sales volume of mobile
devices, and, to a lesser extent, hard disk drives, printers, software and basic
"white-box" systems, partially offset by the decreased sale of memory products.
For the nine months ended September 30, 2012, we realized a negative impact on
sales of mobile devices due to the softening demand, increased competition and
excess availability of certain models in the market. This resulted in reduced
gross margins and increased obsolescence expense. Although we continue to
experience the dilutive effect of mobile device sales on our gross margins, we
continue to focus our efforts on broadening our product offerings to counteract
these market conditions.
Gross profit. Gross profit increased $4.9 million, or 5.6%, to $90.8 million for
the nine months ended September 30, 2012, from $85.9 million for the nine months
ended September 30, 2011. The increase was primarily driven by higher sales
volume in our In-country Operations, partially offset by the increase in
inventory obsolescence provision of $4.1 million. Gross profit from our
In-country Operations increased $7.6 million, or 13.9%, to $62.2 million for the
nine months ended September 30, 2012, from $54.6 million for the nine months
ended September 30, 2011. The improvement in gross profit from our In-country
Operations was driven by the increase in sales volume partially offset by the
incremental inventory obsolescence provision. Gross profit from our In-country
Operations accounted for 68.5% of our consolidated gross profit for the nine
months ended September 30, 2012, as compared to 63.5% for the nine months ended
September 30, 2011. Gross profit from our Miami Operations decreased $2.7
million, or 8.7%, to $28.6 million for the nine months ended September 30, 2012,
as compared to $31.3 million for the nine months ended September 30, 2011. The
decline in gross profit from our Miami Operations was driven by the decreased
sales volume of memory products and the incremental inventory obsolescence
provision, offset by the increased sales of mobile devices, hard disk drives,
printers and software. As a
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percentage of revenue, gross margin was 8.5% for the nine months ended
September 30, 2012, as compared to 9.7% for the nine months ended September 30,
2011. The decrease in gross margin of 1.2% was primarily driven by the dilutive
impact of mobile device sales and the loss of 40 basis points due to additional
inventory obsolescence provision recognized during the nine months ended
September 30, 2012, as compared to the same period in 2011.
Operating expenses. Total operating expenses increased $7.9 million, or 11.8% to
$74.6 million for the nine months ended September 30, 2012, as compared to $66.7
million for the nine months ended September 30, 2011. Excluding the effects of
weakening foreign currencies, the increase in operating expenses resulted from
higher salary and payroll-related expenses of $7.0 million, travel and
transportation expenses of $0.7 million, facilities-related expenses of $0.6
million, partially offset by lower marketing and advertising expenses of $0.2
million and professional fees of $0.1 million. The increase in operating
expenses reflects our expansion of product offerings and the need to support the
incremental business. As a percentage of revenue, operating expenses decreased
to 7.0% for the nine months ended September 30, 2012, as compared to 7.5% for
the nine months ended September 30, 2011, due to our improved leverage resulting
from the increase in revenues. As a percentage of total operating expenses,
salary and payroll-related expenses increased to 57.2% of total operating
expenses for the nine months ended September 30, 2012, as compared to 54.4% for
the nine months ended September 30, 2011. Operating expenses from our In-country
Operations increased $8.0 million, or 18.6% to $51.2 million for the nine months
ended September 30, 2012, as compared to $43.2 million for the nine months ended
September 30, 2011. Excluding the effects of weakening foreign currencies, the
increase resulted from higher salary and payroll-related expenses of $4.5
million, of which $0.6 million related to severance costs related to our
operations in Argentina, higher facilities-related expenses of $0.9 million and
travel and transportation expenses of $0.5 million. Operating expenses from our
In-country Operations benefited from the effects of weakening foreign currencies
of $0.8 million primarily in Chile, Mexico and Uruguay. Operating expenses from
our Miami Operations decreased $0.1 million, or 0.5% to $23.4 million for the
nine months ended September 30, 2012, as compared to $23.5 million for the nine
months ended September 30, 2011.
Operating income. Operating income decreased $3.0 million, or 15.9% to
$16.2 million for the nine months ended September 30, 2012, from $19.2 million
for the nine months ended September 30, 2011, due to the higher operating
expenses in our In-country Operations and the lower sales and margins on the
sale of mobile devices in our Miami Operations. Operating income from our
In-country Operations decreased $0.5 million, or 3.7%, to $11.0 million for the
nine months ended September 30, 2012, from $11.4 million for the nine months
ended September 30, 2011. Operating income from our Miami Operations decreased
$2.6 million, or 33.4%, to $5.2 million for the nine months ended September 30,
2012, from $7.9 million for the nine months ended September 30, 2011.
Other expense, net. Other expense, net decreased $7.5 million, or 40.3%, to
$11.0 million for the nine months ended September 30, 2012, from $18.5 million
for the nine months ended September 30, 2011. The decrease in other expense, net
was primarily attributable to the $4.3 million gain recognized related to the
termination of the mutual non-compete agreement with Brightpoint, and the
foreign exchange gains of $0.8 million, primarily in Chile, during the nine
months ended September 30, 2012, as compared to the foreign exchange losses of
$3.7 million, primarily in Chile and Colombia, during the same period in 2011.
Provision for income taxes. Provision for income taxes decreased $0.4 million,
or 20.4%, to $1.3 million for the nine months ended September 30, 2012, from
$1.7 million for the nine months ended September 30, 2011. The decrease was due
to the higher taxable earnings in our In-country Operations, offset by the
additional tax benefit from our Miami Operations.
Net income (loss). Net income was $3.8 million for the nine months ended
September 30, 2012, primarily attributable to the $4.3 million gain recognized
related to the termination of the mutual non-compete agreement with Brightpoint,
as compared to net loss of $1.0 million for the nine months ended September 30,
2011.
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Liquidity and Capital Resources
The IT products distribution business is working-capital intensive.
Historically, we have financed our working capital needs through a combination
of cash generated from operations, trade credit from manufacturers, borrowings
under revolving bank lines of credit (including issuance of letters of credit),
asset-based financing arrangements that we have established in certain Latin
American markets and the issuance of our $120.0 million aggregate principal
amount 13 1/4% Second Priority Senior Secured Notes due December 15, 2014, or
our "13 1/4% Senior Notes."
Our cash and cash equivalents were $24.8 million as of September 30, 2012, as
compared to $25.7 million as of December 31, 2011. Our working capital increased
to $127.5 million as of September 30, 2012, as compared to $121.3 million as of
December 31, 2011, primarily as a result of the decrease in accounts payable of
$14.3 million and the increase in prepaid expenses, notes receivable and other
of $6.4 million, offset by the increase in lines of credit borrowing of $13.8
million. We believe our existing cash and cash equivalents, as well as any cash
expected to be generated from operating activities, will be sufficient to meet
our anticipated cash needs for at least the next 12 months.
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