IM: Ingram Micro’s Charge is a True One-Timer

By William Trent, CFA of Stock Market Beat

We have been very critical of companies taking charges and asking investors to ignore them. However, the charge Small Cap Watch List and Mid Cap Watch List member Ingram Micro announced in an 8K Filing this morning is a good example of when investors should look past the charge.

In its recently-filed report on Form 10-K, Ingram Micro Inc. (the “Company”) stated its expectation that it would be required to record a charge for commercial taxes on software imports for the period January 2002 to December 2005 if proposed tax legislation in Brazil was enacted in the form in which it was submitted to the Brazilian president for signature on February 9, 2007. On February 28, 2007, the subject legislation was enacted and became law. As a consequence, the Company will record a charge to cost of sales in the first quarter of 2007 of approximately $33.3 million, consisting of $6.0 million for commercial taxes assessed for the period January 2002 to September 2002, and $27.3 million for such taxes that could be assessed for the period October 2002 to December 2005. All sums expressed above are based upon the exchange rate as of February 28, 2007 of 2.118 Brazilian Reais to the U.S. Dollar. The subject legislation provides that such taxes are not assessable on software imports for the period after January 1, 2006. The Company does not anticipate recognizing any income tax benefits for this charge, which will negatively affect the effective tax rate for the first quarter of 2007. An effective tax rate of 28% is estimated for subsequent quarters of 2007.Based on this event, the Company is adjusting its net income guidance for the first quarter, which ends March 31, 2007, to reflect the charge of $33.3 million or $0.19 per diluted share. Net income including this charge now is expected to range from $30 million to $37 million, or $0.17 to $0.21 per diluted share. First-quarter revenue guidance is not affected by this charge.

There are a couple of things we like about the way Ingram handled this.

1. Even though the law had not yet been passed, the company took into account its likelihood and explained it – including its impact on GAAP EPS – in the 10K.
2. The company also is adjusting its own guidance to reflect the GAAP (Generally Accepted Accounting Principles) earnings rather than a pro-forma number. Analysts and investors should (and will) ignore the charge – the company doesn’t have to push them or help those who cajole investors into ignoring what we call “recurring nonrecurring charges.”

The charge Ingram is taking shouldn’t be ignored entirely – it does affect the company’s financial position due to the higher tax rate, which affects future earnings as well as those past. Investors can estimate the impact by spreading the charges over the years they represent – approximately a nickel in each of the last five years.

The future impact for Ingram is fairly modest and there is no read-through to overall technology earnings to be gleaned from this.

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