Ingram Micro 2000 Annual Report Download - page 30

Gross margin decreased to 4.8% in 1999 from 6.3% in 1998.The significant decline in the margin was primarily due to
reduced vendor rebates and incentives and intense price competition in the U.S.and in the larger countries in Europe.The decline
was exacerbated by excess capacity in the information technology products and services distribution industry. In addition,during
1999, the Company recorded substantially higher expenses totaling approximately $94.8 million related to excess and obsolete
inventory as compared to $26.1 million for 1998.The higher excess and obsolete inventory provisions primarily resulted from the
rapid changes experienced in the technology marketplace and the significant changes in vendor terms and conditions during 1999.
A l s o , in the fourth quarter of 1999, the Company recorded additional expenses to cost of sales totaling approx i m at e ly $53.6 million
related to estimated losses from vendor incentive and subsidy programs.The estimated losses on vendor incentive and subsidy pro-
grams primarily originated from recent dramatic changes in the terms and conditions for reimbursements of customer rebates and
competitive price programs by the Company’s major personal computer supplier s.The majority of these higher provisions related
to inventory and vendor programs in the U.S. region with some in the European region.In response to these issues, the Company
has implemented changes to and continually refines its pricing strategies,terms and conditions offered to its customers,inventory
management processes, and administration of vendor subsidized programs.
Total SG&A expenses increased 23.4% to $1.1 billion in 1999 from $0.9 billion in 1998, but decreased as a percentage of
net sales to 4.0% in 1999 from 4.1% in 1998.The increase in SG&A spending was attributable in part to the acquisition of ERL
in January 1999, and the full-year impact of the acquisition of Macrotron in July 1998. In addition, during fiscal year 1999, the
Company recorded significantly higher bad debt expense of approximately $75.8 million or 0.27% as a percentage of net sales as
compared to fiscal year 1998 expense of approximately $32.5 million or 0.15% as a percentage of net sales.The larger bad debt
provision was primarily the result of negotiations with several large customers principally in the area of unauthorized product
returns. SG&A also increased to support the expansion of the Company’s business. Expenses related to expansion consisted of
incremental personnel and support costs, lease expenses related to new operating facilities, and expenses associated with the
development and maintenance of information systems.The overall decrease in SG&A expenses as a percentage of sales is attribut-
able to economies of scale from greater sales volume and continued cost-control measures, but was moderated by the higher bad
debt expenses.
In February 1999, the Company initiated a plan, primarily in the U.S., but also in Europe, to streamline operations and
reorganize resources to increase flexibility and service and maximize cost savings and operational efficiencies.This reorganization
plan included several organizational and structural changes, including the closing of the Company’s California-based consolidation
center and certain other redundant locations; realignment of the Company’s sales force and the creation of a product management
organization that integrates purchasing, vendor services, and product marketing functions;as well as a realignment of administrative
functions and processes throughout the U.S.organization. In addition, during the fourth quarter of 1999,further organizational and
strategic changes were implemented in the Company’s assembly and custom-configuration operations,including the selection of an
outsource partner to produce unbranded systems and the reallocation of resources to support the Company’s custom-configuration
services capabilities.
In connection with these reorganization efforts,the Company recorded a charge of $20.3 million for the fiscal year ended
January 1, 2000.The reorganization charge included $12.3 million in employee termination benefits for approximately 597
employees, $6.4 million for the write-off of software used in the production of unbranded systems, $1.3 million for closing and
consolidation of redundant facilities relating primarily to excess lease costs net of estimated sublease income, and $0.3 million for
other costs associated with the reorganization.These initiatives were substantially complete as of January 1, 2000.
Income from operat i o n s , excluding re o r g a n i z ation costs, d e c reased as a percentage of net sales to 0.8% in 1999 from 2.2%
in 1998.The decrease in income from operat i o n s , excluding re o r g a n i z ation costs, as a percentage of net sales is pri m a ri ly due to
the significant decrease in gross profit as a percentage of net sales as described above. U. S . income from operat i o n s , excluding
re o r g a n i z a tion costs, d e c reased as a percentage of net sales to 0.9% in 1999 from 2.8% in 1998. E u ropean income from operat i o n s ,
excluding re o r g a n i z ation costs, d e c reased as a percentage of net sales to 0.3% in 1999 from 1.1% in 1998. For Other Intern at i o n a l ,
income from operat i o n s , excluding re o r g a n i z ation costs, d e c reased as a percentage of net sales to 1.0% in 1999 from 1.4% in 1998.
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INGRAM MICRO