Ingram Micro 2006 Annual Report Download - page 44

Accounting Standards No. 123 (revised 2004) “Share-Based Payment.” Fiscal 2003 includes a charge of
$20,000 related to the bankruptcy of Micro Warehouse in the United States, one of our former customers, of
which $4,250 was subsequently recovered in 2006 from the bankruptcy proceedings.
(2) Includes items noted in footnote (1) above as well as a loss of $8,413 on the redemption of senior subordinated
notes in 2005, a gain on forward currency hedge of $23,120 in 2004 related to our Australian dollar
denominated purchase of Tech Pacific and a gain on sale of available-for-sale securities of $6,535 in 2002.
(3) Includes items noted in footnotes (1) and (2) above, as well as the reversal of deferred tax liabilities of $801,
$2,385, $41,078 and $70,461 in 2006, 2005, 2004 and 2003, respectively, related to the gains on sale of
available-for-sale securities (see Note 8 to our consolidated financial statements).
(4) Includes items noted in footnotes (1), (2), and (3) above, as well as the cumulative effect of adoption of a new
accounting standard, net of income taxes, of $280,861 in 2002 relating to the adoption of Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
(5) Includes convertible debentures, senior subordinated notes, revolving credit facilities and other long-term debt
including current maturities, but excludes off-balance sheet debt of $68,505, $60,000 and $75,000 at the end of
fiscal years 2006, 2003 and 2002, respectively, which amounts represent the undivided interests in transferred
accounts receivable sold to and held by third parties as of the respective balance sheet dates.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of Our Business
Sales
We are the largest distributor of IT products and services worldwide based on net sales. We offer a broad range
of IT products and services and help generate demand and create efficiencies for our customers and suppliers around
the world. Through fiscal year 2000, we generated positive annual sales growth from expansion of our existing
operations, the integration of numerous acquisitions worldwide, the addition of new product categories and
suppliers, the addition of new customers, increased sales to our existing customer base, and growth in the IT
products and services distribution industry in general. Beginning in the last quarter of 2000 and continuing through
most of 2003, we witnessed the reduction of our annual sales as a result of the general decline in demand for IT
products and services throughout the world, the decision of certain vendors to pursue a direct sales model, and our
exit from or downsizing of certain markets in Europe and Latin America. As a result, our net sales decreased to
$22.5 billion and $22.6 billion in 2002 and 2003, respectively, from $30.7 billion in 2000. Starting in 2004, our net
sales began to recover, reaching $25.5 billion in 2004, $28.8 billion in 2005 and a record $31.4 billion in 2006, or
approximately 13%, 13% and 9% growth for the consecutive years, respectively. These increases primarily reflect
the improving demand environment for IT products and services in most economies worldwide as well as the
additional revenue arising from the acquisitions of Nimax in July 2004, Techpac Holdings Limited or Tech Pacific
in November 2004 and AVAD in July 2005. Competitive pricing pressures, the expansion of a direct sales strategy
by one or more of our major vendors or a decline in the overall demand for IT products and services could, however,
adversely affect our revenues and profitability over the near term.
Gross Margin
The IT distribution industry in which we operate is characterized by narrow gross profit as a percentage of net
sales (“gross margin”) and narrow income from operations as a percentage of net sales (“operating margin”).
Historically, our margins have been negatively impacted by extensive price competition, as well as changes in
vendor terms and conditions, including, but not limited to, significant reductions in vendor rebates and incentives,
tighter restrictions on our ability to return inventory to vendors and reduced time periods qualifying for price
protection. To mitigate these factors, we have implemented, and continue to refine, changes to our pricing
strategies, inventory management processes and vendor program processes. We continuously monitor and change,
as appropriate, certain of the terms and conditions offered to our customers to reflect those being set by our vendors.
In addition, we have pursued expansion into adjacent product markets such as AIDC/POS and consumer
electronics, which generally have higher gross margins. As a result, our gross margin, which ranges from
20