Ingram Micro 2006 Annual Report Download - page 45

approximately 5.4% to 5.5% on an annual basis, has remained relatively flat from 2002 through 2006. However, we
expect that restrictive vendor terms and conditions and competitive pricing pressures will continue and if they
worsen in the foreseeable future, may hinder our ability to maintain and/or improve our gross margins from the
levels realized in recent years.
Selling General and Administrative Expenses or SG&A Expenses
With the significant decline in our net sales during 2001 to 2003, we experienced a significant increase in our
SG&A expenses as a percentage of net sales. As a result, we initiated a comprehensive profit enhancement program
in September 2002 and other detailed actions across all our regions to streamline operations, improve services and
generate operating income improvements. In April 2005, we announced an outsourcing and optimization plan to
improve operating efficiencies within the North American region and, as part of the plan, we have also restructured
and consolidated other job functions within the North American region. We completed the integration of operations
of our pre-existing Asia-Pacific business with Tech Pacific in 2005. In 2006, we outsourced IT application
development functions to enhance capabilities while maintaining effective cost control in this area. As a result of
these actions and the increases in net sales, we reduced our SG&A expenses to 4.4%, 4.1% and 4.0% of net sales in
2004, 2005 and 2006, respectively. Our SG&A expenses in 2006 included charges related to stock-based
compensation expense resulting from our adoption of Statement of Financial Accounting Standards No. 123
(revised 2004) “Share-Based Payment” (“FAS 123R”). These charges represent approximately 0.1% of net sales.
We continue to pursue and implement business process improvements and organizational changes to create
sustained cost reductions without sacrificing customer service over the long-term. Implementation of additional
actions, including integration of acquisitions, in the future, if any, could result in additional costs as well as
additional operating income improvements.
Our Reorganization and Profit Enhancement Programs
In June 2001, we initiated a broad-based reorganization plan to streamline operations and reorganize resources
to increase flexibility, improve service and generate cost savings and operational efficiencies. This program resulted
in restructuring several functions, consolidation of facilities, and reductions of workforce worldwide in each of the
quarters through June 2002. Total reorganization costs associated with these actions were $8.8 million in 2002.
In September 2002, we announced a comprehensive profit enhancement program, which was designed to
improve operating income through enhancements in gross margin and reduction of SG&A expense. Key com-
ponents of this initiative included enhancement and/or rationalization of vendor and customer programs, optimi-
zation of facilities and systems, outsourcing of certain IT infrastructure functions, geographic consolidations and
administrative restructuring. For 2003 and 2002, we incurred $31.0 million and $107.9 million, respectively, of
costs (or $138.9 million from inception of the program through the end of fiscal year 2003) related to this profit
enhancement program, which was within our original announced estimate of $140 million. These costs consisted
primarily of reorganization costs of $13.6 million and $62.4 million in 2003 and 2002, respectively, and other
program implementation costs, or other major-program costs, of $17.4 million and $43.9 million, charged to SG&A
expenses in 2003 and 2002, respectively, and $1.6 million charged to cost of sales in 2002. We realized significant
benefits from the reduction in certain SG&A expenses and from gross margin improvements as a result of our
comprehensive profit enhancement program.
During 2003, we incurred incremental reorganization costs of $8.0 million and incremental other major-
program costs of $6.4 million ($6.0 million charged to SG&A expenses and $0.4 million charged to cost of sales),
which were not part of the original scope of the profit enhancement program announced in September 2002. These
costs primarily related to the further consolidation of our operations in the Nordic region of Europe and a loss on the
sale of a non-core German semiconductor equipment distribution business. These actions resulted in additional
operating income improvements primarily in the European region.
During 2005, we incurred integration expenses of $12.7 million related to our acquisition of Tech Pacific,
comprised of $6.7 million of reorganization costs primarily for employee termination benefits, facility exit costs
and other contract termination costs for associates and facilities of Ingram Micro made redundant by the acquisition
as well as $6.0 million of other costs charged to SG&A primarily for consulting, retention and other expenses
21