Ingram Micro 2006 Annual Report Download - page 50

impact in net sales of approximately 1%. In addition, our revenue growth in Europe in 2006 was tempered by
complications associated with the implementation of a new warehouse management system in Germany. The
implementation issues have been largely addressed as of December 30, 2006, but we expect our revenue growth in
the region to be moderately impacted during the first half of 2007 as we focus on regaining market share,
particularly with those customers who may have been inconvenienced and moved to competitors during the
transition. Net sales from our Asia-Pacific operations were $5.5 billion, $4.8 billion and $2.7 billion in 2006, 2005
and 2004, respectively. The year-over-year growth in Asia-Pacific net sales of 14.3% and 76.7% in 2006 and 2005,
respectively, primarily reflects the strong demand for IT products and services in the region in 2006, with significant
growth in China, Australia and India while 2005 reflects a full year of revenue resulting from our acquisition of Tech
Pacific compared to approximately one and one-half months of revenue in 2004. Net sales from our Latin American
operations were $1.5 billion, $1.3 billion and $1.1 billion in 2006, 2005 and 2004, respectively. The year-over-year
growth in Latin America net sales of 11.8% and 19.9% in 2006 and 2005, respectively, primarily reflects the strong
demand for IT products and services in the region and the strengthening of currencies in certain Latin American
markets.
Our gross margin was 5.4% in 2006, slightly down from the gross margin of 5.5% in both 2005 and 2004. The
slight decrease reflects a continuing competitive pricing environment in certain markets in which we operate, and
the impact from the issues with the implementation of our German warehouse management system, partially offset
by the results of our ongoing product diversification strategy. We continuously evaluate and modify our pricing
policies and certain terms and conditions offered to our customers to reflect those being imposed by our vendors and
general market conditions. As we continue to evaluate our existing pricing policies and make future changes, if any,
we may experience moderated or negative sales growth in the near term. In addition, increased competition and any
retractions or softness in economies throughout the world may hinder our ability to maintain and/or improve gross
margins from the levels realized in recent periods.
Total SG&A expenses were $1.3 billion, $1.2 billion and $1.1 billion in 2006, 2005 and 2004, respectively. In
2006, SG&A increased by $68.1 million compared to 2005, primarily due to the $28.9 million in stock-based
compensation expense resulting from the adoption of FAS 123R during the year, approximately $10.3 million in
incremental technology enhancement costs primarily related to the outsourcing of certain of our application
development functions, the addition of AVAD, the implementation of a new warehouse management system in
Germany and increased expenses required to support the growth of our business in 2006. These factors were
partially offset by the lack of major-program and integration costs in 2006 compared to implementation costs of
$16.9 million related to our outsourcing and optimization plan in North America in 2005 and acquisition-related
costs of $6.0 million associated with the integration of Tech Pacific in 2005, as well as savings associated with the
implementation of these programs upon their completion, and continued cost control measures. In 2005, SG&A
increased by $74.9 million compared to 2004, primarily due to the additions of Tech Pacific and AVAD,
implementation costs associated with our outsourcing and optimization plan in North America of $16.9 million,
costs associated with the integration of Tech Pacific of $6.0 million and increased expenses required to support the
growth of our business, partially offset by our continued cost control measures and the savings realized from the
North American outsourcing and optimization plan. As a percentage of net sales, total SG&A expenses decreased to
4.0% in 2006 compared to 4.1% in 2005 and 4.4% in 2004, primarily due to the economies of scale from the higher
level of revenue, savings associated with the implementation of the programs discussed above, other actions we
have taken and the positive impact of continued cost control measures. These factors were partially offset in 2006 by
the addition of stock-based compensation expense resulting from the adoption of FAS 123R and costs related to the
incremental technology enhancements noted above which were 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.
As previously discussed, in 2006 and 2004, the net credit adjustments to reorganization costs were $1.7 million
and $2.9 million, respectively, primarily related to favorable resolution of obligations associated with prior actions.
In 2005, reorganization costs were $16.3 million related to our outsourcing and optimization plan in North America
and integration of Tech Pacific (see Note 3 to our consolidated financial statements). We may pursue other business
process or organizational changes in our business, which may result in additional charges related to consolidation of
facilities, restructuring of business functions and workforce reductions in the future.
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