Ingram Micro 1999 Annual Report Download - page 21

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Ingram Micro
Annual Report
In evaluating the business of Ingram Micro, readers should carefully consider the important factors discussed in Exhibit 99.01
to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 and “—Cautionary Statements for the
Purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.”
Overview
Ingram Micro is the leading distributor of information technology products and services worldwide.The Company’s net sales
have grown to $28.1 billion in 1999 from $8.6 billion in 1995.The growth reflects substantial expansion of the Company’s existing
operations, resulting from the integration of numerous acquisitions worldwide, growth in the information technology products and
services distribution industry in general, the addition of new customers, and increased sales to the existing customer base, as well
as the addition of new product categories and suppliers.
The Company’s gross profit as a percentage of net sales (“gross margin”) has declined to 4.8% in 1999 from 7.0% in 1995.
The information technology products and services distribution industry in which the Company operates is characterized by
narrow gross margins and narrow income from operations as a percentage of net sales (“operating margin”) that have declined
industry-wide in recent years. In the past, the margin decline has primarily been due to intense price competition; however, more
recently, overall changes in vendor terms and conditions, including, but not limited to, significant reductions in vendor rebates and
incentives, tighter restrictions on the Company’s ability to return inventory to vendors, and reduced time periods qualifying for
price protection, have exacerbated the decline.The Company expects these competitive pricing pressures and the restrictive vendor
terms and conditions to continue in the foreseeable future.The Company has continually implemented and refined changes to its
pricing strategies and inventory management processes to address the intense price competition. In addition, in response to the
changes in vendor terms and conditions, the Company is implementing specific changes to its inventory management processes,
administration of vendor subsidized programs and certain of the terms and conditions offered to its customers.
To partially offset the decline in gross margins, the Company has continually instituted operational and expense controls that
have reduced selling, general, and administrative expenses as a percentage of net sales (“SG&A”) to 4.0% in 1999 from 4.9% in
1995, reflecting the benefit of greater economies of scale. However, the reduction in SG&A expenses was not large enough to
offset the decline in gross margins and as a result, operating margins, excluding reorganization costs, declined to 0.8% in 1999
from 2.2% in 1995. If any future reductions in gross margins were to occur, there can be no assurance that the Company will be
able to reduce SG&A commensurately.
In December 1998, the Company purchased 990,800 shares of common stock of SOFTBANK Corp. (“Softbank”), Japan’s
largest distributor of software, peripherals and networking products, for approximately $50.3 million. During December 1999,
the Company sold 346,800 shares or approximately 35% of its original investment in Softbank common stock for approximately
$230.1 million, resulting in a pre-tax gain of approximately $201.3 million, net of related expenses.The Company used the
proceeds from this sale to repay existing indebtedness. In January 2000, the Company sold an additional 148,600 shares or
approximately 15% of its original holdings in Softbank common stock for approximately $118.9 million, resulting in a pre-tax
gain in the first quarter of fiscal year 2000 of approximately $111.4 million.
The information technology products and services distribution business is capital-intensive.The Company’s business requires
significant levels of capital to finance accounts receivable and product inventory that are not financed by trade creditors. The
Company has relied heavily on debt financing for its increasing working capital needs resulting from organic growth and acquisi-
tions. In March 2000, the Company completed a new 5-year accounts receivable securitization program in the U.S., which provides
for the issuance of up to $700 million in commercial paper.This new program adds to the Company’s existing accounts receivable
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of financial condition and results of operations