Ingram Micro 2008 Annual Report Download - page 35

(4) Includes the after-tax impact of items noted in footnotes (1) through (3) above, as well as the reversal of
deferred tax liabilities of $801, $2,385 and $41,078 in 2006, 2005 and 2004, respectively, related to the gains on
sale of available-for-sale securities.
(5) Includes trade accounts receivable-backed financing and revolving accounts receivable factoring facilities,
senior unsecured term loan, revolving credit facilities and other long-term debt including current maturities, but
excludes off-balance sheet debt of $68,505 at the end of fiscal year 2006, which amounts represent the
undivided interests in transferred accounts receivable sold to and held by third parties.
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. Our results of operations have been directly affected by the conditions in the economy in general. Our net
sales grew from $25.5 billion in 2004 to a record high of $35.0 billion in 2007, with annual sales growth ranging
from nine percent to thirteen percent. These increases primarily reflected the improving demand environment for IT
products and services in most economies worldwide as well as the additional revenue arising from the integration of
numerous acquisitions worldwide, such as Techpac Holdings Limited, or Tech Pacific, in 2004, AVAD in 2005,
DBL Distributing Inc., or DBL, in 2007 and a number of small but strategic acquisitions of businesses in automatic
identification and data capture/point-of-sale, or AIDC/POS, and network security. Also contributing to the growth
trend over this period were the addition of new product categories and suppliers, the addition and expansion of
adjacent product lines and services, the addition of new customers and increased sales to our existing customer base.
In 2008, our net sales declined 2.0% to $34.4 billion despite the relative year-over-year strength of foreign
currencies, which provided approximately two percentage-points of growth. The decline reflects our efforts to exit
or turn away certain unprofitable business relationships during the year, as well as the severe downturn in the
macroeconomic environment, which began in early 2008 in Europe and North America but began to adversely
impact Asia Pacific and Latin America as the year progressed. This economic downturn is expected to continue
through the balance of 2009. We expect these conditions will continue to negatively affect our revenues and
profitability over the near term but the severity of the impacts could be exacerbated by worsening economic
conditions over an extended period in the major markets in which we operate, more intense competitive pricing
pressures, and/or the expansion of a direct sales strategy by one or more of our major vendors.
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 invendor
terms and conditions, including, but not limited to, reductions in vendor rebates and incentives, tighter restrictions on
our ability to return inventory to vendors and reduced time periods qualifying for vendor 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 and related products and
accessories, which generally have higher gross margins, and into certain service categories, including our Ingram
Micro Logistics fee-for-service business. While these dynamics have kept our overall gross margin relatively stable,
near or above 5.40% on an annual basis since 2003, the shift in overall mix of business toward our more profitable
adjacent businesses and growth in our fee-for-service business, coupled with efforts to exit or turn away certain
unprofitable business relationships during 2008, helped to yield our highest gross margin level since 1998. We expect
that restrictive vendor terms and conditions and competitive pricing pressures will continue and may possibly worsen
in the foreseeable future if the current economic downturn continues, which will hinder our ability to maintain and/or
improve our gross margins or overall profitability from the levels realized in recent years.
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