Ingram Micro 2008 Annual Report Download - page 43

compensation plans which are payable in performance-based restricted stock units. In 2007, SG&A expenses as a
percentage of net sales increased compared to 2006, primarily due to the charge of $15.0 million, or 0.04% of net
sales in 2007, to reserve for estimated losses related to the SEC matter, the increase in stock-based compensation by
$9.0 million year-over-year, the residual costs associated with the integration and transition of a warehouse
management system upgrade in Germany during the first half of 2007, the addition of operating expenses primarily
from the DBL acquisition, which generally operates with higher operating expenses and gross profit as a percentage
of net sales compared to the rest of our business, and investments in other strategic initiatives. These factors were
partially offset by a gain of $2.9 million from the sale of our Asian semiconductor business and continued cost
control measures throughout our business. As most economists expect the current economic downturn to last
through most of 2009 and potentially beyond, we continue to make adjustments to improve profitability and
position us for the future. We are taking additional actions in 2009 to ensure our expenses remain aligned with
declines in sales volume, including, but not limited to, further restructuring actions in Europe and North America.
These actions are expected to generate savings of approximately $100 million to $120 million annually, reaching
the full run-rate by the time we exit 2009. Total restructuring and other related costs associated with these actions
are expected to range from approximately $45 million to $65 million. We may also pursue further business process
and/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; however, any such actions may
take time to implement and savings generated may not match the rate of revenue decline in any particular period.
As discussed in our critical accounting policies and estimates, in the fourth quarter of 2008, we recorded a
charge of $742.6 million, or 2.16% of consolidated net sales, for the full impairment of our goodwill, which
consisted of $243.2 million in North America; $24.1 million in EMEA; and $475.3 million in Asia-Pacific (also, see
Notes 2 and 4 to our consolidated financial statements).
In 2008, we incurred a net charge for reorganization costs of $17.0 million, or approximately 0.05% of sales,
which consisted of (a) $14.6 million of employee termination benefits for workforce reductions associated with the
restructuring of the regional headquarters in EMEA and targeted reduction of administrative and back-office
positions in the North America and Asia-Pacific regions, (b) $2.5 million in facility consolidations in EMEA and
(c) $0.4 million for contract terminations for equipment leases in North America, partially offset by (d) $0.5 million
for the reversal of certain excess lease obligation reserves from reorganization actions recorded in earlier years. In
2007, the credit to reorganization costs of $1.1 million primarily related to actions taken in prior years for which we
incurred lower than expected costs associated with restructured facilities in North America.
Our negative operating margin was 0.97% in 2008 compared to a positive margin of 1.27% and 1.35% in 2007
and 2006, respectively. The 2008 negative operating margin includes the impact of 2.16% of sales from the goodwill
impairment charge discussed above. Besides the goodwill impairment, the significant decrease in operating margin
in 2008 compared to 2007 reflects the decline in sales and the related reduction in volume-based rebates, higher
SG&A expenses and costs related to strategic initiatives and reorganization and expense-reduction efforts and the
more competitive pricing environment, partially offset by gross margin improvement from mix of business and
pricing discipline throughout the business and the partial reserve release related to the Brazilian commercial taxes
positively impacting gross margin by approximately two-basis points, as discussed above. The decrease in
operating margin in 2007 compared to 2006 was driven primarily by the Brazilian commercial tax charge and
the charge for the previously discussed SEC matter, partially offset by a gain on the sale of our semiconductor
business in Asia-Pacific, which collectively had a net negative impact on operating margin of 0.12% in 2007. Our
North American segment recorded a negative operating margin of 0.35% in 2008 compared to operating margin of
1.58% and 1.66% in 2007 and 2006, respectively. The significant decrease in operating margin for North America in
2008 compared to 2007 and 2006 primarily reflects the charge for the impairment of goodwill of 1.71% of North
America net sales, as well as competitive pricing pressures in our distribution business resulting from the soft
economic environment, the investments in strategic initiatives and infrastructure and the expense-reduction
program costs. The prior year also included the previously discussed charge related to the SEC matter, which
was 0.11% of North American sales in 2007. Our EMEA operating margin decreased to 0.36% in 2008 compared to
1.22% and 1.18% in 2007 and 2006, respectively. The significant decrease in operating margin for EMEA in 2008
compared to 2007 was primarily attributable to the sales decline and the related reduction in volume-based rebates,
competitive pricing, reorganization costs, and operating expenses that are not yet aligned with the current sales
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