Ingram Micro 2011 Annual Report Download - page 37

countries in approximately the next three years. We can make no assurances that we will not have disruptions,
delays and/or negative business impacts from forthcoming deployments, or that we will complete system
deployment in our planned time frame.
Gross Margin
The IT distribution industry in which we operate is characterized by narrow gross profit as a percentage of
net sales, or gross margin, and narrow income from operations as a percentage of net sales, or operating margin.
Historically, our margins have been impacted by pressures from price competition and declining average selling
prices, as well as changes in vendor terms and conditions, including, but not limited to, variations in vendor
rebates and incentives, our ability to return inventory to vendors, and time periods qualifying for price protection.
We expect competitive pricing pressures and restrictive vendor terms and conditions to continue in the
foreseeable future. In addition, our margins have been and may continue to be impacted by our inventory levels
which are based on projections of future demand, product availability, product acceptance and marketability, and
market conditions. Having available inventory during periods of product shortages enables us to better meet
customer demands and may provide potential for favorable pricing conditions; however, a sudden decline in
demand and/or rapid technological changes in products could cause us to have a charge for excess and/or
obsolete inventory. We continue to refine our pricing strategies, inventory management processes and vendor
program processes to respond to market conditions. In addition, we continuously monitor and work to change, as
appropriate, certain terms, conditions and credit offered to our customers to reflect those being imposed by our
vendors, recover costs and/or facilitate sales opportunities. We have also strived to improve our profitability
through diversification of product offerings, including our presence in specialty product and service categories,
such as AIDC/POS, enterprise computing, cloud computing, consumer electronics and fee-for-service logistics
offerings. While these dynamics have kept our overall gross margin relatively stable, near or above 5.4% on an
annual basis since 2003, shifts in mix of business, the soft demand in consumer markets, particularly in EMEA
and parts of Asia-Pacific, and the business disruptions from the system-implementation complications in
Australia drove our gross margin below 5.3% in 2011.
Selling, General and Administrative Expenses or SG&A Expenses
Another key area for our overall profitability management is the monitoring and control of our level of
SG&A expenses. As the various factors discussed above have impacted our levels of sales and gross margins
over the past several years, we have instituted a number of cost reduction and profit enhancement programs and a
number of other reorganization actions across each of our regions to respond to the downturn in the economy and
to further enhance productivity and profitability. As the economic downturn began in 2008, and impacted our
levels of sales as discussed previously herein, our SG&A expenses increased to 4.41% and 4.53% of consolidated
net sales in 2008 and 2009, respectively, from 4.18% or less in the years prior. To counter this, we implemented
in 2008 and 2009 a number of additional expense-reduction programs with the most significant impacts in
North America and EMEA. These actions included the rationalization and re-engineering of certain roles and
processes, resulting in the reduction of headcount and consolidation of certain facilities (see Note 3 to our
consolidated financial statements). These efforts to reduce costs, as well as continued cost control measures since
the completion of these actions, allowed us to leverage our higher volume of net sales in 2010 and 2011, resulting
in the decline of SG&A expenses as a percentage of sales to 4.07% and 3.98%, respectively, our lowest levels for
this metric in a decade. Our SG&A expenses have also been impacted to a lesser degree by numerous
acquisitions to add to our traditional distribution business over the past several years. While these acquisitions
increased our revenues and market share, they also represent opportunities to streamline and realize operational
synergies from the combined operations. We have also made acquisitions to increase our presence in specialty
product offerings, such as AIDC/POS and enterprise computing, and have invested in organic growth of other
adjacent lines, such as our fee-for-service logistics business. While these lines of business generally carry higher
gross margins, as discussed above, they also generally carry a higher level of SG&A expenses. As a result, our
SG&A expenses could increase as we seek to invest more in these lines of business.
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