UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

Commission File Number: 1-12203

Ingram Micro Inc.

(Exact name of Registrant as Specified in its Charter)

 

1600 E. ST. ANDREW PLACE, SANTA ANA, CALIFORNIA 92705

(Address, including Zip Code, of Principal Executive Offices)

(714) 566-1000

(Registrant’s telephone number, including area code)

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.101 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, at July 4, 2009, was $2,731,700,000 based on the closing sale price on such date of $17.56 per share.

 

The registrant had 164,678,635 shares of Class A Common Stock, par value $0.01 per share, outstanding at January 30, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held June 9, 2010 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

The following discussion includes forward-looking statements, including but not limited to, management’s expectations of competition; revenues, margin, expenses and other operating results or ratios; operating efficiencies; economic conditions; cost savings; capital expenditures; liquidity; capital requirements; acquisitions and integration costs; operating models; exchange rate fluctuations and rates of return. In evaluating our business, readers should carefully consider the important factors discussed under “Risk Factors.” We disclaim any duty to update any forward-looking statements.

 

Ingram Micro Inc., a Fortune 100 company, is the largest global information technology (“IT”) wholesale distributor by net sales, providing sales, marketing, and logistics services for the IT industry worldwide. Ingram Micro provides a vital link in the IT supply chain by generating demand and developing markets for our technology partners. We remain focused on continuing to build our IT distribution business with expansion in segments such as enterprise computing. We also are developing an increasing presence in adjacent technology categories, such as automatic identification and data capture (“AIDC”); point-of-sale (“POS”); managed, professional and warranty maintenance services; and consumer electronics (“CE”) to broaden our product lines and market presence. We create value in the market by extending the reach of our technology partners, capturing market share for resellers and suppliers, creating innovative solutions comprised of both technology products and services, offering credit, and providing efficient fulfillment of IT products and services. With a broad range of products and an array of services, we create operating efficiencies for our partners around the world.

 

We began business in 1979, operating as Micro D Inc., a California corporation. Through a series of acquisitions, mergers and organic growth, Ingram Micro’s global footprint and product breadth have expanded and strengthened in North America; Europe, Middle East and Africa (“EMEA”); Asia Pacific; and Latin America. During 2009, we acquired Computacenter Distribution (“CCD”), a UK-based enterprise distributor, to advance our capabilities in infrastructure solutions in EMEA. We also acquired Value Added Distributors Limited (“VAD”), a small New Zealand enterprise distribution business. We invested further in the AIDC/POS market with the acquisition of the Vantex Group of companies, Asia Pacific’s leading distributor of AIDC/POS products.

 

The worldwide information technology products and services distribution industry generally consists of two types of business: traditional distribution and fee-based supply chain services. Within the traditional distribution model, the distributor buys, holds title to, and sells products and/or services to resellers who, in turn, typically sell directly to end-users, or other resellers. While some vendors have elected to sell directly to resellers or end-users for particular customer and product segments, we believe that vendors continue to embrace traditional distributors that have a global presence and proven ability to manage multiple products and resellers worldwide, provide access to fragmented markets, and deliver products to market in an efficient manner. Resellers in the traditional distribution model are able to build efficiencies and reduce costs by depending on distributors for a number of services, including product availability, marketing, credit, technical support, and inventory management, which includes direct shipment to end-users and, in some cases, provides end-users with distributors’ inventory availability. During periods of constrained credit, distributors with strong balance sheets and ample credit capacity are especially valued by suppliers. Those distributors that work with resellers to offer enhanced value-added solutions and services customized to the needs of their specific end-user customer base are better able to succeed in this environment. As the world’s leading broad-based distributor, we also offer to both suppliers and resellers fee-based supply chain services, encompassing the end-to-end functions of the supply chain. Our fee-based service offerings to suppliers include logistics, fulfillment, and marketing services, as well as third-party product-related services. Likewise, we offer fee-based services to retailers and Internet resellers seeking fulfillment services, inventory management,

reverse logistics, and other supply chain services. We will continue to evolve our business model to meet the changing requirements of our customers (both suppliers and resellers).

 

Despite the global economic downturn that has dampened demand in each of the company’s regions, we believe that the current technology industry generally favors large, financially-sound distributors that have broad product portfolios, economies of scale, strong business partner relationships and wide geographic reach. Two-tier distribution continues to be an integral element of the go-to-market strategy for IT suppliers. Distributors play a vital role in an environment in which suppliers have been compelled to streamline processes and eliminate costs and will play an equally important role if and when the economy recovers. We deliver value to our partners by making reseller customers more valuable to their end-user customers and making suppliers more profitable. Our strengths position us well to meet the needs of our reseller and vendor partners worldwide in the current environment and create a firm foundation for future growth if and when the economy recovers. Our solid financial position helps us to better manage the challenges presented by economic instability, as well as provide operating flexibility and the resources for strategic investment. We have identified several catalysts for growth in our IT distribution business and in new markets. We believe that the following strengths track to those catalysts and enable us to further enhance our leadership position in the IT distribution industry and in adjacent technology product and service categories:

 

 

 

Ingram Micro Services Division (North America) continues to build its managed and professional services delivery engine, branded “Seismic.” Managed services utilize application and technology tools to more effectively and efficiently manage an end-user’s IT environment while affording the solution provider significant remote capabilities, service efficiencies and corresponding improvement in profitability. New offerings include an outsourced global monitoring and management service, enterprise-class business continuity services and an intelligent dashboard tracking end-user data to provide reseller partners with product and service sale leads. These services tend to be infrastructure- and labor-intensive and would burden service providers with investments in data centers and large server installations were they to deploy the services independently.

 

We leverage our extensive database of end-user records using sophisticated business intelligence and data analytics tools to reveal IT refresh and growth opportunities, chart unique sales trends and provide resellers with customized sales leads. Our business intelligence offering taps our rich database of transactional information to help suppliers achieve higher return on marketing campaigns through more effective targeting and messaging.

 

Ingram Micro Logistics provides end-to-end supply-chain services to manufacturers, software publishers and retailers on a fee-for-service basis. We optimize our partners’ supply chains with scalable logistics services that reduce costs, create efficiencies and improve execution. Ingram Micro Logistics enhances service with high levels of order and inventory accuracy, on-time shipping, and world-class logistics centers. We specialize in multi-channel solutions that require flexible scale and a superior end-user experience. Services include supply chain analysis, order management, product launches and replenishment, warehousing, turnkey manufacturing and assembly, reconfiguration and refurbishment, fulfillment, just-in-time vendor-managed inventory and retail hubs, transportation management, customer service, returns processing, kitting, billing and collections, and IT connectivity. We are focused on offering our logistics services to a broader market, including non-IT customers to further diversify our

business. Ingram Micro Logistics also offers an alternative service fee business model that includes components of both the traditional distribution and the logistics fee-for-service models. This blended model combines a flexible inventory ownership option with our supply chain management expertise into a unique client offering. Best practices from Ingram Micro North America will continue to be shared with our other Ingram Micro regional operations as we move toward a global logistics network.

 

In addition, we surround products and programs with our own services to resellers, such as technical support, financing and training. Through our V7 division, we offer an online trade-in program to reward resellers for responsibly recycling old electronics in our North American market.

 

 

We try to limit exposure to the impact of business fluctuations by maintaining a balance in the customer segments we serve. We attempt to periodically rebalance our customer mix in keeping with profitability goals.

 

 

Geographic areas in which we operated during 2009 include North America (United States and Canada), EMEA (Austria, Belgium, Denmark, Finland, France, Germany, Hungary, Israel, Italy, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland and the United Kingdom), Asia Pacific (Australia, the

People’s Republic of China including Hong Kong, India, Malaysia, New Zealand, Singapore and Thailand), and Latin America (Argentina, Brazil, Chile, Mexico and our Latin American export operations in Miami). During 2009, we completed the exit of our broad-based distribution business in Finland and Norway and the sale of our broad-based distribution operations in Denmark. We continue to have AIDC/POS operations in these countries. Additionally, we serve many other markets where we do not have an in-country presence through our various export sales offices, including our general telesales operations in numerous geographies. We sell our products and services to resellers in approximately 150 countries.

 

As of January 2, 2010, we had 103 distribution centers worldwide. We offer more than 1,300 suppliers access to a global customer base of more than 180,000 resellers of various categories including VARs, corporate resellers, direct marketers, retailers, Internet-based resellers, and government and education resellers.

 

For a discussion of our geographic reporting segments, see “Item 7. Financial Statements and Supplemental Data.” A discussion of foreign exchange risks relating to our international operations is included under the captions “Market Risk” and “Market Risk Management” in “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

Our commitment to a customer-centric focus has been widely recognized throughout the IT industry, as evidenced by a number of awards received by Ingram Micro over the past year. In 2009, Ingram Micro UK was awarded “Distributor of the Year” by Computer Reseller News. IM Germany was recognized by IT Business magazine for “Most Important” Broadline Distributor. Three top honors in the Channel Choice and Distributor categories were awarded to IM Australia by Australia Reseller Net magazine. Our vendors have recognized our efforts, as well. For example, Ingram Micro North America was recognized by Juniper Networks as Distributor of the Year and Pro AV Distributor of the Year by Samsung Electronics America Information Technology Division for 2008 (both awarded in June 2009).

 

Our reseller customers are distinguished by the end-user market they serve, such as large corporate accounts, mid-market, SMBs, or home users, and by the level of value they add to the basic products they sell. They include VARs, corporate resellers, retailers, systems integrators, direct marketers, Internet-based resellers, independent dealers, reseller purchasing associations, and PC assemblers. Many of our reseller customers are heavily dependent

on distribution partners with the necessary systems, capital, inventory availability, and distribution facilities in place to provide fulfillment and other services.

 

We conduct business with most of the leading resellers of IT products and services around the world. Our continued expansion in adjacent markets, such as AIDC/POS, has generated opportunities to expand sales in our current customer reseller base, as well as add new reseller customers. In most cases we conduct business under general terms and conditions, without minimum purchase requirements. We also have resale contracts with our reseller customers that are terminable at will after a reasonable notice period and have no minimum purchase requirements. In addition, we also have specific agreements in place with certain manufacturers and resellers in which we provide supply chain management services such as order management, technical support, call center services, logistics management, configuration management, and procurement management services. These agreements generally may be terminated by either party without cause following reasonable notice. The service offerings we provide to our customers are discussed further below under “Services.” Our business is not substantially dependent on any of these distribution or supply chain services contracts. No single customer accounts for more than 10% of our total revenue.

 

We employ sales representatives worldwide who assist resellers with product and solution specifications, system configuration, new product/service introductions, pricing, and availability.

 

Our product management and marketing groups create demand for our suppliers’ products and services, enable the launch of new products, and facilitate customer contact. Our marketing programs are tailored to meet specific supplier and reseller customer needs. These needs are met through a wide offering of services by our in-house marketing organizations, including advertising, direct mail campaigns, market research, on-line marketing, retail programs, sales promotions, training, solutions marketing, and assistance with trade shows and other events. We also create and utilize specialized channel marketing communities to deliver focused resources and business building support to solution providers.

 

We distribute and market hundreds of thousands of technology products worldwide from the industry’s premier computer hardware suppliers, networking equipment suppliers, software publishers, and other suppliers of computer peripherals, CE, AIDC/POS, physical security and mobility hardware worldwide. Product assortments vary by market, and the suppliers’ relative contribution to our sales also varies from country to country. On a worldwide basis, our revenue mix by product category has remained relatively stable over the past several years, although it may fluctuate between and within different operating regions. Over the past several years, our product category revenues on a consolidated basis have generally been within the following ranges:

 

 

IT Peripheral/CE/AIDC/POS/Mobility and Others.  We offer a variety of products within the Peripheral/CE/AIDC/POS/Mobility and Others category that fall within several sub-categories:

 

 

 

Systems.  We define our systems category as self-standing computer systems capable of functioning independently. We offer a variety of systems, such as rack, tower and blade servers; desktops; portable personal computers; and personal digital assistants (“PDAs”).

 

Software.  We define our software category as a broad variety of applications containing computer instructions or data that can be stored electronically. We offer a variety of software products, such as business application software, operating system software, entertainment software, middleware, developer software tools, security software (firewalls, intrusion detection, and encryption) and storage software.

 

Networking.  Our networking category includes networking hardware, communication products and network security hardware. Networking hardware includes switches, hubs, routers, wireless local area networks, wireless wide area networks, network interface cards, cellular data cards, network-attached storage and storage area networks. Communication products incorporate Voice Over Internet Protocol, communications, modems, phone systems and video/audio conferencing. Network security hardware includes firewalls, Virtual Private Networks, intrusion detection, and authentication devices and appliances.

 

We offer a variety of services to our customers and suppliers. Our services may be purchased individually or in combination with other services, or they may be provided along with our product sales. Our services include:

 

 

Although services represent one of the key components of our long-term strategy, they have represented less than 10% of our annual revenues in the past and may not exceed that level in the near term.

 

We sell the products of more than 1,300 suppliers, which represent the world’s leading computer hardware, networking equipment, AIDC/POS and CE manufacturers and software publishers. Products purchased from Hewlett-Packard generated approximately 24%, 23%, and 23% of our net sales in fiscal years 2009, 2008 and 2007, respectively. There were no other vendors that represented 10% or more of our net sales in any of the last three years.

 

Our suppliers generally warrant the products we distribute and allow returns of defective products, including those returned to us by our customers. We generally do not independently warrant the products we distribute; however, local laws might impose warranty obligations upon distributors (such as in the case of supplier liquidation). In certain markets we administer extended warranty programs, supported by a third party, on supplier products. We do warrant services, products that we build-to-order from components purchased from other sources, and our own branded products. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Historically, warranty expense has not been material.

 

We have written distribution agreements with many of our suppliers; however, these agreements usually provide for nonexclusive distribution rights and often include territorial restrictions that limit the countries in which we can distribute the products. The agreements also are generally short term, subject to periodic renewal, and often contain provisions permitting termination by either party without cause upon relatively short notice. Certain distribution agreements either require (at our option) or allow for the repurchase of inventory upon termination of the agreement. In cases where suppliers are not obligated to accept inventory returns upon termination, some suppliers will nevertheless elect to repurchase the inventory while other suppliers will either assist with liquidation or resale of the inventory.

 

Each region in which we operate (North America, EMEA, Asia Pacific and Latin America) is highly competitive. In the current economic environment, competitive pressure in the form of aggressive pricing is acute. In addition to pricing, other competitive factors include:

 

 

We compete against broad-based IT distributors such as Tech Data and Synnex Corporation. There are a number of specialized competitors that focus upon one market or product or a particular sector with whom we compete. Examples include Avnet, Arrow, and Bell Microproducts in components and enterprise products; Westcon in networking and security; D&H Distributing, ADI, ArchBrook Laguna and Petra in consumer electronics; and ScanSource and Bluestar in AIDC/POS products. While we face some competitors in more than one region, others are specialized in local markets, such as Digital China (China), Redington (India), Express Data (Australia and New Zealand), Intcomex (Latin America), Esprinet (Italy and Spain), ALSO and Actebis (both in Europe). We believe that suppliers and resellers pursuing global strategies continue to seek distributors with global sales and support capabilities.

 

The evolving direct-sales relationships between manufacturers, resellers, and end-users continue to introduce change into our competitive landscape. We compete, in some cases, with hardware suppliers and software publishers that sell directly to reseller customers and end-users. However, we may become a business partner with these companies by providing supply chain services optimized for the IT market. Additionally, as

consolidation occurs among certain reseller segments and customers gain market share and build capabilities similar to ours, certain resellers, such as direct marketers, may become our competitors. As some manufacturer and reseller customers move their back-room operations to distribution partners, such outsourcing and value-added services may become areas of opportunity. There has been an accelerated movement among transportation and logistics companies to provide many of these fulfillment and e-commerce supply chain services. Within this arena, we face competition from major transportation and logistics suppliers such as DHL, Menlo, and UPS Supply Chain Solutions.

 

We are constantly seeking to expand our business into areas closely related to our IT products and services distribution business. As we enter new business areas, including value-added services, we may encounter increased competition from current competitors and/or from new competitors, some of which may be our current customers.

 

We experience some seasonal fluctuation in demand in our business. For instance, we typically see lower demand, particularly in Europe, in the summer months. We also normally see an increase in demand in the September to December period, driven primarily by pre-holiday impacts on stocking levels in the retail channel and on volume of business for our North American fee-based logistics services.

 

We strive to maintain sufficient quantities of product inventories to achieve optimum order fill rates. Our business, like that of other distributors, is subject to the risk that the value of our inventory will be impacted adversely by suppliers’ price reductions or by technological changes affecting the usefulness or desirability of the products comprising the inventory. It is the policy of many suppliers of technology products to offer distributors limited protection from the loss in value of inventory due to technological change or a supplier’s price reductions. When protection is offered, the distributor may be restricted to a designated period of time in which products may be returned for credit or exchanged for other products or during which price protection credits may be claimed. We continually take various actions, including monitoring our inventory levels and controlling the timing of purchases, to maximize our protection under supplier programs and reduce our inventory risk. However, no assurance can be given that current protective terms and conditions will continue or that they will adequately protect us against declines in inventory value, or that they will not be revised in such a manner as to adversely impact our ability to obtain price protection. In addition, suppliers may become insolvent and unable to fulfill their protection obligations to us. We are subject to the risk that our inventory values may decline and protective terms under supplier agreements may not adequately cover the decline in values. In addition, we distribute a small amount of private label products for which price protection is not customarily contractually available, for which we do not normally enjoy return rights, and for which we bear certain increased risks. We manage these risks through pricing and continual monitoring of existing inventory levels relative to customer demand, reflecting our forecasts of future demand and market conditions. On an ongoing basis, we reserve for excess and obsolete inventories and these reserves are appropriately utilized for liquidation of such inventories.

 

Inventory levels may vary from period to period, due, in part, to differences in actual demand from that forecasted when placing orders, the addition of new suppliers or new lines with current suppliers, expansion into new product areas, such as AIDC/POS and CE, and strategic purchases of inventory. In addition, payment terms with inventory suppliers may vary from time to time, and could result in fewer inventories being financed by suppliers and a greater amount of inventory being financed by our capital. Our payment patterns can be influenced by incentives, such as early pay discounts offered by suppliers.

 

We own or license various trademarks and service marks, including, among others, “Ingram Micro,” the Ingram Micro logo, “V7” (Video Seven), “VentureTech Network,” “AVAD,” “SymTech” and “Vantex.” Certain of these marks are registered, or are in the process of being registered, in the United States and various other countries. Even though our marks may not be registered in every country where we conduct business, in many cases we have acquired rights in those marks because of our continued use of them.

 

As of January 2, 2010, we employed approximately 13,750 associates worldwide (as measured on a full-time equivalent basis). Certain of our employees in EMEA and Latin America are subject to union representation, collective bargaining or similar arrangements. Our success depends on the talent and dedication of our associates, and we strive to attract, hire, develop, and retain outstanding associates. We believe we reap significant benefits from having a strong and seasoned management team with many years of experience in the IT and related industries. We have a process for measuring the status of associate success and responding to associate priorities.

 

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. We therefore file periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information.

 

Financial and other information can also be accessed through our website at www.ingrammicro.com. There, we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The information posted on our website is not incorporated into this Annual Report on Form 10-K.

 

The following list of executive officers of Ingram Micro is as of March 1, 2010:

 

Gregory M.E. Spierkel.  Mr. Spierkel, age 53, has been our chief executive officer since June 2005. He previously served as president from March 2004 to June 2005, as executive vice president and president of Ingram Micro Europe from June 1999 to March 2004, and as senior vice president and president of Ingram Micro Asia Pacific from July 1997 to June 1999. Prior to joining Ingram Micro, Mr. Spierkel was vice president of global sales and marketing at Mitel Inc., a manufacturer of telecommunications and semiconductor products, from March 1996 to June 1997 and was president of North America at Mitel from April 1992 to March 1996. Mr. Spierkel has been a member of the Board of Directors of PACCAR Inc. since 2008.

 

Alain Monié.  Mr. Monié, age 59, has been our president and chief operating officer since August 1, 2007. He previously served as executive vice president and president of Ingram Micro Asia Pacific from January 2004 to August 2007. He joined Ingram Micro as executive vice president in January 2003. Previously, Mr. Monié was an international executive consultant with aerospace and defense corporations from September 2002 to January 2003. Mr. Monié also served as president of the Latin American division of Honeywell International from January 2000 to August 2002. He joined Honeywell following its merger with Allied Signal Inc., where he built a 17-year career on three continents, progressing from a regional sales manager to head of Asia Pacific operations from October 1997 to December 1999. Mr. Monié has been a member of the Board of Directors of Amazon.com since November 2008.

 

Keith W.F. Bradley.  Mr. Bradley, age 46, has been our senior executive vice president and president of Ingram Micro North America since June 2009 and was previously our executive vice president and president of Ingram Micro North America from January 2005 to June 2009. He previously served as interim president and senior vice president and chief financial officer of Ingram Micro North America from June 2004 to January 2005, and as the region’s senior vice president and chief financial officer from January 2003 to May 2004. Prior to joining Ingram Micro in February 2000 as vice president and controller for the company’s United States operations, Mr. Bradley was vice president and global controller of The Disney Stores, a subsidiary of Walt Disney Company, and an auditor and consultant with PricewaterhouseCoopers LLP in the United Kingdom, United Arab Emirates and the United States.

 

Shailendra Gupta.  Mr. Gupta, age 47, has been our senior executive vice president and president of Ingram Micro Asia Pacific since June 2009 and was previously our executive vice president and president of Ingram Micro Asia Pacific

from January 2008 to June 2009. Mr. Gupta served as our senior vice president, Ingram Micro Asia Pacific from August 2007 to January 2008. Prior to joining Ingram Micro, Mr. Gupta spent nine years with Tech Pacific Group, starting in 1995 as managing director of India, then in 2001 was promoted to chief executive officer. Mr. Gupta joined Ingram Micro in 2004 as chief operating officer of Ingram Micro Asia Pacific when Ingram Micro acquired Tech Pacific. Prior to Tech Pacific, Mr. Gupta spent ten years with Godrej & Boyce Manufacturing Co. Ltd., India, a large diversified Indian conglomerate, where he held various managerial positions including manufacturing plant responsibility.

 

William D. Humes.  Mr. Humes, age 45, has been our senior executive vice president and chief financial officer since June 2009 and was previously our executive vice president and chief financial officer from April 2005 to June 2009. Mr. Humes served as senior vice president and chief financial officer designee from October 2004 to March 2005, corporate vice president and controller from February 2004 to October 2004, vice president, corporate controller from February 2002 to February 2004 and senior director, worldwide financial planning, reporting and accounting from September 1998 to February 2002. Prior to joining Ingram Micro, Mr. Humes was a senior audit manager at PricewaterhouseCoopers LLP.

 

Alain Maquet.  Mr. Maquet, age 58, has been our senior executive vice president and president — EMEA since July 2009, was previously our executive vice president and president of Ingram Micro Latin America from June 2009 to July 2009 and our senior vice president and president of Ingram Micro Latin America from March 2005 to June 2009. Mr. Maquet also served as our senior vice president, southern and western Europe from January 2001 to February 2004. Mr. Maquet joined Ingram Micro in 1993 as the managing director of France and had added additional countries to his responsibilities over the years. His career spans over three decades, the majority of which are in the technology industry. In addition, Mr. Maquet had co-founded an IT distribution company before joining Ingram Micro.

 

Eduardo Araujo.  Mr. Araujo, age 53, has been our executive vice president and president of Ingram Micro Latin America since January 2010. Before joining Ingram Micro, Mr. Araujo served as vice president and general manager, Latin America and the Caribbean for Electronic Data Systems Corporation, which is now a part of Hewlett-Packard. He has also held executive leadership positions at other IT corporations, including HP, Compaq, PeopleSoft, and ATT/NCR.

 

Larry C. Boyd.  Mr. Boyd, age 57, has been our executive vice president, secretary and general counsel since June 2009 and was previously our senior vice president, secretary and general counsel from March 2004 to June 2009. He previously served as senior vice president, U.S. legal services, for Ingram Micro North America from January 2000 to January 2004. Prior to joining Ingram Micro, he was a partner with the law firm of Gibson, Dunn & Crutcher from January 1985 to December 1999.

 

Lynn Jolliffe.  Ms. Jolliffe, age 57, has been our executive vice president, human resources since June 2009 and was previously our senior vice president, human resources from July 2007 to June 2009. She joined Ingram Micro in 1999 as the vice president of human resources for the European region. Ms. Jolliffe served as vice president of human resources for the North American region from October 2006 until June 2007. Prior to Ingram Micro, she served in various executive roles in Canada with Holt Renfrew Ltd. and White Rose Limited.

 

Mario F. Leone.  Mr. Leone, age 54, has been our executive vice president and chief information officer since June 2009 and was previously our senior vice president and chief information officer from January 2009 to June 2009. Prior to joining Ingram Micro, Mr. Leone served as senior vice president and chief information officer at Federal-Mogul Corporation, a global supplier of powertrain and safety technologies serving the automotive, industrial and worldwide after-markets. Mr. Leone was previously senior vice president and chief information officer at FIAT, and its business unit IVECO, a leading European industrial vehicle company. Mr. Leone has also held executive positions in information systems for Dow Chemical Company and Union Carbide Corporation.

 

Ria M. Carlson.  Ms. Carlson, age 48, has been our senior vice president, strategy & communications since June 2009 and was previously our corporate vice president, strategy & communications, from April 2005 to June 2009. She previously served as vice president, investor relations & corporate communications from March 2001 through March 2005. Before joining Ingram Micro, Ms. Carlson served as vice president, communications and investor relations for Equity Marketing, Inc., an international toy and promotions company, from 1999-2001, vice president, public and investor relations for Sierra Health Services, Inc., from 1996-1999, and associate vice president, corporate communications for FHP International Corporation, a health care organization, from 1989 to 1996.

 

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for “forward-looking statements” to encourage companies to provide prospective information, so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statement(s). Ingram Micro desires to take advantage of the safe harbor provisions of the Act.

 

Our periodic and current reports filed with the Securities and Exchange Commission, periodic press releases, and other public documents and statements, may contain forward-looking statements. In addition, our representatives may participate in speeches and calls with market analysts; conferences, meetings and calls with investors and potential investors in our securities; and other meetings and conferences. Some of the information presented in these calls, meetings and conferences may also be forward-looking. We disclaim any duty to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Described below and throughout this report are certain risks that could affect our business, financial results and results of operations. These risk factors should be considered in connection with evaluating your investment in our company because these factors could cause our actual results and conditions to differ materially from our historical performance or those projected in our forward-looking statements. Before you invest in our company, you should know that making such an investment involves risks, including the risks described below. The risks that have been highlighted here are not the only ones that we face. There may be additional risks that are not presently material or known. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Difficult conditions in the global economy have affected our business and results of operations. A prolonged worldwide economic downturn may lead to:

 

 

Each of these factors, individually or in the aggregate, could adversely affect our results of operations, financial condition and cash flows. Our results of operations have been affected to varying degrees by the factors noted above resulting in large part from the difficult conditions experienced in the global economy in recent periods. If the current economic downturn continues or intensifies, our results could be adversely affected.

 

Prolonged economic downturns may also lead to additional restructuring actions and associated expenses in response to the lower sales volume. In addition, we may not be able to adequately adjust our cost structure in a timely fashion to remain competitive, which may cause our profitability to suffer.

 

Our failure to adequately adapt to IT industry changes could negatively impact our future operating results. The IT products industry is subject to rapid technological change, new and enhanced product specification

requirements and evolving industry standards. Suppliers may give us limited or no access to new products being introduced. Changes may cause inventory in stock to decline substantially in value or to become obsolete, regardless of the general economic environment. Although it is the policy of many suppliers of IT products to offer distributors like us, who purchase directly from them, limited protection from the loss in value of inventory due to technological change or such suppliers’ price reductions (“price protection”), if major suppliers decrease the availability of price protection to us, such a change in policy could lower our gross margins on products we sell or cause us to record inventory write-downs. In addition, suppliers could become insolvent and unable to fulfill their protection obligations to us. We offer no assurance that price protection will continue, that unforeseen new product developments will not adversely affect us, or that we will successfully manage our existing and future inventories. Significant changes in supplier terms, such as higher thresholds on sales volume before distributors may qualify for discounts and/or rebates, the overall reduction in the amount of incentives available, reduction or termination of price protection, return levels, or other inventory management programs, or reductions in payment terms or trade credit, or vendor-supported credit programs, may adversely impact our results of operations or financial condition. Finally, if we were not able to adequately adapt to the emergence of alternative means of distribution for software and hardware, such as site licenses, electronic distribution and cloud computing, our future operating results could be adversely affected.

 

We have significant credit exposure to our customers and negative trends in their businesses could cause us significant credit loss. As is customary in many industries, we extend credit to our customers for a significant portion of our net sales. Customers have a period of time, generally 30 to 45 days after date of invoice, to make payment. We are subject to the risk that our customers will not pay for the products they have purchased. The risk that we may be unable to collect on receivables may increase if our customers experience decreases in demand for their products and services or otherwise become less stable, due to adverse economic conditions. If there is a substantial deterioration in the collectability of our receivables or if we cannot obtain credit insurance at reasonable rates, are unable to collect under existing credit insurance policies, or fail to take other actions to adequately mitigate such credit risk, our earnings, cash flows and our ability to utilize receivable-based financing could deteriorate.

 

We continually experience intense competition across all markets for our products and services. Our competitors include local, regional, national, and international distributors, as well as suppliers that employ a direct-sales model. As a result of intense price competition in the IT products and services distribution industry, our gross margins have historically been narrow and we expect them to continue to be narrow in the future. In addition, when there is overcapacity in our industry, our competitors may reduce their prices in response to this overcapacity. We offer no assurance that we will not lose market share, or that we will not be forced in the future to reduce our prices in response to the actions of our competitors and thereby experience a reduction in our gross margins. Furthermore, to remain competitive we may be forced to offer more credit or extended payment terms to our customers. This could increase our required capital, financing costs, and the amount of our bad debt expenses. We have also initiated and expect to continue to initiate other business activities and may face competition from companies with more experience and/or from new entrants in those markets. As we enter new business areas, we may encounter increased competition from current competitors and/or from new competitors, some of which may be our current customers or suppliers, which may negatively impact our sales or profitability.

 

We operate a global business that exposes us to risks associated with international activities. We have local sales offices and/or Ingram Micro representatives in 36 countries, and sell our products and services to resellers in approximately 150 countries. A large portion of our revenue is derived from our international operations. As a result, our operating results and financial condition could be significantly affected by risks associated with international activities, including environmental and trade protection laws, policies and measures; tariffs; export license requirements; enforcement of the Foreign Corrupt Practices Act, or similar laws of other jurisdictions on our business activities outside the Unites States; other regulatory requirements; economic and labor conditions; political or social unrest; economic instability or natural disasters in a specific country or region, such as hurricanes and tsunamis; health or similar issues such as the outbreak of the swine flu; complex tax regimes in various jurisdictions; and difficulties in staffing and managing international operations.

 

We are exposed to market risk primarily related to foreign currencies and interest rates. In particular, we are exposed to changes in the value of the U.S. dollar versus the local currency in which the products are sold and goods

and services are purchased, including devaluation and revaluation of local currencies. We manage our exposure to fluctuations in the value of currencies and interest rates using a variety of financial instruments. Although we believe that our exposures are appropriately diversified across counterparties and that, through our ongoing monitoring procedures, these counterparties are creditworthy financial institutions, we are exposed to credit loss in the event of nonperformance by our counterparties to foreign exchange and interest rate swap contracts and we may not be able to adequately mitigate all foreign currency related risks.

 

We are dependent on a variety of information systems, which, if not properly functioning, could adversely disrupt our business and harm our reputation and net sales. We depend on a variety of information systems for our operations, including our IMpulse enterprise resource planning (ERP) system, which has historically supported many of our operational functions such as inventory management, order processing, shipping, receiving, and accounting. Because most of our information systems consist of a number of legacy, internally developed applications, it can be harder to upgrade them and may be more difficult to adapt to commercially available software.

 

We are in the process of implementing a company-wide transition to a new single ERP software system and related processes to perform various functions and improve on the efficiency with which we do business globally. We began committing resources to this conversion process in 2007, and deployment of the new solution commenced in 2009 and is expected to be completed over the next several years. This conversion is complex, in part, because of the wide range of processes and the multiple legacy systems that must be integrated globally. We are following a project plan that we believe provides for a reasonable allocation of resources for the conversion program. However, execution of such a plan, or a divergence from it, may result in cost overruns, project delays, or business interruptions. Furthermore, divergence from our project plan could impact the timing and/or extent of benefits we expect to achieve from the system and process efficiencies.

 

Any disruptions, delays or deficiencies in the design and implementation of the new ERP system, or in the performance of our legacy systems, particularly any disruptions, delays or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business and potentially for our customers to access our price and product availability information. Further, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be adversely affected if our information systems do not allow us to transmit accurate information, even for a short period of time. We may also be limited in our ability to integrate any new business that we may acquire. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, results of operations and financial condition.

 

Finally, we also rely on the Internet for a significant percentage of our orders and information exchanges with our customers. The Internet and individual websites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some websites have experienced security breakdowns. To date, our website has not experienced any material breakdowns, disruptions or breaches in security; however, we cannot assure that this will not occur in the future. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship with our customers, suppliers or associates. Disruption of our website or the Internet in general could impair our order processing or more generally prevent our customers and suppliers from accessing information. This could cause us to lose business.

 

Changes in our credit rating or other market factors, such as adverse capital and credit market conditions or reductions in cash flow from operations, may affect our ability to meet liquidity needs, reduce access to capital, and/or increase our costs of borrowing. Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. This is especially true when our business is expanding, including through acquisitions, but we still have substantial demand for capital even during periods of stagnant or declining net sales. In order to continue operating our business, we will continue to need access to capital, including debt financing, inbound and outbound flooring and draft discounting facilities. In addition, changes in payment terms with either suppliers or customers could increase our capital requirements. Our ability to repay current or future indebtedness when due, or have adequate sources of liquidity to meet our

business needs may be affected by changes to the cash flows of our subsidiaries. A reduction of cash flow generated by our subsidiaries may have an adverse effect on our liquidity. Under certain circumstances, legal, tax or contractual restrictions may limit our ability or make it more costly to redistribute cash between subsidiaries to meet the company’s overall operational or strategic investment needs, or for repayment of indebtedness requirements.

 

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds available under our credit arrangements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months. However, the capital and credit markets have been experiencing unprecedented levels of volatility and disruption. Such market conditions may limit our ability to replace, in a timely manner, maturing credit arrangements or affect our ability to access committed capacities or the capital we require may not be available on terms acceptable to us, or at all, due to inability of our finance partners to meet their commitments to us. Furthermore, if we do not meet various covenant requirements of our corporate finance programs, including cross-default threshold provisions, we may not be able to access the majority of our credit programs with our finance partners. The lack of availability of such funding could harm our ability to operate or expand our business.

 

In addition, our cash and cash equivalents (including trade receivables collected and/or monies set aside for payment to creditors) are deposited and/or invested with various financial institutions located in the various countries in which we operate. We endeavor to monitor these financial institutions regularly for credit quality; however, we are exposed to risk of loss on such funds or we may experience significant disruptions in our liquidity needs if one or more of these financial institutions were to suffer bankruptcy or similar restructuring.

 

We have made and expect to continue to make investments in new business strategies and initiatives, including acquisitions, which could disrupt our business and have an adverse effect on our operating results. Such investments may involve significant risks and uncertainties, including distraction of management’s attention away from normal business operations; insufficient revenue generation to offset liabilities assumed and expenses associated with the strategy; difficulty in the integration of acquired businesses, including new employees, business systems and technology; inability to adapt to challenges of new markets, including geographies, products and services, or to attract new sources of profitable business from expansion of products or services; exposure to new regulations; and issues not discovered in our due diligence process. Our operations may be adversely impacted by an acquisition that (i) is not suited for us, (ii) is improperly executed, or (iii) substantially increases our debt. Any of these factors could adversely affect our operating results or financial condition.

 

Terminations of a supply or services agreement or a significant change in supplier terms or conditions of sale could negatively affect our operating margins, revenue or the level of capital required to fund our operations. A significant percentage of our net sales relates to products sold to us by relatively few suppliers. As a result of such concentration risk, terminations of supply or services agreements, or a significant change in the terms or conditions of sale from one or more of our more significant partners, or bankruptcy or closure of business by one or more of our more significant partners could negatively affect our operating margins, revenues or the level of capital required to fund our operations. Our suppliers have the ability to make, and in the past have made, rapid and significantly adverse changes in their sales terms and conditions, such as reducing the amount of price protection and return rights as well as reducing the level of purchase discounts and rebates they make available to us. In most cases, we have no guaranteed price or delivery agreements with suppliers. In certain product categories, such as systems, limited price protection or return rights offered by suppliers may have a bearing on the amount of product we may be willing to stock. We expect restrictive supplier terms and conditions to continue in the foreseeable future. Our inability to pass through to our reseller customers the impact of these changes, as well as our failure to develop systems to manage ongoing supplier programs, could cause us to record inventory write-downs or other losses and could have a negative impact on our gross margins.

 

We receive purchase discounts and rebates from suppliers based on various factors, including sales or purchase volume, breadth of customers and achievement of other goals set by the vendors. These purchase discounts and rebates may affect gross margins. Many purchase discounts from suppliers are based on percentage increases in sales of products. Our operating results could be negatively impacted if these rebates or discounts are reduced or eliminated or if our vendors significantly increase the complexity of process and costs for us to receive such rebates.

Our ability to obtain particular products or product lines in the required quantities and to fulfill customer orders on a timely basis is critical to our success. The IT industry experiences significant product supply shortages and customer order backlogs from time to time due to the inability of certain suppliers to supply certain products on a timely basis. As a result, we have experienced, and may in the future continue to experience, short-term shortages of specific products. In addition, suppliers who currently distribute their products through us may decide to shift to or substantially increase their existing distribution, through other distributors, their own dealer networks, or directly to resellers or end-users. Suppliers have, from time to time, made efforts to reduce the number of distributors with which they do business. This could result in more intense competition as distributors strive to secure distribution rights with these vendors, which could have an adverse effect on our operating results. If suppliers are not able to provide us with an adequate supply of products to fulfill our customer orders on a timely basis or we cannot otherwise obtain particular products or a product line or suppliers substantially increase their existing distribution through other distributors, their own dealer networks, or directly to resellers, our reputation, sales and profitability may suffer.

 

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective income tax rates or operating margins and we may be required to pay additional tax assessments. We are subject to both income and transaction based taxes in substantially all countries and jurisdictions in which we operate. Unanticipated changes to our effective income tax rate could adversely affect our future earnings and cash flows. Our effective income tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes to our operating structure, changes in tax laws and the discovery of new information in the course of our tax return preparation process.

 

Likewise, unanticipated changes to our transaction tax liabilities could adversely affect our future results of operations, cash flows and our competitive position. We engage in a high volume of transactions where multiple types of consumption, commercial and service taxes are potentially applicable. An inability to appropriately identify, charge, remit and document such taxes, along with an inconsistency in the application of these taxes by the applicable taxing authorities, may negatively impact our gross and operating margins, financial position or cash flows.

 

We are subject to the continuous examination of both our income and transaction tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. While we regularly evaluate our tax contingencies and uncertain tax positions to determine the adequacy of our provision for income and other taxes based on the technical merits and the likelihood of success resulting from tax examinations, any adverse outcome from these continuous examinations may have an adverse effect on our operating results and financial position.

 

We cannot predict what loss we might incur in litigation matters and contingencies that we may be involved with from time to time. There are various claims, lawsuits and pending actions against us. It is our opinion that the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, we can make no assurances that we will ultimately be successful in our defense of any of these matters. See Item 3, “Legal Proceedings,” in this Form 10-K for a discussion of our material legal matters.

 

Failure to retain and recruit key personnel would harm our ability to meet key objectives. Because of the nature of our business, which includes (but is not limited to) a high volume of transactions, business complexity, wide geographical coverage, and broad scope of products, suppliers, and customers, we are dependent in large part on our ability to retain the services of our key management, sales, IT, operational, and finance personnel. Our continued success is also dependent upon our ability to retain and recruit other qualified employees, including highly skilled technical, managerial, and marketing personnel, to meet our needs. Competition for qualified personnel is intense. We may not be successful in attracting and retaining the personnel we require, which could have a material adverse effect on our business. In addition, we have recently reduced our personnel in various geographies and functions through our restructuring and outsourcing activities. These reductions could negatively impact our relationships with our workforce, or make hiring other employees more difficult. In addition, failure to meet performance targets for the company may result in reduced levels of incentive compensation, which may affect our ability to retain key personnel. Additionally, changes in workforce, including government regulations,

collective bargaining agreements or the availability of qualified personnel could disrupt operations or increase our operating cost structure.

 

We may incur material litigation, regulatory or operational costs or expenses, and may be frustrated in our marketing efforts, as a result of new environmental regulations or private intellectual property enforcement disputes. We already operate in or may expand into markets which could subject us to environmental laws that may have a material adverse effect on our business, including the European Union Waste Electrical and Electronic Equipment Directive as enacted by individual European Union countries and other similar legislation adopted in North America, which make producers of electrical goods, including computers and printers, responsible for collection, recycling, treatment and disposal of recovered products. We may also be prohibited from marketing products, could be forced to market products without desirable features, or could incur substantial costs to defend legal actions, including where third parties claim that we or vendors who may have indemnified us are infringing upon their intellectual property rights. In recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from target companies. Even if we believe that such infringement claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations to us.

 

If our business does not perform well, we may be required to recognize further impairments of our intangible or other long-lived assets or to establish a valuation allowance against our deferred income tax assets, which could adversely affect our results of operations or financial condition. We recognized a $742.6 million impairment charge to our goodwill in the fourth quarter of 2008 which materially impacted our equity and results of operations in 2008, but did not impact our ongoing business operations, liquidity, cash flow or compliance with covenants for our credit facilities. Our future results of operations may be impacted by prolonged weakness in the current economic environment which may result in an impairment of any goodwill recorded in the future and/or other long-lived assets or valuation allowance on our deferred tax assets, which could adversely affect our results of operations or financial condition.

 

We face a variety of risks in our reliance on third-party service companies, including shipping companies for the delivery of our products and outsourcing arrangements. We rely almost entirely on arrangements with third-party shipping and freight forwarding companies for the delivery of our products. The termination of our arrangements with one or more of these third-party shipping companies, or the failure or inability of one or more of these third-party shipping companies to deliver products from suppliers to us or products from us to our reseller customers or their end-user customers, could disrupt our business and harm our reputation and operating results.

 

In addition, we have outsourced various transaction-oriented service and support functions to business process outsource providers. We have also outsourced a significant portion of our IT infrastructure function and certain IT application development functions to third-party providers. We may outsource additional functions to third-party providers. Our reliance on third-party providers to provide service to us, our customers and suppliers and for our IT requirements to support our business could result in significant disruptions and costs to our operations, including damaging our relationships with our suppliers and customers, if these third-party providers do not meet their obligations to adequately maintain an appropriate level of service for the outsourced functions or fail to adequately support our IT requirements. As a result of our outsourcing activities, it may also be more difficult to recruit and retain qualified employees for our business needs.

 

Changes in accounting rules could adversely affect our future operating results. Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretation by various governing bodies, including the Financial Accounting Standards Board and the SEC, who create and interpret appropriate accounting standards. Future periodic assessments required by current or new accounting standards may result in additional noncash charges and/or changes in

presentation or disclosure. A change from current accounting standards could have a significant adverse effect on our financial position or results of operations.

 

Future terrorist or military actions could result in disruption to our operations or loss of assets in certain markets or globally. Future terrorist or military actions, in the U.S. or abroad, could result in destruction or seizure of assets or suspension or disruption of our operations. Additionally, such actions could affect the operations of our suppliers or customers, resulting in loss of access to products, potential losses on supplier programs, loss of business, higher losses on receivables or inventory, and/or other disruptions in our business, which could negatively affect our operating results. We do not carry broad insurance covering such terrorist or military actions, and even if we were to seek such coverage, the cost would likely be prohibitive.

 

Our quarterly results have fluctuated significantly. Our quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of:

 

 

These historical variations in our business may not be indicative of future trends in the near term, particularly in light of the current weak global economic environment. Our narrow operating margins may magnify the impact of the foregoing factors on our operating results. We believe that you should not rely on period-to-period comparisons of our operating results as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year.

 

None.

 

 

Our corporate headquarters is located in Santa Ana, California. We support our global operations through an extensive sales and administrative office and distribution network throughout North America, EMEA, Asia Pacific and Latin America. As of January 2, 2010 we operated 103 distribution centers worldwide.

 

As of January 2, 2010, we leased substantially all our facilities on varying terms. We do not anticipate any material difficulties with the renewal of any of our leases when they expire or in securing replacement facilities on commercially reasonable terms. We also own several facilities, the most significant of which is part of our office/distribution facilities in Straubing, Germany.

 

 

Our Brazilian subsidiary has been assessed for commercial taxes on its purchases of imported software for the period January to September 2002. The principal amount of the tax assessed for this period was 12.7 million Brazilian reais. Although we believe we have valid defenses to the payment of the assessed taxes, as well as any amounts due for the unassessed period from October 2002 to December 2005, after consultation with counsel, it is our opinion that it is probable that we may be required to pay all or some of these taxes and we had established a liability for these taxes assessable through December 2005. Legislation enacted in February 2007 provides that such taxes are not assessable on software imports after January 1, 2006. Accordingly, in 2007, we recorded a net charge to cost of sales of $30.1 million. In the fourth quarters of 2009 and 2008, we released a portion of this commercial tax reserve amounting to $9.8 million and $8.2 million, respectively (17.1 million and 19.6 million Brazilian reais at a December 2009 exchange rate of 1.741 and December 2008 exchange rate of 2.330 Brazilian reais to the U.S. dollar, respectively). These partial reserve releases were related to the unassessed periods from January through December 2004 and January through December 2003, respectively, for which it is our opinion, after consultation with counsel, that the statute of limitations for an assessment from Brazilian tax authorities has expired. The remaining amount of liability at January 2, 2010 and January 3, 2009 was 28.2 million Brazilian reais and 45.2 million Brazilian reais, respectively (approximately $16.2 million and $19.4 million at January 2, 2010 and January 3, 2009, respectively, based on the exchange rate prevailing on those dates of 1.741 and 2.330 Brazilian reais, respectively, to the U.S. dollar).

 

While the tax authorities may seek to impose interest and penalties in addition to the tax as discussed above, we continue to believe that we have valid defenses to the assessment of interest and penalties, which as of January 2, 2010 potentially amount to approximately $13.1 million and $12.1 million, respectively, based on the exchange rate prevailing on that date of 1.741 Brazilian reais to the U.S. dollar. Therefore, we have not established an additional reserve for interest and penalties as we have determined that an unfavorable outcome is currently not probable. We will continue to vigorously pursue administrative and judicial action to challenge the current, and any subsequent assessments. However, we can make no assurances that we will ultimately be successful in defending any such assessments, if made.

 

In 2007, the Sao Paulo Municipal Tax Authorities assessed our Brazilian subsidiary a commercial service tax based upon our sale of software. The assessment for taxes and penalties covers the years 2002 through 2006 and totaled 55.1 million Brazilian reais or approximately $31.6 million based upon a January 2, 2010 exchange rate of 1.741 Brazilian reais to the U.S. dollar. Although not included in the original assessment, additional potential liability arising from this assessment for interest and adjustment for inflation totaled 67.5 million Brazilian reais or approximately $38.8 million at January 2, 2010. The authorities could make further tax assessments for the period after 2006, which may be material. It is our opinion, after consulting with counsel, that our subsidiary has valid defenses against the assessment of these taxes, penalties, interest, or any additional assessments related to this matter, and we therefore have not recorded a charge for the assessment as an unfavorable outcome is not probable. After seeking relief in administrative proceedings, we are now vigorously pursuing judicial action to challenge the current assessment and any subsequent assessments, which may require us to post collateral or provide a guarantee

equal to or greater than the total amount of the assessment, penalties and interest, adjusted for inflation factors. In addition, we can make no assurances that we will ultimately be successful in our defense of this matter.

 

We and one of our subsidiaries were named as defendants in two separate lawsuits arising out of the bankruptcy of Refco, Inc., and its subsidiaries and affiliates (collectively, “Refco”). In August 2007, the trustee of the Refco Litigation Trust filed suit against Grant Thornton LLP, Mayer Brown Rowe & Maw, LLP, Phillip Bennett, and numerous other individuals and entities (the “Kirschner action”), claiming damage to the bankrupt Refco entities in the amount of $2 billion. Of its forty-four claims for relief, the Kirschner action contains a single claim against us and our subsidiary, alleging that loan transactions between the subsidiary and Refco in early 2000 and early 2001 aided and abetted the common law fraud of Bennett and other defendants, resulting in damage to Refco in August 2004 when it effected a leveraged buyout in which it incurred substantial new debt while distributing assets to Refco insiders. In March 2008, the liquidators of numerous Cayman Island-based hedge funds filed suit (the “Krys action”) against many of the same defendants named in the Kirschner action, as well as others. The Krys action alleges that we and our subsidiary aided and abetted the fraud and breach of fiduciary duty of Refco insiders and others by participating in the above loan transactions, causing damage to the hedge funds in an unspecified amount. Both actions were removed by the defendants to the U.S. District Court for the Southern District of New York. In April 2009, the trial court in the Kirschner action granted our motion to dismiss, and ordered that judgment be entered in favor of Ingram Micro and our subsidiary. That judgment has been appealed by the plaintiff. We have filed a motion to dismiss in the Krys action which is pending before the trial court. We intend to vigorously defend these cases and do not expect the final disposition of either to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

 

 

Common Stock.  Our Common Stock is traded on the New York Stock Exchange under the symbol IM. The following table sets forth the high and low price per share, based on closing price, of our Common Stock for the periods indicated.

 

 

As of January 2, 2010 there were 434 holders of record of our Common Stock. Because many of such shares are held by brokers and other institutions, on behalf of shareowners, we are unable to estimate the total number of shareowners represented by these record holders.

 

Dividend Policy.  We have neither declared nor paid any dividends on our Common Stock in the preceding two fiscal years. We currently intend to retain future earnings to fund ongoing operations and finance the growth and development of our business. Any future decision to declare or pay dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deems relevant. In addition, certain of our debt facilities contain restrictions on the declaration and payment of dividends.

 

Equity Compensation Plan Information.  The following table provides information, as of January 2, 2010, with respect to equity compensation plans under which equity securities of our company are authorized for issuance, aggregated as follows: (i) all compensation plans previously approved by our shareholders and (ii) all compensation plans not previously approved by our shareholders.

 

 

 

 

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table presents our selected consolidated financial data, which includes the results of operations of our acquisitions that have been consolidated with our results of operations beginning on their acquisition dates. The information set forth below should be read in conjunction with “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and notes thereto, included elsewhere in this Annual Report on Form 10-K.

 

Our fiscal year is a 52-week or 53-week period ending on the Saturday nearest to December 31. References below to “2009,” “2008,” “2007,” “2006” and “2005” represent the fiscal years ended January 2, 2010 (52-weeks), January 3, 2009 (53-weeks), December 29, 2007 (52-weeks), December 30, 2006 (52-weeks) and December 31, 2005 (52-weeks), respectively.

 

 

 

 

 

Unless otherwise stated, all currency amounts, other than per share information, contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands of U.S. dollars.

 

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. While our consolidated net sales grew in the range of 9% to 12% per year in 2005 through 2007, these increases primarily reflected the strong demand environment for IT products and services in most economies worldwide as well as the additional revenue arising from the integration of several acquisitions worldwide, comprised primarily of small but strategic acquisitions of businesses in the consumer electronics and automatic identification and data capture/point-of-sale, or AIDC/POS, markets. 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 consolidated net sales declined 2.0% despite the relative year-over-year strength of foreign currencies, which provided approximately two percentage-points of growth. The decline reflected our efforts to exit or turn away certain unprofitable business relationships during the year, as well as the downturn in the macroeconomic environment, which began in early 2008 in Europe and North America and adversely impacted Asia Pacific and Latin America towards the second half of 2008. The effect of this recession became more pronounced in 2009 as our consolidated net sales declined 14.1% year-over-year. Contributing to this decline was the approximately three percentage-points negative impact of relatively weaker foreign currencies. Nearing the end of 2009, the IT demand environment started showing some modest signs of improvement. Additionally, in the second half of 2009, we began to strategically leverage our gross margins and strong balance sheet to drive incremental sales and market share. Overall weakness in demand may continue over the near term, particularly given unstable economic conditions in some major markets in which we operate.

 

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 extensive price competition, as well as changes in vendor 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 5.4% on an annual basis since 2003, the shift in overall mix of business toward our higher margin 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 gross margins in excess of 5.6% in 2008 and 2009. We expect that restrictive vendor terms and conditions and competitive pricing pressures will continue to exist in our business as they have for the last few years. Additionally, pricing and our gross margins will be one of several mechanisms we will use to capture sales and enhance market share. These factors could hinder our ability to maintain and/or improve our gross margins or overall profitability from the levels realized in recent years.

Selling, General and Administrative Expenses or SG&A Expenses

 

Another key area for our overall profitability management is the monitoring and control of the level of SG&A expenses. As the various factors discussed above have impacted our levels of sales over the past several years, we have instituted a number of cost reduction and profit enhancement programs. Among other things, these efforts have included our announced outsourcing and optimization plan in North America in 2005, our outsourcing of IT application development functions in 2006 and a number of other reorganization actions across multiple regions to further enhance productivity and profitability. Additionally, we have completed numerous acquisitions to add to our traditional distribution business over the past several years. While these acquisitions increase 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 adjacent product offerings, such as AIDC/POS, in addition to 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 the economic downturn began, our sales leveled then declined year-over-year causing our SG&A expenses to increase to 4.41% and 4.53% in 2008 and 2009, respectively, of consolidated net sales from 4.18% or less in the three years prior. To counter this, we implemented 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. These actions were designed to generate approximately $120,000 to $140,000 in annual expense savings when compared to our first quarter 2008 run rate. As we enter 2010, we have reached the full run rate of this range of savings.

 

Reorganization and Expense-Reduction Program Costs

 

In 2008, we announced cost-reduction programs, resulting in the rationalization and re-engineering of certain roles and processes in EMEA and additional workforce reductions in North America. Total costs of the actions incurred in EMEA were $16,444, comprised of $14,900 of reorganization costs related to employee termination benefits for workforce reductions and facility consolidations, as well as $1,544 of other costs charged to SG&A expenses, comprised of consulting, legal and other expenses associated with implementing the reduction in workforce. In North America, the net costs of the actions were $1,838, all of which were reorganization costs primarily related to employee termination benefits for workforce reductions and other costs related to contract terminations for equipment leases. We also announced cost-reduction programs related to our Asia Pacific operations, incurring reorganization costs of $291, primarily related to employee termination benefits.

 

As noted above, we took additional actions across all regions in 2009. In total, we incurred $37,636 of charges during 2009, of which $34,083 was recorded as reorganization costs, primarily for employee termination benefits for workforce reductions and facility consolidations, and $3,553 was charged to SG&A expenses, primarily for accelerated depreciation of fixed assets related to exited facilities, and retention, consulting and other expenses associated with the reorganization actions. By region, these charges were: $24,267 in North America ($21,133 in reorganization and $3,134 in SG&A expenses); $9,462 in EMEA ($9,201 in reorganization and $261 in SG&A expenses); $3,574 in Asia Pacific ($3,416 in reorganization charges and $158 in SG&A expenses); and $333 in reorganization costs in Latin America. As of the end of 2009, these actions were substantially complete.

 

Acquisitions

 

We have complemented our internal growth initiatives with strategic business acquisitions including our acquisitions over the past five years of the distribution businesses of Eurequat SA, Intertrade A.F. AG, Paradigm Distribution Ltd. and Symtech Nordic AS in EMEA, and Vantex Technology Distribution Limited, or Vantex, and the Cantechs Group in Asia Pacific, each of which expanded our value-added distribution of AIDC/POS solutions; and Computacenter Distribution, or CCD, in EMEA and Value Added Distributors Limited, or VAD, in Asia Pacific, which expanded our presence in the high-end enterprise market. We also expanded our presence in the consumer electronics market in North America through the acquisitions of AVAD and DBL Distributing Inc., or DBL, in the U.S., and expanded our networking products and services offerings through the acquisitions of VPN Dynamics and Securematics in the U.S.

Working Capital and Debt

 

The IT products and services distribution business is working capital intensive. Our business requires significant levels of working capital primarily to finance trade accounts receivable and inventory. However, our business generally requires less financing during an economic downturn because of reduced working capital demands. We have relied heavily on trade credit from vendors, trade accounts receivable financing programs and debt facilities for our working capital needs. Due to our narrow operating margins, we maintain a strong focus on management of working capital and cash provided by operations, as well as our debt and cash levels. However, our debt and/or cash levels may fluctuate significantly on a day-to-day basis due to timing of customer receipts and periodic payments to vendors. Our future debt requirements may increase to support growth in our overall level of business, changes in our required working capital profile, or to fund acquisitions or other investments in the business.

 

Our Critical Accounting Policies and Estimates

 

The discussions and analyses of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of significant contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review and evaluate our estimates and assumptions, including, but not limited to, those that relate to trade accounts receivable; vendor programs; inventory; goodwill, intangible and other long-lived assets; income taxes; and contingencies and litigation. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making our judgment about the carrying values of assets and liabilities that are not readily available from other sources. Although we believe our estimates, judgments and assumptions are appropriate and reasonable based upon available information, these assessments are subject to a wide range of sensitivity. Therefore, actual results could differ from these estimates.

 

We believe the following critical accounting policies are affected by our judgments, estimates and/or assumptions used in the preparation of our consolidated financial statements.

 

 

 

In the fourth quarter of 2008, consistent with the drastic decline in the capital markets in general, we experienced a similar decline in the market value of our common stock. As a result, our market capitalization was significantly lower than the book value of our company. We conducted goodwill impairment tests in each of our regional reporting units that had goodwill during the fourth quarter of 2008, which coincided with the timing of our normal annual impairment test. In performing this test, we, among other things, consulted an independent valuation advisor. Based on the results of these tests, management concluded that the goodwill of each of the North America, EMEA and Asia Pacific reporting units was fully impaired and recorded a charge of $742,653 in the fourth quarter of 2008, which was made up of $243,190, $24,125 and $475,338 in carrying value of goodwill, prior to the impairment, in North America, EMEA and Asia Pacific, respectively. This noncash charge significantly impacted our equity and results of operations for 2008, but did not impact our ongoing business operations, liquidity, cash flow or compliance with covenants for our credit facilities.

 

Our second quarter of 2009 acquisitions of VAD and Vantex in Asia Pacific yielded additional goodwill of $2,490. In light of the continued weak demand for IT products and services in Asia Pacific and globally in 2009, our Asia Pacific reporting unit fair value continued to be below the carrying value of its assets. As such, we recorded a charge for the full impairment of the newly recorded goodwill from these two acquisitions in the second quarter of 2009.

 

We also assess potential impairment of our other identifiable intangible assets and other long-lived assets when there is evidence that recent events or changes in circumstances such as significant changes in the manner of use of the asset, negative industry or economic trends, and significant underperformance relative to historical or projected future operating results, have made recovery of an asset’s carrying value unlikely. The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. We conducted impairment tests of our intangible assets and other long-lived assets in the fourth quarter of 2009 and 2008. Our results indicated that the carrying value of these assets was recoverable from undiscounted cash flows and no impairment was indicated.

 

 

The provision for tax liabilities and recognition of tax benefits involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities. In situations involving uncertain tax positions related to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. As additional information becomes available, or these uncertainties are resolved with the taxing authorities, revisions to these liabilities or benefits may be required, resulting in additional provision for or benefit from income taxes reflected in our consolidated statement of income.

 

 

Results of Operations

 

We do not allocate stock-based compensation expense (see Notes 12 and 13 to our consolidated financial statements) to our operating units; therefore, we are reporting this as a separate amount. The following tables set forth our net sales by geographic region and the percentage of total net sales represented thereby, as well as operating income and operating margin by geographic region for each of the fiscal years indicated.

 

 

As presented below, our income from operations in 2009 includes the goodwill impairment charge of $2,490, or 0.01% of consolidated net sales and 0.04% of net sales in Asia Pacific, and reorganization and expense-reduction program costs of $37,636, or 0.13% of consolidated net sales, ($24,267 or 0.20% of net sales, in North America; $9,462, or 0.10% of net sales, in EMEA; $3,574, or 0.06% of net sales, in Asia Pacific; and $333, or 0.02% of net sales, in Latin America) as discussed in Note 3 to our consolidated financial statements. In addition, our income from operations in 2009 includes the release of a portion of our commercial tax reserve in Brazil totaling $9,758, or 0.03% of consolidated net sales and 0.67% of Latin America net sales, as discussed in Note 10 to our consolidated financial statements.

 

Our loss from operations in 2008 includes the goodwill impairment charge of $742,653, or 2.16% of consolidated net sales, ($243,190, or 1.71% of net sales, in North America; $24,125, or 0.21% of net sales, in EMEA; and $475,338, or 6.88% of net sales, in Asia Pacific) as discussed in Notes 2 and 4 to our consolidated financial statements. Income (loss) from operations in 2008 also includes reorganization and expense-reduction program costs of $18,573, or 0.05% of consolidated net sales, ($1,838, or 0.01% of net sales, in North America; $16,444, or 0.14% of net sales, in EMEA; and $291 of charges in Asia Pacific) as discussed in Note 3 to our consolidated financial statements. In addition, our income from operations in 2008 includes the release of a portion of our commercial tax reserve in Brazil of $8,224, or 0.02% of consolidated net sales and 0.48% of Latin America net sales, as discussed in Note 10 to our consolidated financial statements.

Our income from operations in 2007 includes a net commercial tax charge in Brazil of $30,134, or 0.09% of consolidated net sales and 1.94% of Latin American net sales, and a charge of $15,000, or 0.04% of consolidated net sales and 0.11% of North American net sales, for losses related to a SEC matter both discussed in Note 10.

 

 

We sell products purchased from many vendors, but generated approximately 24%, 23% and 23% of our net sales in 2009, 2008 and 2007, respectively, from products purchased from Hewlett-Packard Company. There were no other vendors and no customers that represented 10% or more of our net sales in each of the last three years.

 

The following table sets forth certain items from our consolidated statement of income as a percentage of net sales, for each of the fiscal years indicated.

 

 

Results of Operations for the Years Ended January 2, 2010, January 3, 2009 and December 29, 2007

 

Our consolidated net sales were $29,515,446, $34,362,152 and $35,047,089 in 2009, 2008 and 2007, respectively. The declines in our consolidated net sales of 14.1% in 2009 compared to 2008 and 2.0% in 2008 compared to 2007 primarily reflect the overall decline in demand for IT products and services globally resulting from the severe economic downturn. The softness in demand for IT products and services initially surfaced in North America and EMEA early in 2008. By the end of 2008, the weak macroeconomic environment had spread to substantially all of our business units in each region. Our fiscal 2008 was also a 53-week year, with an additional four business days compared to 2009 and 2007. The translation impact of the weakening foreign currencies compared to the U.S. dollar contributed approximately three percentage-points of the year-over-year decline in 2009 while it was strengthening foreign currencies compared to the U.S. dollar in 2008 that generated approximately two percentage-points of worldwide growth compared to 2007. To a lesser extent, our efforts to improve our overall returns on invested capital impacted sales in 2008 and 2009, as we made deliberate choices beginning in the second half of 2008 to weigh higher returns and profitable relationships over additional revenues and therefore walked away from certain less profitable relationships. As we continued to implement a number of expense

reduction actions to improve profitability, beginning in the second half of 2009, we also began to proactively leverage our gross margins and balance sheet to drive growth in sales and regain market share. While the weak demand environment began to show some modest signs of improvement late in 2009, the overall weakness compared to 2008 and years prior may continue, and may worsen, over the near term.

 

Net sales from our North American operations were $12,326,555, $14,191,995 and $13,923,186 in 2009, 2008 and 2007, respectively. The significant decline in our North America net sales of 13.1% in 2009 compared to 2008 and the modest growth of 1.9% in 2008 compared to 2007 primarily reflect the demand environment for IT products and services in North America, which began to stagnate in the region in 2008 before entering the severe economic downturn in 2009. The modest growth in 2008 was positively impacted by the revenue contribution of approximately one percentage-point arising from a full year of operations of the DBL acquisition, which closed in June 2007.

 

Net sales from our EMEA operations were $9,483,328, $11,534,968 and $12,438,644 in 2009, 2008 and 2007, respectively. The significant decline in our EMEA net sales of 17.8% in 2009 compared to 2008 primarily reflects the continued weak demand for IT products and services in Europe. The translation impact of the weakening European currencies compared to the U.S. dollar negatively impacted the regional net sales by approximately six percentage-points when comparing 2009 to 2008. Our exit of the broad line distribution business in Finland and Norway, as well as the sale of the broad line distribution operations in Denmark, in the second quarter of 2009, also negatively impacted EMEA’s 2009 net sales by approximately two percentage-points. These decreases were partially offset by the increase in net sales of approximately one percentage-point related to the acquisitions of Eurequat and Intertrade in the fourth quarter of 2008. The year-over-year decline in EMEA net sales of 7.3% in 2008 compared to 2007 primarily reflects the soft demand for IT products and services in Europe, our deliberate actions to exit or turn away unprofitable business and market reaction to our freight cost recovery efforts, partially offset by the appreciation of European currencies compared to the U.S. dollar, which contributed approximately five percentage-points positive impact compared to 2007.

 

Net sales from our Asia Pacific operations were $6,243,455, $6,904,640 and $7,133,417 in 2009, 2008 and 2007, respectively. The year-over-year decline in our Asia Pacific net sales of 9.6% in 2009 was primarily attributable to the continued weak demand for IT products and services, which began in 2008. The translation impact of the weakening Asia Pacific currencies compared to the U.S. dollar negatively impacted the regional net sales by approximately five percentage-points when comparing 2009 to 2008. This year-over-year decrease is net of an approximate one percentage-point increase in net sales resulting from the VAD and Vantex acquisitions completed in the second quarter of 2009. The decline in Asia Pacific net sales of 3.2% in 2008 compared to 2007 was attributable to the softer demand for IT products and services, which began in the larger economies in the region during the second quarter of 2008 and spread throughout the region in the second half of 2008, combined with proactive efforts to exit or turn away unprofitable business in certain markets. Foreign currency exchange rates did not have a material impact in comparing Asia Pacific’s net sales in 2008 to 2007.

 

Net sales from our Latin American operations were $1,462,108, $1,730,549 and $1,551,842 in 2009, 2008 and 2007, respectively. The significant decline in Latin American net sales of 15.5% in 2009 compared to 2008 was attributable to the impacts of the weakening global economy which impacted Latin America beginning in the fourth quarter of 2008 and continuing through 2009. The translation impact of the weakening Latin American currencies compared to the U.S. dollar negatively impacted the regional net sales by approximately nine percentage-points when comparing 2009 to 2008. Because the overall demand for IT products and services remained quite strong throughout the region for much of 2008, Latin America generated 11.5% growth in net sales in 2008 compared to 2007. Foreign currency exchange rates did not have a material impact in comparing Latin America’s net sales in 2008 to 2007.

 

Our gross margin was 5.66% in 2009, 5.65% in 2008 and 5.45% in 2007. The gross margin in 2009 and 2008 includes the positive impact of $9,758, or 0.03% of consolidated net sales, and $8,224, or 0.02% of consolidated net sales, respectively, from a partial release of our commercial tax reserve in Brazil. The 2007 gross margin includes a net commercial tax charge in Brazil of $30,134, or 0.09% of consolidated net sales (see Note 10 to our consolidated financial statements). Gross margin is relatively consistent in 2009 and 2008, reflecting a continued competitive, but generally stable, pricing environment. Despite an overall weak market in 2008, we continued our focus on

pricing discipline and our more profitable businesses, including our fee-for-service logistics business, and other enhancements in gross margin such as our freight recovery program implemented during the year. We continuously evaluate and modify our pricing policies and certain terms, conditions and credit offered to our customers to reflect those being imposed by our vendors and general market conditions. We may experience moderated or continued negative sales growth in the near term, or these modifications may negatively impact our gross margin. In addition, increased competition and any further 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. Finally, we may see some overall reduction in gross margins as we price more competitively, but with sufficient overall returns, in our efforts to grow sales, market share and overall profitability as described previously.

 

Total SG&A expenses were $1,337,696, $1,512,578 and $1,463,969 in 2009, 2008 and 2007, respectively. Total SG&A expenses as a percentage of net sales were 4.53%, 4.41% and 4.18% in 2009, 2008 and 2007, respectively. In 2009, SG&A expenses as a percentage of net sales increased compared to 2008, primarily due to the significant year-over-year decline in consolidated net sales as a result of the downturn in the global economies which began in early 2008. The year-over-year decline in SG&A expenses of 11.6% was primarily attributable to the benefits of our expense-reduction initiatives implemented since mid-2008. The actions completed in the second half of 2008 and through all of 2009 generated an estimated annualized reduction in total costs of approximately $130,000 compared to our run rate in the first quarter of 2008. However because many of these actions, and the related cost reductions, were completed throughout 2009, we did not realize the full impact in SG&A expense in 2009. Also contributing to the 2009 decline versus 2008 were the lower variable expenses associated with reduced sales levels, and the translation effect of weaker foreign currencies compared to the U.S. dollar, which generated approximately $30,000, or approximately two percentage-points, of the decline, partially offset by an increase in stock-based compensation of $7,382 and the addition of approximately $6,600 from our recent acquisitions, or a total of approximately one percentage-point of the change in operating expenses. In 2008, SG&A expenses as a percentage of net sales increased compared to 2007, primarily due to the decline in revenues as a result of the downturn in the global economies in general, which exceeded the rate at which we were able to reduce costs in the short term. With the downturn in the macroeconomic environment, we instituted a number of actions during 2008 to reduce costs. On a global basis, we significantly reduced discretionary spending in areas such as travel and professional services, in addition to managing headcount levels through attrition. Additionally, primarily in North America and EMEA, where the downturn was most pronounced early in the year, specific actions were taken to reduce headcount and operating expenses as further described below. We estimate that these actions yielded at least $20,000 annualized reductions as we entered 2009, although the 2008 impact was much less due to the timing with which the actions were completed throughout the year. Also, driving the year-over-year increase were: additional operating expenses of approximately $20,000, or approximately one percentage-points of the change, for the full year operations of DBL, which was acquired in June 2007; the investments in strategic initiatives and IT systems enhancements; and higher labor costs related to our growing fee-for-service logistics business, which also yields a higher gross margin, as discussed above. The translation impact of foreign currencies also contributed to the growth in SG&A dollars by approximately $26,000, or approximately two percentage-points. These factors were partially offset by the year-over-year reduction of stock-based compensation of $23,030, primarily the result of lower estimated achievement and payout under our long-term incentive compensation plans, which are payable in performance-based restricted stock units.

 

As discussed in our critical accounting policies and estimates, in the second quarter of 2009 and fourth quarter of 2008, we recorded charges of $2,490 and $742,653, or 0.01% and 2.16%, respectively, of full year consolidated net sales, for the full impairment of our goodwill. The 2009 charge was entirely in Asia Pacific, related to goodwill from the 2009 acquisitions of VAD and Vantex. The 2008 charge consisted of $243,190 in North America; $24,125 in EMEA; and $475,338 in Asia Pacific (also, see Notes 2 and 4 to our consolidated financial statements).

 

As previously discussed, we took further actions in 2009 to better align our expenses with the declines in our sales volume. We incurred a net charge for reorganization costs in 2009 of $34,083, or approximately 0.12% of consolidated net sales, which consisted of (a) $18,573 of employee termination benefits for workforce reductions in all four regions, (b) $11,993 in facility consolidations in North America and EMEA, (c) $819 for contract terminations primarily for equipment leases in North America, and (d) an adjustment of $2,698 primarily for higher than expected costs to settle lease obligations related to previous reorganization actions recorded primarily in North

America in earlier years. In 2008, we incurred a net charge for reorganization costs of $17,029, or approximately 0.05% of consolidated net sales, which consisted of (a) $14,588 of employee termination benefits for workforce reductions associated with the restructuring of the regional headquarters in EMEA and certain reductions of administrative and back-office positions in the North America and Asia Pacific regions, (b) $2,571 in facility consolidations in EMEA and (c) $400 for contract terminations for equipment leases in North America, partially offset by (d) $530 for the reversal of certain excess lease obligation reserves from reorganization actions recorded in earlier years. In 2007, the credit to reorganization costs of $1,091 primarily related to actions taken in prior years for which we incurred lower than expected costs associated with restructured facilities in North America. We may pursue other business process and/or organizational changes, which may result in additional charges related to consolidation of facilities, restructuring of business functions and workforce reductions in the future.

 

Our operating margin was 1.00% in 2009 compared to a negative operating margin of 0.97% in 2008 and operating margin of 1.27% in 2007. The decrease in our operating margin in 2008 compared to 2007 was largely due to the goodwill impairment charge in 2008, which was 2.16% of our 2008 consolidated net sales. The additional operating margin declines of 0.08% in 2008 compared to 2007 and 0.19% in 2009 compared to 2008 primarily reflect the decline in our consolidated net sales as discussed above, the related reduction in volume-based rebates, reorganization costs and related expenses from the implementation of our expense-reduction programs totaling approximately 0.13% of our consolidated net sales in 2009 versus 0.05% in 2008, and the more competitive pricing environment. These factors are partially offset by savings realized from expense-reduction programs, gross margin improvement from mix of business and pricing discipline throughout the business, and the partial reserve releases related to the Brazilian commercial taxes positively impacting operating margin by 0.03% and 0.02% of consolidated net sales in 2009 and 2008, respectively, compared to a charge for commercial taxes of 0.09% of consolidated net sales in 2007. Our 2007 operating income also includes a charge of 0.04% of consolidated net sales associated with the SEC matter.

 

Our North American operating margin was 0.86% in 2009 compared to a negative operating margin of 0.35% in 2008 and operating margin of 1.58% in 2007. Operating margin for 2007 includes a charge of 0.11% of the region’s net sales associated with the SEC matter (see Note 10 to our consolidated financial statements for further discussion). The decrease in our operating margin in 2008 compared to 2007 was largely due to the goodwill impairment charge in 2008, which was 1.71% of the region’s 2008 net sales. The additional declines in North America’s operating margin in 2008 and 2009 reflect the decline in the region’s net sales on a pace faster than we were able to reduce costs, as well as the negative impact of charges associated with our expense-reduction program totaling approximately 0.01% and 0.20%, respectively, of the region’s net sales, partially offset by the savings from these programs as they ramped up in 2009.

 

Our EMEA operating margin was 0.98% in 2009 compared to 0.36% in 2008 and 1.22% in 2007. The significant decrease in our 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 and expense-reduction program costs totaling approximately 0.14% of the region’s net sales in 2008, and operating expenses that were not yet aligned with the current sales environment, as well as the goodwill impairment charge, which was 0.21% of the region’s net sales. While weak European economies continued to dampen our region’s sales in 2009, we mitigated the impact on our profitability through targeted cost reduction actions, the previously discussed disposition of certain operations in the Nordic region, pricing discipline and adjustments to our mix of business, partially offset by the charges associated with our expense-reduction program totaling approximately 0.10% of the region’s net sales.

 

Our Asia Pacific operating margin was 1.34% in 2009 compared to a negative operating margin of 5.12% in 2008 and an operating margin of 1.64% in 2007. The decrease in our operating margin in 2008 compared to 2007 was largely due to the goodwill impairment charge in 2008, which was 6.88% of the region’s 2008 net sales. Excluding the impact of goodwill impairment in 2008, the 2008 operating margin improved slightly over 2007, primarily on higher sales levels and overall mix of business. The 2009 operating margin declined from 2008’s operating margin without the goodwill impairment primarily due to the decline in net sales as discussed previously, as well as additional charges associated with our expense-reduction program totaling approximately 0.06% of the region’s net sales.

Our Latin American operating margin was 2.46% and 2.50% in 2009 and 2008, respectively, compared to a negative operating margin of 0.28% in 2007. Our loss in 2007 was largely attributable to the commercial tax charge in Brazil, which was 1.94% of Latin American net sales, whereas 2008 and 2009 benefited by 0.48% and 0.67% of the region’s net sales, respectively, from the partial release of reserve for commercial taxes as the statute of limitations on a portion of these taxes expired. Aside from the impacts of commercial taxes, the increase in operating margin in Latin America in 2008 compared to 2007 primarily reflected the relative economics of scale from the higher revenues in 2008, which declined in 2009 as the weakening global economy began to affect the region. The region’s operation margin in 2009 was also negatively impacted by reorganization costs totaling approximately 0.02% of the region’s net sales.

 

Net other expense consisted primarily of interest income and expense, foreign currency exchange gains and losses, and other non-operating gains and losses. We incurred net other expense of $26,692, $49,969 and $61,182 in 2009, 2008 and 2007, respectively, or 0.09%, 0.14% and 0.17% of net sales, respectively. The decrease in 2009 compared to 2008 primarily reflects lower net interest expense from decreased borrowings associated with the lower volume of business and overall declines in average interest rates, partially offset by higher foreign currency exchange losses. The decrease in 2008 compared to 2007 primarily reflects lower net interest expense from decreased borrowings associated with the lower volume of business and overall declines in average interest rates.

 

Our provision for income taxes in 2009, 2008 and 2007 was $67,110, $12,783 and $109,330, respectively. Our effective tax rate in 2009, 2008 and 2007 was 24.9%, (3.3%) and 28.4%, respectively. Our effective tax rate in 2009 and 2008 was positively impacted by the $9,758 and $8,224 reversal of a portion of the reserve for a Brazilian commercial tax charge, respectively, for which we did not recognize an income tax expense, consistent with the negative impact of $30,134 net Brazilian commercial tax charge in 2007, for which we did not recognize an income tax benefit. Because a majority of the goodwill impairment charge is non-deductible for tax purposes, only $82,873 of tax benefit was realized from the charge. As a result, we had a tax provision on a pre-tax loss in 2008. The 2008 tax provision also included the release of tax reserves related to certain hedge gains recorded in prior period, offset in part by an increase in our valuation allowances placed against certain of our deferred tax assets in certain EMEA business units. Aside from the reversal of the Brazilian commercial tax charge, impairment of goodwill and release of tax reserves as discussed above, the changes in our effective tax rates in 2009, 2008 and 2007 were primarily attributable to the shifts in the product mix, changes in the proportion of income earned within the various taxing jurisdictions, and impacts of our ongoing tax strategies. Our effective tax rate includes the impact of not providing U.S. taxes on undistributed foreign earnings considered indefinitely reinvested. During 2009, the Obama administration announced several proposals to reform the U.S. tax rules, including proposals that, if adopted, could result in a reduction or elimination of the deferral of U.S. income tax on certain types of unrepatriated foreign earnings, potentially requiring such earnings to be taxed at the U.S. federal income tax rate. Our future reported financial results could be adversely affected if tax or accounting rules regarding unrepatriated foreign earnings change or if other tax changes are enacted.

Quarterly Data; Seasonality

 

Our quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of various factors as more fully described in Part I, Item 1A. “Risk Factors.”

 

The following table sets forth certain unaudited quarterly historical financial data for each of the eight quarters in the two years ended January 2, 2010. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in our opinion, includes all adjustments necessary for a fair statement of the selected quarterly information. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter shown are not necessarily indicative of results for any future period.

 

 

 

 

Liquidity and Capital Resources

 

Cash Flows

 

We finance our working capital needs and investments in the business largely through net income before noncash items, available cash, borrowings under various revolving trade accounts receivable-backed financing programs, our senior unsecured term loan, revolving credit and other facilities, and trade and supplier credit. As a distributor, our business requires significant investment in working capital, particularly trade accounts receivable and inventory, partially financed by vendor trade accounts payable. As a general rule, when sales volumes are

decreasing, our net investment in working capital dollars typically declines, which generally results in increased cash flow generated from operating activities. Conversely, when sales volume increases, our net investment in working capital increases, which generally results in decreases in cash flows generated from operating activities. The following is a detailed discussion of our cash flows for 2009, 2008 and 2007.

 

Our cash and cash equivalents totaled $910,936 and $763,495 at January 2, 2010 and January 3, 2009, respectively. The higher cash and cash equivalents level at January 2, 2010 compared to January 3, 2009, primarily reflects the ongoing generation of profits from the business excluding noncash items; partially offset by an increase in our net working capital, net repayments of debt and investments in acquisitions and property and equipment. We have closely managed our overall working capital investment in 2009 and our low level of working capital days achieved as of January 2, 2010 was better than our targeted range and may increase in future periods, particularly as we leverage the current strength in our balance sheet to grow sales and market share. For instance, we may strategically pursue additional early pay discounts on trade accounts payable or purchase discounts on inventory, or we may allow extended payment terms or larger credit lines to certain customers. While each of these factors may yield net additional investment in working capital, as well as sales growth and/or improved profitability, we also continue to manage the risks associated with these strategies and the maximization of our resulting returns on invested capital.

 

Operating activities provided net cash of $240,801, $553,944, and $327,814 in 2009, 2008 and 2007, respectively. Our cash flows from operations are significantly affected by net working capital (trade accounts receivable and inventory, less accounts payable and book overdrafts) required to support our volume of business as well as normal period-to-period variations in days of working capital outstanding due to the timing of collections from customers, movement of inventory and payments to vendors. The net cash provided by operating activities in 2009, principally reflects our net income before noncash charges, offset partially by an increase in our net working capital. The increase in net working capital reflects higher levels of sales to close out the fourth quarter of 2009 compared to the end of 2008, as well as our efforts to gain market share primarily in the fourth quarter of 2009, resulting in the increases in trade accounts receivable and inventory, offset partially by a higher level of accounts payable, largely due to favorable timing of payments to vendors at year end. The net cash provided by operating activities in 2008 principally reflects our net income before noncash charges and the decreases in our net working capital. The decrease in net working capital in 2008 primarily reflects significant decrease in volume of business in the fourth quarter of 2008 compared to the fourth quarter of the previous year, offset partially by a slight increase in our days of inventory on hand largely due to slower movement of product with the onset of the economic decline in 2008. In 2007, there was a slight increase in net working capital, primarily reflecting the significant increase in volume of business in 2007 compared to prior year, partially offset by a slight decrease in our net days of working capital largely due to faster inventory turnover in 2007.

 

Investing activities used net cash of $99,908, $61,437 and $160,475 in 2009, 2008 and 2007, respectively. The net cash used by investing activities in 2009 was primarily due to capital expenditures of $68,667 and cash payments primarily related to the acquisitions of CCD, VAD and Vantex totaling $35,415. The net cash used by investing activities in 2008 was primarily due to capital expenditures of $81,359 and cash payments related to acquisitions of $12,347, partially offset by the collection of collateral deposits. The net cash used by investing activities in 2007 was primarily due to cash payments related to acquisitions of $128,965 and capital expenditures of $49,755, partially offset by the proceeds of $18,245 from the sale of our Asia Pacific semiconductor business. The capital expenditures for 2009, 2008 and 2007 were primarily for expected investments to enhance our underlying infrastructure and IT systems. We presently estimate that our capital expenditures will approximate $80,000 in 2010 for ongoing investments to support existing infrastructure and continued enhancements in our IT systems.

 

Financing activities used net cash of $51,178 and $271,351 in 2009 and 2008, respectively, and provided net cash of $45,904 in 2007. The net cash used by financing activities in 2009 primarily reflects our net repayments of $86,773 on our debt facilities and repayment of $3,125 on our senior unsecured term loan, partially offset by $34,635 in proceeds from the exercise of stock options. The net cash used by financing activities in 2008 primarily reflects our net repayments of $323,243 on our debt facilities and the repurchase of Class A Common Stock of $222,346 under our $300,000 stock repurchase program instituted in the fourth quarter of 2007, partially offset by $250,000 of proceeds from our senior unsecured term loan and $23,256 in proceeds from the exercise of stock options. The net cash provided by financing activities in 2007 primarily reflects the proceeds from the exercise of

stock options of $66,698, partially offset by our repurchase of Class A Common Stock of $25,061 under our $300,000 stock repurchase program.

 

Our debt and cash levels are highly influenced by our working capital needs. As such, our cash balances and borrowings fluctuate from period-to-period and may also fluctuate significantly within a quarter. The fluctuation is the result of the concentration of payments received from customers toward the end of each month, as well as the timing of payments made to our vendors. Accordingly, our period-end debt and cash balances may not be reflective of our average levels or maximum debt and/or minimum cash levels during the periods presented or at any point in time.

 

Acquisitions and Dispositions

 

In 2009, we acquired certain assets of CCD in the United Kingdom and the assets and liabilities of VAD in New Zealand, which further strengthened our distribution capabilities in the mid- to high-end enterprise markets in EMEA and Asia Pacific. In 2009, we also acquired the assets and liabilities of Vantex, which operated in five countries in the Asia Pacific region. The Vantex acquisition further strengthened our distribution capabilities for AIDC/POS technologies. These three businesses were acquired for an aggregate cash price of $32,681 plus an estimated earn-out amount of $935.

 

In 2008, we acquired Eurequat SA in France, Intertrade A.F. AG in Germany, Paradigm Distribution Ltd. in the United Kingdom and Cantechs Group in China. These acquisitions further expanded our value-added distribution of AIDC/POS solutions in EMEA and in Asia Pacific. These businesses were acquired for an aggregate cash price of $12,347, including related acquisition costs, plus an estimated earn-out subject to final true-up.

 

In 2007, we acquired certain assets and liabilities of DBL, a distributor of consumer electronics accessories in the U.S. DBL was acquired for $102,174, which includes an initial cash price of $96,502, including related acquisition costs, plus an estimated working capital adjustment of $5,672.

 

In 2007, we acquired all the outstanding shares of VPN Dynamics and a 49% minority interest in a related company, Securematics. Our interests in these related entities were acquired for an initial aggregate purchase price of $26,791, including contingent consideration for the achievement of a milestone plus related acquisition costs. We have a call option and the sellers have a put option for the remaining 51% interest held by the shareholders of Securematics at a purchase price of $1,000, which both parties have agreed will be executed in March 2012. The option price has been recorded in accrued expenses in our consolidated balance sheet and the results of Securematics have been consolidated in accordance with the FASB provisions for consolidation of variable interest entities since the 2007 acquisition.

 

In 2009, we sold our broadline operations in Denmark. The sales proceed and the related gain on sale were not material.

 

In 2007, we closed the sale of our Asian semiconductor business for a cash price of $18,245. As a result, we recorded a pre-tax gain of $2,859, which is reported as a reduction to SG&A expenses in our 2007 consolidated statement of income.

 

For a full discussion of the above acquisitions and disposition, refer to Note 4 of our consolidated financial statements.

 

Capital Resources

 

We have maintained a conservative capital structure which we believe continues to serve us well in the current weak economic environment, which began in 2008. We have a range of corporate finance facilities which are diversified by type, maturity and geographic region with various financial institutions worldwide. These facilities have staggered maturities through 2014. A significant portion of our cash and cash equivalents balance (including trade receivables collected and/or monies set aside for payment to creditors) at January 2, 2010 and January 3, 2009 resides in our operations outside of the U.S. and are deposited and/or invested with various financial institutions globally that we endeavor to monitor regularly for credit quality. We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds available

under our credit arrangements, provide sufficient resources to meet our present and future capital requirements, including the potential need to post cash collateral for identified contingencies (see Note 10 to our consolidated financial statements and Part I, Item 3. “Legal Proceedings”), for at least the next twelve months. However, the capital and credit markets can be volatile, limiting our ability to replace, in a timely manner, maturing credit facilities on terms acceptable to us, or at all, or affecting our ability to access committed capacities due to the inability of our finance partners to meet their commitments to us. In addition, we are exposed to risk of loss on funds deposited with various financial institutions or we may experience significant disruptions in our liquidity needs if one or more of these financial institutions were to suffer bankruptcy or similar restructuring.

 

We have a revolving trade accounts receivable-backed financing program in North America, which provides for up to $600,000 in borrowing capacity secured by substantially all U.S.-based receivables. The interest rate on this program is dependent on designated commercial paper rates plus a predetermined margin. We had no borrowings at January 2, 2010 and had $69,000 of borrowings at January 3, 2009 under this North American financing program, which matures in July 2010.

 

We have a revolving trade accounts receivable-backed financing program in EMEA, which provides for borrowing capacity of up to Euro 70 million, or approximately $101,000, at January 2, 2010. This revolving financing program is with a financial institution that has an arrangement with a related issuer of third-party commercial paper, requires certain commitment fees, and borrowings under this program incur financing costs at designated commercial paper rates plus a predetermined margin. At January 2, 2010 and January 3, 2009, we had no borrowings under this EMEA financing program, which matures in April 2010.

 

In December 2009, we terminated our Euro 107 million revolving trade accounts receivable-backed financing program in EMEA, which was scheduled to expire in July 2010, and replaced it in January 2010 with a new four-year Euro 100 million revolving trade accounts receivable-backed financing program. This new program also requires certain commitment fees, and borrowings under this program incur financing costs based on EURIBOR plus a predetermined margin. This new program matures in January 2014.

 

We also have two other revolving trade accounts receivable-backed financing programs in EMEA, which respectively provide for a maximum borrowing capacity of 60 million British pounds, or approximately $97,000, and Euro 90 million, or approximately $130,000 at January 2, 2010. These programs require certain commitment fees, and borrowings under both programs incur financing costs, based on LIBOR and EURIBOR, respectively, plus a predetermined margin. At January 2, 2010 and January 3, 2009, we had no borrowings outstanding under these European financing programs. In May 2009, the maturity dates of these programs were extended from March 2010 to May 2013.

 

We have a multi-currency revolving trade accounts receivable-backed financing program in Asia Pacific, which provides borrowing capacity of up to 210 million Australian dollars, or approximately $188,000, at January 2, 2010. The interest rate is dependent upon the currency in which the drawing is made and is related to the local short-term bank indicator rate for such currency plus a predetermined margin. At January 2, 2010 and January 3, 2009, we had borrowings of $57,526 and $29,035, respectively, under this Asia Pacific financing program, which matures in September 2011.

 

Our ability to access financing under all our trade accounts receivable-backed financing programs in North America, EMEA and Asia Pacific, as discussed above, is dependent upon the level of eligible trade accounts receivable as well as continued covenant compliance. We may lose access to all or part of our financing under these programs under certain circumstances, including: (a) a reduction in sales volumes leading to related lower levels of eligible trade accounts receivable, (b) failure to meet certain defined eligibility criteria for the trade accounts receivable, such as receivables remaining assignable and free of liens and dispute or set-off rights, (c) performance of our trade accounts receivable, and/or (d) loss of credit insurance coverage. At January 2, 2010, our actual aggregate available capacity under these programs was approximately $1,020,000 based on eligible trade accounts receivable available, against which we had $57,526 of borrowings. Even if we do not borrow, or choose not to borrow to the full available capacity of certain programs, most of our trade accounts receivable-backed financing programs prohibit us from assigning, transferring or pledging the underlying eligible receivables as collateral for other financing programs. At January 2, 2010, the amount of trade accounts receivable which would be restricted in this regard totaled approximately $1,683,000. In addition, the EMEA revolving trade accounts receivable-backed program that matures in April 2010 is affected by the level of market demand for commercial paper, and could be

impacted by the credit ratings of the third-party issuer of commercial paper or back-up liquidity providers, if not replaced. In addition, in certain situations, we could lose access to all or part of our financing with respect to this EMEA program maturing in 2010, if our authorization to collect the receivables is rescinded by the relevant supplier under applicable local law.

 

In 2008, we entered into a $250,000 senior unsecured term loan facility with a bank syndicate. The interest rate on this facility is based on one-month LIBOR, plus a variable margin that is based on our debt ratings and leverage ratio. Interest is payable monthly. Under the terms of the agreement, we are also required to pay a minimum of $3,125 of principal on the loan on a quarterly basis beginning in November 2009 and a balloon payment of $215,625 at the end of the loan term in August 2012. The agreement also contains certain negative covenants, including restrictions on funded debt and interest coverage, as well as customary representations and warranties, affirmative covenants and events of default.

 

In connection with the senior unsecured term loan facility, we entered into an interest rate swap agreement for a notional amount of $200,000 of the term loan principal amount, the effect of which was to swap the LIBOR portion of the floating-rate obligation for a fixed-rate obligation. The fixed rate including the variable margin is approximately 5%. The notional amount on the interest rate swap agreement reduces by $3,125 quarterly beginning November 2009, consistent with the amortization schedule of the senior unsecured term loan. We account for the interest rate swap agreement as a cash flow hedge. At January 2, 2010, the mark-to-market value of the interest rate swap amounted to $9,662, which was recorded as a decrease in other comprehensive income with an offsetting increase to the hedged debt, bringing the total carrying value of the senior unsecured term loan to $256,537.

 

We have a $275,000 revolving senior unsecured credit facility with a bank syndicate in North America, which matures in August 2012. The interest rate on the revolving senior unsecured credit facility is based on LIBOR, plus a predetermined margin that is based on our debt ratings and leverage ratio. At January 2, 2010 and January 3, 2009, we had no borrowings under this North American credit facility. This credit facility may also be used to issue letters of credit. At January 2, 2010 and January 3, 2009, letters of credit of $5,000 and $9,051, respectively, were issued to certain vendors and financial institutions to support purchases by our subsidiaries, payment of insurance premiums and flooring arrangements. Our available capacity under the agreement is reduced by the amount of any issued and outstanding letters of credit.

 

We have a 20 million Australian dollar, or approximately $18,000 at January 2, 2010, senior unsecured credit facility that matures in December 2011. The interest rate on this credit facility is based on Australian or New Zealand short-term bank indicator rates, depending on the funding currency, plus a predetermined margin that is based on our debt ratings and our leverage ratio. At January 2, 2010 and January 3, 2009, we had $861 and $0 borrowings, respectively, outstanding under this facility.

 

We also have additional lines of credit, short-term overdraft facilities and other credit facilities with various financial institutions worldwide, which provide for borrowing capacity aggregating approximately $614,000 at January 2, 2010. Most of these arrangements are on an uncommitted basis and are reviewed periodically for renewal. At January 2, 2010 and January 3, 2009, we had approximately $64,571 and $118,599, respectively, outstanding under these facilities. The weighted average interest rate on the outstanding borrowings under these facilities, which may fluctuate depending on geographic mix, was 5.1% per annum both at January 2, 2010 and January 3, 2009. At January 2, 2010 and January 3, 2009, letters of credit totaling approximately $22,112 and $31,607, respectively, were issued principally to certain vendors to support purchases by our subsidiaries. The issuance of these letters of credit reduces our available capacity under these agreements by the same amount.

 

Covenant Compliance

 

We are required to comply with certain financial covenants under the terms of some of our financing facilities, including restrictions on funded debt and liens and covenants related to tangible net worth, leverage and interest coverage ratios and trade accounts receivable portfolio performance including metrics related to receivables and payables. We are also restricted by other covenants, including, but not limited to, restrictions on the amount of additional indebtedness we can incur, dividends we can pay, and the amount of common stock that we can repurchase annually. At January 2, 2010, we were in compliance with all material covenants or other material requirements set forth in our trade accounts receivable-backed programs and credit agreements or other agreements with our creditors as discussed above.

Contractual Obligations

 

The following summarizes our financing capacity and contractual obligations at January 2, 2010, and the effects of scheduled payments on such obligations are expected to have on our liquidity and cash flows in future periods. The amounts do not include interest. Except for interest related to $200,000 (notional amount) of the senior unsecured term loan, which is fixed at approximately 5%, through the interest rate swap, all other interest is incurred at variable rates (see Note 6 to our consolidated financial statements).

 

 

 

 

 

We have guarantees to third parties that provide financing to a limited number of our customers, which accounted for less than 1% of our consolidated net sales for both 2009 and 2008. The guarantees require us to reimburse the third party for defaults by these customers up to an aggregate of $10,000. The fair value of these guarantees has been recognized as cost of sales to these customers and is included in other accrued liabilities.

 

Because our commitments under our employee benefit plans are not fixed amounts, they have not been included in the contractual obligations table.

 

Other Matters

 

See Part I, Item 3 “Legal Proceedings” for discussions of legal matters and contingencies.

 

New Accounting Standards

 

See Note 2 to our consolidated financial statements for the discussion of new accounting standards.

 

Market Risk

 

We are exposed to the impact of foreign currency fluctuations and interest rate changes due to our international sales and global funding. In the normal course of business, we employ established policies and procedures to manage our exposure to fluctuations in the value of foreign currencies using a variety of financial instruments. It is our policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. It is our policy not to enter into foreign currency or interest rate transactions for speculative purposes.

 

Our foreign currency risk management objective is to protect our earnings and cash flows resulting from sales, purchases and other transactions from the adverse impact of exchange rate movements. Foreign exchange risk is managed by using forward contracts to offset exchange risk associated with receivables and payables. We generally maintain hedge coverage between minimum and maximum percentages. Cross-currency interest rate swaps are used to hedge foreign currency denominated principal and interest payments related to intercompany and third-party loans. During 2009, hedged transactions were denominated in U.S. dollars, Canadian dollars, euros, British pounds, Danish krone, Hungarian forint, Norwegian kroner, Swedish krona, Swiss francs, Israeli shekel, Australian dollars, Chinese yuan, Indian rupees, Malaysian ringit, New Zealand dollars, Singaporean dollars, Sri Lankan rupees, Thai baht, Argentine peso, Brazilian reais, Chilean peso and Mexican peso.

 

We are exposed to changes in interest rates on a portion of our long-term debt used to maintain liquidity and finance working capital, capital expenditures and business expansion. Our management objective is to finance our business at interest rates that are competitive in the marketplace while moderating our exposure to volatility in

interest costs. To achieve our objectives, we rely primarily on variable-rate debt with some interest rate exposure offset through interest rate swaps.

 

Market Risk Management

 

Foreign exchange and interest rate risk and related derivatives used are monitored using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk, or VaR. The VaR model determines the maximum potential loss in the fair value of market-sensitive financial instruments assuming a one-day holding period. The VaR model estimates were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). The model includes all of our forwards, cross-currency and other interest rate swaps, fixed-rate debt and nonfunctional currency denominated cash and debt (i.e., our market-sensitive derivative and other financial instruments as defined by the SEC). The trade accounts receivable and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model.

 

The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by us, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will likely differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

 

The following table sets forth the estimated maximum potential one-day loss in fair value, calculated using the VaR model. We believe that the hypothetical loss in fair value of our derivatives would be offset by gains in the value of the underlying transactions being hedged.

 

 

 

Information concerning quantitative and qualitative disclosures about market risk is included under the captions “Market Risk” and “Market Risk Management” in “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

INGRAM MICRO INC.

 

CONSOLIDATED BALANCE SHEET

(Dollars in 000s, except share data)

 

 

See accompanying notes to these consolidated financial statements.

INGRAM MICRO INC.

 

CONSOLIDATED STATEMENT OF INCOME

(Dollars in 000s, except per share data)

 

 

See accompanying notes to these consolidated financial statements.

INGRAM MICRO INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

 

See accompanying notes to these consolidated financial statements.

INGRAM MICRO INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS