Summary of INGRAM MICRO INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion includes forward-looking statements, including, but not limited to, management's expectations for: economic conditions; capital resources; cost-reduction actions; revenues, operating income, margins and expenses; integration costs; operating efficiencies; profitability; market share; rates of return; capital expenditures; acquisitions; contingencies; operating models; and exchange rate fluctuations. In evaluating our business, readers should carefully consider the important factors included in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended January 3, 2009, as filed with the SEC. We disclaim any duty to update any forward-looking statements.
Overview of Our Business
We are the largest distributor of information technology, or IT, products and supply chain solutions worldwide based on revenues. We offer a broad range of IT products and supply chain solutions and help generate demand and create efficiencies for our customers and suppliers around the world. Our results of operations have been negatively affected by the difficult conditions in the economy in general. 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 also been impacted by pressures from price competition and declining average selling prices, as well as changes in vendor terms and conditions, including, but not limited to, variations in vendor rebates and incentives, our ability to return inventory to vendors, and time periods qualifying for price protection. We expect these competitive pricing pressures and restrictive vendor terms and conditions to continue in the foreseeable future and may be heightened in the relative near term given the ongoing severe economic weakness that exists in most of the markets in which we operate. To mitigate these factors, we have implemented changes to and continue to refine our pricing strategies, inventory management processes and vendor program processes. In addition, we continuously monitor and change, as appropriate, certain terms, conditions and credit offered to our customers to reflect those being imposed by our vendors, to recover our costs of doing business and/or to facilitate sales opportunities. We have also strived to improve our profitability through our diversification of product offerings, including our presence in adjacent product categories such as consumer electronics and automatic identification/data capture and point-of-sale, or AIDC/POS, and fee-for-service logistics offerings. Our business also requires significant levels of working capital primarily to finance trade accounts receivable and inventory. We have historically relied on, and continue to rely heavily on trade credit from vendors, available cash and debt for our working capital needs.
We have complemented our internal growth initiatives with strategic business acquisitions. We have expanded our value-added distribution of mobile data and AIDC/POS solutions over the past few years through acquisitions of the distribution businesses of Eurequat SA, Intertrade A.F. AG, Paradigm Distribution Ltd. and Symtech Nordic AS in EMEA, Vantex Technology Distribution Limited, or Vantex, and the Cantechs Group in Asia-Pacific and Nimax in North America. We have similarly expanded through acquisitions into other strategic distribution opportunities including AVAD, the leading distributor for solution providers and custom installers serving the home automation and entertainment market in the U.S.; DBL Distributing Inc., a leading distributor of consumer electronics accessories in the U.S.; and VPN Dynamics and Securematics, which expanded our networking product and services offerings in the U.S. To strengthen our capabilities in the high-end enterprise solutions market in Asia-Pacific, we acquired the distribution business of Value Added Distributors Limited, or VAD, during the thirteen weeks ended July 4, 2009. Results of Operations
The following tables set forth our net sales by geographic region, excluding intercompany sales, and the percentage of total net sales represented thereby, as well as operating income (loss) and operating margin (loss) by geographic region for each of the thirteen and thirty-nine week periods indicated (in millions).

                                      Thirteen Weeks Ended                                       Thirty-nine Weeks Ended
                            October 3,                  September 27,                   October 3,                    September 27,
                               2009                          2008                          2009                           2008

Net sales by
geographic
region:
North America        $ 3,219           43.6 %      $ 3,587           43.3 %      $  8,736           42.2 %      $ 10,396           40.5 %
EMEA                   2,155           29.2          2,567           31.0           6,432           31.1           8,589           33.4
Asia-Pacific           1,638           22.2          1,700           20.5           4,524           21.8           5,417           21.1
Latin America            373            5.0            430            5.2           1,016            4.9           1,276            5.0

Total                $ 7,385          100.0 %      $ 8,284          100.0 %      $ 20,708          100.0 %      $ 25,678          100.0 %



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                               Thirteen Weeks Ended                            Thirty-nine Weeks Ended
                        October 3,             September 27,             October 3,              September 27,
                           2009                    2008                     2009                     2008
Operating income
(loss) and
operating margin
(loss) by
geographic
region:
North America       $ 30.4        0.94 %    $ 45.5         1.27 %    $  52.3        0.60 %    $ 130.5        1.26 %
EMEA                  13.6        0.63        (4.7 )      (0.18 )       38.9        0.61         37.7        0.44
Asia-Pacific          21.4        1.31        25.4         1.49         58.0        1.28         90.6        1.67
Latin America          4.7        1.27         6.6         1.54         15.0        1.47         21.7        1.70
Stock-based
compensation
expense               (6.9 )         -        (0.3 )          -        (14.8 )         -        (15.5 )         -


Total               $ 63.2        0.86 %    $ 72.5         0.87 %    $ 149.4        0.72 %    $ 265.0        1.03 %

Our income from operations for the thirteen weeks ended October 3, 2009 includes $8.4 million of charges ($30.0 million of charges for the thirty-nine weeks ended October 3, 2009), comprised of $7.1 million of charges in North America ($18.6 million for the thirty-nine weeks ended October 3, 2009), $0.6 million of charges in EMEA ($8.2 million for the thirty-nine weeks ended October 3, 2009) and $0.7 million of charges in Asia-Pacific ($2.9 million for the thirty-nine weeks ended October 3, 2009) related to our reorganization and expense-reduction programs, as well as costs incurred associated with the acquisition and integration of VAD and Vantex, as discussed in Note 9 to our consolidated financial statements. There were also charges totaling $0.2 million for the thirty-nine weeks ended October 3, 2009 in Latin America related to these same programs. In addition, the thirty-nine-week period ended October 3, 2009 includes a goodwill impairment charge of $2.5 million in Asia-Pacific as discussed in Note 8 to our consolidated financial statements. Our income
(loss) from operations for the thirteen and thirty-nine week periods ended September 27, 2008 include $4.1 million and $11.8 million of net charges, respectively, consisting of: $0.7 million and $1.6 million of net charges, respectively, in North America; $3.1 million and $9.9 million of charges, respectively, in EMEA; and $0.3 million of charges for both periods in Asia-Pacific, related to our reorganization and expense-reduction programs. We sell finished products purchased from many vendors, but generated approximately 24% of our net sales for both of the thirty-nine weeks ended October 3, 2009 and September 27, 2008 from products purchased from Hewlett-Packard Company. There were no other vendors that represented 10% or more of our net sales in the periods presented. The following table sets forth certain items from our consolidated statement of income as a percentage of net sales for each of the periods indicated.

                                                       Thirteen Weeks Ended                     Thirty-nine Weeks Ended
                                                 October 3,         September 27,          October 3,          September 27,
                                                    2009                 2008                 2009                  2008
Net sales                                           100.00 %              100.00 %             100.00 %              100.00 %
Cost of sales                                        94.56                 94.53                94.35                 94.45

Gross profit                                          5.44                  5.47                 5.65                  5.55
Operating expenses:
Selling, general and administrative                   4.49                  4.55                 4.79                  4.48
Impairment of goodwill                                   -                     -                 0.01                     -
Reorganization costs                                  0.09                  0.05                 0.13                  0.04

Income from operations                                0.86                  0.87                 0.72                  1.03
Other expense, net                                    0.10                  0.14                 0.10                  0.14

Income before income taxes                            0.76                  0.73                 0.62                  0.89
Provision for income taxes                            0.19                  0.17                 0.16                  0.23


Net income                                            0.57 %                0.56 %               0.46 %                0.66 %

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Results of Operations for the Thirteen Weeks Ended October 3, 2009 Compared to Thirteen Weeks Ended September 27, 2008
Our consolidated net sales decreased 10.9% to $7.38 billion for the thirteen weeks ended October 3, 2009 or third quarter of 2009, from $8.28 billion for the thirteen weeks ended September 27, 2008, or third quarter of 2008. The primary driver of the year-over-year decline in our net sales is the continued weak global economy and demand for technology products and services in most of our business units globally. Also contributing to the year-over-year decline in net sales is the translation impact of weaker foreign currencies, which generated approximately three percentage points of negative impact. At the regional level, the translation impact of the strengthening U.S. dollar compared to European, Asia-Pacific and Latin American currencies negatively impacted the regional net sales by approximately six, five, and thirteen percentage-points, respectively. To a lesser extent, our efforts to improve our overall returns on invested capital impacted sales as we made deliberate choices to weigh higher returns and profitable relationships over gross additional revenues. While the weak demand environment is recently showing some modest signs of improvement, 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 decreased 10.2% to $3.22 billion in the third quarter of 2009 from $3.59 billion in the third quarter of 2008. Net sales from our EMEA operations decreased 16.1% to $2.15 billion in the third quarter of 2009 from $2.57 billion in the third quarter of 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, negatively impacted EMEA's current period net sales by approximately four percentage-points, offset by the increase in net sales of approximately one percentage-point related to the acquisitions of Eurequat SA and Intertrade A.F. AG in the fourth quarter of 2008. Net sales from our Asia-Pacific operations decreased 3.6% to $1.64 billion in the third quarter of 2009 from $1.70 billion in the third quarter of 2008. This year-over-year decrease is net of an approximate two percentage-point increase in net sales in the third quarter of 2009 resulting from the VAD and Vantex acquisitions completed earlier in the year. Net sales from our Latin American operations decreased 13.4% to $373 million in the third quarter of 2009 from $430 million in the third quarter of 2008.
Gross margin is relatively consistent at 5.44% in the third quarter of 2009 compared to 5.47% in the third quarter of 2008, reflecting a continued competitive, but stable, pricing environment. 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. Increased competition, efforts to capture market share 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 quarters.
Total selling, general and administrative expenses, or SG&A expenses, decreased 12.0% to $331.7 million in the third quarter of 2009 from $376.8 million in the third quarter of 2008, and decreased by six basis points, as a percentage of net sales, to 4.49% in the third quarter of 2009 from 4.55% in the third quarter of 2008. These decreases were primarily attributable to the benefits of our expense-reduction initiatives implemented over the past six quarters, the lower variable expenses associated with reduced sales levels, and the translation effect of weaker foreign currencies compared to the U.S. dollar, which contributed approximately $12 million, or three percentage-points of the change, partially offset by an increase in stock-based compensation of approximately $6.6 million, or nearly two percentage-points of the change. The lower stock-based compensation in the third quarter of 2008 was the result of lower estimated achievement and payout under our long-term incentive compensation plans which were payable in performance-based restricted stock units.
We previously announced that we are taking further actions in 2009 to better align our expenses with declines in sales volume. These actions, including the prior year actions we commenced in the second quarter of 2008, are expected to generate savings of approximately $120 million to $140 million annually, when compared to our first quarter 2008 run-rate. We expect to reach the full run-rate of these savings by the time we exit 2009. As we enter the fourth quarter of 2009, we estimate we are realizing approximately 75% of these annualized savings. Total restructuring and other related costs associated with these actions, which commenced in the fourth quarter of 2008, are expected to be towards the lower end of our previously disclosed range of charges of $45 million to $65 million. To date, we have incurred $35.3 million in charges associated with these actions. In the third quarter of 2009, we incurred a charge to reorganization costs of $7.0 million, or 0.09% of consolidated net sales, which consisted of: (a) $1.3 million of employee termination benefits for workforce reductions in three regions ($0.5 million in North America, $0.6 million in EMEA and $0.2 million in Asia-Pacific) and (b) $5.7 million for facility consolidations, including $1.3 million of charges related to higher than expected costs to settle lease obligations from prior reorganization actions ($5.4 million in North America and $0.3 million in Asia-Pacific). In the third quarter of 2009, we also incurred costs of approximately $1.4 million, or 0.02% of consolidated net sales, ($1.2 million in North America and $0.2 million in Asia-Pacific) which were recorded in SG&A expenses, primarily consisted of accelerated depreciation of fixed assets related to the exit of facilities, retention and consulting costs associated with implementing the expense-reduction actions and the acquisition and integration of VAD and Vantex in Asia-Pacific.

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In the third quarter of 2008, we incurred a charge for reorganization costs of $3.6 million, or approximately 0.05% of consolidated net sales, consisting of:
(a) $3.3 million of employee termination benefits for workforce reductions associated with our targeted reduction of administrative and back-office positions in North America, the restructuring of the regional headquarters in EMEA and workforce reductions in the Asia-Pacific region, and (b) $0.3 million for contract terminations for equipment leases in North America. If the current economic downturn worsens or continues beyond 2009, we may pursue other business processes and/or organizational changes in our business or we may expand the reorganization program described above, which may result in additional charges related to consolidation of facilities, restructuring of business functions and workforce reductions in the future. However, any such actions may take time to implement and savings generated may not match the rate of revenue decline in any particular period. Operating margin decreased one basis point to 0.86% in the third quarter of 2009 from 0.87% in the third quarter of 2008. Our consolidated operating margin for the third quarters of 2009 and 2008 included reorganization and program costs totaling approximately 0.11% and 0.05%, respectively, of consolidated net sales. Our relatively flat year-over-year consolidated operating margin primarily reflects the decline in our net sales, offset by our efforts to date to reduce our cost structure through the previously described reorganization and other cost-reduction activities. As we continue to implement process improvements and other changes to improve profitability over the long-term, operating margins and/or sales may fluctuate significantly from quarter to quarter. Our North American operating margin decreased to 0.94% in the third quarter of 2009 from 1.27% in the third quarter of 2008. North America's operating margin for the third quarters of 2009 and 2008 included reorganization and program costs totaling approximately 0.22% and 0.02%, respectively, of the region's net sales. While the region's expense-reduction efforts have significantly curtailed the weaker year-over-year profitability of the past few quarters, the overall continued weakness, particularly in the consumer electronics space, has retained North America at a lower operating margin in the current year. The region will complete its current expense-reduction programs in the fourth quarter in addition to pursuing market share growth, in an effort to continue to improve on overall profitability. Our EMEA operating margin improved to 0.63% in the third quarter of 2009 compared to a negative margin of 0.18% in the third quarter of 2008. EMEA's operating margin for the third quarters of 2009 and 2008 included reorganization and program costs totaling approximately 0.03% and 0.12%, respectively, of the region's net sales. While weak European economies continue to dampen our sales, 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. Our Asia-Pacific operating margin decreased to 1.31% in the third quarter of 2009 from 1.49% in the third quarter of 2008. Asia-Pacific's operating margin for the third quarters of 2009 and 2008 included reorganization, program and acquisition integration costs of approximately 0.04% and 0.02%, respectively, of the region's net sales. Our Latin American operating margin decreased to 1.27% in the third quarter of 2009 from 1.54% in the third quarter of 2008. Latin America's profitability in the third quarter of 2009 was hampered as the Brazilian operations continued to be impacted by the need to adjust business processes to changes in local and national tax regulations and other operational issues. Other expense, net, consisted primarily of interest expense and income, foreign currency exchange gains and losses and other non-operating gains and losses. We incurred net other expense of $6.8 million in the third quarter of 2009 compared to $12.2 million in the third quarter of 2008, primarily reflecting lower average borrowings and interest rates on borrowings. The provision for income taxes was $14.1 million, or an effective tax rate of 25.0%, in the third quarter of 2009 compared to $13.9 million, or an effective tax rate of 23.1%, in the third quarter of 2008. The change in the effective tax rate is primarily a function of shifts in the profit mix across geographies. 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.

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Results of Operations for the Thirty-nine Weeks Ended October 3, 2009 Compared to
Thirty-nine Weeks Ended September 27, 2008 Our consolidated net sales decreased 19.4% to $20.71 billion for the thirty-nine weeks ended October 3, 2009, or the first nine months of 2009, from $25.68 billion for the thirty-nine weeks ended September 27, 2008, or the first nine months of 2008. Net sales from our North American operations decreased 16.0% to $8.74 billion in the first nine months of 2009 from $10.40 billion in the first nine months of 2008. Net sales from our EMEA operations decreased 25.1% to $6.43 billion in the first nine months of 2009 from $8.59 billion in the first nine months of 2008. Net sales from our Asia-Pacific operations decreased 16.5% to $4.52 billion in the first nine months of 2009 from $5.42 billion in the first nine months of 2008. Net sales from our Latin American operations decreased 20.3% to $1.02 billion in the first nine months of 2009 from $1.28 billion in the first nine months of 2008. The significant year-over-year decline in our consolidated net sales, as well as our regional net sales, is primarily attributable to the same factors discussed in our quarterly net sales above. The translation impact of the strengthening U.S. dollar compared to most foreign currencies contributed approximately five percentage-points of the year-over-year decline in consolidated net sales. The translation impact of the strengthening U.S. dollar compared to European, Asia-Pacific and Latin American currencies negatively impacted the regional net sales by approximately 11, 9 and 15 percentage-points, respectively.
Gross margin improved 10 basis points to 5.65% in the first nine months of 2009 compared to 5.55% in the first nine months of 2008. The year-over-year increase in gross margin is driven primarily by balanced pricing discipline and improved mix of higher margin business, during the first nine months of 2009.
Total SG&A expenses decreased 14.0% to $990.0 million in the first nine months of 2009 from $1.15 billion in the first nine months of 2008. The year-over-year decline was attributable to the translation effect of weaker foreign currencies compared to the U.S. dollar of approximately $61 million, or five percentage-points, the benefit of our expense-reduction initiatives implemented since mid-2008, and the lower variable expenses associated with the reduced sales levels. SG&A as a percentage of revenues increased 31 basis points to 4.79% of net sales in the first nine months of 2009 from 4.48% in the first nine months of 2008, primarily as a result of net sales declining at a more rapid pace than expense reductions.
In the first nine months of 2009, we incurred net charges to reorganization costs of $27.1 million, or 0.13% of consolidated net sales, which consisted of:
(a) $16.1 million of employee termination benefits for workforce reductions in all four regions, net of $0.2 million of credit adjustments related to prior reorganization actions ($7.0 million in North America, net of $0.1 million of credit adjustments related to prior actions; $6.4 million in EMEA, net of less than $0.1 million of credit adjustments related to prior actions; $2.5 million in Asia-Pacific; and $0.2 million in Latin America), (b) $10.3 million for facility consolidations, including $1.6 million of net charges related to prior reorganization actions ($8.5 million in North America, including $1.7 million of charges related to higher than expected costs to settle lease obligations from prior actions; $1.5 million in EMEA, net of $0.1 million of credit adjustments related to prior actions; and $0.3 million in Asia-Pacific), and (c) $0.7 million for contract terminations primarily for equipment leases in North America. SG&A expenses for the first nine months of 2009 also include approximately $2.9 million (0.01% of consolidated net sales) of program costs ($2.4 million in North America, $0.3 million in EMEA and $0.2 million in Asia-Pacific) - primarily consisting of accelerated depreciation of fixed assets related to the exit of facilities, retention and consulting costs - associated with implementing the expense-reduction actions, as well as costs incurred associated with the Asia-Pacific acquisition and integration of VAD and Vantex. The first nine months of 2008 included the $10.2 million (0.04% of consolidated net sales) net charge to reorganization costs, which consisted of (a) $10.5 million of employee termination benefits for workforce reductions associated with our targeted reduction of administrative and back-office positions in North America, the restructuring of the regional headquarters in EMEA and workforce reduction in the Asia-Pacific region, and (b) $0.3 million for contract terminations for equipment leases in North America, partially offset by $0.5 million for the reversal of certain excess lease obligation reserves from reorganization actions recorded in earlier years, as well as $1.5 million of consulting and other costs (0.01% of consolidated net sales) associated with the reorganization program charged to SG&A expense. As discussed in Note 8 to our consolidated financial statements, during the first nine months of 2009, we recorded a charge of $2.5 million, or 0.01% of consolidated net sales, for the impairment of goodwill related to the acquisitions of VAD and Vantex. Operating margin decreased 31 basis points to 0.72% in the first nine months of 2009 from 1.03% in the first nine months of 2008. Our consolidated operating margin for the first nine months of 2009 and 2008 included reorganization and program costs totaling approximately 0.14% and 0.05%, respectively, of net sales, as well as a charge for goodwill impairment of approximately 0.01% in the current period. The decline in our consolidated operating margin primarily reflects the significant decline in our net sales, offset partially by higher gross margins in

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the current period and our efforts to date to reduce our cost structure through the previously described reorganization and other cost-reduction activities. Our . . .