Avnet 2005 Annual Report Download - page 26

margin than Avnet. As a result, the integration of Memec's operations into Avnet in fiscal 2006 is also
expected to favorably impact consolidated gross profit margins in the upcoming year.
Another key metric measured by the Company is gross profit per average employee. The increase in gross
profit dollars combined with a slight decline in average headcount resulting from restructuring efforts in past
years (see Restructuring and Other Charges in this MD&A for further discussion) has yielded gross profit per
average employee in fiscal 2005 of approximately $148,000, up over 6% when compared with $139,000 per
average employee in fiscal 2004.
Consolidated gross profit margins in fiscal 2004 were 13.3%, down from 13.4% in fiscal 2003. The
regional mix of EM's business impacted margin between the two years. Because the business model for EM
Asia yields lower gross profit margins but also a lower operating cost structure than the other regions of EM's
operations, the significant growth of the EM Asia's operations, in comparison to the Americas and EMEA
regions, contributed to the decrease in gross profit margins between fiscal 2004 and fiscal 2003.
Selling, General and Administrative Expenses
Avnet's consolidated selling, general and administrative expenses were $1.14 billion, or 10.3% of sales, in
fiscal 2005 as compared with $1.11 billion, or 10.8% of sales, in fiscal 2004. Management also monitors the
metric of selling, general and administrative expenses as a percentage of gross profit. This ratio was 78.0% in
fiscal 2005, a 313 basis point improvement over 81.1% in fiscal 2004. Each of these ratios has improved to its
best annual level since before the industry and economic downturn began in fiscal 2001. The current year
improvement in these key measures of operating leverage is a result of the significant cost reductions that the
Company has put in place in recent years to manage its overall profitability (see Restructuring and Other
Charges in this MD&A for further discussion of the cost reduction actions taken by the Company). Selling,
general and administrative expenses were negatively impacted in fiscal 2005 by an increased level of corporate
operating expenses, driven primarily by increased professional fees and related costs associated with the
Company's Sarbanes-Oxley Section 404 compliance efforts. Finally, management estimates that substantially
all of the net year-over-year increase of $31 million in selling, general and administrative expenses, or 0.3% of
fiscal 2005 sales, is a result of the translation impact of changes in foreign currency exchange rates. Excluding
this impact of foreign currency exchange rates, the Company grew its gross profit dollars year-over-year by
over 4% with virtually no increase in operating expense, thereby demonstrating the operating leverage in the
business. The Company's focus on the key operating leverage ratios discussed previously, in addition to a focus
on returns on working capital, have allowed Avnet to continue to post these improvements in operating
profitability, even in the face of the mid-cycle inventory correction in the first half of fiscal 2005. EM
completed fiscal 2005 with a record for inventory turns in the fiscal fourth quarter.
The acquisition of Memec will bring a higher level of operating expense dollars in fiscal 2006. However,
management expects to remove more than $120 million of annualized operating costs from the combined
business, largely through headcount, facility and IT-related synergies. As a result, management expects the
Company will be able to maintain positive trends in the operating leverage ratios discussed above as the
Company moves into fiscal 2006.
Selling, general and administrative expenses of $1.11 billion in fiscal 2004 were 10.8% of sales as
compared with $1.10 billion, or 12.1% of sales, in fiscal 2003. Selling, general and administrative expenses as a
percentage of gross profit of 81.1% in fiscal 2004 represented a 905 basis point improvement over the same
ratio in fiscal 2003. The significant improvement in these metrics between fiscal 2004 and fiscal 2003 was a
more direct impact of the Company's restructuring efforts. Specifically, the restructuring efforts completed by
the Company during fiscal 2003 did not fully impact operating results until fiscal 2004. Fiscal 2004 also
benefited from a portion of annualized synergies that were realized from restructuring actions taken in the first
half of that fiscal year. Partially offsetting the positive impacts of restructuring charges, the fiscal 2004 selling,
general and administrative expenses were negatively impacted by the translation impact of changes in foreign
currency exchange rates between fiscal 2004 and fiscal 2003, which management estimates yielded an increase
in fiscal 2004 costs of approximately $56 million (0.5% of fiscal 2004 sales and 4.1% of fiscal 2004 gross
profits).
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