Avnet 2011 Annual Report Download - page 24

Table of Contents
Gross Profit and Gross Profit Margins
Consolidated gross profit in fiscal 2011 was $3.11 billion, an increase of $827.6 million, or 36.3%, from fiscal 2010 due
primarily to strong organic sales growth and the increase in sales related to acquisitions. Gross profit margin of 11.7% declined 19
basis points year over year due primarily to the impact of businesses acquired, which had product lines with lower gross margins than
Avnet’
s other product lines. EM gross profit margin increased 10 basis points where the addition of the lower margin embedded
business acquired from Bell and the embedded business transferred from TS mostly offset the margin increase that occurred in the
legacy EM business and geographic mix shift. TS gross profit margin declined 52 basis points year over year primarily attributable to
the EMEA region and the impact of the integration of the Bell business, which has a lower gross profit margin profile than the other
TS EMEA product lines. Although the Bell business has a lower gross profit margin profile due to its product mix, the Company
expects to realize the full impact of over $60 million in annualized synergies in the first quarter of fiscal 2012. However, portions of
the synergies have been realized incrementally as cost actions have been taken during fiscal 2011.
Consolidated gross profit for fiscal 2010 was $2.28 billion, up $257.2 million, or 12.7%, over the prior year primarily due to the
increase in sales volume. Gross profit margin of 11.9% declined 56 basis points over the prior year with all regions in each operating
group experiencing declines in margins. The gross profit margin at EM declined 63 basis points year over year partially due to
geographic mix changes as the Asia region, which has a lower gross profit margin than the Americas or EMEA regions, represented
35% of EM sales in fiscal 2010 as compared with 31% in fiscal 2009. In addition, the EMEA region gross profit margins had been
slower to recover than those in the Americas or Asia regions. The negative effects of the recession began later in the EMEA region
than in the Americas and, as a result, the region’
s recovery also occurred later than the other regions. However, the quarterly gross
profit margin at EM improved sequentially during the last three quarters of fiscal 2010 in all three regions with the largest
improvement in the EMEA region where gross profit margin increased over 100 basis points from the March to June quarter. TS gross
profit margin was down 54 basis points year over year due to the combination of (i) geographic mix changes as the Asia region, which
has lower gross profit margins than the Americas or EMEA regions, represented 12% of TS sales as compared with 7% in fiscal 2009,
(ii) lower gross profit margins in Asia and (iii) lower gross profit margins in the Americas region.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”)
were $2.10 billion in fiscal 2011, which was an increase of
$481.5 million, or 29.7%, from fiscal 2010. The increase in SG&A expenses was primarily a result of approximately $304 million of
additional SG&A expenses associated with acquisitions, $170 million of incremental costs necessary to support the 17.1% year-over-
year organic sales growth, net of incremental cost savings from integration activity and the additional week of expenses in fiscal 2010
and $7 million due to the translation impact of changes in foreign currency exchange rates. Metrics that management monitors with
respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In fiscal 2011,
SG&A expenses were 7.9% of sales and 67.6% of gross profit as compared with 8.5% and 71.0%, respectively, in fiscal 2010. This
continued year-over-
year improvement reflects the operating leverage in the business model realized from recent revenue growth and
effective expense management.
SG&A expenses were $1.62 billion in fiscal 2010, an increase of $87.7 million, or 5.7%, as compared with $1.53 billion in fiscal
2009. The increase in SG&A expenses was primarily attributable to supporting the increased sales volume, an additional week in
fiscal 2010 and additional expenses associated with businesses acquired, partially offset by the impact of cost reduction actions. The
cost reduction actions taken during fiscal 2009, as described in further detail below, were completed during the first quarter of fiscal
2010 and the full benefit of the actions were realized beginning in the second quarter of fiscal 2010. SG&A expenses were 8.5% of
sales and 71.0% of gross profit in fiscal 2010 as compared with 9.4% of sales and 75.7% of gross profit in fiscal 2009. The year-over-
year improvement in these metrics is primarily the result of effective cost management, including the impact of cost reduction actions
taken during fiscal 2009, as sales increased 18.1% year over year as compared with only a 5.7% increase in SG&A expenses.
Due to the decline in sales and gross profit margin that began in late fiscal 2008 and accelerated further during fiscal 2009, the
Company initiated significant cost reduction actions to realign its expense structure with market conditions (see
Restructuring,
Integration and Other Charges
for a discussion of charges associated with the actions undertaken). In the third quarter of fiscal 2008,
the Company began to experience demand weakness and organic sales growth at both EM and TS continued to slow through the first
quarter of fiscal 2009. In the second quarter of fiscal 2009, the Company experienced continued sales deceleration in both operating
groups, particularly in November in the Asia region and in December in the Americas region. During the third quarter of fiscal 2009,
end demand in the EM business deteriorated even further, in particular in EM Americas and EM EMEA, which have been the
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