Avnet 2001 Annual Report Download - page 36

result of the elimination of goodwill attributable to the Allied and
Setron businesses for which no tax benefit was available.
OPERATING INCOME
Consolidated gross profit margins, before special charges, were
15.2% in 2001 as compared with 14.7% and 15.6% in 2000 and 1999,
respectively. The gross profit margin in 2001 reversed a downward
trend in the prior few years which was due primarily to the
competitive environment in the electronic distribution market-
place as a result of the global industry cyclical downtrend as well
as the effect of increased sales of computer products (including
microprocessors, DRAMS, disk drives, etc.) which have lower
gross profit margins than other products in the Company’s product
lines. After reaching a low point of approximately 14.4% in the
second quarter of 2000, consolidated gross profit margins, before
special charges, began increasing and reached 15.5% in the fourth
quarter of 2001. This increase through roughly the second quarter
of 2001 was primarily a result of the rebound in the electronics
distribution industry from the longest cyclical downtrend in its
history. However, the increase in gross profit margins during the
second half of 2001 was due primarily to a decline in sales to large
customers who had previously been afforded better pricing due to
their significant sales volume.
Although operating expenses, before special charges, in absolute
dollars were sequentially higher during the last three years, they
fell to 10.7% and 10.5% as a percentage of sales during 2001 and
2000, respectively, as compared with 11.9% in 1999. The Company’s
operating expenses, before special charges, as a percentage of sales
for the entire 2000 year reached a record low of 10.5% due in part
to the Company’s highly successful integration of Marshall
Industries into its EM Americas’ operations. The impact of the
synergy benefits was more evident in the first and second quarters
of 2001 and the fourth quarter of 2000 as operating expenses as a
percentage of sales fell to a record low of 9.7% in those quarters.
The combination of improving industry conditions and the synergy
benefits derived from recent acquisitions resulted in a fourth
quarter 2000 operating income margin before special charges of
5.2%, the first time operating income margins had exceeded 5.0%
since the third quarter of 1998. This was followed by two subse-
quent quarters of operating income margins above 5.0% (5.6% and
5.3% in the first and second quarters of 2001, respectively).
Thereafter, the negative business environment began to impact
operating income margins which fell to 4.7% and 2.0% (before
special charges), respectively, in the third and fourth quarters
of 2001. Operating income, before special charges, of $581.2 million
in 2001 represented 4.5% of sales, as compared with $417.0 million,
or 4.2% of sales, in 2000 and $251.7 million, or 3.7% of sales, in 1999.
INTEREST EXPENSE, INCOME TAXES
AND NET INCOME
Interest expense was $191.9 million in 2001 as compared with $94.8
million in 2000 and $62.6 million in 1999. The significant increase
in interest expense during the last few years was due primarily to
increased borrowings to fund the Company’s acquisition program
and the additional working capital requirements to support the
growth in business. This included approximately $893.7 million
and $1.35 billion, respectively, for working capital and acquisitions,
net of cash received from dispositions of businesses during 2000
and 2001. Interest expense in 2000 was also impacted by increased
interest rates as a result of the Federal Reserve’s actions to increase
short-term rates and the Company’s decision to issue, in February
2000, $360.0 million of 7 7/8% Notes due 2005.
The Company’s effective income tax rate for 2001, including
special charges, was 99.9% as compared with 42.7% in 2000. This
increase was due primarily to the impact of non-deductible costs
related to the acquisition of Kent and the impact of tax rates in
foreign jurisdictions.
As a result of the factors described above, consolidated income from
continuing operations before special charges in 2001 was $236.8
million, or $1.99 per share on a diluted basis, as compared with
$193.0 million, or $1.78 per share on a diluted basis, in 2000 and
$116.4 million, or $1.22 per share on a diluted basis, in 1999.
Including the special charges referred to above, income from
continuing operations in 2001 was $97 thousand as compared with
income from continuing operations of $162.6 million, or $1.50 per
share on a diluted basis, in 2000 and $180.3 million, or $1.86 per share
on a diluted basis, in 1999. Income from continuing operations
before special charges as a percentage of sales was 1.8% in 2001 as
compared with 1.9% and 1.7% in 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Over the last three years, cash generated from income from continuing
operations before depreciation, amortization, deferred taxes, cash
payments related to the acquisition of Kent (included in cash used
for acquisitions in the Statement of Cash Flows), the pre-tax gain on
the disposition of Allied Electronics and other non-cash items
34