Avnet 2002 Annual Report Download - page 35

pressures on gross proÑt margins during 2002 as the Company made the strategic decision to reduce its
exposure to larger tier-one OEM customers whose return on working capital fails to meet Company
performance requirements.
Operating expenses, before special charges, as a percentage of sales increased substantially to 13.1%
during 2002 due to the dramatic decline in revenues discussed earlier. Operating expenses in the fourth quarter
of 2002 reÖected an annualized reduction of over $300 million as compared with operating expenses in the
December 2000 quarter. This annualized reduction includes a pro forma adjustment to the actual reported
expenses in the second quarter of 2001 to account for the impact of the operations of the VEBA Group of
companies which were acquired partway through that quarter. However, the revenue declines during that
period occurred at an unprecedented rate and faster than management could reasonably remove expense from
the business. Operating expenses before special charges, as a percentage of sales, were fairly consistent at
10.7% and 10.5% during 2001 and 2000, respectively. 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 beneÑts was more evident in the Ñrst 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.
Operating income, before special charges, declined to $76.6 million in 2002, or 0.9% of sales, from 2001
levels of $581.2 million, or 4.5% of sales. This represented a percentage decline of 86.8% year over year.
Operating proÑt margins before special charges in 2002 deteriorated substantially from 2001 and 2000 levels.
However, management believes that the combination of cost savings derived from synergies realized from the
Company's recent acquisitions as well as restructured operations and additional operating expense reductions
over the past year, have situated the Company with considerable operating leverage when market conditions
improve. Management believes that its current operations are well poised for a market upturn, and any
material improvement in revenues brought about by more favorable economic and industry conditions should
generate operating income growth at a faster rate than both revenue and gross proÑt dollar growth.
Each of the Company's operating groups experienced deep year-over-year declines in operating income.
EM's 2002 operating income, excluding special charges, was $22.7 million, down 95.7% from 2001 levels of
$532.3 million. CM and AC also experienced declines in operating income, excluding special charges, from
$86.4 million and $63.9 million in 2001, respectively, to 2002 levels of $63.0 million and $42.8 million,
respectively. Including special charges and the results of operations of corporate, the Company recorded an
operating loss of $3.0 million. This compares to consolidated operating income, including special charges, of
$253.7 million and $368.0 million in 2001 and 2000, respectively.
Management's actions to improve gross proÑt margins as well as implement careful expense reductions
through the year have created increased operating leverage in the business model. As a result, excluding
special items, the Company experienced three consecutive quarterly improvements in operating proÑt margins
through the end of 2002. From a low of 0.16% in the Ñrst quarter, operating proÑt margins improved by 106
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