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Avnet 2004 Annual Report

Table of contents

  • Page 1
    Avnet 2004 Annual Report

  • Page 2
    2004 Annual Report Avnet, Inc. markets, distributes and adds value to a wide variety of electronic components, enterprise computer products and embedded subsystems. Our Company provides cost-effective services and solutions vital to more than 250 suppliers and 100,000 customers in the technology ...

  • Page 3
    ...the rewards of mutual success - to our Shareholders by increasing the value of their investment in Avnet through our focus on profitable growth and return on capital Globalization continued apace in FY04, with technology companies seeking lower manufacturing costs and new markets for their products...

  • Page 4
    ... discipline and operational excellence. It's all part of our philosophy of providing the best customer experience in the business. From design to production, from engineering services to end-to-end global supply chain management solutions, Avnet Electronics Marketing provides Support Across the...

  • Page 5
    ... the world's leading manufacturers of LCD displays, recognized our efforts in Europe with awards for sales growth, market development and overall excellence in four countries. And Intermec, a global provider of supply chain products, services and systems, named Avnet Technology Solutions its highest...

  • Page 6
    2004 Annual Report Value-Based Management Avnet has evolved. For years, our Company focused on sales, growing revenue, capturing market share and creating a global footprint. We are now a multibillion-dollar organization with an international presence. In January 2001, we launched a strategic ...

  • Page 7
    ... service to our Company. Senior Management David Birk General Counsel & Chief of Staff Andy Bryant President, Avnet Logistics Steve Church Senior Vice President, Organizational & Business Development Harley Feldberg President, Avnet Electronics Marketing Rick Hamada President, Avnet Technology...

  • Page 8
    ... South 47th Street, Phoenix, Arizona (Address of principal executive oÇces) 85034 (Zip Code) Registrant's telephone number, including area code (480) 643-2000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock...

  • Page 9

  • Page 10
    ... and Procedures Other Information PART III Directors and Executive OÇcers of the Registrant Executive Compensation Security Ownership of Certain BeneÃ'cial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services PART IV Exhibits, Financial...

  • Page 11
    ... pressures among distributors of electronic components and computer products may increase signiÃ'cantly through entry of new competitors or otherwise. ‚ General economic or business conditions, domestic and foreign, may be less favorable than management expected, resulting in lower sales and...

  • Page 12
    ... devices (""IP&E''), and also oÃ...ers an array of value-added services to its customers, such as supply-chain management, engineering design, inventory replenishment systems, connector and cable assembly and semiconductor programming. EM markets and sells its products and services to a diverse...

  • Page 13
    ..., South Africa, Turkey, Egypt and Israel. Asia ‚ EM Asia is a value-added distributor of electronic components and services in 15 Asian countries, Australia and New Zealand. All of EM Asia's operations have access to the products and services provided by EM globally. Avnet goes to market in China...

  • Page 14
    ...(formerly named Avnet Hall-Mark) is a value-added distributor of enterprise computer systems, software, storage, networking solutions and services. Avnet Partner Solutions is one of the industry's leading value-added distributors in the enterprise computing space in support of a limited line card of...

  • Page 15
    ... of electronic components and computer equipment worldwide. While Avnet will continue to pursue strategic acquisitions as part of its overall growth strategy, the limited number of potential acquisition targets has changed the focus of the Company's acquisition strategy to a relatively smaller scale...

  • Page 16
    ... needs such as point of use replenishment, testing, assembly, supply chain management and materials management. A key strength of the Company is the breadth and quality of the suppliers whose products it distributes. Because of the number of Avnet's suppliers, many customers can make all of their...

  • Page 17
    ... summarizes certain of the Company's key facilities as of July 3, 2004: Location Sq. Footage Leased or Owned Primary Use Phoenix, Arizona ÏÏÏ Tempe, Arizona ÏÏÏÏ Chandler, Arizona ÏÏ Phoenix, Arizona ÏÏÏ Grapevine, Texas ÏÏÏ Poing, Germany ÏÏÏÏ Tongeren, BelgiumÏÏ 176,000 132...

  • Page 18
    ..., management believes that the Company has appropriately accrued in its consolidated Ã'nancial statements for its share of the costs associated with these environmental clean-up sites. The Company and/or its subsidiaries are also parties to various other legal proceedings arising from time to time...

  • Page 19
    ... Equity Securities The following table includes the Company's monthly purchases of common stock during the fourth quarter ended July 3, 2004: Total Number of Shares Purchased Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value...

  • Page 20
    ... Ã'rst and second quarters of Ã'scal 2004 in connection with cost cutting initiatives and the previously announced combination of the Avnet Computer Marketing (""CM'') and Avnet Applied Computing (""AC'') operating groups into one operating group now called Avnet Technology Solutions. These charges...

  • Page 21
    ... Macro Group into Avnet Electronics Marketing (""EM''), (ii) the integration of JBA Computer Solutions into CM North America, (iii) the reorganization of EM Asia, (iv) the reorganization of EM's European operations including costs related to the consolidation of EM's European warehousing operations...

  • Page 22
    ...scal 2004 resulted from increased sales in each of the Company's operating groups (Avnet Electronics Marketing, or ""EM,'' and Avnet Technology Solutions, or ""TS'') as well as across all three regions in which Avnet does business (Americas; Europe, the Middle East and Africa, hereafter referred to...

  • Page 23
    ... Republic of China. As a result of this trend, the Asia/PaciÃ'c region now accounts for 22.0% of EM's global sales as compared with 17.4% in Ã'scal 2003. The Ã'scal 2004 growth in TS's sales was driven primarily by growth in the Americas region on strength of sales primarily in storage, software and...

  • Page 24
    ... sales for this region of EM's operations. This growth in the Asia/PaciÃ'c region is indicative of an ongoing trend whereby technology manufacturing continues to shift to this region, especially in the component industry in which EM competes, as well as the growth of the indigenous markets. Avnet...

  • Page 25
    ... quarters of Ã'scal 2004 until the second half of Ã'scal 2004. As a result of this timing, selling, general and administrative expenses as a percentage of sales and as a percentage of gross proÃ't fell to 10.7% and 76.7%, respectively, in the fourth quarter of Ã'scal 2004, representing the Company...

  • Page 26
    ... lease obligations and write-downs to fair market value of owned assets located in these facilities that have been vacated. Management also evaluated and elected to discontinue a number of IT-related initiatives that, in light of recent business restructurings, no longer met the Company's return...

  • Page 27
    ...: (1) EM's decision to combine its Cilicon and RF and Microwave sales divisions; and (2) TS's decision to reduce its participation in certain market segments where proÃ'tability of the products in question have not yielded acceptable economic returns to the Company. The fourth quarter adjustments to...

  • Page 28
    ... in selling, general and administrative expenses, all of which are discussed previously in this MD&A. EM reported operating income of $212.5 million, or 3.6% of EM's sales, in Ã'scal 2004, which is more than double EM's operating income in Ã'scal 2003 of $101.9 million, or 2.0% of EM's sales. TS...

  • Page 29
    ..., particularly in the EMEA and Asia/PaciÃ'c regions, has led to an eÃ...ective tax rate substantially lower than the 35% U.S. federal tax rate. Similarly, the mix of proÃ'ts amongst international subsidiaries in Ã'scal 2003 yielded an eÃ...ective tax rate on the Company's pre-tax loss that was more...

  • Page 30
    ...Company conducts its periodic test for goodwill impairment annually, on the Ã'rst day of the Ã'scal fourth quarter. The Company's annual impairment tests in Ã'scal 2004, 2003 and 2002 have yielded no additional impairments to the carrying value of the Company's goodwill. Critical Accounting Policies...

  • Page 31
    ... cost (Ã'rst in ÃŒ Ã'rst out) or estimated market value. The Company's inventories include high-technology components, embedded systems and computing technologies sold into rapidly changing, cyclical and competitive markets whereby such inventories may be subject to early technological obsolescence...

  • Page 32
    ... disclosures about plan assets, beneÃ't obligations, cash Ã-ows, beneÃ't costs and other relevant information related to pensions and other postretirement beneÃ'ts. The disclosure requirements of the revised SFAS 132 are eÃ...ective for the Company for the Ã'scal year ended July 3, 2004 and such...

  • Page 33
    ... electronic components sector where longer lead times from suppliers and increased demand from customers typically result in the distributor carrying higher levels of inventory. As a result, EM elected to build inventory in certain products to accommodate the growing levels in demand and in support...

  • Page 34
    ... of this free cash Ã-ow was used to reduce the Company's borrowings under its accounts receivable securitization program in addition to the retirement of certain of the Company's long-term debt, net of proceeds from new debt issued during Ã'scal 2003, with the remaining $236.2 million generating...

  • Page 35
    ...at July 3, 2004, please refer to Note 7 in the notes to the consolidated Ã'nancial statements appearing in Item 15 of this Report. The table below highlights the Company's capital structure: CAPITAL STRUCTURE (Dollars in thousands) July 3, 2004 June 27, 2003 % Change Short-term debt Long-term debt...

  • Page 36
    ... the short-term working capital, foreign exchange, overdraft and letter of credit needs of its wholly owned subsidiaries in Europe and Asia. Avnet generally guarantees its subsidiaries' debt under these facilities. OÃ...-Balance Sheet Arrangements The Company has a $350.0 million accounts receivable...

  • Page 37
    ... and various other economic, market and industry factors. The Company was in compliance with all covenants of the Program at July 3, 2004. The Credit Facility discussed in Financing Transactions contains certain covenants with various limitations on debt incurrence, dividends, investments and...

  • Page 38
    ... outstanding under which the Company pays a variable interest rate and receives a Ã'xed interest rate. The following table sets forth the scheduled maturities and the total fair value (generally based on quoted market prices) of the Company's debt outstanding at July 3, 2004 (dollars in millions...

  • Page 39
    ... by the Company in the reports that it Ã'les or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods speciÃ'ed by the Securities and Exchange Commission's rules and forms relating to the Company. During the last quarter of Ã'scal 2004, there have...

  • Page 40
    ...by reference to the Company's definitive proxy statement relating to the Annual Meeting of Stockholders anticipated to be held on November 11, 2004. Item 12. Security Ownership of Certain BeneÃ'cial Owners and Management Equity Compensation Plan Information as of July 3, 2004 Number of Securities to...

  • Page 41
    Item 14. Principal Accounting Fees and Services The information called for by Item 14 is incorporated in this Report by reference to the Company's deÃ'nitive proxy statement relating to the Annual Meeting of Stockholders anticipated to be held on November 11, 2004. 32

  • Page 42
    ... to Item 12, its press release announcing the Ã'scal third quarter Ã'nancial results; (4) Current Report on Form 8-K bearing cover date of June 7, 2004 in which the Company (i) Ã'led, pursuant to Item 7, its Credit Agreement dated June 7, 2004 for the Company's new syndicated bank facility and (ii...

  • Page 43
    ...7, 2004. Signature Title /s/ ROY VALLEE Roy Vallee * Eleanor Baum Chairman of the Board, Chief Executive OÇcer and Director Director * J. Veronica Biggins * Lawrence W. Clarkson * Ehud Houminer * James A. Lawrence * Frank R. Noonan * Ray M. Robinson * Gary L. Tooker /s/ RAYMOND SADOWSKI Raymond...

  • Page 44
    ...OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Avnet, Inc.: We have audited the accompanying consolidated balance sheets of Avnet, Inc. and subsidiaries (the Company) as of July 3, 2004 and June 27, 2003, and the related consolidated statements of operations...

  • Page 45
    AVNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 3, June 27, 2004 2003 (Thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents (Note 1 Receivables, less allowances of $78,410 and $84,042, respectively (Note 3) ÏÏ Inventories Other Total current assets ...

  • Page 46
    AVNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended July 3, June 27, June 28, 2004 2003 2002 (Thousands, except per share amounts) Sales Cost of sales (Note 17 Gross proÃ't Selling, general and administrative expenses Restructuring and other charges (Note 17 ...

  • Page 47
    ... adjustments (Note 4 Minimum pension liability adjustment, net of tax of $1,651 (Notes 4 and 15 Comprehensive income (Note 4 Eurotronics contingent purchase price (Note 2 Stock option and incentive programs, including related tax beneÃ'ts of $756 Balance, July 3, 2004 $117,840 ÃŒ ÃŒ $542...

  • Page 48
    ... reconciling items: Depreciation and amortization Deferred taxes (Note 9 Non-cash restructuring and other charges (Note 17 Other, net (Note 15 Changes in (net of eÃ...ects from business acquisitions and dispositions): Receivables Inventories Accounts payable Accrued expenses and other, net Net...

  • Page 49
    ...invests from time to time in ventures in which the Company's ownership interest is less than 20% and over which the Company does not exercise signiÃ'cant inÃ-uence. Such investments are accounted for under the cost method. The fair values for investments not traded on a quoted exchange are estimated...

  • Page 50
    ... for accepting returns of product from the customer even if Avnet, in turn, has a right to return the product to the original supplier if the product is defective. Under these terms, the Company serves as the principal with the customer, as deÃ'ned under SEC StaÃ... Accounting Bulletin No...

  • Page 51
    ... accounts receivable. The Company invests its excess cash primarily in overnight Eurodollar time deposits and institutional money market funds with quality Ã'nancial institutions. The Company sells electronic components and computer products primarily to original equipment and contract manufacturers...

  • Page 52
    ..., including cash and cash equivalents, receivables and accounts payable approximate their fair values at July 3, 2004 due to the short-term nature of these instruments. See Note 7 for further discussion of the fair value of the Company's Ã'xed rate long-term debt instruments and see Investments in...

  • Page 53
    ... fair value of the stock guarantee incorporated into the purchase price accounting at the time of the Eurotronics B.V. acquisition. During Ã'scal 2004, the Company also acquired the interest of a 9% minority shareholder in the Company's majority-owned Brazilian subsidiary, Avnet do Brasil, LTDA, as...

  • Page 54
    ... at market rates; accordingly, no servicing asset or liability has been recorded. The Program qualiÃ'es for sale treatment under SFAS 140. As of July 3, 2004 and June 27, 2003, the Company had no drawings outstanding under the Program and therefore there are no securitized accounts receivable held...

  • Page 55
    ..., to each of those reporting units as of June 30, 2001. For the purpose of this process, the reporting unit structure was deÃ'ned as each of the three regional businesses (Americas, EMEA and Asia) within each of the Company's operating groups. The fair value of each reporting unit was determined by...

  • Page 56
    ...'s annual impairment tests in Ã'scal 2004, 2003 and 2002 yielded no additional impairments to the carrying value of the Company's goodwill. The following table presents the carrying amount of goodwill, by reportable segment, for the periods presented: Avnet Electronics Marketing Avnet Technology...

  • Page 57
    ... support the working capital requirements of foreign operations. The weighted average interest rates on the bank credit facilities at July 3, 2004 and June 27, 2003 were 2.5% and 4.7%, respectively. As of its acquisition of Kent Electronics Corporation (""Kent'') on June 8, 2001, Avnet assumed Kent...

  • Page 58
    ... escrow account was $78,543,000. During the third quarter of Ã'scal 2003, the Company incurred debt extinguishment costs of $13,487,000 pre-tax, $8,152,000 after-tax and $0.07 per share on a diluted basis, related primarily to premiums and other transaction costs associated with the tender and early...

  • Page 59
    .... Additionally, included in long-term debt is a comparable fair value adjustment increasing the total liability by these same amounts. The Company had total borrowing capacity of $700,000,000 at July 3, 2004 under the Credit Facility and the asset securitization program (see Note 3), against which...

  • Page 60
    ... rates applied to foreign income (losses) and also include the impact of valuation allowances placed against the Company's otherwise realizable foreign loss carry-forwards. The additional valuation allowances recorded during Ã'scal 2004 and 2003 are substantially oÃ...set by tax beneÃ'ts related to...

  • Page 61
    ...) The signiÃ'cant components of deferred tax assets and liabilities, included primarily in other long-term assets on the consolidated balance sheets, are as follows: July 3, June 27, 2004 2003 (Thousands) Deferred tax assets: Inventory valuation Accounts receivable valuation Federal, state and...

  • Page 62
    ... and 2003: July 3, June 27, 2004 2003 (Thousands) Changes in beneÃ't obligations: BeneÃ't obligations at beginning of year Service cost Interest cost Actuarial (gain) loss BeneÃ'ts paid BeneÃ't obligations at end of year Change in plan assets: Fair value of plan assets at beginning of year...

  • Page 63
    ...: 2004 2003 Equity securities Debt securities Other investments, primarily money market funds 59% 34 7 56% 38 6 The general investment objectives of the Plan are to maximize returns through a diversiÃ'ed investment portfolio in order to earn annualized returns that meet the long-term cost of...

  • Page 64
    ... the 401(k) plan were $23,000. 11. Long-term Leases: The Company leases many of its operating facilities and is also committed under lease agreements for transportation and operating equipment. Rent expense charged to operations during the last three years is as follows: July 3, 2004 Years Ended...

  • Page 65
    AVNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) The Company has Ã've stock option plans with shares available for grant at July 3, 2004: 1995 1996 Plan 1997 1999 2003 Minimum exercise price as a percentage of fair market value at date of grant Plan ...

  • Page 66
    ...) Employee Stock Purchase Plan: In October 1995, the Company implemented the Avnet Employee Stock Purchase Plan (""ESPP''). Under the terms of the ESPP, eligible employees of the Company are oÃ...ered options to purchase shares of Avnet common stock at a price equal to 85% of the fair market value on...

  • Page 67
    ... for the outstanding options exceeded the average market price for the Company's common stock. Accordingly, in Ã'scal 2004, the eÃ...ects of approximately 3,159,000 shares related to stock options are excluded from the computation above, all of which relate to options for which exercise prices were...

  • Page 68
    ..., industrial and manufacturing, medical equipment and military and aerospace. EM also oÃ...ers an array of value-added services to its customers such as supply-chain management, engineering design, inventory replenishment systems, connector and cable assembly and semiconductor programming. 59

  • Page 69
    ... storage, software and networking solutions, and the services required to implement these solutions, to the value-added reseller channel and enterprise computing customers. TS also focuses on the worldwide original equipment manufacturers (""OEM'') market for computing technology, system integrators...

  • Page 70
    ... prior year acquisition integration costs discussed more fully below. During the Ã'rst and second quarters of Ã'scal 2004, the Company executed certain restructuring and cost reduction initiatives designed to continue improving the proÃ'tability of the Company. These actions can generally be broken...

  • Page 71
    ... lease obligations and write-downs to fair market value of owned assets located in these facilities that have been vacated. Management also evaluated and elected to discontinue a number of IT-related initiatives that, in light of recent business restructurings, no longer met the Company's return...

  • Page 72
    ... related to an owned facility that was vacated and classiÃ'ed as held for sale during that quarter. In the fourth quarter of Ã'scal 2002, the Company recorded charges representing a write-down in value of certain assets acquired in the Ã'scal 2001 acquisition of Kent Electronics Corporation (""Kent...

  • Page 73
    ... as part of the restructuring and integration charges taken in the fourth quarter of 2001. The majority of these acquisition-related charges are included in ""other'' in the table summarizing the Company's restructuring activity for the three years ended July 3, 2004. The remaining pre-tax charge...

  • Page 74
    ... into one operating group now called Avnet Technology Solutions (""TS''). The charges amounted to $32.2 million pre-tax (all of which was included as part of operating expenses), $22.2 million after-tax and $0.18 per share on a diluted basis for the Ã'rst quarter and Ã'scal year 2004. See Note 17...

  • Page 75
    SCHEDULE II AVNET, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended July 3, 2004, June 27, 2003 and June 28, 2002 Column A Column B Balance at Beginning of Period Column C Additions Charged to Charged to Costs and Other AccountsExpenses Describe (Thousands) Column D Column E ...

  • Page 76
    ... to the Company's Current Report on Form 8-K dated March 8, 2004, Exhibit 4.2). Note: The total amount of securities authorized under any other instrument that deÃ'nes the rights of holders of Company's long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on...

  • Page 77
    ...October 1, 2003). Avnet, Inc. 2003 Stock Compensation Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 333-112057, Exhibit 10.1). Change of Control Agreement dated as of March 1, 2001 between the Company and Harley Feldberg (incorporated herein by...

  • Page 78
    ... Union National Bank, The Bank of Nova Scotia, and ABN AMRO Bank, N.V., as Joint Syndication Agents, the Other Lenders and Banc of America Securities LLC, and Credit Suisse First Boston as Joint Lead Arrangers and Joint Book Managers (incorporated herein by reference to the Company's Current Report...

  • Page 79
    ...Inc. and Avnet Logistics U.S., L.P., as Borrowers, the Lenders party thereto, and Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer. (incorporated herein by reference to the Company's Current Report on Form 8-K dated June 8, 2004, Exhibit 99. 21. List of subsidiaries of...

  • Page 80
    ... by Raymond Sadowski, Chief Financial OÇcer, under Section 906 of the SarbanesOxley Act of 2002. * This Exhibit does not include the Exhibits and Schedules thereto as listed in its table of contents. The Company undertakes to furnish any such Exhibits and Schedules to the Securities and Exchange...

  • Page 81
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