Avnet 2004 Annual Report Download - page 22

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For an understanding of Avnet and the signiÑcant factors that inÖuenced the Company's performance
during the past three Ñscal years, the following discussion should be read in conjunction with the description of
the business appearing in Item 1 of this Report and the consolidated Ñnancial statements, including the related
notes, and other information appearing in Item 15 of this Report.
There are numerous references to the impact of foreign currency translation in this Management's
Discussion and Analysis of Financial Condition and Results of Operations (""MD&A''). Over the past two
years, the U.S. Dollar has weakened signiÑcantly in comparison to most foreign currencies, especially the Euro
(which strengthened against the U.S. Dollar by approximately 14% from Ñscal 2003 to Ñscal 2004 and by
approximately 16% from Ñscal 2002 to Ñscal 2003). When the weaker U.S. Dollar exchange rates of Ñscal
2004 and 2003 are used to translate the results of operations of Avnet's subsidiaries denominated in foreign
currencies, the resulting impact is an increase, in U.S. Dollars, of reported results.
In addition to disclosing Ñnancial results that are determined in accordance with U.S. generally accepted
accounting principles (""GAAP''), the Company also discloses pro forma or non-GAAP measures that may
exclude certain items. Management believes that providing this additional information is useful to the reader
to better assess and understand operating performance, especially when comparing results with previous
periods or forecasting performance for future periods. Management believes the pro forma measures also help
indicate underlying trends in the business. Management also uses pro forma information to establish
operational goals and, in some cases, for measuring performance for compensation purposes. However,
analysis of results and outlook on a pro forma or non-GAAP basis should be used as a complement to, and in
conjunction with, data presented in accordance with GAAP.
Results from Operations
Executive Summary
Fiscal 2004 was the year operating eÇciencies, which Avnet has derived from its value-based manage-
ment initiatives and focus on operating costs over the past several years, combined with sales growth to drive a
dramatic increase in the Company's proÑtability. The Company's sales growth of 13.2% from Ñscal 2003 to
Ñscal 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 as ""EMEA''; and
Asia). Approximately one-third of this year-over-year sales growth is a result of the impact of changes in
foreign currency exchange rates.
During Ñscal 2004, the electronic component and computer product industry emerged from the economic
and industry downturn that commenced after the Company's second quarter of Ñscal 2001. While the
downturn caused rapid sales declines in the second half of Ñscal 2001 and in Ñscal 2002, the Company's top
line performance largely stabilized from that point forward until the beginning of Ñscal 2004 in what remained
a relatively weak technology industry and economy as a whole. During the down-cycle, Avnet's focus on
managing its operating costs resulted in the Company eliminating signiÑcant expense from its ongoing
operations. As a result, selling, general and administrative expenses as a percentage of sales were 10.8% in
Ñscal 2004 as compared with 13.1% as recently as Ñscal 2002. Selling, general and administrative expenses as a
percentage of gross proÑt showed a more signiÑcant positive trend by dropping to 81.1% in Ñscal 2004 as
compared with 95.5% in Ñscal 2002. The operating expense reductions resulted primarily from the Company's
ongoing cost reduction initiatives and recent restructuring eÅorts further discussed in this MD&A. The
Company similarly managed its working capital during this period with steady improvement in inventory turns,
days' sales outstanding and payable days. This focus on managing working capital allowed the Company to
maximize its operating cash Öow despite the downturn and to reduce its outstanding debt and related interest
expense substantially since Ñscal 2001.
Within Avnet's operating groups, EM generated increases in sales in Ñscal 2004 of 18.1% over Ñscal 2003.
EM, which markets and sells semiconductors as well as interconnect, passive and electromechanical devices
and radio frequency/microwave components, is the more cyclical of the Company's two operating groups.
Therefore, the previous down-cycle, as well as the industry upturn that commenced in Ñscal 2004, had a more
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