Avnet 2004 Annual Report Download - page 25

Gross ProÑt and Gross ProÑt Margins
Consolidated gross proÑt for Ñscal 2004 was $1.36 billion, representing a gross proÑt margin of 13.3%, as
compared with $1.21 billion, and a comparable gross proÑt margin of 13.4% in Ñscal 2003. The mix of business
between the Company's two operating groups as well as the mix of product sales within the operating groups
impacts the gross proÑt margins of the Company. SpeciÑcally, computer product sales from TS typically yield
lower gross proÑt margins than the component sales of EM. In addition, the continuing growth of business in
EM Asia impacts consolidated gross proÑt margins as the business model in this region typically yields a lower
gross proÑt margin although the operating cost structure of EM Asia is also lower than the other regions in
which the Company operates. Therefore, when EM constitutes a larger percentage of consolidated sales, gross
proÑt margins will also typically increase. The impact on gross proÑt margins of EM's increased share of
Avnet's consolidated sales for the whole of Ñscal 2004 was not signiÑcant primarily due to the mix between the
operating groups over the course of Ñscal 2004. The dramatic growth in EM's business did not fully emerge
until the second half of Ñscal 2004. As a result, the Company's consolidated gross proÑt margin improved by
89 basis points in the second half of Ñscal 2004 when compared with the Ñrst half of Ñscal 2004. Consolidated
gross proÑt margins of 13.9% in the fourth quarter of Ñscal 2004 reached their highest level in two years.
The Company also measures productivity by monitoring its gross proÑt per average employee and, due in
large part to the restructuring eÅorts in recent years as further discussed in Restructuring and Other Charges,
the Company's gross proÑt per average employee in Ñscal 2004 was approximately $139,000 as compared with
approximately $114,000 in Ñscal 2003, an increase of 21.9%.
Consolidated gross proÑt margins were 13.4% in Ñscal 2003, down from 13.7% in Ñscal 2002.
Additionally, gross proÑt in Ñscal 2002 included $21.6 million of restructuring charges discussed below which
reduced the reported gross proÑt margin in Ñscal 2002 by 24 basis points (0.24%). This year-over-year decline
was attributable to a larger portion of the Company's consolidated sales originating from the lower margin
computer products operating group, in addition to mix of product sales within the groups, speciÑcally in TS
where there was a higher volume of software sales in Ñscal 2003, which yield a lower gross proÑt margin and
have a lower capital requirement than most other computer products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1.11 billion, or 10.8% of sales, in Ñscal 2004 as
compared with $1.10 billion, or 12.1% of sales in Ñscal 2003. In addition to percentage of sales, another
important metric that management utilizes to monitor its operating expenses is selling, general and
administrative expenses as a percentage of gross proÑt. This ratio improved to 81.1% in Ñscal 2004 as
compared with 90.2% in Ñscal 2003. This substantial improvement in these key measures of operating leverage
resulted from the signiÑcant cost reduction eÅorts that the Company put in place in recent years to manage its
overall proÑtability during the industry downturn and through the up-cycle that has now begun (these eÅorts
are further discussed in Restructuring and Other Charges below). The Ñscal 2004 selling, general and
administrative expenses were also negatively impacted by foreign exchange rate diÅerences year-over-year
which yielded an estimated increase in Ñscal 2004 costs of roughly $56 million (0.5% of sales and 4.1% of gross
proÑt). Furthermore, the Company did not realize the majority of the beneÑt from the restructuring activities
of the Ñrst and second quarters of Ñscal 2004 until the second half of Ñscal 2004. As a result of this timing,
selling, general and administrative expenses as a percentage of sales and as a percentage of gross proÑt fell to
10.7% and 76.7%, respectively, in the fourth quarter of Ñscal 2004, representing the Company's best
performance in these metrics since Ñscal 2001 when the downturn began. The operating leverage ratios
discussed above, in addition to return on working capital and return on capital employed, continue to be key
metrics that management monitors in its eÅorts to achieve appropriate levels of proÑtability.
Selling, general and administrative expenses of $1.10 billion in Ñscal 2003 were 12.1% of sales as
compared with $1.17 billion, or 13.1% of sales, in Ñscal 2002. The improvement in Ñscal 2003 was a function of
the Company's cost reduction eÅorts in that year and in the previous year to remove expenses from the
business in the face of the revenue declines that occurred during the industry and economic downturn. The
impacts of these eÅorts were partially oÅset by the strengthening of the Euro against the US Dollar in Ñscal
2003 as compared with Ñscal 2002.
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