Avnet 2004 Annual Report Download - page 28

business conditions. The charge totaled $79.6 million pre-tax ($21.6 million included in cost of sales and the
remaining $58.0 million included as a component of operating expenses) and $62.1 million after tax, or
$0.52 per share on a diluted basis.
The Kent-related items resulted from the acquisition of Kent being accounted for using the ""pooling-of-
interests'' method of accounting for the acquisition. These items related speciÑcally to assets or obligations
that were on the books of Kent at the acquisition and, therefore, under the ""pooling-of-interests'' method,
these items that normally would have been reÖected as adjustments to goodwill if the purchase method of
accounting had been used were instead recorded to the Company's consolidated statement of operations.
These items amounted to $29.7 million pre-tax and relate primarily to: (1) write-downs to the value of
receivables considered uncollectible after the Company had exhausted eÅorts of collecting these amounts from
Kent's pre-acquisition customers ($8.2 million pre-tax); (2) excess and obsolete inventory, primarily for
customer-speciÑc inventory held by Kent at the acquisition date that was subsequently determined, through
ongoing negotiations with the customer, to require a write-down to net realizable value ($21.6 million pre-
tax); and (3) charges to record additional write-downs to approximate fair market value on held-for-sale
properties acquired in the Kent acquisition or to record lease reserves for non-cancelable lease obligations on
properties the Company committed to exit ($15.9 million pre-tax); (4) net of approximately $16.0 million
pre-tax in cash recoveries of certain charges recorded as part of the restructuring and integration charges taken
in the fourth quarter of 2001.
The remaining pre-tax charge recorded in the fourth quarter of Ñscal 2002, which amounted to
$49.9 million, included an impairment charge of $36.2 million pre-tax to write-down certain of the Company's
investments in unconsolidated Internet-related businesses to their fair market value and $13.7 million pre-tax
for severance charges taken for workforce reductions, primarily in the Americas region, with more limited
reductions in EMEA and Asia, totaling approximately 850 individuals. The impairments recorded to the
Company's Internet-related investments are considered capital losses for tax purposes and were therefore only
deductible to the extent the Company had available capital gains. At that time, there were no capital gains,
available or forecasted in the foreseeable future, to oÅset these losses. Therefore, the Company generally did
not record a tax beneÑt for these losses.
Status of Restructuring Reserves
As of July 3, 2004, the Company's total remaining reserves for restructuring and other related activities
totaled $26.8 million. Of this balance, $3.0 million relates to remaining severance reserves, the majority of
which the Company expects to utilize by the end of the Ñrst quarter of Ñscal 2006. Reserves for $22.4 million
relate to reserves for contractual lease commitments, substantially all of which the Company expects to utilize
by the end of Ñscal 2007. The IT-related and other reserves, which total $1.4 million, relate primarily to
remaining contractual commitments, the majority of which the Company expects to utilize by the end of Ñscal
2005.
Operating Income (Loss)
Operating income for Ñscal 2004 was $202.2 million, or 2.0% of consolidated sales as compared with
operating income of $12.7 million, or 0.1% of consolidated sales in Ñscal 2003. Results for both of these
periods include the negative impacts of restructuring and other charges, further discussed above, which totaled
$55.6 million, or 0.5% of sales, in Ñscal 2004 and $106.8 million, or 1.2% of sales in Ñscal 2003. This signiÑcant
improvement in operating income in absolute dollars and as a percentage of sales is driven by the growth in
sales and the reduction 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 Ñscal 2004, which is more
than double EM's operating income in Ñscal 2003 of $101.9 million, or 2.0% of EM's sales. TS's Ñscal 2004
operating income of $98.9 million, or 2.3% of TS's sales, also improved from $56.2 million, or 1.4% of TS's
sales, in Ñscal 2003. These operating income results within Avnet's operating groups are, similar to the
consolidated results, primarily a function of the Company's ongoing cost reduction eÅorts across both
operating groups and all regions, in addition to the growth in sales year-over-year.
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