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50
YEARS
OF MAKING HISTORY
2005 ANNUAL REPORT

Table of contents

  • Page 1
    50 YEARS OF MAKING HISTORY 2005 ANNUAL REPORT

  • Page 2
    ...leading global distributor of electronic components, computer products, and technology services and solutions. From cell phones, video games and computers to automotive instrumentation, test and measurement devices, automatic teller machines, and avionics and medical equipment, Avnet helps the world...

  • Page 3
    ... supply chain, the industry collapsed into an unparalleled Phoenix ended fiscal 2005 with record working capital velocity in the fourth quarter. Services and solutions were at the forefront, making Avnet's expertise in logistics, financing, marketing, integration and a host of other value-added...

  • Page 4
    ... products in the technology supply chain Avnet's supply chain management solutions reduce customers' working capital and inventory risk Avnet's value-added solutions for design chain management help customers reduce cycle time and lower costs Avnet's experienced technical customer support teams...

  • Page 5
    2005 Annual Report 50 YEARS OF MAKING HISTORY Avnet will provide the highest value to our customers, suppliers, employees and shareholders as the premier technology marketing, distribution and services provider, globally. AVNET, INC. Sales by Region Americas 52.4% EMEA 33.2% Asia 14.4% Return...

  • Page 6
    ...Union. From design to production, from engineering solutions to worldwide supply chain management, Avnet Electronics Marketing gives customers and suppliers Support Across the Boardâ„¢ and Support Across the Globeâ„¢. AVNET TECHNOLOGY SOLUTIONS Sales (in billions) Avnet Technology Solutions is the...

  • Page 7
    ...the Avnet Electronics Marketing group. Less than a month after the acquisition, the integration of Memec's inventory, information technology systems, facilities and workforce was largely complete in the Americas, The acquisition of Memec opens the door to the Japanese market for Avnet. MEMEC Sales...

  • Page 8
    ... Street, Phoenix, Arizona (Address of principal executive offices) 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 New York...

  • Page 9
    ... Other Information PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV...

  • Page 10
    ... distributors of electronic components and computer products may increase significantly 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 profitability which...

  • Page 11
    ...users. Avnet distributes electronic components, computer products and software as received from its suppliers or with assembly or other value added by Avnet. Additionally, Avnet provides engineering design, materials management and logistics services, system integration and configuration, and supply...

  • Page 12
    ...EM Americas also provides an array of value-added services including engineering design, supply chain services, hi-reliability processing, parametric assembly, cable assembly, fan assembly, taping, reeling and component modification. EMEA ‚ In EMEA, EM goes to market with seven sales and marketing...

  • Page 13
    ... worldwide OEM market for computing technology, system integrators and non-PC OEMs that require embedded systems and solutions including engineering, product prototyping, integration and other value-added services. TS is a leading partner for system vendors such as IBM and HP. Other key suppliers TS...

  • Page 14
    ...of this Report. Acquisitions Subsequent to fiscal 2005 (on July 5, 2005), the Company completed the acquisition of Memec, a global distributor that markets and sells a portfolio of semiconductor devices from industry-leading suppliers, and a provider of engineering expertise and design services. The...

  • Page 15
    ...July 2, 2005, the Company had more than 250 locations worldwide, as well as a limited number of instances where Avnet-owned product is stored in customer facilities. Many of these locations contain sales, warehousing and administrative functions for multiple sales and marketing units. Avnet sells to...

  • Page 16
    ... Company's website (www.avnet.com under the ""Investor Relations Ì SEC Filings'' caption) as soon as reasonably practicable after the report is electronically filed with, or furnished to, the Securities and Exchange Commission. These details about Avnet's website and its content are for information...

  • Page 17
    ..., Arizona Tempe, Arizona Chandler, Arizona Phoenix, Arizona Grapevine, Texas Poing, Germany Tongeren, Belgium 176,000 132,000 395,000 122,000 181,000 190,000 167,000 Leased Leased Owned Leased Leased Leased Owned Corporate and EM headquarters TS headquarters EM warehousing and value-added...

  • Page 18
    ... information known to date, management believes that the Company has appropriately accrued in its consolidated financial 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...

  • Page 19
    PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market price per share The Company's common stock is listed on the New York Stock Exchange. Quarterly market prices (as reported for the New York Stock Exchange composite transactions) for the last two fiscal years...

  • Page 20
    ... 2, 2005 Years Ended July 3, June 27, June 28, 2004 2003 2002 (Millions, except for per share and ratio data) June 29, 2001 Income: Sales Gross profit Operating income (loss Income tax provision (benefit)ÏÏÏÏ Earnings (loss Financial Position: Working capital Total assets Long-term debt...

  • Page 21
    ... the Computer Marketing (""CM'') and Applied Computing (""AC'') operating groups into one operating group now called Technology Solutions. These charges amounted to $55.6 million (all of which was included in operating expenses), $38.6 million after-tax and $0.32 per share on a diluted basis. Fiscal...

  • Page 22
    ... 2005 (on July 5, 2005), the Company acquired Memec Group Holdings Limited (""Memec''), a global distributor that markets and sells a portfolio of semiconductor devices from industryleading suppliers, in addition to providing customers with engineering expertise and design services. The acquisition...

  • Page 23
    ...for the Company's computer products group but is the smallest region for TS, with Asia sales accounting for less than 5% of TS's consolidated sales. The Americas and Asia regions of TS both achieved record annual sales in fiscal 2005, bolstered by strong server and software sales in the Americas and...

  • Page 24
    ... fiscal 2005 compared to fiscal 2004. Fiscal 2005 sales were the highest for Avnet since fiscal 2001 Ì the year in which the multi-year downturn in the electronic components and computer product industry began. Management estimates that the translation impact of changes in foreign currency exchange...

  • Page 25
    ....3%. The mix of business between Avnet's two operating groups impacts the gross profit margin of the Company. The computer product sales of TS typically yield lower gross profit margins, but also a lower capital investment, than the electronic component sales of EM. As a result, the slight increase...

  • Page 26
    ....8% of sales, in fiscal 2004. Management also monitors the metric of selling, general and administrative expenses as a percentage of gross profit. This ratio was 78.0% in fiscal 2005, a 313 basis point improvement over 81.1% in fiscal 2004. Each of these ratios has improved to its best annual level...

  • Page 27
    ... the profitability of the Company. These actions can generally be broken into three categories: (1) the combination of the Company's former Computer Marketing (""CM'') and Applied Computing (""AC'') segments into one computer products and services business called Technology Solutions (""TS''), as...

  • Page 28
    ...their estimated fair market values. This charge, totaling $9.4 million, of which $4.2 million relates to the CM EMEA computer systems that were disposed of, is included in the facilities and IT-related charges discussed above. During the fourth quarter of fiscal 2004, as part of management's ongoing...

  • Page 29
    ...The new charge activity, mostly for severance and consolidation of selected facilities, related to each of the Company's three operating groups and its corporate functions in the Americas and EMEA regions. The additional census reductions totaled approximately 175 and resulted primarily from: (1) EM...

  • Page 30
    ...on the Company's annual interest expense as the Company was able to satisfy the cash obligations of the purchase with cash on hand. Simultaneous with the July 5, 2005 close of the acquisition, Avnet also repaid, in cash, substantially all of Memec's ongoing debt obligations. Certain foreign lines of...

  • Page 31
    ... these transactions, the Company incurred debt extinguishment costs, related primarily to premiums and other transaction costs associated with these tenders and early purchases, which totaled $16.4 million pre-tax, $14.2 million after-tax, or $0.12 per share on a diluted basis in fiscal 2004 and $13...

  • Page 32
    ... 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. The Company regularly evaluates...

  • Page 33
    ... Item 15 of this Report. Management expects that the fiscal 2005 pro forma impacts will be a reasonable approximation of the expense associated with share-based payments in fiscal 2006. In addition, the Company will continue to use the Black-Scholes option valuation model to value stock options. 25

  • Page 34
    ... rather than capitalized as part of inventory, and requires the allocation of fixed production overhead costs to be based on normal capacity. SFAS 151 is to be applied prospectively and is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS...

  • Page 35
    ... quarter fiscal 2005 acquisition of DNS Slovakia, a small computer product distributor, as well as certain legal and other costs incurred in fiscal 2005 related to the acquisition of Memec, which did not close until after fiscal 2005. Trends in foreign currency exchange rates shifted in fiscal 2005...

  • Page 36
    ... 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 grew inventory in certain products to accommodate the growing levels in demand and in support of customer...

  • Page 37
    ... table summarizes the Company's capital structure as of the end of fiscal 2005 with a comparison with the end of fiscal 2004: July 2, 2005 % of Total July 3, Capitalization 2004 (Dollars in thousands) % of Total Capitalization Short-term debt Long-term debt Total debt Shareholders' equity Total...

  • Page 38
    ..., the Company has several small lines of credit in various locations to fund 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. Off...

  • Page 39
    ... an upcycle in the electronic components and computer products industry. However, additional cash requirements for working capital are generally expected to be offset by the operating cash flows generated by the Company's enhanced profitability model resulting from the Company's significant cost...

  • Page 40
    ... grew yearover-year, commensurate with the moderate growth in sales in fiscal 2005. However, the growth in accounts receivable was more than offset by reductions in inventory, as a function of the Company's previously discussed working capital management initiatives, and other assets. As a result...

  • Page 41
    ... set forth the scheduled maturities of the Company's debt outstanding at July 2, 2005 and the total fair value (generally based on quoted market prices) of the debt outstanding at July 2, 2005 and July 3, 2004 (dollars in millions): 2006 2007 Fiscal Year 2008 2009 2010 Thereafter Total Liabilities...

  • Page 42
    ... by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission's rules and forms relating to the Company. During the last quarter of fiscal 2005, there have...

  • Page 43
    ... Control Ì Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Avnet, Inc. and subsidiaries as of July 2, 2005 and July 3, 2004, and the related consolidated...

  • Page 44
    Item 9B. Other Information Not applicable. 36

  • Page 45
    ... on November 10, 2005. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information called for by Item 12 is incorporated in this Report by reference to the Company's definitive proxy statement relating to the Annual Meeting of Stockholders...

  • Page 46
    ...a. The following documents are filed as part of this Report: Page 1. Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm Avnet, Inc. and Subsidiaries Consolidated Financial Statements: Consolidated Balance Sheets at July 2, 2005 and July 3, 2004 Consolidated...

  • Page 47
    ... the undersigned, thereunto duly authorized. AVNET, INC. (Registrant) By: ROY VALLEE Roy Vallee, Chairman of the Board, Chief Executive Officer and Director /s/ Date: September 13, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the...

  • Page 48
    Report 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 2, 2005, and July 3, 2004, and the related consolidated statements of ...

  • Page 49
    AVNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 2, July 3, 2005 2004 (Thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents Receivables, less allowances of $85,079 and $78,410, respectively (Note 3) ÏÏ Inventories Other Total current assets Property, ...

  • Page 50
    ... per share amounts) Sales Cost of sales Gross profit Selling, general and administrative expenses Restructuring and other charges (Note 17 Operating income Other income, net Interest expense Debt extinguishment costs (Note 7 Income (loss) before income taxes Income tax provision (benefit...

  • Page 51
    ... adjustments (Note 4) ÏÏÏ Minimum pension liability adjustment, net of tax of $11,877 (Notes 4, 10 and 15 Comprehensive income (Note 4) ÏÏÏ Stock option and incentive programs, including related tax benefits of $102 Balance, July 2, 2005 15,000) Ì Ì $(178) $1,804,510 Ì (46,116) Ì 98...

  • Page 52
    AVNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS July 2, 2005 Years Ended July 3, 2004 (Thousands) June 27, 2003 Cash flows from operating activities: Net income (loss Non-cash and other reconciling items: Depreciation and amortization Deferred income taxes (Note 9 Non-cash ...

  • Page 53
    ... impairment are performed by applying a fair-value based test to Avnet's reporting units, defined as each of the three regional businesses, which are the Americas, EMEA (Europe, Middle East and Africa), and Asia, within each of the Company's operating groups. The Company conducts its periodic test...

  • Page 54
    ... or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met upon shipment to customers. Most of the Company's product sales come from product Avnet purchases from a supplier and holds in inventory. A portion...

  • Page 55
    ... Board Opinion No. 25 (""APB 25''), Accounting for Stock Issued to Employees. In applying APB 25, no expense is recognized upon grant of stock under the Company's various stock option plans, except in the rare circumstances where the exercise price is less than the fair market value on the grant...

  • Page 56
    .... The Company sells electronic components and computer products primarily to original equipment and contract manufacturers, including the military and military contractors, throughout the world. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial...

  • Page 57
    ... to employees, including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). SFAS 123(R) is effective in Avnet's first quarter of fiscal 2006 at which point the Company has...

  • Page 58
    ... to Fiscal 2005 On July 5, 2005, the Company acquired Memec Group Holdings Limited (""Memec''), a global distributor that markets and sells a portfolio of semiconductor devices from industry leading suppliers in addition to providing customers with engineering expertise and design services. Memec...

  • Page 59
    ...714 500,766 10,206 1,243,490 459,258 12,700 27,343 499,301 $ 744,189 The acquisition of Memec will provide for expansion of EM in each of the three major economic regions. The combination of Memec's Asian operations with Avnet's already industry-leading position, based on sales, in the Asia region...

  • Page 60
    ... 2005. Fiscal 2005 In August 2004, Avnet completed the acquisition of DNS Slovakia (""DNS''), a value-added distributor of enterprise computing solutions. DNS, with annual sales of approximately $15,000,000, was integrated into Avnet's Technology Solutions operations in Europe. The Company acquired...

  • Page 61
    ...244 1,864 $3,108 $2,999 $2,410 Losses on sales of receivables and discount on retained interest, net of related servicing revenues, were recorded in interest expense while the other costs associated with the Program were recorded in selling, general and administrative expenses in the accompanying...

  • Page 62
    ... and $80,338,000 in fiscal 2005, 2004 and 2003, respectively. 6. Goodwill The following table presents the carrying amount of goodwill, by reportable segment, for the periods presented: Electronics Marketing Technology Solutions (Thousands) Total Carrying value at June 27, 2003 Additions Foreign...

  • Page 63
    ... February 15, 2005 Other debt due within one year Short-term debt $60,468 Ì Ì 830 $61,298 $ 70,096 2,956 86,633 975 $160,660 The bank credit facilities consist of various committed and uncommitted lines of credit with financial institutions utilized primarily to support the working capital...

  • Page 64
    ... due February 15, 2005. The Company incurred debt extinguishment costs of $16,370,000 pre-tax, $14,215,000 after-tax and $0.12 per share on a diluted basis during fiscal 2004 related primarily to premiums and other transaction costs associated with this tender. The Company has an unsecured, three...

  • Page 65
    ...table above have, subsequent to fiscal 2005, been replaced by approximately $250,000,000 of new debt maturing in fiscal 2016. At July 2, 2005, the fair value, generally based upon quoted market prices, of the 2% Convertible Senior Debentures due March 15, 2034 is $289,500,000. Additionally, the $175...

  • Page 66
    ... in the application of complex tax regulations in the large number of global tax jurisdictions in which the Company operates. In accordance with Statement of Financial Accounting Standard No. 5, Accounting for Contingencies, the Company recognizes these tax liabilities based upon best estimates of...

  • Page 67
    ... and federal statutory 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 Company reclassified certain contingency reserves to the valuation allowance in fiscal 2005 (see...

  • Page 68
    ...602,000 as of July 2, 2005, which have expiration dates ranging from fiscal 2023 to 2025. 10. Pension and profit sharing plans Pension Plan The Company's noncontributory defined benefit pension plan (the ""Plan'') covers substantially all domestic employees. Employees are eligible to participate in...

  • Page 69
    ...25% 9.00 9.00 The Company bases its discount rate on a hypothetical portfolio of bonds rated Aa by Moody's Investor Services or AA by Standard & Poors. The bonds selected for this determination are based upon the estimated amount and timing of payouts of the pension plan. Components of net periodic...

  • Page 70
    ...service. The expense, including matching contributions, relating to the 401(k) plan for fiscal 2005 and 2004 totaled $1,448,000 and $1,478,000, respectively. There was no expense associated with the 401(k) plan in fiscal 2003. 11. Long-term leases The Company leases many of its operating facilities...

  • Page 71
    ...at July 2, 2005 387,540 133,393 29,500 124,951 4,936,000 As applicable, the excess of the fair market value at the date of grant over the exercise price is considered deferred compensation, which is amortized and charged against income as it is earned. The maximum term of options granted under any...

  • Page 72
    ... 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 offered options to purchase shares of Avnet common stock at a price equal to 85% of the fair market value on the first or last day...

  • Page 73
    ... options exceeded the average market price for the Company's common stock. Accordingly, in fiscal 2005 and 2004, the effects of approximately 3,805,000 and 4,276,000 shares, respectively, related to stock options are excluded from the computation above, all of which relate to options for which...

  • Page 74
    ... and aerospace. EM also offers 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. TS markets and sells mid- to high-end servers, data storage, software and...

  • Page 75
    ...) computing technology, system integrators and non-PC OEMs that require embedded systems and solutions including engineering, product prototyping, integration and other value-added services. July 2, 2005 Years Ended July 3, 2004 (Millions) June 27, 2003 Sales: Electronics Marketing Technology...

  • Page 76
    ..., related to Belgium. The Company manages its business based upon the operating results of its two operating groups before restructuring and other charges (see Note 17). In fiscal 2004 and 2003 presented above, approximate unallocated pre-tax restructuring and other charges related to EM and TS...

  • Page 77
    ... 2003, respectively. As part of management's ongoing analysis of its restructuring reserves, the Company recorded certain adjustments to reserves totaling $1,320,000 during fiscal 2005, which were recorded through selling, general and administrative expenses. The adjustments related primarily to the...

  • Page 78
    ... to their estimated fair market values. This charge, totaling $9,430,000, of which $4,228,000 relates to the CM EMEA computer systems, is included in the facilities and IT-related charges quantified above. During the fourth quarter of fiscal 2004, as part of management's ongoing analysis of the...

  • Page 79
    ... pre-tax). Charges related to severance costs and the consolidation of selected facilities were taken in response to the business environment. During the second quarter of fiscal 2003, management identified a number of facilities in each of the Company's operating groups and its corporate functions...

  • Page 80
    ...initiatives and the combination of the Computer Marketing (""CM'') and Applied Computing (""AC'') operating groups into one operating group now called 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...

  • Page 81
    SCHEDULE II AVNET, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended July 2, 2005, July 3, 2004 and June 27, 2003 Column A... DeductionsDescribe Fiscal 2005 Allowance for doubtful accounts ÏÏ Valuation allowance on foreign tax loss carryforwards (Note 9)ÏÏÏÏ Fiscal 2004 ...

  • Page 82
    ... Company's long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Therefore, these instruments are not required to be filed as exhibits to this Report. The Company agrees to furnish copies of such instruments to the Commission upon request...

  • Page 83
    ...No. 333-112057, Exhibit 10.1). Avnet Deferred Compensation Plan (incorporated by reference to the Company's Current Report on Form 8-K dated May 18, 2005, Exhibit 99.1). Change of Control Agreement dated as of March 1, 2001 between the Company and Harley Feldberg (incorporated herein by reference to...

  • Page 84
    ... 6, 2002 among Avnet Receivables Corporation, as Seller, Avnet, Inc., as Servicer, the Companies, as defined therein, the Financial Institutions, as defined therein, and Bank One, NA (Main Office Chicago) as Agent (incorporated herein by reference to the Company's Current Report on Form 8-K dated...

  • Page 85
    ... 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). Other Agreements Securities Acquisition Agreement, dated April 26, 2005, by and among Avnet, Inc. and the sellers named therein and Memec Group...

  • Page 86
    ... & General Manager, Industry Standard Components Center of Excellence, Avnet Technology Solutions R. Neil Taylor Deputy General Counsel Steve Tepedino President, Avnet Technology Solutions Americas Roy Vallee Chief Executive Officer Patrick Zammit President, EBV Elektronik Fiscal 2005, 2004...

  • Page 87
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