Avnet 2005 Annual Report Download - page 23

was declining sequential quarterly sales in the first two quarters of fiscal 2005 before EM returned to
sequential quarterly growth in the second half of the fiscal year and sales levels for electronic components
returned to levels experienced before the mid-cycle inventory correction began. In contrast, TS's record sales
in fiscal 2005 grew by 10.5% as compared with fiscal 2004 sales for the computer products group. This growth
rate was 327 basis points higher than the 7.2% growth in sales in TS in fiscal 2004 compared with fiscal 2003,
when the industry was emerging from the multi-year downturn discussed above. The current year increase in
sales was a result of strength in the small-and medium-sized business segments served by TS, as well as
growth in sales for microprocessors throughout the fiscal year.
Geographically, both operating groups grew sales in all three major economic regions in which they
operate: the Americas; Europe, the Middle East and Africa (""EMEA''); and Asia. Positive growth trends for
EM Asia, particularly in the second half of fiscal 2005, are especially encouraging as EM Asia was the first
region to feel the impacts of the mid-cycle inventory correction in the electronic components sector. The
growth in the second half of the fiscal year, coupled with positive trends in customer bookings in all regions,
are encouraging signs for continued growth in EM. These trends helped EM Asia yield its seventh consecutive
year of record annual sales. The Asia region exhibited the largest percentage growth for TS, which represents a
significant ongoing strategic opportunity 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 strong microprocessor sales in Asia. Although the EMEA region of TS did not quite post a
record regional sales year in fiscal 2005, EMEA has returned to essentially the same sales levels as fiscal
2002 Ì TS's previous highest sales year for the EMEA region.
Avnet's ongoing focus on the management of operating costs and return on working capital have resulted
in Avnet's highest level of operating profits and operating profit margin since before the multi-year economic
and industry downturn began. Avnet's operating income as a percentage of sales was 2.90% in fiscal 2005, up
93 basis points from 1.97% in fiscal 2004. Fiscal 2004 operating expenses also included restructuring and other
charges of $55.6 million, or 0.54% of sales (see Restructuring and Other Charges in this MD&A for further
discussion). With gross profit margins remaining relatively stable year-over-year, the Company's reduction of
ongoing operating costs has been key to the significant improvement in profitability. As a result, the
Company's fiscal 2005 operating income drop-through, which is the percentage of incremental gross profit
dollars that drop through to the operating income line before restructuring and other charges, was 67% (126%
including the impact of the fiscal 2004 restructuring and other charges). The Company also maintained
inventory turns for fiscal year 2005 at levels comparable to the prior fiscal year. However, this includes a
period of decline in this asset velocity metric in the first half of fiscal year 2005, which was more than offset by
the improvement in the second half of the fiscal year as EM began to emerge from the mid-cycle inventory
correction and achieved record quarterly inventory turns by the fourth quarter of fiscal 2005. TS also
maintained high levels of working capital productivity even after the computer business's typical seasonal peak
in Avnet's second fiscal quarter.
Operating efficiency and working capital management will remain a key focus of Avnet's overall value-
based management initiatives and its efforts to continue growing profitability and return on capital at a faster
rate than its growth in revenues.
It is difficult for the Company, as a distributor, to forecast the material trends of the electronic
component and computer product industry, aside from some of the normal seasonality discussed herein,
because Avnet does not typically have material forward-looking information available from its customers and
suppliers beyond approximately three to four months of forecast information. As such, management relies on
the publicly available information published by certain industry groups and other related analyses in evaluating
its business plans in the longer term.
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