Avnet 2006 Annual Report Download - page 24

Avnet's ongoing focus on the management of operating costs and returns on capital has resulted in its
highest level of operating profits, operating profit margin and returns on capital since before the multi-year
economic and industry downturn began in 2001. Avnet's operating income was $430.5 million, or 3.0% of
consolidated sales in fiscal 2006, up 12 basis points from 2.9% in fiscal 2005. Fiscal 2006 operating income was
negatively impacted by expenses relating to (i) restructuring, integration and other costs resulting from the
acquisition and integration of Memec into Avnet's existing business, (ii) actions taken following the
divestitures of two small, non-core TS businesses in the Americas, certain cost-cutting initiatives in the TS
EMEA region and other actions, (iii) incremental stock-based compensation expense resulting from the
Company's adoption of SFAS 123R and modifications to stock compensation plans in fiscal 2006,
(iv) incremental amortization expense associated with amortizable intangible assets recorded in fiscal 2006 as
a result of the Memec acquisition, and (v) the net loss related to the divestiture of non-core businesses, all of
which are described further under the caption Restructuring, Integration and Other Charges. The total of these
costs amounted to $93.3 million or 0.65% of sales. These restructuring and integration initiatives were part of
the Company's overall efforts to realize the synergies expected as a result of the Memec acquisition and to
achieve greater operational efficiency. At the beginning of fiscal 2006, management anticipated that
approximately $120 million of annualized operating expenses would be removed from the combined Avnet and
Memec businesses once the integration of Memec was completed. As of the end of fiscal 2006, the Company
had taken actions to remove approximately $150 million of annualized operating expenses. With gross profit
margins declining during the first half of fiscal 2006, but improving during the second half, the Company's
acquisition of Memec and the reduction of ongoing operating costs have been key to the significant
improvement in profitability. The Company also continued to improve its working capital velocity and, in
particular, its inventory turns during fiscal 2006 as it continued to focus on improving its asset utilization.
Operating efficiency and working capital management will remain a key focus of Avnet's overall value-
based management initiatives and its efforts to continue to grow profitability and to increase 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 products 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.
Sales
The table below provides a year-over-year summary of sales for the Company and its operating groups:
Three-Year Analysis of Sales: By Operating Group and Geography
Years Ended Percent Change
July 1, % of July 2, % of July 3, % of 2006 to 2005 to
2006 Total 2005 Total 2004 Total 2005 2004
(Dollars in millions)
Sales by Operating Group:
EM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,262.4 65.0% $ 6,259.0 56.6% $ 5,892.4 57.5% 48.0% 6.2%
TS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,991.2 35.0 4,807.8 43.4 4,352.3 42.5 3.8 10.5
$14,253.6 $11,066.8 $10,244.7 28.8 8.0
Sales by Geographic Area:
Americas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,223.9 50.7% $ 5,804.9 52.4% $ 5,409.6 52.8% 24.4% 7.3%
EMEA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,374.2 30.7 3,669.8 33.2 3,380.2 33.0 19.2 8.6
Asia/Pacific ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,655.5 18.6 1,592.1 14.4 1,454.9 14.2 66.8 9.4
$14,253.6 $11,066.8 $10,244.7 28.8 8.0
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