Avnet 2006 Annual Report Download - page 26

Gross Profit and Gross Profit Margins
Avnet's consolidated gross profit in fiscal 2006 was $1.84 billion, which represents a gross profit margin of
12.9%. This compares with gross profit of $1.46 billion and a gross profit margin of 13.2% in fiscal 2005. The
$380 million increase in gross profit was due primarily to the increase in sales as a result of the acquisition of
Memec. The gross profit in fiscal 2006 includes charges totaling $9.0 million, or 0.06% of sales, to write down
certain inventory due primarily to supplier terminations as a result of a strategic decision to exit certain
product lines within EM after an evaluation of the combined product lines of EM and Memec. See
Restructuring Integration and Other Charges for further discussion of these charges. The Company's margin is
impacted by the mix of business between Avnet's two operating groups as 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. In addition, the sales mix by region also impacts Avnet's consolidated margins as EM Asia's
gross margins are typically lower than those in the Americas and EMEA, but its expense to sales are lower and
its working capital investment is also lower as compared with the other regions. Gross margin is also impacted
by customer mix, product mix within each business group and region, the business environment and
competitive factors. As a result of these factors, gross profit margins declined in the first half of fiscal 2006,
but began to strengthen during the second half of the year as the Company placed a heavy focus on improving
gross margins.
Another important metric measured by management is gross profit per average employee. The increase in
gross profit dollars and the synergies resulting from the acquisition and integration of Memec combined to
yield a record gross profit per average employee in fiscal 2006 of approximately $162,000, an improvement of
approximately 10% when compared with $148,000 per average employee in fiscal 2005.
Consolidated gross profit in fiscal 2005 was $1.46 billion as compared with $1.36 billion in fiscal 2004.
Gross profit margin in fiscal 2005 was 13.2%, down from 13.3% in fiscal 2004. The mix of business between
Avnet's two operating groups and the growth of EM Asia's business impacted the gross profit margin of the
Company as noted above and was the primary driver of the slight decline in gross profit margin year over year.
Selling, General and Administrative Expenses
Avnet's consolidated selling, general and administrative (""SG&A'') expenses were $1.34 billion, or 9.4%
of sales, in fiscal 2006 as compared with $1.14 billion, or 10.3% of sales, in fiscal 2005. The increase in SG&A
dollars over the prior year is a direct result of the expansion of the overall business following the acquisition of
Memec at the beginning of fiscal 2006. Despite this increase in SG&A expenses, the ratio of SG&A expenses
as a percentage of sales improved 84 basis points over fiscal 2005. More importantly, the ratio of SG&A
expenses as a percentage of sales improved 158 basis points over the fiscal 2005 ratio adjusted to include
Memec as if it had been part of Avnet throughout fiscal 2005. The primary driver in the ratio improvement
was the realization of synergies as a result of restructuring and integration actions taken in fiscal 2006. SG&A
expenses were also negatively impacted by incremental stock-based compensation expense as a result of the
adoption of a new accounting pronouncement and the initial recognition and subsequent amortization of
intangible assets associated with the Memec acquisition.
SG&A expenses as a percentage of gross profit in fiscal 2006 was 73.1% as compared with 80.6% on a pro
forma basis in fiscal 2005, representing a 743 basis point year-over-year improvement. Each of the ratios
mentioned has improved to its best annual level since before the industry and economic downturn began in
fiscal 2001. The current year improvement in these key measures of operating leverage is largely a result of the
actions taken in connection with the Memec integration and the synergies realized from such actions (see
Restructuring, Integration and Other Charges in this MD&A for further discussion of the actions taken by the
Company). 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. In addition to cost savings realized through the
integration of Memec into Avnet's business, management took actions in connection with recent divestures to
further reduce operating expenses during fiscal 2006 (see Restructuring, Integration and Other Charges in this
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