Avnet 2006 Annual Report Download - page 28

Memec-related restructuring, integration and other charges
During fiscal 2006, the acquired Memec business was being integrated into the Company's existing EM
operations in all three regions. As a result of the acquisition integration efforts, the Company established and
approved plans to restructure certain of Avnet's existing operations to accommodate the integration of Memec
into Avnet.
The restructuring and other charges (excluding integration charges discussed below) incurred during fiscal
2006 related to the integration of Memec totaled $31.6 million pre-tax, $24.2 million after-tax and $0.16 per
share on a diluted basis. The pre-tax charges included inventory write-downs for terminated lines amounting to
$9.0 million recorded in ""Cost of sales'' as discussed below. The remaining pre-tax charge of $22.6 million,
which was included in ""Restructuring, integration and other charges'' in the accompanying consolidated
statement of operations, included $16.4 million for severance costs, $2.6 million of facility exit costs related
primarily to remaining lease obligations on exited facilities, $2.4 million for the write-down of certain capitalized
IT-related initiatives, primarily in the Americas, and $1.2 million for other charges related primarily to other
contractual obligations that will no longer be utilized in the combined Avnet and Memec business.
The charge for terminated inventory lines related to a strategic decision during the first half of fiscal 2006 to
exit certain product lines within EM in the Americas. The charge in the third quarter of fiscal 2006 was a result
of similar strategic decisions made in the EMEA region. The terminated lines were product lines that Avnet
management elected not to continue with the combined Avnet and Memec business. As a result, management
recorded a write-down of the related inventory on hand to fair market value due to the lack of contractual return
privileges when a line is terminated by Avnet. Severance charges incurred during fiscal 2006 related to work
force reductions of over 250 personnel primarily in administrative and support functions in the EMEA and
Americas regions. The positions eliminated were Avnet personnel that were deemed redundant by management
with the integration of Memec into Avnet. The facility exit charges related to liabilities for remaining non-
cancelable lease obligations and the write-down of leasehold improvements and other property, plant and
equipment relating to the facilities being exited. The facilities, which supported administrative and support
functions, and some sales functions, were identified for consolidation based upon the termination of certain
personnel discussed above and the relocation of other personnel into other existing Avnet facilities. The
IT-related charges resulted from management's review of certain capitalized systems and hardware as part of the
integration effort. A substantial portion of this write-off, which was recorded in the first quarter of fiscal 2006,
relates to mainframe hardware that was scrapped due to the purchase of new, higher capacity hardware to handle
the increased capacity needs with the addition of Memec. Similarly, certain capitalized IT assets were written off
when they became redundant either to other acquired systems or new systems under development in the first
quarter of fiscal 2006 as a result of the acquisition of Memec. Other charges in fiscal 2006 related primarily to
certain other contractual obligations and contract termination charges.
Of the $31.6 million recorded to expense for the Memec-related restructuring activity during fiscal 2006,
$11.6 million represented non-cash asset write-downs, which consisted primarily of the charge to cost of sales
for inventory write-downs and the write-down of IT and other fixed assets. In addition, certain severance and
lease liabilities in the amount of $1.3 million were assumed by the buyer of the net assets of a small, non-core
EM business in the EMEA region (see Loss on Sale of Business Lines in this MD&A for further discussion).
The remaining Memec-related charges in fiscal 2006 of $18.7 million required or will require the use of cash,
of which $15.4 million was paid during fiscal 2006.
As of July 1, 2006, remaining Memec-related reserves related to the restructuring actions taken in fiscal
2006 totaled $3.7 million, of which $3.0 million related to severance reserves, the majority of which
management expects to utilize by the end of fiscal 2007, facility exit costs and other costs of $0.7 million, the
majority of which management expects to utilize by fiscal 2009.
As a result of the Memec acquisition and its subsequent integration into Avnet, the Company incurred
integration costs during fiscal 2006, which totaled $21.9 million pre-tax, $14.6 million after-tax and $0.10 per
share on a diluted basis. The integration costs, particularly in the first nine months of fiscal 2006, related to
incremental salary costs, primarily of Memec personnel, who were retained following the close of the
acquisition, solely to assist in the integration of Memec's IT systems, administrative and logistics operations
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