Avnet 2006 Annual Report Download - page 32

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a gain of $10.9 million pre-tax, $7.3 million after tax and $0.05 per share on a diluted basis was recorded in the
third quarter of fiscal 2006. In EM, the Company sold two small, non-core business lines in its EMEA region
during the fourth quarter of fiscal 2006 for which no tax benefit was available and, as a result, recorded a loss
of $13.6 million pre-tax, $14.3 million after tax and $0.10 per share on a diluted basis. The total impact of
these divestitures in fiscal 2006 was a loss of $2.6 million pre-tax, $7.1 million after tax and $0.05 per share on
a diluted basis.
Operating Income
Operating income for fiscal 2006 was $430.5 million, or 3.0% of consolidated sales, as compared with
operating income of $321.3 million, or 2.9% of consolidated sales, in fiscal 2005. Operating income dollars
increased over the prior year largely as a result of the Memec acquisition. On a pro forma combined basis,
operating income in fiscal 2005 was $355.1 million, or 2.7% of pro forma combined sales. The margin and
operating expense trends discussed previously in this MD&A contributed to the operating income perform-
ance improvement over prior year. Operating income in fiscal 2006 was negatively impacted by a total of
$93.4 million (0.7% of consolidated sales) for charges previously described. (See table in Net Income for a
detail of these charges. See also Restructuring, Integration and Other Charges, Selling, General and
Administrative Expenses and Loss on Sale of Business Lines, Net for further discussion of these charges).
EM reported operating income of $419.1 million (4.5% of EM sales) in fiscal 2006 as compared with
operating income of $233.1 million (3.7% of EM sales) in the prior year. On a pro forma combined basis,
operating income in the prior year was $266.8 million, or 3.1% of EM's pro forma combined sales. The
80 basis point year-over-year improvement in operating income margin (140 basis points on a pro forma
combined basis) reflects increased volume resulting from the Memec acquisition and the synergies created
from the successful integration of the combined businesses. Operating income at TS was $165.7 million (3.3%
of TS sales) as compared with operating income of $147.7 million (3.1% of TS sales) in fiscal 2005. The
improvement in TS operating profitability in fiscal 2006 was driven by continued focus on profitable
relationships and managing ongoing operating costs.
Operating income for fiscal 2005 was $321.3 million, or 2.9% of consolidated sales, as compared with
operating income of $202.2 million, or 2.0% of consolidated sales, in fiscal 2004. Operating income in fiscal
2004 was negatively impacted by the restructuring and other charges discussed above, which totaled
$55.6 million, or 0.5% of sales, in fiscal 2004. The significant growth of operating income in both dollars and as
a percentage of sales is a function of the moderate increase in consolidated sales between the two fiscal years
and the reduction of selling, general and administrative expenses discussed previously in this MD&A.
Interest Expense and Other Income
Interest expense was $96.5 million in fiscal 2006, up $11.4 million, or 13.5%, from interest expense of
$85.1 million in fiscal 2005. The increase in interest expense is a result of rising short-term interest rates and
higher borrowings on the Company's various bank credit facilities. The increase in short-term interest rates
that rose during fiscal 2006 resulted in the Company's fair value hedges paying interest at a higher rate. The
increased borrowings are a direct result of certain cash expended for the acquisition of Memec in the first
quarter of fiscal 2006, cash payments for other charges in fiscal 2006 and working capital needs (see Liquidity
and Capital Resources Ì Cash Flow for further discussion). The factors driving interest expense up are offset
partially by the favorable impact of the Company's issuance of $250.0 million of 6.00% Notes due
September 1, 2015 (the ""6.00% Notes'') and repurchase of $254.1 million of the Company's higher rate
8.00% Notes due November 15, 2006 (the ""8.00% Notes'') during the first quarter of fiscal 2006.
Interest expense was $85.1 million in fiscal 2005, down $9.5 million, or 10.1%, as compared with interest
expense of $94.6 million in fiscal 2004. The reduction in interest expense year-over-year is due to a
combination of reduced total debt outstanding and a lower effective interest rate on outstanding borrowings.
As further described below, the Company has used cash and new financings to further repay outstanding debt
obligations. As a result of these actions, the Company's total debt outstanding at July 2, 2005 was $1.24 billion
and the average debt outstanding during fiscal 2005 was approximately $1.30 billion. This is down from total
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