Avnet 2007 Annual Report Download - page 28

consolidated sales) for restructuring charges previously described. See Restructuring, Integration and Other Items
for further discussion. The overall improvement in operating income margin without these charges was driven by
the increased sales volume, gross profit margin growth, continued focus on cost management and the full benefit of
the synergies achieved subsequent to the successful Memec integration completed at the end of fiscal 2006, as
discussed previously in this MD&A.
EM reported operating income of $529.9 million (5.5% of EM sales) in fiscal 2007 as compared with operating
income of $419.1 million (4.5% of EM sales) in fiscal 2006. The fourth quarter of fiscal 2007 is the sixth
consecutive quarter that EM has generated operating income margin in excess of 5.0%. This year-over-year
improvement is a direct result of the full benefit of the synergies realized from the Memec integration and continued
focus on profitable top line growth. TS increased operating income to $232.2 million, or 3.9% of TS sales, as
compared with $165.7 million, or 3.3% of TS sales, in the prior year, which is a 55 basis point increase in operating
profit margin over fiscal 2006. The fourth quarter of fiscal 2007 represents the sixteenth consecutive quarter of year-
over-year improvement in both operating income dollars and margin for TS.
Operating income for fiscal 2006 was $433.1 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. The margin and operating expense trends
discussed previously in this MD&A contributed to the operating income performance improvement over prior year.
Operating income in fiscal 2006 was negatively impacted by a total of $69.9 million (0.5% of consolidated sales) for
charges previously described. (See Restructuring, Integration and Other Items). Operating income for fiscal 2006
as compared to fiscal 2005 was 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. 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 fiscal 2005.
The 80 basis point year-over-year improvement in operating income margin reflects increased volume resulting
from the Memec acquisition and the partial realization of 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.
Interest Expense and Other Income
Interest expense was $77.2 million in fiscal 2007, down $19.3 million, or 20.0%, from interest expense of
$96.5 million in fiscal 2006. The decrease in interest expense is attributable to the reduction in the average debt
balance year over year and a lower effective interest rate on debt outstanding during fiscal 2007. The lower effective
interest rate is a direct result of the refinancing activities that occurred in fiscal 2006 and fiscal 2007, whereby
higher interest rate debt was repaid or replaced with lower interest rate debt. Specifically, during the fourth quarter
of fiscal 2006, the Company repurchased $113.6 million of its 93⁄4% Notes due February 15, 2008 with available
liquidity. During fiscal 2007, the Company issued $300.0 million principal amount of 6.625% Notes due 2016 in
September 2006, and used the proceeds and available liquidity to fund the repurchase of $361.4 million of the
93⁄4% Notes, which was completed in October 2006. The Company also repaid the remaining $143.7 million of the
8.00% Notes that matured on November 15, 2006 and, in March 2007, the Company issued $300.0 million principal
amount of 5.875% Notes due 2014 and used the proceeds to repay amounts outstanding under the Credit Facility
and the Securitization Program. See Financing Transactions for further discussion of the Company’s outstanding
debt.
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 was a result of rising short-term interest rates and
higher borrowings on the Company’s various bank credit facilities. As a result of rising short-term interest rates
during fiscal 2006, the Company incurred a higher rate of interest on its fair value hedges. The increased borrowings
were 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 — Cash
Flow for further discussion). The factors driving interest expense up were offset partially by the favorable impact of
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