Avnet 2008 Annual Report Download - page 24

Table of Contents
Gross Profit and Gross Profit Margins
Consolidated gross profit was $2.31 billion in fiscal 2008, a $265.1 million increase, or 12.9%, compared with
fiscal 2007. This increase was primarily due to the impact of acquisitions and the year-over-year weakening of the
US dollar against the Euro. Consolidated gross profit margin of 12.9% in fiscal 2008 decreased 17 basis points from
the prior year due primarily to slightly lower margins at TS and the mix of business between EM and TS described
below. The EM Asia business continued to grow faster than the Americas or EMEA regions, and although the EM
Asia business has relatively lower gross profit margin than the other regions, EM’s gross profit margin increased
15 basis points over prior year. TS gross profit margins declined 9 basis points year over year. In addition, as a result
of the acquisitions in fiscal 2008, TS sales grew to 42% of the consolidated sales as compared to 38% of the
consolidated sales in fiscal 2007. Because the TS business typically yields lower gross margins relative to the EM
business, the larger representation by TS in the consolidated sales also has a negative impact on the consolidated
gross profit margin. Notwithstanding the lower gross profit margins, the TS business contributes to the Company’s
performance goals through the combination of its operating profit margin and asset velocity which is typically higher
than asset velocity at EM.
Consolidated gross profit was $2.05 billion in fiscal 2007, up $209.6 million, or 11.4%, as compared with fiscal
2006. The gross profit in fiscal 2006 included a charge totaling $9.0 million to write down inventory due primarily to
the Company’
s decision to terminate certain supplier relationships in connection with the Memec acquisition in fiscal
2006. See Restructuring, Integration and Other Charges for further discussion. Gross profit margin of 13.1% was up
16 basis points as compared with fiscal 2006 profit margin of 12.9%. Both operating groups contributed to the
improvement in gross profit margins with an increase of 33 basis points at EM and 17 basis points at TS. The impact
to consolidated gross margins resulted from the change in the mix of business between EM and TS over the prior
year as a result of the Access acquisition as well as the change from gross revenue to net revenue reporting for
supplier service contracts. For EM, the mix of revenues among small-to-medium businesses and large customers,
particularly large EMS customers, positively impacted EM’s gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses in fiscal 2008 were $1.56 billion, a $201.4 million
increase, or 14.8%, compared with fiscal 2007. The year-over-year increase in SG&A expenses was primarily due to
acquisitions and the weakening of the US dollar versus the Euro. Management estimates that approximately
$70.8 million of the SG&A expense increase was attributable to the translation impact of changes in foreign currency
exchange rates. SG&A expenses were also impacted by the overall volume increase due to acquisitions. Furthermore,
management believed that during second half of fiscal 2008, SG&A expenses were higher than necessary to support
the level of business in certain business segments due to revenue weakness in those segments. As a result, during the
second half of fiscal 2008, management took actions, as described in Restructuring, Integration and Other Charges,
to adjust the Company’s cost structure as deemed appropriate. Further cost reduction initiatives are taking place in
the first quarter of fiscal 2009 to address continued weakness in certain business segments.
Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of
sales and as a percentage of gross profit. In fiscal 2008, SG&A expenses were 8.7% of sales and 67.6% of gross
profit as compared with 8.7% and 66.5%, respectively, in fiscal 2007. SG&A expenses as a percentage of sales for
fiscal 2008 were flat as compared with fiscal 2007, however, SG&A expenses as a percentage of gross profits were
up 108 basis points. As previously discussed, management has taken actions to address the factors they believe had
an impact on the lack of attainment of SG&A expense metrics.
SG&A expenses in fiscal 2007 were $1.36 billion, a $18.1 million increase, or 1.3%, compared with fiscal 2006.
Excluding the translation impact of changes in foreign currency exchange rates, SG&A expenses were down 1.2%.
The year-over-year comparison of expenses was positively impacted by the divestitures of businesses in the second
half of fiscal 2006, further cost-reduction initiatives during fiscal 2007 (see Restructuring, Integration and Other
Charges for further discussion) and the synergy benefits associated with the Memec integration during fiscal 2006.
SG&A expenses as a percentage of sales were 8.7% in fiscal 2007, down 75 basis points, as compared with 9.4% in
fiscal 2006. SG&A expenses as a percentage of gross profit were 66.5% in fiscal 2007, down 660 basis
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