For a description of the Company's critical accounting policies and an understanding of the significant factors that influenced the Company's performance during the quarters ended October 3, 2009 and September 27, 2008, this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Report, as well as the Company's Annual Report on Form 10-K for the year ended June 27, 2009. The Company operates on a "52/53 week" fiscal year, and as a result, the quarter ended October 3, 2009 contained 14 weeks while the quarter ended September 27, 2008 contained 13 weeks. This extra week in the current quarter impacts the year over year analysis in this MD&A. In addition, the Company's consolidated financial statements reflect the adjustments or reclassifications of certain prior period amounts for accounting changes as a result of the required retrospective application of an accounting standard which changes the accounting for debt that may be settled in cash as discussed in Note 1 in the accompanying Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
There are numerous references to the impact of foreign currency translation in the discussion of the Company's results of operations. Over the past several years, the exchange rates between the US Dollar and many foreign currencies, especially the Euro, have fluctuated significantly. For example, the US Dollar has strengthened against the Euro by approximately 5% when comparing the first quarter of fiscal 2010 with the first quarter of fiscal 2009. When the stronger US Dollar exchange rates of the current year are used to translate the results of operations of Avnet's subsidiaries denominated in foreign currencies, the resulting impact is a decrease in US Dollars of reported results as compared with the prior period. In the discussion that follows, this is referred to as the "translation impact of changes in foreign currency exchange rates." In addition to disclosing financial results that are determined in accordance with US generally accepted accounting principles ("GAAP"), the Company also discloses certain non-GAAP financial information such as (i) income or expense items as adjusted for the translation impact of changes in foreign currency exchange rates, as discussed above, and (ii) sales adjusted for the impact of acquisitions by adjusting Avnet's prior periods to include the sales of businesses acquired as if the acquisitions had occurred at the beginning of the period presented and, in the discussion that follows, this adjustment for acquisitions is referred to as "pro forma sales" or "organic sales." Management believes that providing this additional information is useful to the reader to better assess and understand operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring performance for compensation purposes. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
OVERVIEW
Organization
Avnet, Inc., incorporated in New York in 1955, together with its consolidated subsidiaries (the "Company" or "Avnet"), is one of the world's largest industrial distributors, based on sales, of electronic components, enterprise computer and storage products and embedded subsystems. Avnet creates a vital link in the technology supply chain that connects more than 300 of the world's leading electronic component and computer product manufacturers and software developers with a global customer base of more than 100,000 original equipment manufacturers ("OEMs"), electronic manufacturing services ("EMS") providers, original design manufacturers ("ODMs"), and value-added resellers ("VARs"). Avnet distributes electronic components, computer products and software as received from its suppliers or with assembly or other value added by Avnet. Additionally, Avnet provides engineering design, materials management and logistics services, system integration and configuration, and supply chain services.
Avnet has two primary operating groups - Electronics Marketing ("EM") and Technology Solutions ("TS"). Both operating groups have operations in each of the three major economic regions of the world: the Americas; Europe, the Middle East and Africa ("EMEA"); and Asia/Pacific, consisting of Asia, Australia and New Zealand ("Asia" or "Asia/Pac"). A brief summary of each operating group is provided below:
• EM markets and sells semiconductors and interconnect, passive and electromechanical devices ("IP&E") for more than 300 of the world's leading electronic component manufacturers. EM markets and sells its products and services to a diverse customer base serving many end-markets including automotive, communications, computer hardware and peripheral, industrial and manufacturing, medical equipment, military and aerospace. EM also offers an array of value-added services that help customers evaluate, design-in and procure electronic components throughout the lifecycle of their technology products and systems. By working with EM from the design phase through new product introduction and through the product lifecycle, customers and suppliers can accelerate their time to market and realize cost efficiencies in both the design and manufacturing process.

• TS markets and sells mid- to high-end servers, data storage, software, and the services required to implement these products and solutions to the VAR channel. TS also focuses on the worldwide OEM market for computing technology, system integrators and non-PC OEMs that require embedded systems and solutions including engineering, product prototyping, integration and other value-added services. As a global technology sales and marketing organization, TS has dedicated sales and marketing divisions focused on specific customer segments including OEMs, independent software vendors, system builders, system integrators and VARs.

Results of Operations
Executive Summary
The first quarter of fiscal 2010 financial results improved in comparison to recent quarters, which is an indication that the effect of the global economic slowdown on end demand may be beginning to improve. However, the results for the current quarter were below the prior year first quarter performance due to the global economic slowdown. The Company's year over year operating performance improved in the Asia region in both operating groups, but remained below the prior year first quarter performance levels in the historically more profitable Americas and EMEA regions. Avnet's consolidated sales of $4.36 billion were down 3.1% year over year and essentially flat excluding the impact of changes in foreign currency exchange rates. This rate of year-over-year decline in sales was significantly less than the declines experienced in the prior four quarters and was the second consecutive quarter of improvement (smaller declines) providing further evidence that business conditions continue to improve. As a result of Avnet's 52/53 week fiscal calendar, the first quarter of fiscal 2010 contained fourteen weeks of activity compared with thirteen weeks in fiscal 2009. Due to sales fluctuations that occur from the first month of each quarter to the last month of each quarter, estimating the effect of an additional week's activity in the first quarter of fiscal 2010 is not precise; however, management roughly estimates that approximately $400 million of sales in the first quarter of fiscal 2010 are a result of the extra week.
Gross profit margin declined 153 basis points year over year primarily due to regional mix and lower margins in the EM Americas and EMEA regions. Although operating income margins improved sequentially due to the improving business environment as noted above and the positive impact of cost reductions actions, it declined 142 basis points year over year to 2.0%. This was primarily due to lower than historical operating performance from the EM Americas and EMEA regions resulting from the impact of the global economic slowdown. Previously announced cost reduction actions totaling $225 million in annualized cost savings were substantially complete as of the end of the first quarter of fiscal 2010, with the related benefit to be fully realized in the second quarter of fiscal 2010. In addition, the Company expects to achieve cost synergies of approximately $40 million as a result of acquisition integration activities most of which were completed by the end of fiscal 2009 with the remaining expected to be completed by the end of the second quarter of fiscal 2010.
The Company continued to focus on managing working capital velocity, defined as quarterly sales annualized divided by the monthly average of receivables plus inventory less accounts payable, which improved significantly both year over year and sequentially. Working capital declined $869 million year over year, or 29%, while sales declined 3.1%, resulting in an improvement in working capital velocity from 5.9 times to a record 7.6 times. Sequentially, working capital increased by $67 million even though sales increased by nearly $590 million or over 15% resulting in a sequential improvement in working capital velocity from 6.5 times to 7.6 times. During growth periods, the Company is more likely to utilize operating cash flows for working capital requirements; however, the improvement in working capital velocity contributed to the generation of $6.2 million of cash from operating activities during the first quarter of fiscal 2010 even with the sequential sales growth of $590 million. This compares with cash usage of $5.3 million in the prior year first quarter. On a trailing twelve month basis, through the first quarter of fiscal 2010, the Company generated cash from operating activities of $1.1 billion. However, as revenues seem to be stabilizing and working capital velocity are at appropriate levels for the operating groups, management does not expect to continue to generate the same levels of cash from operating activities as were generated in fiscal 2009 ($1.1 billion).

Sales
The table below provides the comparison of first quarter of fiscal 2010 and 2009
sales for the Company and its operating groups. In addition, certain
acquisitions completed in fiscal 2009 impact the comparison of first quarter
sales to sales in the prior year first quarter, therefore, the table below also
provides pro forma (or organic) sales which include acquisitions as if they
occurred on the first day of fiscal 2009.

                                                                                                              Pro forma
                                                                       Year-Year           Pro forma          Year-Year
                             Q1-Fiscal '10        Q1-Fiscal '09        % Change          Q1-Fiscal '09        % Change
                                                               (Dollars in thousands)
Avnet, Inc.                 $     4,355,036      $     4,494,450             (3.1 )%    $     4,658,931             (6.5 )%
EM                                2,438,081            2,701,479             (9.8 )           2,865,387            (14.9 )
TS                                1,916,955            1,792,971              6.9             1,793,544              6.9
EM
Americas                    $       757,588      $       952,971            (20.5 )%    $       952,971            (20.5 )%
EMEA                                788,595              882,495            (10.6 )           1,008,825            (21.8 )
Asia                                891,898              866,013              3.0               903,591             (1.3 )
TS
Americas                    $     1,161,539      $     1,064,200              9.2 %     $     1,064,200              9.1 %
EMEA                                558,720              613,977             (9.0 )             613,977             (9.0 )
Asia                                196,696              114,794             71.4               115,367             70.5
Totals by Region
Americas                    $     1,919,127      $     2,017,171             (4.9 )%    $     2,017,171             (4.9 )%
EMEA                              1,347,315            1,496,472            (10.0 )           1,622,802            (17.0 )
Asia                              1,088,594              980,807             11.0             1,018,958              6.8



                                   As           Acquisition       Pro forma
                                Reported         Sales (1)          Sales
                                                (Thousands)
              Q1 Fiscal 2009
              Avnet, Inc.      $ 4,494,450     $     164,481     $ 4,658,931
              EM                 2,701,479           163,908       2,865,387
              TS                 1,792,971               573       1,793,544

(1) Includes the following acquisitions:

Ontrack
Solutions
Pvt. Ltd.
acquired
July 2008 in
the TS Asia
region

Nippon
Denso
Industry Co.,
Ltd acquired
December 2008
in the EM
Asia region

Abacus
Group plc
acquired
January 2009
in the EM
EMEA region

Consolidated sales for the first quarter of fiscal 2010 were $4.36 billion, down 3.1%, or $139.4 million, from the prior year first quarter consolidated sales of $4.49 billion. Excluding the translation impact of changes in foreign currency exchange rates, sales were essentially flat year over year. As noted previously, the first quarter of fiscal 2010 includes an extra week when compared with the prior year first and fourth quarters, which management estimates added approximately $400 million in sales. On a sequential basis, consolidated sales grew 15.6% with both operating groups delivering double digit sequential sales growth. On a pro forma basis, consolidated sales declined 6.5% year over year. EM sales of $2.44 billion in the first quarter of fiscal 2010 declined 9.8% over the prior year first quarter sales of $2.70 billion and declined 8.0% excluding the translation impact of changes in foreign currency exchange rates. The first quarter of fiscal 2010 includes an extra week of sales, estimated at roughly $150 million, compared with the sequential or prior year quarter. The year-over-year decline in revenue was a result of the Americas and the EMEA regions, which were down 20.5% and 10.6%, respectively, as these two regions have not yet fully recovered from the effects of the global economic slowdown. The EMEA results were negatively impacted by the strengthening of the US dollar against the Euro during the first quarter of fiscal 2010 as compared with the prior year first quarter as the EMEA region sales declined 4.4% excluding the translation impact of changes in foreign currency exchange rates. Year-over-year organic sales in the EMEA region declined 16.4% excluding the translation impact of changes in foreign currency exchange rates. EM Asia sales grew 3.0% year over year primarily due to the impact of acquisitions, the effects of recent government stimulus actions in China and the extra week of sales due to the Company's fiscal calendar. EM Asia's year-over-year organic sales declined only 1.3% due primarily to the effects of recent government stimulus actions in China and the extra week of sales.

TS sales of $1.92 billion in the first quarter of fiscal 2010 were up 6.9% year over year and up 10.5% excluding the translation impact of changes in foreign currency exchange rates. The extra week in the first quarter of fiscal 2010 added an estimated $250 million in sales compared with the sequential quarter and prior year first quarter. On a sequential basis, TS sales were up 17.0% and up 14.7% excluding the translation of changes in foreign currency exchange rates. Year-over-year sales in the Americas and Asia regions were up 9.2% and 71.4%, respectively, primarily as a result of higher demand for microprocessors and storage products combined with the impact of the extra week in the first quarter. The EMEA region sales were down 9.0% year over year, and flat when excluding the impact of changes in foreign currency exchange rates, primarily due to a slower recovery from the global economic slowdown. Gross Profit and Gross Profit Margins
Consolidated gross profit for the first quarter of fiscal 2010 was $499.7 million, down $84.4 million, or 14.5%, from prior year first quarter primarily due to the decline in revenue and the decline in gross profit margin. Gross profit margin of 11.5% declined 153 basis points over the prior year. For EM, gross profit margin declined 138 basis points year over year, primarily due to the negative impacts of (i) customer mix and competitive pressure in the Americas and EMEA regions and (ii) geographic mix as Asia grew to 37% of EM sales compared with 32% of EM sales in the prior year first quarter. TS gross profit margin was down 129 basis points year over year with both the Americas and EMEA regions contributing to the decline primarily due to competitive pressures.
Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A expenses") were $392.7 million in the first quarter of fiscal 2010, a decrease of $26.9 million, or 6.4%, from the prior year quarter. The decrease in SG&A expenses was primarily a result of the positive impact of the cost reduction actions and the translation impact of changes in foreign currency exchange rates, partially offset by additional SG&A expenses associated with businesses acquired in fiscal 2009 and the extra week of expenses due to the Company's fiscal calendar as noted above. 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 the first quarter of fiscal 2010, SG&A expenses were 9.0% of sales and 78.6% of gross profit as compared with 9.3% and 71.8%, respectively, in the first quarter of fiscal 2009. Although these metrics were worse than in the prior year, they improved sequentially for the second quarter in a row due to the positive impact of the cost reduction actions taken in response to business conditions.
During fiscal 2009, the Company took actions to reduce costs over the course of the fiscal year to better align its cost structure with the market conditions. By the end of fiscal 2009, approximately 90% of the $225 million annualized cost savings were estimated to have been achieved. The remaining cost reduction actions were substantially complete by the end of the first quarter of fiscal 2010 and for which the full benefit of the cost savings is expected to be reflected in the second quarter of fiscal 2010. Restructuring, Integration and Other Charges Restructuring, integration and other charges amounted to $18.1 million pre-tax, $13.2 million after tax and $0.09 per share on a diluted basis during the first quarter of fiscal 2010 as compared with $10.0 million pre-tax, $8.9 million after tax and $0.06 per share on a diluted basis in the prior year first quarter, which included a cumulative catch up of intangible asset amortization totaling $3.8 million. As discussed above, the restructuring, integration and other charges in the first quarter of fiscal 2010 represent the remaining cost reduction actions announced in fiscal 2009 as well as integration costs associated with recently acquired businesses. Restructuring costs included $9.7 million of severance, $3.7 million of facility exit costs and $3.7 million of other charges related to contract termination costs, fixed asset write-downs and other charges. The Company also recorded a reversal of $1.9 million to adjust reserves related to prior year restructuring activity which were deemed excessive. Integration costs of $2.9 million included professional fees, facility moving costs, travel, meeting, marketing and communication costs that were incrementally incurred as a result of the integration activity.

Operating Income
During the first quarter of fiscal 2010, the Company generated operating income of $89.0 million, down 42.4% as compared with operating income of $154.6 million in the prior year first quarter. Consolidated operating income margin was 2.0% as compared with 3.4% in the prior year first quarter. EM operating income declined 41.3% to $81.4 million and operating income margin of 3.3% declined 179 basis points from the first quarter of fiscal 2009. Although the cost reduction actions at EM provided the expected benefit to operating income, the year-over-year decline in gross profit margins in the Americas and EMEA regions was a significant factor in the year-over-year decline in EM operating income. TS operating income of $51.4 million was essentially flat year over year. Even though the TS gross profit margin declined 129 basis points, operating income margin declined only 17 basis points over the prior year first quarter due to the benefits of the cost reduction actions. Corporate operating expenses were $25.7 million in the first quarter of fiscal 2010 as compared with $25.2 million in the first quarter of fiscal 2009. In addition, during the first quarter of fiscal 2010, restructuring, integration and other charges amounted to $18.1 million pre-tax, $13.2 million after tax and $0.09 per share on a diluted basis as compared with $10.0 million pre-tax, $8.9 million and $0.06 per share on a diluted basis for the prior year first quarter. Interest Expense and Other Income (Expense), net Interest expense for the first quarter of fiscal 2010 was $15.2 million, down $5.7 million, or 27.2%, from interest expense of $21.0 million in the first quarter of fiscal 2009. During the first quarter of fiscal 2010, the Company adopted an accounting standard which required retrospective application of the standard's provisions to prior years which resulted in recognizing incremental non-cash interest expense of $4.1 million in addition to the previously reported interest expense of $16.9 million in the first quarter of fiscal 2009 (see Note 1 in the Notes to Consolidated Financial Statements included in Part I of this Form 10-Q). The year-over-year decrease in interest expense was primarily due to the elimination of interest on the Company's $300.0 million 2% Convertible Senior Debentures which were extinguished in March 2009. See Financing Transactions for further discussion of the Company's outstanding debt. During the first quarter of fiscal 2010, the Company recognized $2.9 million in other income as compared with $0.6 million of other expense in the first quarter of the prior year.
Income Tax Provision
The Company's effective tax rate on its income before income taxes was 33.6% in the first quarter of fiscal 2010 as compared with 32.1% in the first quarter of fiscal 2009.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the Company's consolidated net income for the first quarter of fiscal 2010 was $50.9 million and $0.33 per share on a diluted basis, as compared with net income of $90.3 million and $0.59 per share on a diluted basis in the prior year first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the first quarter of fiscal 2010, the Company generated $6.2 million of cash and cash equivalents from its operating activities as compared with a use of $5.3 million in the first quarter of fiscal 2009. These results are comprised of: (1) cash flow generated from net income excluding non-cash and other reconciling items, which includes the add-back of depreciation and amortization, deferred income taxes, stock-based compensation and other non-cash items (primarily the provision for doubtful accounts and periodic pension costs) and
(2) cash flow used for working capital, excluding cash and cash equivalents. Cash used for working capital during the first quarter of fiscal 2010 consisted of accounts receivable growth of $219.4 million and inventory growth of $135.5 million, growth in accrued expenses and other of $49.6 million, primarily offset by growth in payables of $312.8 million. During growth periods, the Company has historically been more likely to utilize operating cash flows for working capital requirements; however, the improvement in working capital velocity contributed to the generation of $6.2 million of cash from operating activities during the first quarter of fiscal 2010 even though sales grew nearly $590 million or over 15% sequentially. Comparatively, the working capital outflow in the first quarter of fiscal 2009 consisted of net collections in receivables ($78.7 million) offset by growth in inventories ($57.5 million), net cash outflows for accounts payable ($140.4 million) and cash outflow for other items ($8.2 million). The decrease in receivables and payment of accounts payable during the quarter was driven primarily by TS activities.

Cash Flow from Financing Activities
The Company received proceeds of $31.4 million primarily from bank credit facilities during the first quarter of fiscal 2010. During the first quarter of fiscal 2009, the Company used $3.8 million to repay bank credit facilities and other debt.
Cash Flow from Investing Activities
The Company used $9.5 million of cash for primarily for capital expenditures related to building and leasehold improvements, system development costs, computer hardware and software. During the first quarter of fiscal 2009, the Company used $234.2 million of cash primarily for acquisitions and capital expenditures related to system development costs, computer hardware and software expenditures.
Capital Structure and Contractual Obligations The following table summarizes the Company's capital structure as of the end of the first quarter of fiscal 2010 with a comparison to fiscal 2009 year-end:

                        October 3,         % of Total         June 27,          % of Total
                           2009          Capitalization         2009          Capitalization
                                               (Dollars in thousands)
 Short-term debt        $    50,440                  1.3 %   $    23,294                  0.6 %
 Long-term debt             957,279                 24.6         946,573                 25.4

 Total debt               1,007,719                 25.9         969,867                 26.0
 Shareholders' equity     2,888,640                 74.1       2,760,857                 74.0

 Total capitalization   $ 3,896,359                100.0     $ 3,730,724                100.0

For a description of the Company's long-term debt and lease commitments for the next five years and thereafter, see Long-Term Contractual Obligations appearing in Item 7 of the Company's Annual Report on Form 10-K for the year ended June 27, 2009. With the exception of the Company's debt transactions discussed herein, there are no material changes to this information outside of normal lease payments.
The Company does not currently have any material commitments for capital expenditures.
Financing Transactions
The Company has a five-year $500.0 million unsecured revolving credit facility . . .