Avnet, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended December 29, 2012 (fiscal 2013), compared with the corresponding fiscal 2012 periods. Avnet distributes electronic components and enterprise computing products and provides related technology and supply-chain services through Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Sales | $6.699 billion | $6.694 billion | $12.570 billion | $13.120 billion |
| Gross profit / margin | $768.5 million / 11.5% | $784.1 million / 11.7% | $1.453 billion / 11.6% | $1.538 billion / 11.7% |
| Operating income | $195.6 million | $230.9 million | $295.5 million | $454.0 million |
| Net income | $137.5 million | $147.0 million | $237.8 million | $286.1 million |
| Diluted EPS | $0.99 | $0.98 | $1.69 | $1.88 |
- Q2 reported sales were essentially flat year over year; pro forma organic sales declined 5.7% (4.8% excluding currency translation). Six-month sales fell 4.2%, and organic sales declined 6.4% in constant currency.
- Q2 operating margin was 2.9%, versus 3.5%. Excluding restructuring, integration and other charges, adjusted operating income was $220.5 million (3.3% margin), versus $265.4 million (4.0%).
- Q2 EM sales increased 2.2% as reported but declined 2.2% pro forma; TS sales declined 2.3% as reported and 9.6% pro forma. Asia growth supported EM, while weakness in western markets weighed on both groups, particularly TS.
- Six-month operating cash flow was $407.4 million, versus $245.8 million. It included a $399.9 million use of cash from receivables, partly offset by cash released from inventory and increases in payables. Q2 operating cash flow was $326.4 million, according to MD&A.
- Six-month investing cash use was $222.6 million, including $171.0 million net for acquisitions and $55.3 million for capital expenditures. Financing cash use was $392.4 million, including $207.2 million for share repurchases.
Financial position and liquidity
- At December 29, 2012, cash was $815.3 million, total debt $1.998 billion, and shareholders’ equity $4.106 billion. Debt was down 6.8% from June 30, 2012; debt-to-capital declined to 32.7% from 35.4%.
- Current assets were $8.450 billion and current liabilities $4.770 billion; working capital was $3.680 billion. The current ratio was 1.8:1 and quick ratio 1.3:1.
- Avnet reported $1.5 billion of net availability under its $1.0 billion revolving credit facility and $800 million receivables securitization program. There were no revolver borrowings and $304 million outstanding under the securitization program. The program expires in August 2013; the company was in covenant compliance.
- Avnet issued $350 million of 4.875% notes due 2022. Of its $815.3 million cash balance, $730.3 million was held outside the U.S.; management said those funds were expected to remain permanently reinvested abroad.
Material changes, outlook and unusual items
- Management said Q2 sequential organic growth returned to normal seasonality after two quarters of below-seasonal growth. Consolidated organic revenue grew 9.4% sequentially in constant dollars; TS rose 27%, slightly above its stated seasonal range, while EM declined 1.7%, in line with normal December-quarter seasonality. No quantified forward revenue or earnings guidance was provided.
- Management cited continued weak business conditions and cost-reduction actions, estimating approximately $100 million in annualized cost benefits in Q2 versus the prior year. Actions included workforce reductions affecting more than 800 employees and facility exits. The company said TS acquisition synergies, especially in Europe, would take several quarters to achieve.
- Q2 restructuring, integration and other charges were $24.9 million pre-tax ($0.14 per diluted share); six-month charges were $62.3 million ($0.33 per diluted share). These included severance, facility costs, and acquisition/integration expenses.
- Q2’s effective tax rate was 18.6%, favorably affected by a $17.4 million tax benefit from an IRS audit settlement and a tax benefit related to closure of a foreign operation. The six-month rate was 14.4%, also affected by the non-taxable bargain-purchase gain.
- The first half included a $31.35 million net gain in “gain on bargain purchase and other,” principally from the Internix acquisition; Q2’s net amount was nearly zero after a gain adjustment was offset by a loss on a small divestiture. Avnet acquired nine businesses in the first half for approximately $188.2 million, with aggregate annualized revenues of approximately $1.01 billion.
- Avnet disclosed a Bell-related potential import-duty exposure of up to $73 million and a recorded contingent liability of $10 million. Management considered the recorded amount reasonable based on information available. Management did not expect other ongoing legal matters to have a material adverse effect; environmental liabilities were accrued based on estimated costs.
- Key stated risks include global economic weakness, technology-industry cyclicality, competition, supplier product allocation, supply-chain disruptions, foreign exchange and international operating risks, and access to financing. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Underlying sales, margins, and segment trends apart from acquisition effects, currency translation, and the weak prior-year HDD-related margin comparison.
- Whether the estimated cost savings materialize and whether TS acquisitions deliver expected synergies without further integration costs.
- The sustainability of reported earnings given the IRS-related tax benefit, Internix bargain-purchase gain, and restructuring charges.
- Renewal or replacement of the receivables securitization program before its August 2013 expiration, covenant headroom, and the company’s working-capital needs.
- Final resolution of the Bell import-duty matter and the potential exposure relative to the $10 million recorded liability.
- Cash availability and potential tax or regulatory costs associated with repatriating foreign-held cash, along with the pace and funding of acquisitions and share repurchases.