Avnet, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2010 ended April 3, 2010. Avnet distributes electronic components and enterprise computing, storage and related products and services through Electronics Marketing (EM) and Technology Solutions (TS). Fiscal 2010’s first nine months included 40 weeks versus 39 weeks in the prior-year period; management estimated the extra week contributed about $400 million of sales.
Financial performance
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Sales | $4.757 billion | $3.701 billion | $13.946 billion | $12.464 billion |
| Gross profit | $582.8 million | $462.5 million | $1.634 billion | $1.580 billion |
| Operating income (loss), GAAP | $167.2 million | $55.6 million | $418.5 million | $(998.5) million |
| Net income (loss) | $114.5 million | $15.8 million | $269.3 million | $(1.099) billion |
| Diluted EPS | $0.75 | $0.10 | $1.76 | $(7.29) |
| Operating cash flow | Not separately stated here | Not separately stated here | $(154.7) million | $788.1 million |
- Q3 sales rose 28.5% year over year; excluding currency translation, they increased 25.5%. Management reported organic sales growth of 25.1%. EM sales grew 37.7% and TS sales grew 16.6% year over year.
- Q3 gross margin was 12.3%, down 25 basis points year over year but up 83 basis points sequentially. Nine-month gross margin was 11.7%, versus 12.7% in the prior-year period.
- Q3 GAAP operating margin was 3.5%, versus 1.5%. Excluding restructuring, integration and other charges, operating income was $174.6 million, or 3.7% of sales, versus adjusted income of $88.2 million, or 2.4%, a 97.8% increase in adjusted operating income.
- For the first nine months, adjusted operating income was $443.9 million, or 3.2% of sales, versus $406.2 million, or 3.3%. The prior-year GAAP period included $1.349 billion of impairment charges.
- Q3 SG&A was $408.2 million, up 9.1%, while sales rose 28.5%. SG&A fell to 8.6% of sales from 10.1%. Interest expense declined 28.2% to $15.3 million in Q3; the filing attributes the reduction partly to repayment of convertible debentures in 2009.
Balance sheet, debt and liquidity
- At April 3, 2010, cash and cash equivalents were $754.6 million, down from $943.9 million at June 27, 2009. Total assets were $7.158 billion; shareholders’ equity was $3.021 billion.
- Total debt was $992.6 million, compared with $969.9 million at fiscal year-end. Debt comprised $55.1 million due within one year and $937.5 million long term. Debt was 24.7% of total capitalization, down from 26.0%.
- Working capital was $2.884 billion; the current ratio was 1.9:1 and quick ratio 1.3:1, compared with 2.1:1 and 1.5:1 at June 27, 2009. Receivables and inventory increased alongside sales growth.
- Avnet reported $862.7 million of net availability under its $500 million revolving credit facility after outstanding borrowings and letters of credit; together with the $450 million receivables program, total borrowing capacity was $950 million. No receivables-program borrowings were outstanding. The company was compliant with applicable facility covenants.
- Nine-month operating cash use of $154.7 million reflected working-capital investment, including $732.5 million of cash use from receivables and $356.4 million from inventory, partly offset by $583.9 million from accounts payable. Management said growth periods typically consume operating cash and did not expect fiscal 2010 operating cash generation to match fiscal 2009.
Material changes, outlook and risks
- Management said Q3 results exceeded expectations as technology markets showed continued recovery. EM Americas returned to year-over-year sales growth after five quarters of contraction. Management attributed part of EM growth to inventory restocking, while strong bookings and lean supply-chain inventories also suggested improving end demand. EMEA recovery was described as lagging other regions.
- On March 29, 2010, Avnet agreed to acquire Bell Microproducts for $7.00 per share in cash, representing approximately $252 million of equity value and $594 million transaction value based on Bell’s stated net debt. Closing was expected in 60–90 days, subject to shareholder and regulatory approvals. Management expected the acquisition to be immediately accretive excluding integration and transaction costs and cited expected integration cost synergies of $50–$60 million. Putative shareholder class actions had been filed and could affect the transaction.
- Q3 included $7.3 million of restructuring, integration and other charges, including a $6.5 million European VAT exposure, partially offset by a reserve reversal. Nine-month charges were $25.4 million. A $3 million annual pension expense impact for each of the next 11 years is expected following an approved settlement of pension litigation; management also anticipated resuming plan benefits in fiscal 2011.
- Avnet recognized $8.8 million of nine-month pretax gains related to earn-out provisions from a prior asset sale. In the prior-year period, it recorded $1.349 billion of noncash goodwill and intangible impairment charges.
- Management said available cash, borrowing capacity and expected operating cash flows were sufficient for projected financing needs, including the Bell transaction. The filing provides no general quantified revenue or earnings guidance.
- Risks include demand and technology-market fluctuations, gross-margin pressure from geographic and product mix, foreign-exchange exposure, working-capital cash needs, acquisition execution and integration, Bell transaction approvals and litigation, and environmental or other legal contingencies. Management stated that risk factors were not materially changed from the 2009 Form 10-K and did not expect pending ordinary-course contingencies to materially adversely affect results, liquidity or financial condition.
Important facts for investors to verify
- Whether the Bell acquisition closed, its final financing and purchase accounting, and whether projected accretion and $50–$60 million of synergies were realized.
- Whether sales recovery persisted after Q3 and how much growth reflected end demand, restocking, currency, acquisitions and the extra fiscal week.
- Whether gross margins recovered, particularly in EMEA, and whether growth continued to require substantial working capital and operating cash.
- Cash generation, receivables and inventory quality, debt levels, borrowing availability and continued covenant compliance.
- The final cost and timing of the European VAT matter, pension settlement obligations, and any material developments in environmental, legal or Bell-related proceedings.