AVT

Avnet, Inc. 10-Q Summary: Quarter Ended December 27, 2002

Business Context and Reporting Period

This Form 10-Q covers the second quarter and first half of fiscal year 2003, ended December 27, 2002. Avnet, Inc. is the world's largest industrial distributor of electronic components, enterprise network, and computer equipment. The company operates through three segments: Electronics Marketing (EM), Computer Marketing (CM), and Applied Computing (AC). The reporting period reflects a stable but weak technology marketplace, particularly in the semiconductor sector.

Key Financial Metrics

*First Half 2002 includes a $580.5 million cumulative effect of change in accounting principle (SFAS 142 goodwill impairment).

Material Changes vs. Prior Period

• Revenue: Consolidated sales decreased 0.6% year-over-year in Q2 and 0.9% for the first half. While Electronics Marketing (EM) sales grew 2.7% (driven by Asia), Computer Marketing (CM) and Applied Computing (AC) declined 3.1% and 4.9% respectively.
• Profitability: The company reported an operating loss of $75.2 million in Q2, compared to an operating income of $23.8 million in the prior year. This deterioration was primarily driven by a $106.8 million pre-tax special charge.
• Special Charges: A significant restructuring charge of $106.8 million was recorded in Q2, consisting of $21.7 million in severance, $37.4 million in facility consolidation costs, and $47.7 million in IT-related write-offs. Excluding these charges, operating income was $31.6 million.
• Debt Reduction: Total debt decreased by approximately $235 million from the prior fiscal year-end. The company repaid $150 million under its accounts receivable securitization program and $259.4 million in other debt during the first half.
• Working Capital: Working capital decreased to $1.33 billion from $1.93 billion, largely due to the reclassification of $450 million in notes (6.45% and 8.20%) as current liabilities due to their 2003 maturities.

Guidance, Outlook, and Risks

• Outlook: Management expects the Asia region to remain a primary growth driver. Cost reduction initiatives from the Q2 special charge are estimated to yield over $90 million in annualized savings, with $80 million impacting Q3 results.
• Liquidity Strategy: The company is evaluating capital markets transactions to pre-fund senior notes maturing in calendar 2003. Total available borrowing capacity is $600 million (excluding cash on hand).
• Financing Covenants: The company amended its credit facilities, introducing a "springing lien" provision. This lien would secure borrowings against inventory and assets if the company fails to complete a qualified capital markets transaction by February 14, 2003, or if credit ratings fall to Ba1 (Moody's) or BB+ (S&P).
• Risks: Key risks include the continuation of the technology industry down-cycle, competitive pressures, currency fluctuations, and the potential inability to meet debt covenants or refinance maturing debt if market conditions worsen.
• Contingencies: A potential contingent payment of approximately $80.6 million exists related to the 2000 acquisition of Eurotronics B.V. (SEI) if the stock price does not reach a specified minimum by January 2004.

Investor Verification Checklist

• Debt Maturity Wall: Verify the company's ability to refinance or repay $450 million in notes maturing in August and October 2003.
• Covenant Compliance: Monitor credit rating levels (Moody's/S&P) to ensure the "springing lien" on assets is not triggered.
• Capital Markets Transaction: Confirm progress on the targeted $325 million capital markets transaction required to restore full credit facility availability and avoid lien triggers.
• Restructuring Execution: Track the realization of the projected $90 million in annualized cost savings from the Q2 restructuring.
• Contingent Liability: Assess the likelihood of the $80.6 million contingent payment on the SEI acquisition based on stock price performance.