AVT

Business Context and Reporting Period

Company: Avnet, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and First Half ended December 29, 2000 (Fiscal 2001).
Business Overview: Avnet is a distributor of electronic components and computer products. The reporting period was significantly impacted by major acquisitions, including the EBV Group and RKE Systems (completed October 31, 2000), and the creation of a new operating segment, Avnet Applied Computing (AAC).

Key Financial Metrics

Note: All dollar figures in thousands except per share data. Prior year figures include special charges as reported; adjusted figures are noted in text.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 61% in Q2 and 69% YTD compared to the prior year. This growth is primarily attributed to the acquisitions of the EBV Group, RKE Systems, Savoir Technology, and others, rather than organic growth alone.
• Profitability: Operating income surged 301% in Q2 and 271% YTD. Gross margins improved to 14.5% in Q2 (up 0.6% from prior year excluding special charges) due to a favorable electronics industry environment.
• Debt Structure: Total debt increased by approximately $1.17 billion to $3.11 billion to finance acquisitions and working capital. The debt-to-capital ratio rose to 58.5% from 50.5%.
• Interest Expense: Interest expense increased significantly (Q2: $50.9M vs $17.7M prior year) due to higher debt levels and rising interest rates.
• Special Charges: The prior year period (Q2 2000) was negatively impacted by $28.0 million in pre-tax special charges related to the integration of Marshall Industries and reorganization costs. The current period had no comparable special charges.

Guidance, Outlook, and Risks

Management Commentary:

• Management expects the second half of fiscal 2001 to be significantly impacted by the integration of the EBV Group and RKE Systems.
• The company is evaluating its capital structure and may issue equity or equity-linked securities if deemed appropriate.
• Operating expenses as a percentage of sales decreased to 9.3% due to economies of scale and synergies from acquisitions.

• Market Risk: 71% of outstanding debt is subject to variable short-term interest rates. The company does not hedge floating interest rate exposures.
• Foreign Exchange: Operations are exposed to currency fluctuations, though the company utilizes natural hedging and forward contracts.
• Environmental: The company is a potentially responsible party for environmental clean-ups at several sites (e.g., Oxford, NC; San Gabriel Valley; Rush, PA). Management believes reserves are adequate and no material adverse impact is anticipated.
• Integration: Risks associated with integrating newly acquired businesses, including potential loss of customers or suppliers.

• Stock Split: A two-for-one stock split was effected in September 2000; all share and per-share data have been restated.
• Acquisition Financing: Issued $572.7 million in notes (8.20% fixed and floating rate) and entered a $1.25 billion credit facility to fund the EBV/RKE acquisition.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating the EBV Group and RKE Systems and whether synergies are being realized as projected.
• Debt Servicing: Monitor the impact of rising interest rates on the 71% of debt that is variable-rate and the company's ability to service the increased debt load.
• Working Capital Trends: Review the trend in receivables and inventory, which grew significantly ($2.48B receivables, $2.42B inventory) to support sales growth.
• Environmental Liabilities: Confirm that reserves for environmental clean-ups remain adequate as investigations at sites like Oxford, NC, and Huguenot, NY, progress.
• Segment Performance: Analyze the standalone performance of the new Avnet Applied Computing (AAC) segment versus the legacy Electronics and Computer Marketing segments.