Avnet, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 30, 2013, Avnet’s fiscal 2013 third quarter; comparisons are with the quarter ended March 31, 2012. The filing also reports year-to-date results for the nine months ended March 30, 2013. The request metadata says “2012 Q3,” but the filing itself covers fiscal 2013 Q3.
Business context
Avnet distributes electronic components and enterprise computing products and provides related technical, integration and supply-chain services. Its two operating groups are Electronics Marketing (EM) and Technology Solutions (TS), with operations in the Americas, EMEA and Asia/Pacific.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Sales | $6,298.7 | $6,280.6 | $18,868.2 | $19,400.1 |
| Gross profit / margin | $756.0 / 12.0% | $753.8 / 12.0% | $2,208.9 / 11.7% | $2,291.5 / 11.8% |
| Operating income / margin | $167.6 / 2.7% | $216.8 / 3.5% | $463.2 / 2.5% | $670.7 / 3.5% |
| Net income | $86.2 | $147.6 | $324.0 | $433.6 |
| Diluted EPS | $0.62 | $1.00 | $2.31 | $2.88 |
| Operating cash flow | $22.0 | $23.6 | $429.4 | $269.4 |
Q3 SG&A was $561.1 million, up 8.2% year over year; SG&A was 8.9% of sales versus 8.3% a year earlier. Q3 interest expense was $27.3 million, versus $23.6 million. The Q3 effective tax rate rose to 40.3% from 26.6%, primarily due to increases in valuation allowances and reserves. The nine-month rate fell to 23.2% from 28.3%, mainly reflecting IRS audit settlements and a nontaxable bargain-purchase gain.
Balance sheet and liquidity
At March 30, 2013, cash and cash equivalents were $820.9 million, down from $1,006.9 million at June 30, 2012; $747.5 million was held outside the United States. Total debt was approximately $2.08 billion, compared with $2.14 billion at fiscal year-end. Shareholders’ equity was $4.08 billion. Current assets were $8.10 billion and current liabilities $4.44 billion; working capital was $3.66 billion, the current ratio 1.8:1 and the quick ratio 1.3:1.
Nine-month investing cash use was $315.6 million, including $244.1 million for acquisitions and $75.4 million for capital expenditures. Financing cash use was $304.2 million, including $207.2 million for share repurchases. The company reported $1.4 billion of net availability under its $1.0 billion revolving credit facility and $800 million receivables program combined, after outstanding borrowings and letters of credit. The receivables program had $411 million outstanding and was due to expire in August 2013. Management said available cash, borrowing capacity and expected operating cash generation were sufficient for projected financing needs.
Material changes and management commentary
- Reported Q3 sales increased 0.3%, but organic sales declined 4.8% year over year (4.4% excluding currency effects). Nine-month reported sales fell 2.7%; organic sales excluding currency declined 5.8%.
- Q3 EM sales rose 1.1% reported, while organic sales in constant currency fell 1.7%; Asia growth was offset by weakness in the Americas. TS sales fell 0.9% reported and organic sales in constant currency declined 8.3%, reflecting weaker western-region demand.
- Q3 GAAP operating income fell 22.7%. Excluding restructuring, integration and other charges, operating income was $195.0 million, or 3.1% of sales, versus $235.4 million, or 3.8%, a year earlier.
- Management cited uneven regional economic recovery, weak business conditions and delayed acquisition synergies. Asia’s increasing share of EM sales pressured margins because it is a lower-margin region; TS margins benefited from a mix of higher-margin products and services.
- Cost reductions included 1,160 employee reductions and facility actions. Avnet estimated approximately $110 million in annualized cost benefits in Q3 compared with the prior-year quarter.
Outlook, unusual items and risks
- The filing provides no specific forward revenue or earnings guidance. Management said acquisition-related cost synergies, particularly in EMEA, were not yet realized and were expected to take several quarters to achieve; it expected most new severance and other reserves to be used by fiscal 2014 and facility-exit reserves by fiscal 2018.
- Nine-month restructuring, integration and other charges totaled $89.7 million pre-tax, including $70.2 million of restructuring charges. Q3 included an $8.8 million charge related to exiting two Japanese multi-employer pension plans and a $6.6 million write-down tied to a planned business exit. A $11.2 million earn-out liability reversal partly offset Q3 charges.
- Nine-month gain on bargain purchase and other was $31.4 million, mainly the $33.0 million Internix acquisition gain, partly offset by a $1.7 million divestiture loss. Avnet acquired 11 businesses during the first nine months, with aggregate annualized revenue of approximately $1.10 billion.
- Avnet recorded a $2.6 million loss from Venezuelan currency devaluation. It also disclosed possible exposure of up to $73 million for import duties, interest and penalties relating to a Bell subsidiary customs audit; $10 million had been accrued, which management considered a reasonable estimate based on information available.
- Key stated risks include global economic conditions, technology-industry cyclicality, competition, supplier product allocation, supply-chain disruptions, acquisitions, foreign exchange and international fund-repatriation constraints. Management said it did not expect other ongoing litigation to materially affect results. The company reported effective disclosure controls; an EMEA ERP implementation changed certain internal controls, with pre- and post-implementation procedures performed.
Important facts for investors to verify
- Whether demand and organic sales stabilize, especially in TS and the Americas, and whether regional sales mix continues to pressure EM margins.
- Whether acquired businesses deliver expected cost synergies and whether restructuring savings offset acquisition-related SG&A growth.
- Renewal and availability terms for the receivables securitization program, which was scheduled to expire in August 2013.
- Resolution and final exposure in the Bell customs audit compared with the $10 million accrual and potential exposure of up to $73 million.
- Whether the unusually high Q3 tax rate and other acquisition-related gains, charges and currency effects recur or distort comparisons.
- Cash location and repatriation constraints, alongside continued acquisitions and share repurchases; $224.5 million remained available under the repurchase authorization at quarter-end.