Business context and reporting period
Avnet distributes electronic components and technology solutions through its Electronics Marketing (EM) and Technology Solutions (TS) groups. This Form 10-Q covers the fiscal third quarter and first nine months of fiscal 2012, ended March 31, 2012; comparisons are with periods ended April 2, 2011. The request metadata says “2011 Q3,” which does not match the filing period.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Sales | $6.281 billion | $6.672 billion | $19.400 billion | $19.622 billion |
| Gross profit | $753.8 million | $786.6 million | $2.292 billion | $2.283 billion |
| Operating income | $216.8 million | $240.7 million | $670.7 million | $662.8 million |
| Net income | $147.6 million | $151.0 million | $433.6 million | $430.2 million |
| Diluted EPS | $1.00 | $0.98 | $2.88 | $2.79 |
| Operating cash flow | $23.6 million | $188.1 million | $269.4 million | $(3.4) million |
Q3 gross margin was 12.0%, up 21 basis points year over year; operating margin was 3.5% versus 3.6%. Excluding restructuring, integration and other charges, operating margin was 3.8% versus 3.9%. Nine-month gross and operating margins were 11.8% and 3.5%, respectively. Nine-month adjusted operating income was $723.8 million versus $736.3 million.
Q3 sales fell 5.9% reported and 8.1% on an organic basis. EM organic sales declined 10.0% and TS organic sales declined 5.2%. EMEA was the principal weakness: total regional sales fell 15.6% reported. Nine-month reported sales declined 1.1%, while organic sales excluding currency effects declined 2.5%. Q3 net income was lower, but diluted EPS increased, reflecting a lower weighted-average share count following repurchases.
At March 31, cash and cash equivalents were $940.1 million; current assets were $8.305 billion and current liabilities $4.826 billion. Working capital was $3.480 billion, the quick ratio 1.2:1 and the current ratio 1.7:1. Total debt was $2.118 billion, up from $1.517 billion at July 2, 2011; debt to total capitalization rose to 34.3% from 27.2%. Nine-month capital expenditures were $95.4 million and acquisition spending, net of cash acquired, was $229.5 million.
Material changes and notable items
- Q3 sales weakness reflected a difficult comparison with the prior-year recovery peak, continued supply-chain inventory correction and softer EMEA demand. Management said EM’s book-to-bill ratio was at parity and the inventory correction appeared to be nearing an end.
- TS improved Q3 gross margin by 80 basis points and operating margin by 60 basis points year over year, supported by EMEA performance initiatives and restructuring. EM operating margin declined 56 basis points year over year but improved sequentially to 5.2%.
- Avnet acquired nine businesses during the first nine months, with approximately $730 million of aggregate annualized revenue, for $241.7 million net of cash acquired. Q3 included a $4.5 million bargain-purchase gain on its acquisition of Singapore’s Unidux Electronic Limited.
- Nine-month restructuring, integration and other charges were $53.1 million pretax ($0.25 per diluted share), including restructuring actions affecting more than 550 employees. Management expected $35–$45 million in annualized savings by fiscal year-end. Most remaining new-plan severance and other reserves were expected to be used by fiscal 2013, with facility-exit reserves extending later.
- The company repurchased 8.77 million shares for $248.8 million through Q3 under a $500 million authorization; approximately $251.2 million remained. Nine-month cash flow from financing was $334.7 million, including repurchases and securitization borrowings.
Liquidity, outlook and risks
Avnet had $940.1 million in cash, of which $852.1 million was held outside the U.S. Management said cash, borrowing capacity and expected operating cash flows were sufficient for projected financing needs. The $1.0 billion revolving credit facility expires in November 2016; the $750 million receivables securitization program expires in August 2012 and was fully drawn at quarter-end. Together, the facilities had $961.1 million of net availability, and the company reported compliance with their covenants. Foreign cash was expected to remain permanently reinvested abroad; repatriation could trigger significant taxes.
No specific revenue or earnings guidance was provided. Management described Q3 results as in line with expectations and said seasonal growth rates appeared to be normalizing. An April 2012 IRS audit report, subject to Joint Committee approval, could lead to a $15–$17 million tax benefit within the next twelve months. A 1 percentage-point interest-rate increase was estimated to affect quarterly pretax income by $2.4 million; 46% of debt bore variable rates.
Key risks include global economic uncertainty, technology-sector cyclicality, competitive pressure, supply-chain disruptions, supplier product allocation, currency and international-operating risks, and financing access or covenant compliance. For a Bell-related customs audit, Avnet had accrued $10 million; estimated potential exposure could be up to $73 million, though management considered the recorded amount reasonable based on available information. Management did not expect other pending legal matters to materially affect the company.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for fiscal Q3 2012, not 2011 Q3.
- Track whether EM’s inventory correction ended and whether sales stabilized, especially in EMEA.
- Monitor the August 2012 securitization-program renewal, borrowing levels, debt mix and covenant headroom.
- Assess whether restructuring delivers the projected $35–$45 million annualized savings and how much of reported performance depends on adjustments.
- Follow the Bell customs audit exposure and the timing and approval of the potential IRS-related tax benefit.
- Consider the location and potential repatriation cost of foreign-held cash, alongside ongoing acquisition and share-repurchase spending.