Avnet, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 2, 2011. The quarter is compared with the quarter ended April 3, 2010; nine-month comparisons are affected by fiscal 2011 having 39 weeks versus 40 weeks in fiscal 2010. Amounts below are in U.S. dollars.
Business context and performance
Avnet distributes electronic components and enterprise computing, storage and related products through Electronics Marketing (EM) and Technology Solutions (TS). Fiscal 2011 growth reflects acquisitions, including Bell Microproducts, Tallard and Unidux, as well as stronger organic demand.
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Sales | $6.672 billion | $4.757 billion | $19.622 billion | $13.946 billion |
| Gross profit | $786.6 million | $582.8 million | $2.283 billion | $1.634 billion |
| Operating income | $240.7 million | $167.2 million | $662.8 million | $418.5 million |
| Net income | $151.0 million | $114.5 million | $430.2 million | $269.3 million |
| Diluted EPS | $0.98 | $0.75 | $2.79 | $1.76 |
Financial condition and material changes
- Q3 sales increased 40.3% year over year; organic sales rose 16.2% (15.5% excluding currency translation). EM organic growth was 18.3%; TS organic growth was 13.2%.
- Q3 gross margin was 11.8%, down 46 basis points year over year. Operating margin was 3.6%, up from 3.5%. Management attributed margin pressure principally to acquired businesses’ lower gross-margin mix; SG&A fell to 7.9% of sales from 8.6%.
- For the first nine months, gross margin was 11.6% versus 11.7%; operating margin was 3.4% versus 3.0%. Period comparisons also reflect the extra week in the prior-year period.
- Operating cash flow was negative $3.4 million for the first nine months, compared with negative $154.7 million a year earlier. Acquisitions used $691.0 million net of cash acquired; capital expenditures were $105.2 million. Cash and cash equivalents declined to $781.7 million from $1.092 billion at July 3, 2010.
- At April 2, 2011, total debt was $1.883 billion, up from $1.280 billion at fiscal year-end; debt was 33.5% of total capitalization versus 29.8%. Short-term debt included $485 million drawn under the receivables securitization program. Long-term debt was $1.251 billion.
- Current assets were $8.216 billion and current liabilities $4.725 billion; working capital was $3.491 billion. The quick ratio was 1.2:1 and current ratio 1.7:1, versus 1.4:1 and 1.9:1, respectively, at July 3, 2010. Management reported $500.6 million net availability under its revolving credit facility and securitization program, in addition to cash.
- Nine-month results included a $31.0 million non-taxable bargain-purchase gain from Unidux, partly offset by other items; Q3 included a $6.3 million loss related to write-downs of prior investments. The nine-month period also included a $19.8 million tax adjustment, primarily a non-cash write-off of a deferred tax asset.
Outlook, commentary and risks
- Management said Q3 revenue was stronger than expected and described it as the fifth consecutive quarter of double-digit year-over-year organic growth. It expected at least $60 million of annualized Bell cost synergies, with the full impact anticipated in Q1 fiscal 2012. This is the filing’s stated outlook; no specific sales or earnings forecast is provided.
- Bell integration was substantially complete by the end of March. Integration, restructuring and transaction charges were $16.3 million in Q3 and $73.5 million for the first nine months. More than 450 employees were reduced and 47 facilities vacated in fiscal 2011 restructuring actions.
- Potential U.S. Customs and Border Protection duties, interest and penalties related to pre-acquisition Bell Latin America import practices were estimated at up to $73 million. Avnet had recorded an $18 million contingent liability and said that estimate was reasonable based on information then available; additional exposure remained possible.
- The receivables securitization program, with $485 million outstanding, expires in August 2011. The company said it was covenant-compliant at quarter-end. Management considered liquidity sufficient for projected needs, while noting operating cash use during growth periods.
- Risk factors include global economic and technology-industry conditions, competition, supplier product allocation, foreign currency and international operating risks, and potential supply-chain disruption from the Japan earthquake and tsunami. Management reported no material change to the prior annual report’s risk factors. Ordinary-course legal and environmental matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether organic growth and margins persist after separating acquisition effects, currency translation and the prior-year extra week.
- Progress toward the anticipated $60 million of annualized Bell synergies and the resulting effect on TS margins and cash generation.
- Resolution of the Bell customs audit, including whether the recorded $18 million liability adequately reflects possible exposure up to $73 million.
- Refinancing, renewal or repayment plans for the securitization program before its August 2011 expiry, and covenant headroom.
- Working-capital requirements, acquisition spending and debt levels as sales grow, given negative nine-month operating cash flow and increased short-term borrowing.