Avnet, Inc. — Q1 FY2012 Form 10-Q
Reporting period: First quarter ended October 1, 2011; comparisons are with the first quarter ended October 2, 2010, except balance-sheet comparisons, which are with July 2, 2011. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Avnet distributes electronic components and enterprise computing products and provides related engineering, integration, logistics and supply-chain services. Its two operating groups are Electronics Marketing (EM) and Technology Solutions (TS), operating across the Americas, EMEA and Asia/Pacific.
Financial performance
| Metric | Q1 FY2012 | Prior comparable quarter | Change / context |
|---|---|---|---|
| Sales | $6,426.0 | $6,182.4 | Up 3.9%; organic sales up 3.6%, but roughly flat excluding currency translation. |
| Gross profit / margin | $753.6 / 11.7% | $723.1 / approximately 11.7% | Gross profit up 4.2%; margin essentially flat year over year and down 21 basis points sequentially. |
| Operating income | $223.1 | $194.5 reported; $222.5 adjusted | Prior quarter included $28.1 of restructuring, integration and other charges. Current operating margin was 3.5%, versus 3.6% on the prior adjusted basis. |
| Net income | $139.0 | $138.2 | Nearly flat; prior-period results included a $31.0 bargain-purchase gain and restructuring charges. |
| Diluted EPS | $0.90 | $0.90 | Unchanged. |
| Operating cash flow | $(204.1) | $(112.3) | Cash use increased, principally from a $373.8 decline in accounts payable and an $89.0 increase in inventory, partly offset by a $125.4 reduction in receivables. |
| Cash and cash equivalents | $622.4 | $675.3 at July 2, 2011 | $555.1 was held outside the U.S. |
| Total debt | $1,907.7 | $1,516.6 at July 2, 2011 | Up 25.8%; debt to total capital rose to 32.7% from 27.2%. |
SG&A was $530.5 million, or 8.3% of sales and 70.4% of gross profit, compared with 8.1% and 69.2%, respectively, a year earlier. Interest expense was $21.9 million, essentially unchanged. The effective tax rate declined to 29.0% from 32.5%.
Segments and material changes
- EM: Sales rose 5.4% reported, but organic sales were down 0.1%; organic sales excluding currency were down 3% year over year. Operating income was $191.2 million, essentially flat, and operating margin declined 30 basis points to 5.0%. Management cited the lower-margin Latin America business transferred from TS and weaker-than-expected sequential sales, particularly in EMEA.
- TS: Sales rose 1.9% reported; organic sales increased 9.7%, or 6.3% excluding currency. Operating income increased 14.7% to $65.0 million and operating margin improved 28 basis points to 2.5%. Organic growth was led by the Americas and Asia, while EMEA declined.
- Reported consolidated sales benefited from currency translation and acquisitions. The U.S. dollar was weaker against the euro by approximately 10% year over year, increasing translated results.
- Avnet acquired three businesses during the quarter, with approximately $320 million in annualized revenue, for $103.2 million net of cash acquired. Acquisition-related goodwill increased; total goodwill was $939.3 million at quarter-end.
- The company repurchased 3.45 million shares under a newly authorized $500 million program for a total cost of $90.9 million at an average price of $26.32 per share; shares were retired.
Cash, debt and liquidity
Working capital was $3,474.0 million, down 7.3% from fiscal year-end; the quick ratio was 1.1:1 and the working-capital ratio was 1.8:1. Avnet reported $686.4 million of net availability under its $500 million revolving credit facility and $750 million receivables securitization program. The revolving facility expires in September 2012 and the securitization program in August 2012. Borrowings under both facilities increased during the quarter. The company said it was compliant with applicable covenants and believed cash, borrowing capacity and expected future operating cash flows were sufficient for projected financing needs.
Investing cash use was $142.5 million, including $103.2 million for acquisitions and $39.7 million for capital expenditures. Financing provided $307.7 million, including increased securitization and bank borrowings; cash used for share repurchases was $81.9 million.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management described a business slowdown and a customer supply-chain inventory correction; sequential EM sales were weaker than expected, with EMEA particularly weak. Management noted that the September quarter is typically Avnet’s weakest revenue quarter.
- Management expected liquidity and borrowing capacity to meet projected financing needs and intended to continue strategic acquisitions and share repurchases, subject to returns, market conditions and other factors.
- For a customs audit relating to a Bell Microproducts subsidiary, Avnet had accrued $10 million for potentially unpaid import duties, interest and penalties. The company estimated potential exposure could reach $73 million, while stating the recorded amount was a reasonable estimate based on information then available.
- Other ordinary-course litigation, tax and environmental matters were not expected by management to have a material adverse effect. The filing reported no material change to the risk factors in the FY2011 Form 10-K.
- Foreign-exchange exposure, technology-industry cyclicality, global economic conditions, supplier product allocation, supply-chain disruption and restrictions or taxes on repatriating foreign cash were identified as risks. A hypothetical 1 percentage point increase in interest rates would have affected quarterly pretax income by $1.9 million.
- Unusual prior-period items include the $31.0 million bargain-purchase gain and $28.1 million restructuring, integration and other charges. Current-quarter foreign currency translation adjustments were negative $186.3 million, resulting in a comprehensive loss of $47.2 million despite net income of $139.0 million.
Important facts for investors to verify
- Whether the sales slowdown and supply-chain inventory correction persist, particularly in EM and EMEA, and how they affect gross margins.
- Whether operating cash flow improves after the substantial quarterly reduction in payables and inventory investment.
- Debt maturities, refinancing or renewal of the revolving and securitization facilities, covenant compliance, and remaining borrowing availability.
- Resolution and potential financial impact of the Bell customs audit, given the disclosed exposure range up to $73 million versus the $10 million accrual.
- Acquisition performance and returns, progress under the $500 million repurchase authorization, and the use and potential tax cost of foreign-held cash.