Avnet, Inc. — Q2 FY2010 Form 10-Q
Business context and reporting period. Avnet distributes electronic components and technology products and services through Electronics Marketing (EM) and Technology Solutions (TS). The quarter ended January 2, 2010; the six-month period included 27 weeks, compared with 26 weeks in the prior-year first half. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 FY2010 | Prior-year comparable quarter | Six months FY2010 | Prior-year comparable period |
|---|---|---|---|---|
| Sales | $4,834.5 | $4,269.2 | $9,189.6 | $8,763.6 |
| Gross profit / margin | $551.9 / 11.4% | $533.5 / 12.5% | $1,051.6 / 11.4% | $1,117.7 / 12.7% |
| Operating income (loss), GAAP | $162.3 | $(1,208.7) | $251.3 | $(1,054.0) |
| Adjusted operating income | $162.3 | $153.3 | $269.4 | $318.0 |
| Net income (loss) | $103.9 | $(1,205.0) | $154.7 | $(1,114.6) |
| Diluted EPS | $0.68 | $(7.99) | $1.01 | $(7.40) |
| Operating cash flow | Not provided for quarter in cash flow statement | Not provided for quarter in cash flow statement | $(91.3) | $314.2 |
Adjusted operating income excludes impairment charges and restructuring, integration and other charges as applicable; it is a non-GAAP measure. FY2010 first-half adjusted operating income was $269.4 million versus $318.0 million in FY2009. The prior-year GAAP loss included $1,348.8 million of non-cash impairment charges.
Q2 sales grew 13.2% year over year; management reported pro forma growth of 9.6%, or 6.5% excluding foreign-exchange effects. EM sales rose 11.0% and TS sales rose 15.8%. Regional growth was strongest in Asia, where total sales increased 48.3%; Americas sales rose 3.4% and EMEA sales 8.2%. First-half sales increased 4.9% reported, with the extra fiscal week, acquisitions, currency translation and TS growth contributing.
Q2 gross margin fell 108 basis points year over year, reflecting a greater share of lower-margin Asia sales and market pressures in EM Americas and EMEA. Adjusted operating margin was 3.4%, versus 3.6% in the prior-year quarter. Management said cost-saving actions of approximately $225 million in annualized savings and about $40 million in acquisition-related synergies were fully realized in Q2 FY2010.
At January 2, 2010, cash and cash equivalents were $894.9 million; total debt was $1,019.8 million, comprising $81.0 million short-term and $938.8 million long-term debt. Current assets were $6,168.2 million and current liabilities $3,318.6 million; working capital was $2,849.6 million. The quick ratio was 1.3:1, down from 1.5:1 at June 27, 2009, and debt to total capitalization was 25.5%, versus 26.0%.
Avnet reported $862 million of net availability under its $500 million revolving credit facility and $450 million receivables securitization program, after borrowings and letters of credit. No securitization borrowings were outstanding. The company was in compliance with facility covenants. Total debt increased 5.1% from fiscal year-end, primarily due to additional bank borrowings.
Cash flow, changes and unusual items
First-half operating cash flow was a use of $91.3 million, compared with generation of $314.2 million a year earlier. Working capital absorbed cash as receivables increased $793.3 million and inventories increased $272.9 million, partly offset by a $753.4 million increase in accounts payable. Cash and equivalents declined $49.1 million during the half to $894.9 million. Management cited $713 million of operating cash generation on a trailing-12-month basis and said it did not expect FY2010 to match FY2009’s $1.1 billion.
Q2 included a $5.5 million pre-tax gain related to earn-out provisions from the prior sale of an investment; first-half divestiture proceeds were $8.6 million. Two TS Asia acquisitions were completed in Q2, with combined annualized revenue of approximately $60 million. First-half acquisition cash outflow, net of cash acquired, was $5.6 million.
FY2010 first-half restructuring, integration and other charges totaled $18.1 million pre-tax, recorded in Q1, including workforce reductions affecting more than 150 employees and facility exit costs. Remaining restructuring reserves were $7.7 million for FY2010 actions and $32.7 million for FY2009 actions at January 2, 2010. The company also adopted convertible-debt accounting guidance retrospectively; it had no current-period impact because the applicable debentures had been extinguished in FY2009, but prior-period interest expense and EPS were adjusted.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the filing. Management said Q2 performance exceeded expectations, citing stronger-than-anticipated December demand across regions and better-than-expected corporate spending on servers and storage. It also noted that western markets were recovering more slowly than Asia and that gross-margin pressure reflected geographic and customer mix and late-cycle market conditions. Management expects to continue strategic acquisitions where they strengthen competitiveness and meet return thresholds.
Management considered cash, borrowing capacity and expected operating cash flow adequate for projected financing needs, while cautioning that cash generation was not expected to equal FY2009 levels. Risks include industry demand and market conditions, foreign-exchange and interest-rate exposure, and the ability to satisfy financing-program covenants. 84% of debt bore fixed rates; management estimated a 1 percentage-point rate increase would affect quarterly pre-tax income by $0.4 million.
The filing reports ordinary-course litigation, tax, environmental and other matters; management did not expect them to have a material adverse effect and said environmental cleanup costs were appropriately accrued. A pension-litigation settlement, subject to court approval, would require retroactive benefits and is expected to add approximately $3 million in pension expense annually for 11 years. No material changes to the FY2009 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether the substantial working-capital investment and negative first-half operating cash flow reverse as sales growth continues.
- Whether revenue growth, particularly in Asia and TS, is sustainable and how the mix affects gross and operating margins.
- How the 27-week first half, acquisitions and currency translation affect comparisons with the prior year.
- Debt maturities, facility availability and covenant compliance, including the securitization program’s August 2010 expiry.
- The timing and cash costs of remaining restructuring reserves and the outcome and expense implications of the pension settlement.