AVT

Business Context and Reporting Period

Company: Avnet, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 2008 (Second Quarter of Fiscal 2009)
Business Overview: Avnet is a global industrial distributor of electronic components, enterprise computer products, and embedded subsystems. Operations are divided into two primary groups: Electronics Marketing (EM) and Technology Solutions (TS), serving customers in the Americas, EMEA, and Asia/Pacific regions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 10.2% year-over-year in Q2 2009. On a pro forma basis (adjusting for acquisitions), organic sales contracted 14.9%. The decline was driven by a global economic slowdown affecting all three geographic regions.
• Impairment Charges: The Company recorded a non-cash goodwill and intangible asset impairment charge of $1.35 billion ($1.32 billion goodwill, $31.4 million intangibles). This charge resulted from an interim impairment test triggered by a decline in market capitalization and the global economic downturn. It impacted four reporting units: EM Americas, EM Asia, TS EMEA, and TS Asia.
• Operating Loss: Due to the impairment charges and revenue contraction, the Company reported an operating loss of $1.21 billion in Q2 2009, compared to operating income of $207.9 million in the prior year. Excluding impairment charges, adjusted operating income was $140.1 million, a 32.6% decline from the prior year.
• Cost Reductions: Management announced additional cost reduction actions with annualized savings of $50 million, bringing total expected savings to $155 million (approx. 10% of annualized operating expenses).

Guidance, Outlook, and Risks

• Outlook: Management expects continued market weakness in the March and June quarters of fiscal 2009. Despite the challenging environment, the Company intends to continue strategic acquisitions if they meet return on capital thresholds.
• Liquidity: The Company maintains strong liquidity with $670.9 million in cash and $919.4 million in net borrowing availability under its credit facilities. The impairment charges are non-cash and do not impact debt covenant compliance.
• Convertible Debentures: The Company has $300 million in 2% Convertible Senior Debentures due 2034. Based on current stock prices, it is likely holders will exercise their put option on March 15, 2009. Management intends to use its credit facility to satisfy this obligation.
• Risks: Key risks include the severity and duration of the global economic downturn, cyclical fluctuations in the semiconductor industry (which accounts for over 50% of sales), and foreign currency exchange rate fluctuations (specifically the strengthening US Dollar).

Investor Verification Checklist

• Impairment Validity: Verify the assumptions used in the goodwill impairment test (discount rates, growth rates) given the significant write-down of $1.35 billion.
• Debt Covenants: Confirm continued compliance with the Credit Agreement and Securitization Program covenants, particularly interest coverage and leverage ratios, despite the reported net loss.
• Convertible Debt Put Option: Assess the Company's ability to fund the potential $300 million put option on the Convertible Senior Debentures due March 15, 2009, using its credit facility.
• Working Capital Trends: Monitor the effectiveness of cost reduction initiatives and working capital management (receivables and inventory levels) as demand remains weak.
• Acquisition Integration: Review the integration progress and financial contribution of recent acquisitions (Horizon, Source Electronics, Ontrack) amidst the market downturn.