Business Context and Reporting Period
Company: Avnet, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: July 30, 2003
Reporting Period: This filing provides reconciliations of Non-GAAP financial information for historical periods, specifically the fiscal year ended June 28, 2002, and the fiscal quarters ended September 27, 2002, and December 27, 2002. The data compares reported GAAP results against "Adjusted" results that exclude special charges related to restructuring, acquisitions, and cost-cutting initiatives.
Key Financial Metrics
The filing details significant variances between reported GAAP results and adjusted non-GAAP results due to special charges. Key metrics for the most recent periods covered are as follows:
Fiscal Year Ended June 28, 2002
| Metric | Reported (GAAP) | Adjusted (Non-GAAP) |
|---|---|---|
| Sales | $8,920,248,000 | $8,920,248,000 |
| Gross Profit Margin | 13.71% | 13.95% |
| Operating Income | ($2,985,000) | $76,638,000 |
| Operating Margin | -0.03% | 0.86% |
| Net Loss | ($664,931,000) | ($602,847,000) |
| Net Loss Per Share (Diluted) | ($5.61) | ($5.09) |
Note: The reported Net Loss includes a $580.5 million cumulative effect of a change in accounting principle, which is excluded from the adjusted calculation.
Second Quarter Ended December 27, 2002
| Metric | Reported (GAAP) | Adjusted (Non-GAAP) |
|---|---|---|
| Sales | $2,346,665,000 | $2,346,665,000 |
| Gross Profit Margin | 13.45% | 13.45% |
| Operating Income | ($75,192,000) | $31,573,000 |
| Operating Margin | -3.20% | 1.35% |
| Net Loss | ($58,657,000) | $7,092,000 |
| Net Earnings Per Share (Diluted) | ($0.49) | $0.06 |
Debt and Liquidity
The filing highlights a significant pro forma reduction in debt, assuming drawings under an accounts receivable securitization program are treated as debt:
- Pro Forma Debt Reduction (Dec 29, 2000 to Dec 27, 2002): $1.88 billion.
- Pro Forma Debt at Dec 27, 2002: $1.44 billion (including $50 million in securitization drawings).
- Pro Forma Debt at Sep 27, 2002: $1.73 billion (including $100 million in securitization drawings).
Material Changes and Special Items
The primary driver of the difference between reported and adjusted results is the presence of "Special Items" (restructuring and acquisition charges). These items are excluded in the adjusted figures to show underlying operating trends.
- Fiscal 2002 Special Charges: $79.6 million pre-tax ($21.6 million in Cost of Sales; $58.0 million in SG&A). These related to the Kent Electronics acquisition, impairment of Internet-related investments, and severance.
- Q2 2003 (Ended Dec 27, 2002) Special Charges: $106.8 million pre-tax (all in SG&A). These related to cost-cutting initiatives, severance, facility consolidation, and write-offs of capitalized IT initiatives.
- Expense Reductions: Management reports an annualized reduction in operating expenses of approximately $322 million comparing Q2 Fiscal 2001 (pro forma) to Q4 Fiscal 2002.
Management Commentary and Outlook
Management states that providing non-GAAP pro forma measures is useful for investors to assess operating performance, especially when comparing results across periods with varying special charges. The company utilizes these measures to establish operational goals and measure performance for compensation purposes.
Key Commentary Points:
- Underlying Trends: Adjusted operating margins were positive in all periods presented, contrasting with reported losses in several quarters due to special charges.
- Cost Cutting: The company emphasizes significant progress in reducing operating expenses through restructuring and consolidation.
- Debt Management: The company has aggressively reduced debt levels, utilizing an accounts receivable securitization program to improve liquidity.
The filing does not contain forward-looking guidance, specific risk factors, or contingencies beyond the historical reconciliation of special charges.
Investor Verification Checklist
- Special Charge Composition: Verify the specific nature of the $106.8 million charge in Q2 2003 (severance vs. IT write-offs) to assess future cash flow impacts.
- Accounting Principle Change: Confirm the impact of the $580.5 million cumulative effect of change in accounting principle on the Fiscal 2002 Net Loss, as this is a non-cash, one-time item.
- Debt Metrics: Review the balance sheet to distinguish between reported debt and the pro forma debt figures which include securitization drawings.
- Segment Performance: Analyze Schedule 12 to understand which segments (EM, CM, AC) are driving the adjusted operating income versus reported losses.
- Goodwill Amortization: Note the removal of goodwill amortization in pro forma calculations due to the adoption of SFAS 142 in Fiscal 2002.