AVT

Avnet, Inc. 10-Q Summary: Quarter Ended September 27, 2002

Business Context and Reporting Period

This Form 10-Q covers the first quarter of fiscal year 2003 ended September 27, 2002. Avnet, Inc. is a global industrial distributor of electronic components, enterprise network equipment, and computer products. The company operates through three segments: Electronics Marketing (EM), Computer Marketing (CM), and Applied Computing (AC). The reporting period reflects continued challenging economic conditions in the technology sector.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Sales decreased 1.2% year-over-year to $2.17 billion, driven primarily by a 6.9% decline in Computer Marketing (CM) sales. This was partially offset by growth in Applied Computing (AC) (+2.1%) and Electronics Marketing (EM) (+0.3%).
• Profitability: Operating income improved significantly to $20.0 million from $3.6 million in the prior year, aided by aggressive cost reduction initiatives. However, gross margins compressed by 42 basis points year-over-year due to pricing pressures and a shift toward lower-margin PC-builder segments.
• Net Loss Comparison: The current quarter net loss of $0.5 million is a substantial improvement over the $599.7 million loss in Q1 2002. The prior year loss was heavily impacted by a one-time $580.5 million goodwill impairment charge due to the adoption of SFAS 142.
• Debt Reduction: Total debt decreased by approximately $91 million year-over-year. The company repaid $100 million under its accounts receivable securitization program and reduced commercial paper and bank debt.

Guidance, Outlook, and Risks

• Cost Reduction: Management anticipates further cost reduction efforts in the second quarter of fiscal 2003, targeting approximately $80 million in annualized expense reductions. This may result in special charges related to census reductions and facility consolidation.
• Liquidity and Financing: On October 10, 2002, the company amended its multi-year credit facility, reducing available borrowings to $300 million (from $428.75 million) unless a qualified capital offering of $325 million is completed by April 15, 2003. A "springing lien" provision was added, which could collateralize assets if credit ratings fall below Ba1/BB+ or if the capital offering is not consummated by December 15, 2002.
• Outlook: Management expects the Asia region to remain a primary growth driver. The company believes current liquidity ($173 million cash plus $421 million available borrowing capacity) is sufficient to meet 2003 debt maturities and operational needs.
• Risks: Key risks include competitive pressures, general economic downturns, supplier product allocation issues, and the potential triggering of debt covenants or rating downgrades.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to meet the interest coverage ratio and the requirement to complete a $325 million capital offering by April 2003 to restore full credit facility availability.
• Goodwill Impairment History: Note that the massive 2001 goodwill charge ($580.5 million) is a non-recurring item; current results should be evaluated on a run-rate basis excluding this historical anomaly.
• Margin Trends: Monitor gross margin compression in the Computer Marketing segment and the impact of the shift toward lower-margin PC-builder business.
• Upcoming Special Charges: Watch for the anticipated $80 million annualized cost reduction plan in Q2, which may include one-time restructuring charges.
• Securitization Program: Confirm the status of the accounts receivable securitization program and any potential impact of credit rating changes on its availability.