Avnet, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2011; comparable periods ended January 1, 2011. Avnet distributes electronic components and enterprise technology products through Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $6.694bn | $6.767bn | $13.120bn | $12.950bn |
| Gross profit | $784.1m | $773.2m | $1.538bn | $1.496bn |
| Operating income | $230.9m | $227.6m | $454.0m | $422.1m |
| Net income | $147.0m | $141.0m | $286.1m | $279.2m |
| Diluted EPS | $0.98 | $0.91 | $1.88 | $1.81 |
- Q2 sales declined 1.1% reported and 0.8% organically. Gross margin rose 28 basis points to 11.7%; GAAP operating margin was 3.5%, versus 3.4%. Excluding restructuring and related charges in both periods, operating income was $265.4m versus $256.7m, and margin was 4.0% versus 3.8%.
- EM Q2 organic sales fell 3.5%; segment operating income declined 4.7% to $174.9m and margin fell 30 basis points to 4.9%. TS organic sales increased 2.5%; operating income rose 13.1% to $118.9m and margin improved 56 basis points to 3.8%.
- Six-month gross margin was 11.7%, versus 11.6%. Six-month diluted EPS increased to $1.88 from $1.81.
- Six-month operating cash flow was $245.8m, compared with cash used of $191.5m. Cash and equivalents were $968.5m at December 31, 2011, up from $675.3m at July 2, 2011. The MD&A separately reports $450.0m of operating cash flow for Q2.
- Total debt was $1.985bn, up from $1.517bn at fiscal year-end; debt-to-capital rose to 34.0% from 27.2%. Current liabilities were $5.023bn and working capital $3.432bn; the current ratio was 1.7:1 and quick ratio 1.1:1.
Changes, outlook, and notable items
- Management cited a continuing supply-chain inventory correction and subdued economic conditions. EM had its second consecutive quarter of negative year-over-year organic growth. TS improved profitability despite lower reported sales, with margin back within management’s 3.4%–3.9% target range for the first time in eight quarters.
- Hard-drive supply constraints temporarily supported pricing and margins in EM Americas. Management cautioned that sequential sales growth of 4.2% was below the usual seasonal range of 8%–12%.
- Avnet recorded $34.5m of Q2 restructuring, integration, and acquisition-related charges ($23.6m after tax; $0.16 per diluted share), including restructuring actions affecting about 350 employees and 14 facility exits. Management expects annualized savings of approximately $25m–$30m by fiscal year-end 2012. No specific revenue or earnings guidance is provided.
- During the first half, Avnet acquired four businesses with approximately $335m in annualized revenue for $118.5m net of cash acquired. It repurchased 8.06m shares at an average $28.01 per share for a reported total cost of $225.9m under a $500m authorization.
- The company entered a $1.0bn five-year revolving credit facility and increased its receivables securitization capacity to $750m. Combined capacity was $1.75bn, with $1.10bn net available at quarter-end. The securitization program expires in August 2012; covenants were met at period-end.
- Cash held outside the U.S. was $843.5m and was expected to remain permanently reinvested abroad; repatriation could trigger significant income taxes. Market risks include foreign exchange, interest rates, technology-industry cyclicality, global economic conditions, supplier product allocation, and supply-chain disruption. A 100-basis-point interest-rate increase was estimated to affect quarterly pretax income by $2.1m.
- For potential unpaid import duties tied to the acquired Bell business, Avnet had accrued $10m; estimated exposure could be as high as $73m. Management considered the accrual reasonable based on information available. Management did not expect other pending matters to materially affect financial condition, liquidity, or results.
Key facts for investors to verify
- Whether EM’s inventory correction and weak organic demand continue, and whether TS can sustain its margin recovery.
- Whether the projected $25m–$30m annualized restructuring savings are achieved, and how much further restructuring or integration expense is incurred.
- Availability and renewal of the receivables securitization facility before its August 2012 expiry, covenant headroom, and the rise in short-term borrowings.
- Resolution of the Bell import-duty review and whether the $10m accrual remains adequate against the stated potential exposure.
- Cash-flow timing: the filing reports $450.0m of Q2 operating cash flow in MD&A but $245.8m for the six-month period in the cash-flow statement; investors should reconcile the quarterly figure to the underlying statements.