Avnet, Inc. — Form 10-Q Summary
Business context and reporting period
Avnet distributes electronic components, computing and storage products, and related technology and supply-chain services through Electronics Marketing (EM) and Technology Solutions (TS). This report covers the fiscal second quarter ended January 1, 2011, and the six months ended that date. The comparable prior-year six-month period included 27 weeks versus 26 weeks in fiscal 2011; management estimated the extra prior-year week contributed roughly $400 million in sales.
Key financial metrics
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Sales | $6.767 billion | $4.835 billion | $12.950 billion | $9.190 billion |
| Gross profit | $773.2 million | $551.9 million | $1.496 billion | $1.052 billion |
| Gross margin | 11.4% | 11.4% | 11.6% | 11.4% |
| Operating income | $227.6 million | $162.3 million | $422.1 million | $251.3 million |
| Net income | $141.0 million | $103.9 million | $279.2 million | $154.7 million |
| Diluted EPS | $0.91 | $0.68 | $1.81 | $1.01 |
- Q2 organic sales grew 13.7% year over year (15.7% excluding currency translation); EM organic sales rose 23.0% and TS rose 4.9%. Reported sales increased 40.0%, principally reflecting acquisitions.
- Q2 SG&A was $516.5 million, or 7.6% of sales, versus 8.1% a year earlier. Operating margin was 3.4% in both quarters. Excluding restructuring, integration and other charges, Q2 operating income was $256.7 million; first-half adjusted operating income was $479.2 million.
- Six-month operating cash flow was negative $191.5 million, compared with negative $91.3 million in the prior-year period. Working-capital growth, especially receivables and inventory, used cash.
- At January 1, cash was $756.9 million; total debt was $2.025 billion, including $777.2 million current and $1.248 billion long-term. Debt was 37.0% of total capitalization, up from 29.8% at fiscal year-end.
- Working capital was $3.274 billion; current and quick ratios were 1.6:1 and 1.1:1, respectively. The company reported $537.6 million net availability under its revolving credit and receivables-securitization facilities, in addition to cash.
Material changes versus prior comparable periods
- Revenue and earnings rose sharply, reflecting organic demand growth and acquisitions. Q2 was the fourth consecutive quarter of double-digit year-over-year organic sales growth.
- Q2 gross margin was flat year over year but declined 27 basis points sequentially as lower-margin TS grew to 47% of consolidated revenue. EM margins improved year over year; TS margins declined, partly due to acquired Bell’s lower-margin product mix.
- Q2 operating income rose 40.2%; first-half operating income increased to $422.1 million from $251.3 million. First-half diluted EPS rose to $1.81 from $1.01.
- Debt increased $744.9 million from July 3, 2010, reflecting acquisition-related debt, receivables-program borrowings and working-capital needs. Cash fell $335.2 million over the same period.
- Acquisitions included Bell, Tallard Technologies, Unidux and three smaller businesses. First-half acquisition cash outflow, net of cash acquired, was $626.9 million.
Outlook, commentary, risks and unusual items
- Management expected Bell integration to be completed by the end of fiscal 2011 and projected at least $60 million of annualized cost synergies, with the full benefit expected in the first quarter of fiscal 2012. This is management’s stated expectation, not a formal earnings forecast.
- Management cited anticipated seasonal strength in the March quarter, including inventory built to support EM demand. It said cash, borrowing capacity and expected operating cash generation were sufficient for projected financing needs.
- The six-month results included a $31.0 million non-taxable Unidux bargain-purchase gain, or $0.20 per diluted share. First-half restructuring, integration and other charges were $57.2 million pre-tax, or $0.27 per diluted share; these charges were $29.1 million in Q2.
- Avnet recorded an $18 million contingent liability for potential unpaid import duties, interest and penalties relating to a former Bell Latin America business. Management considered it a reasonable estimate based on available facts, but said additional exposure was possible and a reasonably possible range could not be estimated.
- The first half included a $16.9 million income-tax adjustment, primarily a non-cash write-off of a deferred tax asset associated with acquisition integration. Interest expense also increased, to $46.3 million for the half from $30.6 million.
- Management said ordinary-course litigation and contingencies were not expected to materially adversely affect results or financial condition. Environmental obligations and the CBP matter remain relevant contingencies. The filing reported no material change to the risk factors in the prior Form 10-K.
- Currency movements affected reported results; Avnet said it hedged the majority of foreign-exchange exposures. A hypothetical 1 percentage-point increase in interest rates was estimated to affect quarterly pre-tax income by $1.9 million.
Important facts for investors to verify
- Whether Bell integration delivers the projected at least $60 million of annualized synergies on the stated timeline, and how margins evolve as integration proceeds.
- Whether organic growth and demand remain strong, particularly in EM and in the seasonally important March quarter; distinguish organic performance from acquisition and currency effects.
- Whether operating cash flow improves as receivables and inventory normalize, given first-half cash usage and the growth in working capital.
- How Avnet manages higher debt and near-term funding needs, including the $450 million securitization borrowing, the program’s August 2011 expiration, and the $104.8 million Bell notes subject to potential holder repurchase in March 2011.
- The final resolution of the CBP import-duty audit and any changes to the recorded $18 million estimate; also monitor remaining acquisition purchase-price and tax-accounting adjustments.