Business Context and Reporting Period
Company: Avnet, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: June 8, 2001
Reporting Period: The filing primarily reports on the completion of the acquisition of Kent Electronics Corporation ("Kent") on June 8, 2001. It includes supplemental consolidated financial statements restated to reflect this acquisition for fiscal years ended June 30, 2000, July 2, 1999, and June 26, 1998, as well as the nine months ended March 30, 2001.
Key Financial Metrics
Acquisition Details (Kent Electronics):
- Transaction Type: Merger accounted for as a pooling-of-interests.
- Consideration: Kent shareholders received 0.87 shares of Avnet common stock for each share of Kent stock held. Cash was paid for fractional shares based on $25.84 per Avnet share.
- Share Issuance: Approximately 25.3 million Avnet shares issued to Kent shareholders; 1.7 million shares reserved for warrants/options.
- Stock Price: Avnet closing price on June 8, 2001, was $24.30.
- Sales: $9.915 billion (up 46% from 1999).
- Net Income: $163.4 million ($1.51 diluted EPS).
- Gross Profit Margin: 14.7% (before special charges).
- Operating Income: $368.0 million (4.2% of sales excluding special charges).
- Total Assets: $5.934 billion.
- Total Debt: $2.154 billion.
- Shareholders' Equity: $2.247 billion.
- Sales: $10.276 billion (up 48% from prior year period).
- Net Income: $251.5 million ($2.09 diluted EPS).
- Operating Income: $531.3 million (5.2% of sales).
- Total Assets: $7.217 billion.
- Total Debt: $2.976 billion.
- Shareholders' Equity: $2.639 billion.
- Cash and Cash Equivalents (March 30, 2001): $352.7 million.
- Working Capital (March 30, 2001): $2.44 billion.
- Quick Ratio (March 30, 2001): 1.03.
Material Changes vs. Prior Period
Revenue Growth: Consolidated sales increased significantly due to organic growth and strategic acquisitions, including Marshall Industries, Savoir Technology Group, EBV Group, RKE Systems, and the Kent merger. Sales for the nine months ended March 30, 2001, rose 48% year-over-year.
Profitability: Operating income margins improved to 5.2% in the first nine months of fiscal 2001 compared to 3.8% in the prior year period, driven by improved industry conditions and synergy benefits from acquisitions. However, interest expense increased significantly due to higher debt levels used to fund acquisitions and working capital.
Balance Sheet: Total debt increased by $822.2 million in the first nine months of fiscal 2001, raising the debt-to-capital ratio to 53.0% from 48.9% at the end of fiscal 2000. This was financed by the issuance of commercial paper, bank debt, and public notes.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items (Special Charges):
- Fiscal 2000: Recorded $49.0 million in pre-tax special charges related to the integration of acquired businesses (Marshall Industries, SEI, JBA), reorganization of European and Asian operations, and legal costs (Wyle Laboratories lawsuit).
- Fiscal 2001 (Nine Months): No new special charges were recorded in the first nine months of fiscal 2001; however, the prior year comparison includes the $49.0 million in charges mentioned above.
- Discontinued Operations: The sale of K*TEC Electronics Corporation in October 2000 resulted in a one-time gain of $30.0 million pre-tax ($18.0 million after-tax).
- Management expects to realize significant synergies from the Kent acquisition and other recent deals, though these are not reflected in the restated historical financials.
- The company is evaluating its capital structure and may issue equity or equity-linked securities if deemed appropriate.
- Management does not anticipate that future acquisitions will materially impact liquidity.
- Environmental: The company is a defendant in environmental clean-up matters (Oxford, NC; San Gabriel Valley; Rush, PA; Huguenot, NY). Management believes reserves are adequate and does not anticipate a material adverse impact.
- Market Risk: Exposure to foreign currency fluctuations (hedged via natural hedging and derivatives) and interest rate changes (62% of debt is variable rate).
- Convertible Notes: Holders of Kent's 4.5% convertible notes may exercise put rights due to the change of control resulting from the merger.
Key Facts for Investor Verification
- Merger Accounting: Verify the impact of the "pooling-of-interests" accounting method on the restated historical financials, which combines Kent's results without recognizing goodwill or purchase price allocation.
- Debt Structure: Confirm the terms of the new $1.25 billion credit facility and the potential put option on Kent's $207 million convertible notes triggered by the acquisition.
- Special Charges: Review the cash vs. non-cash components of the $49.0 million in special charges recorded in fiscal 2000 to understand their impact on future cash flows.
- Environmental Liabilities: Assess the adequacy of reserves for the Oxford, NC site (estimated $6.3 million total cost, with Avnet responsible for up to 30%) and other contingent environmental matters.
- Segment Performance: Analyze the contribution of the new Avnet Applied Computing (AAC) segment and the Kent segment to overall sales and operating income growth.