Avnet, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, ended September 29, 2012. Avnet distributes electronic components and enterprise computing products and provides related services through Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
- Sales: $5.87 billion, down 8.7% year over year; organic sales fell 11.3% (8.4% excluding foreign-exchange effects). EM sales declined 4.3% and TS sales declined 15.1%.
- Profit and margins: Gross profit was $684.4 million, down 9.2%; gross margin was 11.7%, down 7 basis points year over year. Operating income was $100.0 million versus $223.1 million; operating margin was 1.7% versus 3.5%. Excluding $37.4 million of current-quarter restructuring, integration and other charges, operating income was $137.4 million and margin was 2.3%.
- Net income and EPS: Net income was $100.3 million versus $139.0 million; diluted EPS was $0.70 versus $0.90. Current-quarter results included a $31.3 million bargain-purchase gain, or $0.22 per diluted share, and a 7.9% effective tax rate versus 29.0% in the prior-year quarter. Management attributed the lower tax rate principally to an IRS audit settlement and the non-taxable bargain gain.
- Cash flow: Operating cash flow was $81.0 million, compared with a $204.1 million use in the prior-year quarter. Investing activities used $106.8 million, including $87.2 million for acquisitions; financing activities provided $44.7 million, including $128.7 million of cash used for share repurchases. Cash ended at $1.04 billion.
- Debt and liquidity: Total debt was $2.35 billion, up from $2.14 billion at June 30, 2012; debt was 37.1% of total capitalization versus 35.4%. Working capital was $3.57 billion; the current ratio was 1.8:1 and quick ratio 1.2:1. The company reported $831.7 million of net availability under its revolving credit facility and receivables program. Cash included $916.2 million held outside the U.S., which management said was expected to remain permanently reinvested abroad.
- Other metrics: SG&A was $547.0 million, or 9.3% of sales versus 8.3%. The company repurchased 4.17 million shares for $130.7 million during the quarter.
Material changes and management commentary
- Management said revenue was below expectations amid slower technology-market growth. Weakness was pronounced in the western regions: combined EM and TS Americas organic revenue fell 14% year over year and sequentially. Consolidated organic sales declined 7.4% sequentially, worse than typical September-quarter seasonality of flat to down 4%.
- Lower western-region sales reduced operating leverage and margins. EM operating income fell 23.5% to $146.3 million; TS operating income fell 47.1% to $34.4 million.
- Avnet recorded $37.4 million of restructuring, integration and other charges, including $30.2 million of restructuring charges. Actions affected more than 600 employees and included facility exits. Management estimated that actions taken by the quarter-end would generate about $90 million in annualized cost benefits in fiscal Q2 2013, and said it was evaluating further reductions.
- Avnet acquired five businesses with aggregate annualized revenue of about $330 million for $97.9 million net of cash acquired, including contingent earn-out obligations. The Internix acquisition produced the $31.3 million bargain-purchase gain.
Outlook, risks and contingencies
- The filing gives no specific revenue or earnings guidance. Management described the business environment as weak and said further cost reductions were under consideration.
- Risks cited include global economic uncertainty, technology-industry cyclicality, competition, supply-chain disruptions, international operations and currency exposure, product allocation, and legislative or regulatory changes. Management reported no material changes to the risk factors in its fiscal 2012 Form 10-K.
- Avnet accrued $10 million for potential unpaid import duties, interest and penalties relating to a Bell subsidiary customs audit; estimated potential exposure could reach $73 million. Management considered the recorded amount reasonable based on information then available.
- Management did not expect ongoing legal matters to have a material adverse effect. Environmental obligations remain subject to estimation and allocation among potentially responsible parties.
- The filing states the receivables securitization program expires in August 2013 in the debt note, but MD&A states August 2012. The stated expiration date is inconsistent and should be verified.
Important facts for investors to verify
- Whether revenue and margins stabilize after the steep declines, particularly in the Americas and TS business.
- Whether the projected $90 million annualized cost benefits are achieved, and the cash and execution costs of restructuring and integration.
- How much reported earnings depended on the bargain-purchase gain and unusually favorable tax items; these reduced the comparability of net income and EPS.
- Debt growth, receivables-program availability and covenants, and the inconsistent stated program expiration date.
- The ultimate outcome and potential exposure from the Bell customs matter, including the gap between the $10 million accrual and the stated possible exposure of up to $73 million.
- The pace of share repurchases and acquisitions relative to cash generation and leverage.