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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the quarterly period ended September 27, 2002

Commission File #1-4224

Avnet, Inc.

Incorporated in New York

IRS Employer Identification No. 11-1890605

2211 South 47th Street, Phoenix, Arizona 85034

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      The total number of shares outstanding of the registrant’s Common Stock (net of treasury shares) as of

October 25, 2002	119,416,949 shares

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AVNET, INC. AND SUBSIDIARIES

INDEX

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FORWARD-LOOKING STATEMENTS

      This Report contains forward-looking statements with respect to the financial condition, results of operations and business of Avnet, Inc. and subsidiaries (“Avnet” or the “Company”). You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates” or similar expressions in this Report or in documents incorporated by reference in this Report.

      These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include the following:

	•	Competitive pressures among distributors of electronic components and computer products may increase significantly through industry consolidation, entry of new competitors or otherwise.
	•	General economic or business conditions, domestic and foreign, may be less favorable than Avnet expected, resulting in lower sales and declining operating results which can, in turn, impact the Company’s credit ratings, debt covenant compliance and liquidity as well as the Company’s ability to obtain financing.
	•	Avnet may lose customers or suppliers as a result of the integration into the Company of newly-acquired businesses.
	•	Legislative or regulatory changes may adversely affect the businesses in which Avnet is engaged.
	•	Adverse changes may occur in the securities markets.
	•	Changes in interest rates and currency fluctuations may reduce Avnet’s profit margins.
	•	Avnet may be adversely affected by the allocation of products by suppliers.

      Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by them. Avnet cautions you not to place undue reliance on these statements, which speak only as of the date of this Report.

      Avnet does not undertake any obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1.     Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

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AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements

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AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	1.	In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary, all of which are of a normal recurring nature, except for the cumulative effect of change in accounting principle discussed in note 4, to present fairly the Company’s financial position, results of operations and cash flows. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2002.
	2.	The results of operations for the first quarter ended September 27, 2002 are not necessarily indicative of the results to be expected for the full year.
	3.	Accounts receivable securitization:
		In June 2001, the Company entered into a five-year accounts receivable securitization program (the “Program”) with a financial institution. The Program allows the Company to sell, on a revolving basis, an undivided interest of up to $350,000,000 in eligible U.S. receivables while retaining a subordinated interest in a portion of the receivables. The eligible receivables are sold without legal recourse to third party conduits through a wholly owned bankruptcy-remote special purpose entity that is consolidated for financial reporting purposes. The Company continues servicing the sold receivables and charges the third party conduits a monthly servicing fee at market rates; accordingly, no servicing asset or liability has been recorded. Cash received from the Program has been used primarily to pay down outstanding external financing.
		The Program qualifies for sale treatment under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” As of September 27, 2002 and June 28, 2002, the outstanding balance of securitized accounts receivable held by the third party conduits, net of applicable allowances, totaled $163,720,000 and $324,570,000, respectively, of which the Company’s subordinated retained interest was $63,720,000 and $124,570,000, respectively. Accordingly, $100,000,000 and $200,000,000 of accounts receivable balances were removed from the consolidated balance sheets at September 27, 2002 and June 28, 2002, respectively, with those funds being used to reduce outstanding debt.
	4.	Goodwill and impairment:
		The Company has adopted Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations” and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and that certain identifiable intangible assets be recognized as assets apart from goodwill. The Company has no other material identifiable intangible assets besides goodwill. SFAS 142 requires that ratable amortization of goodwill be replaced with periodic tests for goodwill impairment. Therefore, the amortization of goodwill was suspended effective from the adoption date forward and in all periods presented herein.
		The carrying amount of goodwill upon adoption of SFAS 142 on June 30, 2001 was $1,404,863,000, net of accumulated amortization through that date. Under the transitional impairment provisions of SFAS 142, the Company identified and evaluated its reporting units for impairment of goodwill as of June 30, 2001 using a combination of present value and multiple of earnings valuation techniques. The carrying amounts of certain reporting units exceeded their fair values at the date of adoption. As a result, the Company recorded an impairment charge of $580,495,000, which was recorded in the consolidated statement of operations as a cumulative effect of change in accounting principle in the quarter ending September 28, 2001.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		The following table presents the carrying amount of goodwill, by reportable segment, for the quarter ending September 27, 2002:

		The “Other” caption above primarily represents the impact of changes in foreign currency exchange rates on goodwill denominated in currencies other than U.S. dollars.
		During the quarter ending September 27, 2002, the Company and the seller of certain European operations of the VEBA Electronics Group (consisting of EBV, WBC, Atlas Logistics and RKE Systems) resolved certain remaining purchase price contingencies related to this acquisition which was completed during fiscal 2001. This resolution resulted in a refund to Avnet, totaling approximately $6,486,000, of a portion of the amount paid at the closing of the acquisition. This refunded purchase price was recorded as a reduction in operating expenses in the consolidated statement of operations for the quarter ended September 27, 2002 as the related goodwill had been written off as a result of the transition impairment test performed upon the adoption of SFAS 142.
	5.	External financing:

                 Short-term debt consists of the following:

		Bank credit facilities consist of various committed and uncommitted lines of credit with financial institutions utilized primarily to support the working capital requirements of foreign operations. The weighted average interest rates on the bank credit facilities at September 27, 2002 and June 28, 2002 were 3.2% and 3.4%, respectively.
		As of its acquisition of Kent Electronics Corporation (“Kent”) on June 8, 2001, Avnet assumed Kent’s 4.5% Convertible Notes due 2004 (the “Notes”). During the first quarter of fiscal 2002, virtually all holders of the Notes exercised their “put” options by selling the Notes back to the Company. As of September 27, 2002 and June 28, 2002, $3,031,000 in Notes remain outstanding. The Company has the right to redeem all remaining Notes upon 30-day prior notice.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Long-term debt consists of the following:

		At September 27, 2002, the Company had a multi-year credit facility with a syndicate of banks led by Bank of America that provided up to $428,750,000 in financing (this borrowing capacity was limited to $300,000,000 subsequent to the quarter-end, as described below). The bank financing also originally contained a 364-day facility providing up to $488,750,000 in financing, which was terminated on October 10, 2002 as described below, and a $82,500,000 term loan facility that matured in November 2001. The multi-year facility is a three-year revolving, multi-currency facility that matures on October 25, 2004. The Company may select from various interest rate options and maturities under the facility.
		Outstanding balances under the bank credit facilities consist primarily of foreign currency borrowings under the multi-year revolving credit facility described above with a weighted average interest rate of 4.3% at September 27, 2002 and 4.4% at June 28, 2002. The weighted average interest rate on the commercial paper program was 3.7% at September 27, 2002 and June 28, 2002. The Company classifies borrowings under its commercial paper program as long-term as it has the intent and ability to refinance such borrowings under its multi-year borrowing facility.
		On October 10, 2002, the Company amended its multi-year facility. The amended terms reduce the available borrowings under the facility to $300,000,000. Availability under the facility will increase back to the original $428,750,000 if the Company completes a qualified debt or equity offering of $325,000,000 or more by April 15, 2003. Additionally, the 364-day facility was terminated as part of this amendment on October 10, 2002.
		The amended agreement also modifies the interest coverage ratio, as defined therein, that the Company must maintain through the remaining term of the agreement. The amended agreement did not modify the other financial covenants of the bank credit facilities. The Company was in compliance with all of the covenants at September 27, 2002.
		The amended agreement also contains a “springing lien” whereby borrowings under the amended multi-year facility will become collateralized by certain assets of the Company and its subsidiaries in the event of the occurrence of certain triggering events. These triggering events include: (a) the establishment of a debt rating of Ba1 or lower by Moody’s Investor Services or BB+ or lower by Standard and Poor’s; (b) the failure by the Company to consummate a qualified debt or equity offering of $325,000,000 or more by December 15, 2002; and (c) the termination of Avnet’s current

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		accounts receivable securitization program (see Note 3) without simultaneously entering into another securitization with similar attributes.
		The amended multi-year facility combined with the accounts receivable securitization program provide the Company with total available drawings currently of $650,000,000 against which the Company had drawn $228,944,153 at September 27, 2002.
		In November 2001, the Company entered into two interest rate swaps (the “Swaps”) with a total notional amount of $400,000,000 in order to hedge the change in fair value of the 8.00% Notes due November 2006 (the “8% Notes”) related to fluctuations in interest rates. These contracts are classified as fair value hedges and mature in November 2006. The Swaps modify the Company’s interest rate exposure by effectively converting the 8.0% fixed rate on the 8% Notes to a floating rate based on three-month U.S. LIBOR plus a spread through their maturities (4.7% at September 27, 2002). The hedged fixed rate debt and the Swaps are adjusted to current market values through interest expense in the accompanying consolidated statement of operations. The Company accounts for the hedges using the shortcut method as defined under Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” Due to the effectiveness of the hedges since inception, the market value adjustments for the hedged debt and the Swaps directly offset one another. The fair value of the Swaps at September 27, 2002 and June 28, 2002 was $33,660,000 and $7,043,000, respectively, and is included in other long-term assets in the accompanying consolidated balance sheets. Additionally, included in long-term debt is a comparable fair value adjustment increasing the total liability by these same amounts.
	6.	From time to time, the Company may become liable with respect to pending and threatened litigation, taxes and environmental and other matters. The Company has been designated a potentially responsible party or has become aware of other potential claims against it in connection with environmental clean-ups at several sites. Based upon the information known to date, the Company believes that it has appropriately reserved for its share of the costs of the clean-ups and it is not anticipated that any contingent matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.
	7.	Number of shares of common stock reserved for stock option and stock incentive programs as of September 27, 2002:   12,996,157
	8.	Comprehensive income (loss):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	9.	Loss per share:

		The 4.5% convertible notes are excluded from the computation of loss per share in each quarter presented as the effects were antidilutive. Additionally, in the quarters ended September 27, 2002 and September 28, 2001, respectively, the effects of approximately 11,326,000 and 11,470,000 shares related to stock options and restricted stock awards are excluded from the determination of the weighted average common shares for diluted loss per share shown above as the effects were antidilutive.

      10.     Additional cash flow information:

		Other non-cash and other reconciling items primarily include the provision for doubtful accounts.
		Interest and income taxes paid (refunded) in the first quarters were as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	11.	Segment information:

		Beginning in fiscal 2003, the Company allocated its remaining goodwill, previously included in the total assets for “Corporate,” to the applicable segment level in order to better evaluate and measure performance of its segment operations. The asset information as of June 28, 2002 in the table above has been reclassified to disclose this information on a basis consistent with the current quarter presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	12.	Special charge activity:
		The following table summarizes the activity during the quarter ended September 27, 2002 in the accrued liability and reserve accounts recorded through special charge activity in prior fiscal years. There were no special charges recorded in either of the quarters presented herein.

		Amounts utilized during the quarter ending September 27, 2002 consist primarily of cash payments. The accrued liability and reserve balances at September 27, 2002 relate primarily to severance, substantially all of which is scheduled to be utilized during fiscal 2003, and contractual lease commitments, substantially all of which is expected to be utilized by the end of fiscal 2007.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      For a description of the Company’s critical accounting policies and an understanding of the significant factors that influenced the Company’s performance during the quarters ended September 27, 2002 and September 28, 2001, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Report as well as the Company’s Annual Report on Form 10-K for the year ended June 28, 2002.

OVERVIEW

Organization

      Avnet, Inc. and subsidiaries (the “Company” or “Avnet”) is one of the world’s largest industrial distributors of electronic components, enterprise network and computer equipment and embedded subsystems. Additionally, Avnet provides services to both the end user and the reseller channels. The Company currently consists of three operating groups, Electronics Marketing (“EM”), Computer Marketing (“CM”) and Applied Computing (“AC”). A brief summary of each group is provided below:

	•	EM is engaged in the global marketing, assembly and/or distribution of electronic and electromechanical components and certain computer products, principally for industrial and some commercial and military use. EM also offers an array of value-added services to its customers, such as supply-chain management, engineering design, inventory replenishment systems, connector and cable assembly and semiconductor programming.
	•	CM is an international distributor/reseller of enterprise networking and computer equipment to value-added resellers (“VARs”) and end users focusing primarily on middle- to high-end, value-added computer products and services. CM also provides a variety of networking solutions to its customer base.
	•	AC serves the needs of personal computer original equipment manufacturers (“OEMs”) and system integrators worldwide by providing the latest computer component technologies, and also serves the needs of non-PC OEMs that require embedded systems and technical services such as product prototyping, configurations and other value-added services.

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RESULTS OF OPERATIONS

Sales

      The table below provides period sales for the Company and its operating groups:

Period Sales by Operating Group and Geography

      Challenging economic conditions continued to impact the electronic component and computer industries through the first quarter of fiscal 2003 causing consolidated sales to be essentially flat in comparison with the prior year first and fourth quarters. The Company closed the first quarter of fiscal 2003 with consolidated sales of $2.17 billion, down $27.3 million, or 1.2%, in comparison to the prior year first quarter and up $29.1 million, or 1.4%, sequentially from the fourth quarter of fiscal 2002. The slight year-over-year decline is primarily a result of weaker CM sales of $532.2 million in the current quarter, down $39.7 million, or 6.9%, from the prior year first quarter. EM sales of $1.24 billion in the first quarter of fiscal 2003 increased by $4.2 million, or 0.3%, from the prior year first quarter. This increase encompassed stronger sales in Asia substantially offset by slightly weaker sales in the Americas and EMEA. AC sales of $399.9 million were up $8.3 million, or 2.1%, from the prior year first quarter.

      The modest sequential improvement in sales noted above is due primarily to increased sales in both the EM and AC businesses. EM’s sequential sales growth of $25.1 million, or 2.1%, is indicative of a stronger Euro during the fiscal 2003 first quarter; meaning, at a constant exchange rate, EM’s sales would have been essentially flat in comparison to the prior year fourth quarter. AC’s sequential sales growth of $42.6 million, or 11.9%, was offset to a substantial degree by normal seasonal weakness in CM, where sales declined sequentially by $38.6 million, or 6.8%.

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      EM accounted for 57.1% of consolidated sales in the first quarter of fiscal 2003 and the combined computer businesses of CM and AC accounted for the remaining 42.9%. During the first quarter of fiscal 2003, revenue by region depicts the relative growing importance of the Asia region, which reached 9.7% of consolidated sales, up from 7.3% of consolidated sales as recently as the first quarter of fiscal 2002. The Company expects the Asia region to continue to be a primary growth driver as this region becomes more of a vital link in the technology supply chain. As a result, the trend of growth of the Asia region as a percentage of consolidated sales will likely continue as the Company continues to invest in that region, specifically in the Peoples’ Republic of China, where the Company continues to enhance its already established position. The Company’s EMEA region remained essentially unchanged in its relative proportion at approximately 32% of consolidated sales. The Americas region decreased in its percentage from 61.1% to 58.6% of total sales on a year-over-year basis.

Gross Profit Margins

      Enterprise gross profit margins were down in the first quarter of fiscal 2003 by 42 basis points, to 13.69%, from the prior year first quarter and down 50 basis points sequentially, excluding the impact of special charges recorded in the fourth quarter of fiscal 2002. Including these special charges, the current quarter gross profit margin improved by 51 basis points sequentially. First quarter enterprise gross profit margins were also down slightly from the average 13.9% margin over the past five quarters, excluding special charges, which management believes represents the trough of the current industry down-cycle. By contrast, the Company recorded an average gross profit margin, excluding special charges, of 15.1% over the six quarters ending in June 2001, which was the most recent industry up-cycle.

      The year-over-year and sequential decline in consolidated gross profit margins excluding the impact of special charges was due primarily to shifts in the business mix between the Company’s computing businesses as well as continued pricing pressures in the technology markets served by the Company. Higher levels of sales in the lower gross profit margin PC-builder segment of AC, coupled with the reduced CM revenues of higher gross profit margin business, was the major contributor to enterprise gross profit margin decline.

      This mix-of-business trend is indicative of the cyclical nature of the electronic component and computer industries as, during the time period covering the up-cycle discussed above, EM accounted for approximately 67% of consolidated revenues, as compared with the down-cycle time period where EM accounted for approximately 55% of consolidated revenues. Management expects that margins previously enjoyed during the last up-cycle are achievable again once the current industry down-cycle comes to an end.

Operating Expenses

      Operating expense totaled $277.7 million for the first quarter of fiscal 2003, as compared with $306.9 million in the first quarter of fiscal 2002 and $278.1 million, excluding special charges, in the prior sequential quarter. Including special charges recorded in the fourth quarter of fiscal 2002, operating expenses were $336.1 million. Operating expenses as a percentage of sales in the first quarter of fiscal 2003 were 12.8%, down from 13.9% in the prior year first quarter and 13.0%, excluding special charges, from the prior sequential quarter.

      The declines in operating expenses as a percentage of sales are a result of all three operating groups executing expense reduction plans in prior quarters. Beginning with the second quarter of fiscal 2001, total quarterly operating expenses were reduced from a pro forma $358.5 million to $277.7 million as of the first quarter of fiscal 2003. This reduction takes into account a pro forma adjustment to increase the actual reported expenses in the second quarter of fiscal 2001 to account for the impact of the operations of the VEBA Electronics Group (consisting of EBV, WBC, Atlas Logistics and RKE Systems, collectively the “VEBA Group”), which were acquired partway through that quarter. Additionally, the pro forma adjustments to operating expenses remove the goodwill amortization expense for periods prior to the beginning of fiscal 2002, the Company’s adoption date for Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” (see Note 4 to the accompanying consolidated financial statements appearing in Item 1 of this Report), in order to be consistent with the current method of accounting under

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      Operating leverage created over the past several quarters has come through cost reduction initiatives which have steadily reduced expenses over the past seven consecutive quarters. Reducing expenses has been an important factor in returning the Company to essentially breakeven results. However, in concert with a commitment to grow earnings and create shareholder value, and in reaction to the continued difficult market environment, the Company anticipates further cost reduction efforts during the second quarter of fiscal 2003 aimed at taking approximately $80 million, on an annualized basis, of additional expense out of the business in order to return the Company to reasonable profitability.

      These efforts will likely result in special charges during the second quarter of fiscal 2003. These special charges cannot yet be accurately estimated and have not been recorded to date as the reorganization plan has not yet been finalized by management and the liabilities have not yet been incurred. Cost reductions are anticipated to occur in three main areas: census reductions, mainly focused on non customer-facing personnel; consolidation of selected facilities; and curtailment of certain IT-related initiatives. These cost reduction efforts are expected to have their full impact in the third quarter of fiscal 2003.

Operating Income (Loss)

      The Company’s consolidated operating income was $20.0 million in the first quarter of fiscal 2003 (0.92% of sales) as compared with $3.6 million in the prior year first quarter (0.16% of sales) and $26.2 million, excluding special charges, in the prior sequential quarter (1.22% of sales). Including special charges recorded in the fourth quarter of fiscal 2002, the Company recorded an operating loss of $53.4 million, or 2.49% of sales. The improved operating income before special charges in the two most recent quarters as compared with the first three quarters of fiscal 2002 is primarily a result of the cost reduction efforts discussed previously. The changes in revenue mix and the mitigating factors related to operating expense reduction efforts discussed above resulted in the slight decline in operating income as a percentage of sales between the first quarter of fiscal 2003 and the fourth quarter of fiscal 2002.

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      The following table provides consolidated and group operating income (loss) margins, before and after special charges, for the September 2002 quarter and compares these results to prior sequential and year-over-year quarterly results.

Quarterly Operating Income (Loss) Margin Analysis

Interest Expense

      Interest expense of $27.0 million for the first quarter of fiscal 2003 was down significantly from $38.1 million in the prior year first quarter but up slightly from $26.5 million in the prior sequential quarter. Interest expense was down by $11.1 million year-over-year and the Company experienced five consecutive quarterly reductions in interest expense prior to the current quarter’s slight increase. These reductions are attributed specifically to the significant reductions of consolidated debt and, to a lesser extent, lower interest rates. Since the end of December 2000, the Company has reduced total debt by approximately $1.6 billion, including amounts outstanding under the accounts receivable securitization program as debt.

Net Income (Loss) Before Cumulative Effect of Change in Accounting Principle

      The table below summarizes the Company’s net income (loss), both before and after special charges and the cumulative effect of change in accounting principle, for the September 2002 quarter in comparison to prior sequential and year-over-year results:

Quarterly Net Income (Loss)