Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - AVNET INC | c91675exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - AVNET INC | c91675exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - AVNET INC | c91675exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - AVNET INC | c91675exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2009
Commission File #1-4224
AVNET, INC.
Incorporated in New York
IRS Employer Identification No. 11-1890605
2211 South 47th Street, Phoenix, Arizona 85034
(480) 643-2000
(480) 643-2000
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
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 23, 2009, the total number of shares outstanding of the registrants Common
Stock was 151,274,767 shares, net of treasury shares.
AVNET, INC. AND SUBSIDIARIES
INDEX
Page No. | ||||||||
2 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
13 | ||||||||
21 | ||||||||
21 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements |
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 3, | June 27, | |||||||
2009 | 2009 (1) | |||||||
(Thousands, except | ||||||||
share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 987,296 | $ | 943,921 | ||||
Receivables, less allowances of $90,428 and $85,477, respectively |
2,864,450 | 2,618,697 | ||||||
Inventories |
1,567,742 | 1,411,755 | ||||||
Prepaid and other current assets |
161,923 | 169,879 | ||||||
Total current assets |
5,581,411 | 5,144,252 | ||||||
Property, plant and equipment, net |
306,308 | 305,682 | ||||||
Goodwill (Notes 2 and 3) |
550,039 | 550,118 | ||||||
Other assets |
269,906 | 273,464 | ||||||
Total assets |
$ | 6,707,664 | $ | 6,273,516 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Borrowings due within one year (Note 4) |
$ | 50,440 | $ | 23,294 | ||||
Accounts payable |
2,293,149 | 1,957,993 | ||||||
Accrued expenses and other |
446,334 | 474,573 | ||||||
Total current liabilities |
2,789,923 | 2,455,860 | ||||||
Long-term debt (Note 4) |
957,279 | 946,573 | ||||||
Other long-term liabilities |
71,822 | 110,226 | ||||||
Total liabilities |
3,819,024 | 3,512,659 | ||||||
Commitments and contingencies (Note 6) |
||||||||
Shareholders equity (Notes 8 and 9): |
||||||||
Common stock $1.00 par; authorized 300,000,000 shares; issued
151,310,000 shares and 151,099,000 shares, respectively |
151,310 | 151,099 | ||||||
Additional paid-in capital |
1,194,987 | 1,178,524 | ||||||
Retained earnings |
1,264,966 | 1,214,071 | ||||||
Accumulated other comprehensive income (Note 8) |
278,307 | 218,094 | ||||||
Treasury stock at cost, 45,624 shares and 32,306 shares, respectively |
(930 | ) | (931 | ) | ||||
Total shareholders equity |
2,888,640 | 2,760,857 | ||||||
Total liabilities and shareholders equity |
$ | 6,707,664 | $ | 6,273,516 | ||||
(1) | As adjusted for the retrospective application of an accounting standard. See Note
1 to the consolidated financial statements. |
See notes to consolidated financial statements.
2
Table of Contents
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 (1) | |||||||
(Thousands, except | ||||||||
per share data) | ||||||||
Sales |
$ | 4,355,036 | $ | 4,494,450 | ||||
Cost of sales |
3,855,298 | 3,910,283 | ||||||
Gross profit |
499,738 | 584,167 | ||||||
Selling, general and administrative expenses |
392,666 | 419,554 | ||||||
Restructuring, integration and other charges (Note 12) |
18,072 | 9,991 | ||||||
Operating income |
89,000 | 154,622 | ||||||
Other income (expense), net |
2,917 | (649 | ) | |||||
Interest expense |
(15,282 | ) | (21,003 | ) | ||||
Income before income taxes |
76,635 | 132,970 | ||||||
Income tax provision |
25,740 | 42,631 | ||||||
Net income |
$ | 50,895 | $ | 90,339 | ||||
Net earnings per share (Note 9): |
||||||||
Basic |
$ | 0.34 | $ | 0.60 | ||||
Diluted |
$ | 0.33 | $ | 0.59 | ||||
Shares used to compute earnings per share (Note 9): |
||||||||
Basic |
151,276 | 150,561 | ||||||
Diluted |
152,635 | 151,930 | ||||||
(1) | As adjusted for the retrospective application of an accounting standard. See
Note 1 to the consolidated financial statements. |
See notes to consolidated financial statements.
3
Table of Contents
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 (1) | |||||||
(Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 50,895 | $ | 90,339 | ||||
Non-cash and other reconciling items: |
||||||||
Depreciation and amortization |
15,647 | 19,139 | ||||||
Deferred income taxes |
11,757 | (5,757 | ) | |||||
Stock-based compensation |
15,124 | 11,510 | ||||||
Other, net |
4,504 | 6,890 | ||||||
Changes in (net of effects from businesses acquired): |
||||||||
Receivables |
(219,366 | ) | 78,725 | |||||
Inventories |
(135,520 | ) | (57,499 | ) | ||||
Accounts payable |
312,827 | (140,428 | ) | |||||
Accrued expenses and other, net |
(49,642 | ) | (8,214 | ) | ||||
Net cash flows provided by (used for) operating activities |
6,226 | (5,295 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from (repayment of) bank debt, net (Note 4) |
29,349 | (6,696 | ) | |||||
Proceeds from other debt, net (Note 4) |
210 | 2,154 | ||||||
Other, net |
1,873 | 756 | ||||||
Net cash flows provided by (used for) financing activities |
31,432 | (3,786 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(10,314 | ) | (27,578 | ) | ||||
Cash proceeds from sales of property, plant and equipment |
1,241 | 788 | ||||||
Acquisition of operations, net of cash acquired (Note 2) and other |
(476 | ) | (207,384 | ) | ||||
Net cash flows used for investing activities |
(9,549 | ) | (234,174 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
15,266 | (10,269 | ) | |||||
Cash and cash equivalents: |
||||||||
increase (decrease) |
43,375 | (253,524 | ) | |||||
at beginning of period |
943,921 | 640,449 | ||||||
at end of period |
$ | 987,296 | $ | 386,925 | ||||
Additional cash flow information (Note 10)
(1) | As adjusted for the retrospective application of an accounting standard. See Note
1 to the consolidated financial statements. |
See notes to consolidated financial statements.
4
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
In the opinion of management, the accompanying unaudited interim consolidated financial
statements contain all adjustments necessary to present fairly the Companys financial position,
results of operations and cash flows. All such adjustments are of a normal recurring nature,
except for (i) the adoption of an accounting standard which changes the accounting for convertible
debt that may be settled in cash as discussed below, and (ii) the restructuring, integration and
other charges discussed in Note 12.
The preparation of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements. Actual results may differ from these estimates.
The Company operates on a 52/53 week fiscal year, and as a result, the quarter ended October
3, 2009 contained 14 weeks while the quarter ended September 27, 2008 contained 13 weeks. Interim
results of operations are not necessarily indicative of the results to be expected for the full
fiscal year. The information included in this Form 10-Q should be read in conjunction with the
consolidated financial statements and accompanying notes included in the Companys Annual Report on
Form 10-K for the fiscal year ended June 27, 2009.
Management has evaluated events and transactions that occurred after the balance sheet date
and through the date these consolidated financial statements were issued.
Adoption of accounting standard
The Financial Accounting Standards Board issued authoritative guidance which requires the
issuer of certain convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the debt and equity (conversion option) components of the
instrument. The standard requires the convertible debt to be recognized at the present value of its
cash flows discounted using the non-convertible debt borrowing rate at the date of issuance. The
resulting debt discount from this present value calculation is to be recognized as the value of the
equity component and recorded to additional paid in capital. The discounted convertible debt is
then required to be accreted up to its face value and recorded as non-cash interest expense over
the expected life of the convertible debt. In addition, deferred financing costs associated with
the convertible debt are required to be allocated between the debt and equity components based upon
relative values. During the first quarter of fiscal 2010, the Company adopted this standard,
however, there was no impact to the fiscal 2010 consolidated financial statements because the
Companys $300.0 million 2% Convertible Senior Debentures (the Debentures), to which this
standard applies, were extinguished in fiscal 2009. Due to the required retrospective application
of this standard to prior periods, the Company adjusted the prior period comparative consolidated
financial statements as summarized in the following tables.
June 27, 2009 | ||||||||||||
As Reported | Adjustments | As Adjusted | ||||||||||
(Thousands) | ||||||||||||
Additional paid in capital (1) |
$ | 1,135,334 | $ | 43,190 | $ | 1,178,524 | ||||||
Retained earnings (2) |
$ | 1,257,261 | $ | (43,190 | ) | $ | 1,214,071 |
5
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
First Quarter Ended September 27, 2008 | ||||||||||||
As Reported | Adjustments | As Adjusted | ||||||||||
(Thousands, except per share data) | ||||||||||||
Selling, general and adminstrative expenses (3) |
$ | 419,651 | $ | (97 | ) | $ | 419,554 | |||||
Interest expense (4) |
(16,860 | ) | (4,143 | ) | (21,003 | ) | ||||||
Income tax provision |
44,211 | (1,580 | ) | 42,631 | ||||||||
Net income |
$ | 92,805 | $ | (2,466 | ) | $ | 90,339 | |||||
Basic EPS |
$ | 0.62 | $ | (0.02 | ) | $ | 0.60 | |||||
Diluted EPS |
$ | 0.61 | $ | (0.02 | ) | $ | 0.59 |
(1) | Adjustment represents the value of the equity component of the Debentures, net of
deferred taxes. |
|
(2) | Adjustment represents the accretion of the debt discount, net of tax, over the
expected life of the Debentures, which was five years from the date of issuance, or March
2009, because this was the earliest date the Debenture holders had a right to exercise their
put option. |
|
(3) | Adjustment represents a reduction to deferred financing cost amortization expense as
a result of allocating a portion of such costs to the equity component of the Debentures. |
|
(4) | Adjustment represents incremental non-cash interest expense as a result of accreting
the Debenture debt discount.
|
2. Acquisitions
There were no acquisitions completed during the first quarter of fiscal 2010.
During the first quarter of fiscal 2009, the Company completed the following three
acquisitions with combined annualized revenues of approximately $500 million: Horizon Technology
Group plc, Source Electronics Corporation and OnTrack Solutions Pvt. Ltd., which are reported in
the TS EMEA, EM Americas and TS Asia reporting units, respectively.
Acquisition-related exit activity accounted for in purchase accounting
During fiscal 2007 and 2006, the Company recorded certain exit-related liabilities through
purchase accounting which consisted of severance for workforce reductions, non-cancelable lease
commitments and lease termination charges for leased facilities, and other contract termination
costs associated with the exit activities. The following table summarizes the utilization of these
reserves during the first three months of fiscal 2010:
FY 2007 | FY 2006 | Total | ||||||||||
(Thousands) | ||||||||||||
Balance at June 27, 2009 |
$ | 698 | $ | 7,619 | $ | 8,317 | ||||||
Amounts utilized |
(172 | ) | (576 | ) | (748 | ) | ||||||
Other, principally foreign currency translation |
(8 | ) | 11 | 3 | ||||||||
Balance at October 3, 2009 |
$ | 518 | $ | 7,054 | $ | 7,572 | ||||||
As of October 3, 2009, the remaining reserves related primarily to facility exit costs and
other contractual lease obligations which management expects to be substantially utilized by fiscal
2012.
6
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Goodwill and intangible assets
The following table presents the carrying amount of goodwill, by reportable segment, for the
three months ended October 3, 2009:
Electronics | Technology | |||||||||||
Marketing | Solutions | Total | ||||||||||
(Thousands) | ||||||||||||
Carrying value at June 27, 2009 |
$ | 240,388 | $ | 309,730 | $ | 550,118 | ||||||
Additions |
1,168 | | 1,168 | |||||||||
Adjustments |
(143 | ) | | (143 | ) | |||||||
Foreign currency translation |
(1,118 | ) | 14 | (1,104 | ) | |||||||
Carrying value at October 3, 2009 |
$ | 240,295 | $ | 309,744 | $ | 550,039 | ||||||
As of October 3, 2009, Other assets included customer relationship intangible assets with a
carrying value of $54,148,000; (consisting of $78,248,000 in original cost value and accumulated
amortization and foreign currency translation of $24,100,000). These assets are being amortized
over a weighted average life of nine years. Intangible asset amortization expense was $2,175,000
and $5,215,000 for the first quarter of fiscal 2010 and fiscal 2009, respectively. During the
first quarter of fiscal 2009, the Company completed the valuation of identifiable intangible assets
related to fiscal 2008 acquisitions. As a result, the Company recognized $3,830,000 for cumulative
catch up adjustment to amortization expense during the first quarter of fiscal 2009. Amortization
expense for the next five years is expected to be approximately $9,000,000 each year.
4. External financing
Short-term debt consists of the following:
October 3, | June 27, | |||||||
2009 | 2009 | |||||||
(Thousands) | ||||||||
Bank credit facilities |
$ | 48,532 | $ | 20,882 | ||||
Other debt due within one year |
1,908 | 2,412 | ||||||
Short-term debt |
$ | 50,440 | $ | 23,294 | ||||
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 rate on the outstanding bank credit facilities was 1.2%
at October 3, 2009 and 1.8% at June 27, 2009.
The Company has an accounts receivable securitization program (the Program) with a group of
financial institutions that allows the Company to sell, on a revolving basis, an undivided interest
of up to $450,000,000 in eligible receivables while retaining a subordinated interest in a portion
of the receivables. The Program does not qualify for sale treatment and, as a result, any
borrowings under the Program are recorded as debt on the consolidated balance sheet. The Program
contains certain covenants, all of which the Company was in compliance with as of October 3, 2009.
The Program has a one year term that expires in August 2010. There were no amounts outstanding
under the Program at October 3, 2009.
Long-term debt consists of the following:
October 3, | June 27, | |||||||
2009 | 2009 | |||||||
(Thousands) | ||||||||
5.875% Notes due March 15, 2014 |
$ | 300,000 | $ | 300,000 | ||||
6.00% Notes due September 1, 2015 |
250,000 | 250,000 | ||||||
6.625% Notes due September 15, 2016 |
300,000 | 300,000 | ||||||
Other long-term debt |
109,514 | 98,907 | ||||||
Subtotal |
959,514 | 948,907 | ||||||
Discount on notes |
(2,235 | ) | (2,334 | ) | ||||
Long-term debt |
$ | 957,279 | $ | 946,573 | ||||
7
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has a five-year $500,000,000 unsecured revolving credit facility (the Credit
Agreement) with a syndicate of banks
which expires in September 2012. Under the Credit Agreement, the Company may elect from
various interest rate options, currencies and maturities. The Credit Agreement contains certain
covenants, all of which the Company was in compliance with as of October 3, 2009. At October 3,
2009, there were $103,644,000 in borrowings outstanding under the Credit Agreement included in
other long-term debt in the preceding table. In addition, there were $2,009,000 in letters of
credit issued under the Credit Agreement which represent a utilization of the Credit Agreement
capacity but are not recorded in the consolidated balance sheet as the letters of credit are not
debt. At June 27, 2009, there were $86,565,000 in borrowings outstanding under the Credit Agreement
and $1,511,000 in letters of credit issued under the Credit Agreement.
At October 3, 2009, the carrying value and fair value of the Companys debt was $1,007,719,000
and $1,047,535,000, respectively. Fair value was estimated primarily based upon quoted market
prices.
5. Derivative financial instruments
Many of the Companys subsidiaries, on occasion, purchase and sell products in currencies
other than their functional currencies. This subjects the Company to the risks associated with
fluctuations in foreign currency exchange rates. The Company reduces this risk by utilizing natural
hedging (offsetting receivables and payables) as well as by creating offsetting positions through
the use of derivative financial instruments, primarily forward foreign exchange contracts with
maturities of less than sixty days. The Company continues to have exposure to foreign currency
risks to the extent they are not hedged. The Company adjusts all foreign denominated balances and
any outstanding foreign exchange contracts to fair market value through the consolidated statements
of operations. Therefore, the market risk related to the foreign exchange contracts is offset by
the changes in valuation of the underlying items being hedged. The asset or liability representing
the fair value of foreign exchange contracts, based upon level 2 criteria under the fair value
measurements standard, is classified in the captions other current assets or accrued expenses
and other, as applicable, in the accompanying consolidated balance sheets and were not material.
In addition, the Company did not have material gains or losses related to the forward contracts
which are recorded in other income (expense), net in the accompanying consolidated statements of
operations.
The Company generally does not hedge its investment in its foreign operations. The Company
does not enter into derivative financial instruments for trading or speculative purposes and
monitors the financial stability and credit standing of its counterparties.
6. Commitments and contingencies
From time to time, the Company may become a party to, or otherwise involved in pending and
threatened litigation, tax, environmental and other matters arising in the ordinary course of
conducting its business. Management does not anticipate that any contingent matters will have a
material adverse impact on the Companys financial condition, liquidity or results of operations.
7. Pension plan
The Companys noncontributory defined benefit pension plan (the Plan) covers substantially
all domestic employees. Components of net periodic pension costs during the quarters ended October
3, 2009 and September 27, 2008 were as follows:
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
(Thousands) | ||||||||
Service cost |
$ | | $ | 4,051 | ||||
Interest cost |
3,937 | 4,544 | ||||||
Expected return on plan assets |
(7,534 | ) | (6,363 | ) | ||||
Recognized net actuarial loss |
1,422 | 581 | ||||||
Amortization of prior service credit |
(1,221 | ) | | |||||
Net periodic pension cost (income) |
$ | (3,396 | ) | $ | 2,813 | |||
During the first quarter of fiscal 2010, the Company made contributions to the Plan of $4,750,000.
In October 2009, the Company agreed to settle a pension
litigation matter, subject to court approval, which will require a plan
amendment to provide retroactive benefits to certain pension plan participants and which will
result in additional pension expense to the Company of approximately $3 million per year for each
of the next 11 years.
8
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | Comprehensive income (loss) |
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
(Thousands) | ||||||||
Net income |
$ | 50,895 | $ | 90,339 | ||||
Foreign currency translation adjustments |
60,213 | (151,664 | ) | |||||
Total comprehensive income (loss) |
$ | 111,108 | $ | (61,325 | ) | |||
9. Earnings per share
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 (1) | |||||||
(Thousands, except per share data) | ||||||||
Numerator: |
||||||||
Net income |
$ | 50,895 | $ | 90,339 | ||||
Denominator: |
||||||||
Weighted average common shares for basic earnings per share |
151,276 | 150,561 | ||||||
Net effect of dilutive stock options and performance share awards |
1,359 | 1,369 | ||||||
Weighted average common shares for diluted earnings per share |
152,635 | 151,930 | ||||||
Basic earnings per share |
$ | 0.34 | $ | 0.60 | ||||
Diluted earnings per share |
$ | 0.33 | $ | 0.59 | ||||
(1) | As adjusted for the retrospective application of an accounting standard. See
Note 1. |
Options to purchase 1,635,000 and 1,007,000 shares of the Companys stock were excluded from
the calculations of diluted earnings per share for the quarters ended October 3, 2009 and September
27, 2008, respectively, because the exercise price for those options was above the average market
price of the Companys stock. Therefore, inclusion of these options in the diluted earnings per
share calculation would have had an anti-dilutive effect.
10. Additional cash flow information
Interest and income taxes paid in the three months ended October 3, 2009 and September 27,
2008 were as follows:
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
(Thousands) | ||||||||
Interest |
$ | 27,181 | $ | 31,224 | ||||
Income taxes |
26,710 | 34,849 |
9
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Segment information
First Quarters Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 (1) | |||||||
(Thousands) | ||||||||
Sales: |
||||||||
Electronics Marketing |
$ | 2,438,081 | $ | 2,701,479 | ||||
Technology Solutions |
1,916,955 | 1,792,971 | ||||||
$ | 4,355,036 | $ | 4,494,450 | |||||
Operating income (loss): |
||||||||
Electronics Marketing |
$ | 81,411 | $ | 138,706 | ||||
Technology Solutions |
51,398 | 51,107 | ||||||
Corporate |
(25,737 | ) | (25,200 | ) | ||||
107,072 | 164,613 | |||||||
Restructuring, integration and other charges (Note 12) |
(18,072 | ) | (6,161 | ) | ||||
Incremental intangible asset amortization (Note 3) |
| (3,830 | ) | |||||
$ | 89,000 | $ | 154,622 | |||||
Sales, by geographic area: |
||||||||
Americas (2) |
$ | 1,919,127 | $ | 2,017,171 | ||||
EMEA (3) |
1,347,315 | 1,496,472 | ||||||
Asia/Pacific (4) |
1,088,594 | 980,807 | ||||||
$ | 4,355,036 | $ | 4,494,450 | |||||
(1) | As adjusted for the retrospective application of an accounting standard. See
Note 1. |
|
(2) | Includes sales in the United States of $1.7 billion and $1.8 billion for the
quarters ended October 3, 2009 and September 27, 2008, respectively. |
|
(3) | Includes sales in Germany and United Kingdom of $466.1 million and $284.8
million, respectively, for the quarter ended October 3, 2009, and $555.5 million and
$250.0 million, respectively, for the quarter ended September 27, 2008. |
|
(4) | Includes sales in Taiwan, Hong Kong and Singapore of $325.5 million, $353.3
million and $259.2 million, respectively, for the quarter ended October 3, 2009 and
$333.0 million, $298.3 million and $249.7 million, respectively, for the quarter ended
September 27, 2008. |
October 3, | June 27, | |||||||
2009 | 2009 | |||||||
(Thousands) | ||||||||
Assets: |
||||||||
Electronics Marketing |
$ | 3,792,309 | $ | 3,783,364 | ||||
Technology Solutions |
2,261,978 | 2,036,832 | ||||||
Corporate |
653,377 | 453,320 | ||||||
$ | 6,707,664 | $ | 6,273,516 | |||||
Property, plant, and equipment, net, by geographic area |
||||||||
Americas (5) |
$ | 180,669 | $ | 183,937 | ||||
EMEA (6) |
106,910 | 101,261 | ||||||
Asia/Pacific |
18,729 | 20,484 | ||||||
$ | 306,308 | $ | 305,682 | |||||
(5) | Includes property, plant and equipment, net, of $176.2 million and $179.6
million as of October 3, 2009 and June 27, 2009, respectively, in the United States. |
|
(6) | Includes property, plant and equipment, net, of $42.4 million, $24.7 million
and $26.3 million in Germany, Belgium and the United Kingdom, respectively, as of October
3, 2009 and $41.4 million, $24.2 million and $26.8 million, respectively, as of June 27,
2009. |
10
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Restructuring, integration and other charges
Fiscal 2010
During the first quarter of fiscal 2010, the Company incurred restructuring, integration and
other charges related to the remaining cost reduction actions announced in fiscal 2009 which were
taken in response to market conditions as well as integration costs associated with acquired
businesses.
Quarter ended | ||||
October 3, 2009 | ||||
(Thousands) | ||||
Restructuring charges |
$ | 15,991 | ||
Integration costs |
2,931 | |||
Other |
1,104 | |||
Reversal of excess prior year restructuring reserves |
(1,954 | ) | ||
Total restructuring, integration and other charges |
$ | 18,072 | ||
The activity related to the restructuring charges incurred during the first quarter of fiscal
2010 is presented in the following table:
Severance | Facility | |||||||||||||||
Reserves | Exit Costs | Other | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Fiscal 2010 pre-tax charges |
$ | 9,683 | $ | 3,711 | $ | 2,597 | $ | 15,991 | ||||||||
Amounts utilized |
(2,934 | ) | (1,171 | ) | (13 | ) | (4,118 | ) | ||||||||
Other, principally foreign currency translation |
2 | | (15 | ) | (13 | ) | ||||||||||
Balance at October 3, 2009 |
$ | 6,751 | $ | 2,540 | $ | 2,569 | $ | 11,860 | ||||||||
Severance charges recorded in the first quarter of fiscal 2010 related to personnel reductions
of over 150 employees in administrative, finance and sales functions in connection with the cost
reduction actions in all three regions. Facility exit costs consisted of lease liabilities and
fixed asset write-downs associated with seven vacated facilities in the Americas, one in EMEA and
four in the Asia/Pac region. Other charges consisted primarily of contractual obligations with no
on-going benefit to the Company. Cash payments of $2,961,000 are reflected in the amounts utilized
during the first quarter of fiscal 2010 and the remaining amounts were related to non-cash asset
write downs. As of October 3, 2009, management expects the majority of the remaining severance and
other reserves to be utilized by the end of fiscal 2012 and the remaining facility exit cost
reserves to be utilized by the end of fiscal 2013.
During the first quarter of fiscal 2010, the Company incurred integration costs for
professional fees, facility moving costs, travel, meeting, marketing and communication costs that
were incrementally incurred as a result of the integration efforts of previously acquired
businesses.
Fiscal 2009
During fiscal 2009, the Company incurred restructuring, integration and other charges related
to cost reduction actions, costs for integration activity for acquired business and other items.
The following table presents the activity during the first quarter of fiscal 2010 related to the
remaining restructuring reserves established during fiscal 2009.
Severance | Facility | |||||||||||||||
Reserves | Exit Costs | Other | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Balance at June 27, 2009 |
$ | 19,471 | $ | 26,678 | $ | 2,458 | $ | 48,607 | ||||||||
Amounts utilized |
(8,159 | ) | (2,343 | ) | (34 | ) | (10,536 | ) | ||||||||
Adjustments |
(1,810 | ) | | (37 | ) | (1,847 | ) | |||||||||
Other, principally foreign currency translation |
350 | 137 | 117 | 604 | ||||||||||||
Balance at October 3, 2009 |
$ | 9,852 | $ | 24,472 | $ | 2,504 | $ | 36,828 | ||||||||
11
Table of Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amounts utilized during the first quarter of fiscal 2010 represent cash payments.
Management expects the majority of the remaining severance reserves to be utilized in fiscal 2011,
the remaining facility exit cost reserves to be utilized by the end of fiscal 2015 and other
contractual obligations to be utilized by the end of fiscal 2010.
Fiscal 2008 and prior restructuring reserves
In fiscal year 2008 and prior, the Company incurred restructuring charges under five separate
restructuring plans. The table below presents the activity during the first quarter of fiscal
2010 related to the remaining reserves established as part of these restructuring plans:
FY 2006 | ||||||||||||||||
Restructuring charges | FY 2008 | FY 2007 | & Prior | Total | ||||||||||||
(Thousands) | ||||||||||||||||
Balance at June 27, 2009 |
$ | 2,977 | $ | 190 | $ | 1,617 | $ | 4,784 | ||||||||
Amounts utilized |
(558 | ) | (97 | ) | (360 | ) | (1,015 | ) | ||||||||
Adjustments |
| (107 | ) | | (107 | ) | ||||||||||
Other, principally foreign currency translation |
22 | 14 | 34 | 70 | ||||||||||||
Balance at October 3, 2009 |
$ | 2,441 | $ | | $ | 1,291 | $ | 3,732 | ||||||||
The amounts utilized during the first quarter of fiscal 2010 represent cash payments. As of
October 3, 2009, the remaining FY 2008 reserves related to severance and other contractual
obligations which are expected to be utilized by the end of fiscal 2010 and facility exit costs
which are expected to be utilized by the end of fiscal 2013. The remaining FY 2006 and prior
reserves related to facility exit costs, which management expects to be utilized by fiscal 2013.
12
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
For a description of the Companys critical accounting policies and an understanding of the
significant factors that influenced the Companys performance during the quarters ended October 3,
2009 and September 27, 2008, this Managements 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
Companys Annual Report on Form 10-K for the year ended June 27, 2009. The Company operates on a
52/53 week fiscal year, and as a result, the quarter ended October 3, 2009 contained 14 weeks
while the quarter ended September 27, 2008 contained 13 weeks. This extra week in the current
quarter impacts the year over year analysis in this MD&A. In addition, the Companys consolidated
financial statements reflect the adjustments or reclassifications of certain prior period amounts
for accounting changes as a result of the required retrospective application of an accounting
standard which changes the accounting for debt that may be settled in cash as discussed in Note 1
in the accompanying Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
There are numerous references to the impact of foreign currency translation in the discussion
of the Companys results of operations. Over the past several years, the exchange rates between the
US Dollar and many foreign currencies, especially the Euro, have fluctuated significantly. For
example, the US Dollar has strengthened against the Euro by approximately 5% when comparing the
first quarter of fiscal 2010 with the first quarter of fiscal 2009. When the stronger US Dollar
exchange rates of the current year are used to translate the results of operations of Avnets
subsidiaries denominated in foreign currencies, the resulting impact is a decrease in US Dollars of
reported results as compared with the prior period. In the discussion that follows, this is
referred to as the translation impact of changes in foreign currency exchange rates.
In addition to disclosing financial results that are determined in accordance with US
generally accepted accounting principles (GAAP), the Company also discloses certain non-GAAP
financial information such as (i) income or expense items as adjusted for the translation impact of
changes in foreign currency exchange rates, as discussed above, and (ii) sales adjusted for the
impact of acquisitions by adjusting Avnets prior periods to include the sales of businesses
acquired as if the acquisitions had occurred at the beginning of the period presented and, in the
discussion that follows, this adjustment for acquisitions is referred to as pro forma sales or
organic sales. Management believes that providing this additional information is useful to the
reader to better assess and understand operating performance, especially when comparing results
with previous periods or forecasting performance for future periods, primarily because management
typically monitors the business both including and excluding these adjustments to GAAP results.
Management also uses these non-GAAP measures to establish operational goals and, in some cases, for
measuring performance for compensation purposes. However, analysis of results on a non-GAAP basis
should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
OVERVIEW
Organization
Avnet, Inc., incorporated in New York in 1955, together with its consolidated subsidiaries
(the Company or Avnet), is one of the worlds largest industrial distributors, based on sales,
of electronic components, enterprise computer and storage products and embedded subsystems. Avnet
creates a vital link in the technology supply chain that connects more than 300 of the worlds
leading electronic component and computer product manufacturers and software developers with a
global customer base of more than 100,000 original equipment manufacturers (OEMs), electronic
manufacturing services (EMS) providers, original design manufacturers (ODMs), and value-added
resellers (VARs). Avnet distributes electronic components, computer products and software as
received from its suppliers or with assembly or other value added by Avnet. Additionally, Avnet
provides engineering design, materials management and logistics services, system integration and
configuration, and supply chain services.
Avnet has two primary operating groups Electronics Marketing (EM) and Technology Solutions
(TS). Both operating groups have operations in each of the three major economic regions of the
world: the Americas; Europe, the Middle East and Africa (EMEA); and Asia/Pacific, consisting of
Asia, Australia and New Zealand (Asia or Asia/Pac). A brief summary of each operating group is
provided below:
| EM markets and sells semiconductors and interconnect, passive and electromechanical
devices (IP&E) for more than 300 of the worlds leading electronic component
manufacturers. EM markets and sells its products and services to a diverse customer base
serving many end-markets including automotive, communications, computer hardware and
peripheral, industrial and manufacturing, medical equipment, military and aerospace. EM also
offers an array of value-added services that help customers evaluate, design-in and procure
electronic components throughout the lifecycle of their technology products and systems. By
working with EM from the design phase through new product introduction and through the
product lifecycle, customers and suppliers can accelerate their time to market and realize
cost efficiencies in both the design and
manufacturing process. |
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Table of Contents
| TS markets and sells mid- to high-end servers, data storage, software, and the services
required to implement these products and solutions to the VAR channel. TS also focuses on
the worldwide OEM market for computing technology, system integrators and non-PC OEMs that
require embedded systems and solutions including engineering, product prototyping,
integration and other value-added services. As a global technology sales and marketing
organization, TS has dedicated sales and marketing divisions focused on specific customer
segments including OEMs, independent software vendors, system builders, system integrators
and VARs. |
Results of Operations
Executive Summary
The first quarter of fiscal 2010 financial results improved in comparison to recent quarters,
which is an indication that the effect of the global economic slowdown on end demand may be
beginning to improve. However, the results for the current quarter were below the prior year first
quarter performance due to the global economic slowdown. The Companys year over year operating
performance improved in the Asia region in both operating groups, but remained below the prior year
first quarter performance levels in the historically more profitable Americas and EMEA regions.
Avnets consolidated sales of $4.36 billion were down 3.1% year over year and essentially flat
excluding the impact of changes in foreign currency exchange rates. This rate of year-over-year
decline in sales was significantly less than the declines experienced in the prior four quarters
and was the second consecutive quarter of improvement (smaller declines) providing further evidence
that business conditions continue to improve. As a result of Avnets 52/53 week fiscal calendar,
the first quarter of fiscal 2010 contained fourteen weeks of activity compared with thirteen weeks
in fiscal 2009. Due to sales fluctuations that occur from the first month of each quarter to the
last month of each quarter, estimating the effect of an additional weeks activity in the first
quarter of fiscal 2010 is not precise; however, management roughly estimates that approximately
$400 million of sales in the first quarter of fiscal 2010 are a result of the extra week.
Gross profit margin declined 153 basis points year over year primarily due to regional mix and
lower margins in the EM Americas and EMEA regions. Although operating income margins improved
sequentially due to the improving business environment as noted above and the positive impact of
cost reductions actions, it declined 142 basis points year over year to 2.0%. This was primarily
due to lower than historical operating performance from the EM Americas and EMEA regions resulting
from the impact of the global economic slowdown. Previously announced cost reduction actions
totaling $225 million in annualized cost savings were substantially complete as of the end of the
first quarter of fiscal 2010, with the related benefit to be fully realized in the second quarter
of fiscal 2010. In addition, the Company expects to achieve cost synergies of approximately $40
million as a result of acquisition integration activities most of which were completed by the end
of fiscal 2009 with the remaining expected to be completed by the end of the second quarter of
fiscal 2010.
The Company continued to focus on managing working capital velocity, defined as quarterly
sales annualized divided by the monthly average of receivables plus inventory less accounts
payable, which improved significantly both year over year and sequentially. Working capital
declined $869 million year over year, or 29%, while sales declined 3.1%, resulting in an
improvement in working capital velocity from 5.9 times to a record 7.6 times. Sequentially, working
capital increased by $67 million even though sales increased by nearly $590 million or over 15%
resulting in a sequential improvement in working capital velocity from 6.5 times to 7.6 times.
During growth periods, the Company is more likely to utilize operating cash flows for working
capital requirements; however, the improvement in working capital velocity contributed to the
generation of $6.2 million of cash from operating activities during the first quarter of fiscal
2010 even with the sequential sales growth of $590 million. This compares with cash usage of
$5.3 million in the prior year first quarter. On a trailing twelve month basis, through the first
quarter of fiscal 2010, the Company generated cash from operating activities of $1.1 billion.
However, as revenues seem to be stabilizing and working capital velocity are at appropriate levels
for the operating groups, management does not expect to continue to generate the same levels of
cash from operating activities as were generated in fiscal 2009 ($1.1 billion).
14
Table of Contents
Sales
The table below provides the comparison of first quarter of fiscal 2010 and 2009 sales for the
Company and its operating groups. In addition, certain acquisitions completed in fiscal 2009 impact
the comparison of first quarter sales to sales in the prior year first quarter, therefore, the
table below also provides pro forma (or organic) sales which include acquisitions as if they
occurred on the first day of fiscal 2009.
Pro forma | ||||||||||||||||||||
Year-Year | Pro forma | Year-Year | ||||||||||||||||||
Q1-Fiscal 10 | Q1-Fiscal 09 | % Change | Q1-Fiscal 09 | % Change | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Avnet, Inc. |
$ | 4,355,036 | $ | 4,494,450 | (3.1 | )% | $ | 4,658,931 | (6.5 | )% | ||||||||||
EM |
2,438,081 | 2,701,479 | (9.8 | ) | 2,865,387 | (14.9 | ) | |||||||||||||
TS |
1,916,955 | 1,792,971 | 6.9 | 1,793,544 | 6.9 | |||||||||||||||
EM |
||||||||||||||||||||
Americas |
$ | 757,588 | $ | 952,971 | (20.5 | )% | $ | 952,971 | (20.5 | )% | ||||||||||
EMEA |
788,595 | 882,495 | (10.6 | ) | 1,008,825 | (21.8 | ) | |||||||||||||
Asia |
891,898 | 866,013 | 3.0 | 903,591 | (1.3 | ) | ||||||||||||||
TS |
||||||||||||||||||||
Americas |
$ | 1,161,539 | $ | 1,064,200 | 9.2 | % | $ | 1,064,200 | 9.1 | % | ||||||||||
EMEA |
558,720 | 613,977 | (9.0 | ) | 613,977 | (9.0 | ) | |||||||||||||
Asia |
196,696 | 114,794 | 71.4 | 115,367 | 70.5 | |||||||||||||||
Totals by Region |
||||||||||||||||||||
Americas |
$ | 1,919,127 | $ | 2,017,171 | (4.9 | )% | $ | 2,017,171 | (4.9 | )% | ||||||||||
EMEA |
1,347,315 | 1,496,472 | (10.0 | ) | 1,622,802 | (17.0 | ) | |||||||||||||
Asia |
1,088,594 | 980,807 | 11.0 | 1,018,958 | 6.8 |
As | Acquisition | Pro forma | ||||||||||
Reported | Sales (1) | Sales | ||||||||||
(Thousands) | ||||||||||||
Q1 Fiscal 2009 |
||||||||||||
Avnet, Inc. |
$ | 4,494,450 | $ | 164,481 | $ | 4,658,931 | ||||||
EM |
2,701,479 | 163,908 | 2,865,387 | |||||||||
TS |
1,792,971 | 573 | 1,793,544 |
(1) | Includes the following acquisitions: |
|
Ontrack Solutions Pvt. Ltd. acquired July 2008 in the TS Asia region |
||
Nippon Denso Industry Co., Ltd acquired December 2008 in the EM Asia region |
||
Abacus Group plc acquired January 2009 in the EM EMEA region |
Consolidated sales for the first quarter of fiscal 2010 were $4.36 billion, down 3.1%, or
$139.4 million, from the prior year first quarter consolidated sales of $4.49 billion. Excluding
the translation impact of changes in foreign currency exchange rates, sales were essentially flat
year over year. As noted previously, the first quarter of fiscal 2010 includes an extra week when
compared with the prior year first and fourth quarters, which management estimates added
approximately $400 million in sales. On a sequential basis, consolidated sales grew 15.6% with both
operating groups delivering double digit sequential sales growth. On a pro forma basis,
consolidated sales declined 6.5% year over year.
EM sales of $2.44 billion in the first quarter of fiscal 2010 declined 9.8% over the prior
year first quarter sales of $2.70 billion and declined 8.0% excluding the translation impact of
changes in foreign currency exchange rates. The first quarter of fiscal 2010 includes an extra week
of sales, estimated at roughly $150 million, compared with the sequential or prior year quarter.
The year-over-year decline in revenue was a result of the Americas and the EMEA regions, which were
down 20.5% and 10.6%, respectively, as these two regions have not yet fully recovered from the
effects of the global economic slowdown. The EMEA results were negatively impacted by the
strengthening of the US dollar against the Euro during the first quarter of fiscal 2010 as compared
with the prior year first quarter as the EMEA region sales declined 4.4% excluding the translation
impact of changes in foreign currency exchange rates. Year-over-year organic sales in the EMEA
region declined 16.4% excluding the translation impact of changes in foreign currency exchange
rates. EM Asia sales grew 3.0% year over year primarily due to the impact of acquisitions, the
effects of recent government stimulus actions in China and the extra week of sales due to the
Companys fiscal calendar. EM Asias year-over-year organic sales
declined only 1.3% due primarily to the effects of recent government stimulus actions in China
and the extra week of sales.
15
Table of Contents
TS sales of $1.92 billion in the first quarter of fiscal 2010 were up 6.9% year over year and
up 10.5% excluding the translation impact of changes in foreign currency exchange rates. The extra
week in the first quarter of fiscal 2010 added an estimated $250 million in sales compared with the
sequential quarter and prior year first quarter. On a sequential basis, TS sales were up 17.0% and
up 14.7% excluding the translation of changes in foreign currency exchange rates. Year-over-year
sales in the Americas and Asia regions were up 9.2% and 71.4%, respectively, primarily as a result
of higher demand for microprocessors and storage products combined with the impact of the extra
week in the first quarter. The EMEA region sales were down 9.0% year over year, and flat when
excluding the impact of changes in foreign currency exchange rates, primarily due to a slower
recovery from the global economic slowdown.
Gross Profit and Gross Profit Margins
Consolidated gross profit for the first quarter of fiscal 2010 was $499.7 million, down $84.4
million, or 14.5%, from prior year first quarter primarily due to the decline in revenue and the
decline in gross profit margin. Gross profit margin of 11.5% declined 153 basis points over the
prior year. For EM, gross profit margin declined 138 basis points year over year, primarily due to
the negative impacts of (i) customer mix and competitive pressure in the Americas and EMEA regions
and (ii) geographic mix as Asia grew to 37% of EM sales compared with 32% of EM sales in the prior
year first quarter. TS gross profit margin was down 129 basis points year over year with both the
Americas and EMEA regions contributing to the decline primarily due to competitive pressures.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A expenses) were $392.7 million in the
first quarter of fiscal 2010, a decrease of $26.9 million, or 6.4%, from the prior year quarter.
The decrease in SG&A expenses was primarily a result of the positive impact of the cost reduction
actions and the translation impact of changes in foreign currency exchange rates, partially offset
by additional SG&A expenses associated with businesses acquired in fiscal 2009 and the extra week
of expenses due to the Companys fiscal calendar as noted above. Metrics that management monitors
with respect to its operating expenses are SG&A expenses as a percentage of sales and as a
percentage of gross profit. In the first quarter of fiscal 2010, SG&A expenses were 9.0% of sales
and 78.6% of gross profit as compared with 9.3% and 71.8%, respectively, in the first quarter of
fiscal 2009. Although these metrics were worse than in the prior year, they improved sequentially
for the second quarter in a row due to the positive impact of the cost reduction actions taken in
response to business conditions.
During fiscal 2009, the Company took actions to reduce costs over the course of the fiscal
year to better align its cost structure with the market conditions. By the end of fiscal 2009,
approximately 90% of the $225 million annualized cost savings were estimated to have been achieved.
The remaining cost reduction actions were substantially complete by the end of the first quarter of
fiscal 2010 and for which the full benefit of the cost savings is expected to be reflected in the
second quarter of fiscal 2010.
Restructuring, Integration and Other Charges
Restructuring, integration and other charges amounted to $18.1 million pre-tax, $13.2 million
after tax and $0.09 per share on a diluted basis during the first quarter of fiscal 2010 as
compared with $10.0 million pre-tax, $8.9 million after tax and $0.06 per share on a diluted basis
in the prior year first quarter, which included a cumulative catch up of intangible asset
amortization totaling $3.8 million. As discussed above, the restructuring, integration and other
charges in the first quarter of fiscal 2010 represent the remaining cost reduction actions
announced in fiscal 2009 as well as integration costs associated with recently acquired businesses.
Restructuring costs included $9.7 million of severance, $3.7 million of facility exit costs and
$3.7 million of other charges related to contract termination costs, fixed asset write-downs and
other charges. The Company also recorded a reversal of $1.9 million to adjust reserves related to
prior year restructuring activity which were deemed excessive. Integration costs of $2.9 million
included professional fees, facility moving costs, travel, meeting, marketing and communication
costs that were incrementally incurred as a result of the integration activity.
16
Table of Contents
Operating Income
During the first quarter of fiscal 2010, the Company generated operating income of $89.0
million, down 42.4% as compared with operating income of $154.6 million in the prior year first
quarter. Consolidated operating income margin was 2.0% as compared with 3.4% in the prior year
first quarter. EM operating income declined 41.3% to $81.4 million and operating income margin of
3.3% declined 179 basis points from the first quarter of fiscal 2009. Although the cost reduction
actions at EM provided the expected benefit to operating income, the year-over-year decline in
gross profit margins in the Americas and EMEA regions was a significant factor in the
year-over-year decline in EM operating income. TS operating income of $51.4 million was
essentially flat year over
year. Even though the TS gross profit margin declined 129 basis points, operating income
margin declined only 17 basis points over the prior year first quarter due to the benefits of the
cost reduction actions. Corporate operating expenses were $25.7 million in the first quarter of
fiscal 2010 as compared with $25.2 million in the first quarter of fiscal 2009. In addition,
during the first quarter of fiscal 2010, restructuring, integration and other charges amounted to
$18.1 million pre-tax, $13.2 million after tax and $0.09 per share on a diluted basis as compared
with $10.0 million pre-tax, $8.9 million and $0.06 per share on a diluted basis for the prior year
first quarter.
Interest Expense and Other Income (Expense), net
Interest expense for the first quarter of fiscal 2010 was $15.2 million, down $5.7 million, or
27.2%, from interest expense of $21.0 million in the first quarter of fiscal 2009. During the
first quarter of fiscal 2010, the Company adopted an accounting standard which required
retrospective application of the standards provisions to prior years which resulted in recognizing
incremental non-cash interest expense of $4.1 million in addition to the previously reported
interest expense of $16.9 million in the first quarter of fiscal 2009 (see Note 1 in the Notes to
Consolidated Financial Statements included in Part I of this Form 10-Q). The year-over-year
decrease in interest expense was primarily due to the elimination of interest on the Companys
$300.0 million 2% Convertible Senior Debentures which were extinguished in March 2009. See
Financing Transactions for further discussion of the Companys outstanding debt.
During the first quarter of fiscal 2010, the Company recognized $2.9 million in other income
as compared with $0.6 million of other expense in the first quarter of the prior year.
Income Tax Provision
The Companys effective tax rate on its income before income taxes was 33.6% in the first
quarter of fiscal 2010 as compared with 32.1% in the first quarter of fiscal 2009.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the Companys
consolidated net income for the first quarter of fiscal 2010 was $50.9 million and $0.33 per share
on a diluted basis, as compared with net income of $90.3 million and $0.59 per share on a diluted
basis in the prior year first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the first quarter of fiscal 2010, the Company generated $6.2 million of cash and cash
equivalents from its operating activities as compared with a use of $5.3 million in the first
quarter of fiscal 2009. These results are comprised of: (1) cash flow generated from net income
excluding non-cash and other reconciling items, which includes the add-back of depreciation and
amortization, deferred income taxes, stock-based compensation and other non-cash items (primarily
the provision for doubtful accounts and periodic pension costs) and (2) cash flow used for working
capital, excluding cash and cash equivalents. Cash used for working capital during the first
quarter of fiscal 2010 consisted of accounts receivable growth of $219.4 million and inventory
growth of $135.5 million, growth in accrued expenses and other of $49.6 million, primarily offset
by growth in payables of $312.8 million. During growth periods, the Company has historically been
more likely to utilize operating cash flows for working capital requirements; however, the
improvement in working capital velocity contributed to the generation of $6.2 million of cash from
operating activities during the first quarter of fiscal 2010 even though sales grew nearly $590
million or over 15% sequentially.
Comparatively, the working capital outflow in the first quarter of fiscal 2009 consisted of
net collections in receivables ($78.7 million) offset by growth in inventories ($57.5 million), net
cash outflows for accounts payable ($140.4 million) and cash outflow for other items ($8.2
million). The decrease in receivables and payment of accounts payable during the quarter was
driven primarily by TS activities.
17
Table of Contents
Cash Flow from Financing Activities
The Company received proceeds of $31.4 million primarily from bank credit facilities during
the first quarter of fiscal 2010. During the first quarter of fiscal 2009, the Company used $3.8
million to repay bank credit facilities and other debt.
Cash Flow from Investing Activities
The Company used $9.5 million of cash for primarily for capital expenditures related to
building and leasehold improvements, system development costs, computer hardware and software.
During the first quarter of fiscal 2009, the Company used $234.2 million of cash primarily for
acquisitions and capital expenditures related to system development costs, computer hardware and
software expenditures.
Capital Structure and Contractual Obligations
The following table summarizes the Companys capital structure as of the end of the first
quarter of fiscal 2010 with a comparison to fiscal 2009 year-end:
October 3, | % of Total | June 27, | % of Total | |||||||||||||
2009 | Capitalization | 2009 | Capitalization | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Short-term debt |
$ | 50,440 | 1.3 | % | $ | 23,294 | 0.6 | % | ||||||||
Long-term debt |
957,279 | 24.6 | 946,573 | 25.4 | ||||||||||||
Total debt |
1,007,719 | 25.9 | 969,867 | 26.0 | ||||||||||||
Shareholders equity |
2,888,640 | 74.1 | 2,760,857 | 74.0 | ||||||||||||
Total capitalization |
$ | 3,896,359 | 100.0 | $ | 3,730,724 | 100.0 | ||||||||||
For a description of the Companys long-term debt and lease commitments for the next five
years and thereafter, see Long-Term Contractual Obligations appearing in Item 7 of the Companys
Annual Report on Form 10-K for the year ended June 27, 2009. With the exception of the Companys
debt transactions discussed herein, there are no material changes to this information outside of
normal lease payments.
The Company does not currently have any material commitments for capital expenditures.
Financing Transactions
The Company has a five-year $500.0 million unsecured revolving credit facility (the Credit
Agreement) with a syndicate of banks which expires in September 2012. Under the Credit Agreement,
the Company may elect from various interest rate options, currencies and maturities. As of the end
of the first quarter of fiscal 2010, there were $103.6 million in borrowings outstanding under the
Credit Agreement included in long-term debt in the consolidated financial statements. In
addition, there were $2.0 million in letters of credit issued under the Credit Agreement which
represent a utilization of the Credit Agreement capacity but are not recorded in the consolidated
balance sheet as the letters of credit are not debt. As of June 27, 2009, there were $86.6 million
in borrowings outstanding and $1.5 million in letters of credit issued under the Credit Agreement.
The Company has an accounts receivable securitization program (the Securitization Program)
with a group of financial institutions that allows the Company to sell, on a revolving basis, an
undivided interest of up to $450.0 million in eligible receivables while retaining a subordinated
interest in a portion of the receivables. The Securitization Program does not qualify for sale
accounting and has a one year term that expires in August 2010. There were no borrowings
outstanding under the Securitization Program at October 3, 2009 or June 27, 2009.
Notes outstanding at October 3, 2009 consisted of:
| $300.0 million of 5.875% Notes due March 15, 2014 |
| $250.0 million of 6.00% Notes due September 1, 2015 |
| $300.0 million of 6.625% Notes due September 15, 2016 |
In addition to its primary financing arrangements, the Company has several small lines of
credit in various locations to fund the short-term working capital, foreign exchange, overdraft and
letter of credit needs of its wholly owned subsidiaries in Europe, Asia and Canada. Avnet generally
guarantees its subsidiaries obligations under these facilities.
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Covenants and Conditions
The Credit Agreement contains certain covenants with various limitations on debt incurrence,
dividends, investments and capital expenditures and also includes financial covenants requiring the
Company to maintain minimum interest coverage and leverage ratios, as defined. Management does not
believe that the covenants in the Credit Agreement limit the Companys ability to pursue its
intended business strategy or future financing needs. The Company was in compliance with all
covenants of the Credit Agreement as of October 3, 2009.
The Securitization Program requires the Company to maintain certain minimum interest coverage
and leverage ratios as defined in the Credit Agreement in order to continue utilizing the
Securitization Program. The Securitization Program also contains certain covenants relating to the
quality of the receivables sold. If these conditions are not met, the Company may not be able to
borrow any additional funds and the financial institutions may consider this an amortization event,
as defined in the agreement, which would permit the financial institutions to liquidate the
accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the
Companys ability to meet the required covenants and conditions of the Securitization Program
include the Companys ongoing profitability and various other economic, market and industry
factors. Management does not believe that the covenants under the Securitization Program limit the
Companys ability to pursue its intended business strategy or future financing needs. The Company
was in compliance with all covenants of the Securitization Program as of October 3, 2009.
Liquidity
The Company had total borrowing capacity of $950.0 million at October 3, 2009 under the Credit
Agreement and the Securitization Program. There were $103.6 million in borrowings outstanding and
$2.0 million in letters of credit issued under the Credit Agreement resulting in $844.4 million of
net availability at the end of the first quarter. The Company also had $987.3 million of cash and
cash equivalents at October 3, 2009.
The Company has no other significant financial commitments outside of normal debt and lease
maturities discussed in Capital Structure and Contractual Obligations. Management believes that
Avnets borrowing capacity, its current cash availability and the Companys expected ability to
generate operating cash flows are sufficient to meet its projected financing needs. During periods
of weakening demand in the electronic component and enterprise computer solutions industry, as was
experienced in the prior fiscal year, the Company typically generates cash from operating
activities. However, during high growth periods the Company is more likely to utilize operating
cash flows for working capital requirements. Although management expects to continue to generate
cash from operating activities, it does not expect to continue to generate the same levels of cash
from operating activities that were generated during fiscal 2009 ($1.1 billion).
The Company has been making and expects to continue to make strategic investments through
acquisition activity to the extent the investments strengthen Avnets competitive position and meet
managements return on capital thresholds.
The following table highlights the Companys liquidity and related ratios as of the end of the
first quarter of fiscal 2010 with a comparison to the fiscal 2009 year-end:
COMPARATIVE ANALYSIS LIQUIDITY
(Dollars in millions)
(Dollars in millions)
October 3, | June 27, | Percentage | ||||||||||
2009 | 2009 | Change | ||||||||||
Current Assets |
$ | 5,581.4 | $ | 5,144.3 | 8.5 | % | ||||||
Quick Assets |
3,851.7 | 3,562.6 | 8.1 | |||||||||
Current Liabilities |
2,789.9 | 2,455.9 | 13.6 | |||||||||
Working Capital (1) |
2,791.5 | 2,688.4 | 3.8 | |||||||||
Total Debt |
1,007.7 | 969.9 | 3.9 | |||||||||
Total Capital (total
debt plus total
shareholders equity) |
3,896.4 | 3,730.7 | 4.4 | |||||||||
Quick Ratio |
1.4:1 | 1.5:1 | ||||||||||
Working Capital Ratio |
2.0:1 | 2.1:1 | ||||||||||
Debt to Total Capital |
25.9 | % | 26.0 | % |
(1) | This calculation of working capital is defined as current assets less current liabilities. |
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The Companys quick assets (consisting of cash and cash equivalents and receivables) increased
8.1% from June 27, 2009 to October 3, 2009 primarily due to the sequential increase in sales,
particularly in the last two weeks of the first quarter. Current assets increased 8.5% due to the
increase in receivables and, to a lesser extent, in inventory. Current liabilities increased 13.6%
primarily due to the growth in accounts payable. As a result of the factors noted above, total
working capital increased by 3.8% during the first quarter. Total debt increased by 3.9%, total
capital increased 4.4% and the debt to capital ratio was flat as compared with June 27, 2009.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance
which establishes the FASB Accounting Standards CodificationTM (ASC) as the single
source of authoritative US GAAP, organized by topic, and creates a new referencing system to
identify authoritative guidance such that references to SFAS, EITF, etc. will no longer be valid.
The Codification does not create any new GAAP standards. In addition, the Securities and Exchange
Commission (SEC) rules and releases will remain as sources of authoritative US GAAP for SEC
registrants. The standard is effective for the Companys first quarter of fiscal 2010 and did not
have a material impact on the Companys consolidated financial statements.
In June 2009, the FASB issued authoritative guidance which changes the analysis required to
determine controlling interest in variable interest entities and requires additional disclosures
regarding a companys involvement with such entities. The standard, which is effective beginning
the Companys fiscal year 2011, is not expected to have a material impact on the Companys
consolidated financial statements.
In June 2009, the FASB issued authoritative guidance which eliminates the concept of
qualifying special purpose entities, limits the number of financial assets and liabilities that
qualify for derecognition, and requires additional disclosures. The standard, which is effective
beginning the Companys fiscal year 2011, is not expected to have a material impact on the
Companys consolidated financial statements.
In April 2009, the FASB issued authoritative guidance which requires disclosure about fair
value of financial instruments in interim financial statements in order to provide more timely
information about the effects of current market conditions on financial instruments. The standard,
which is effective beginning the Companys first quarter of fiscal 2010, did not have a material
impact on the Companys consolidated financial statements.
In May 2008, the FASB issued authoritative guidance which requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on conversion to
separately account for the debt and equity (conversion option) components of the instrument. The
standard requires the convertible debt to be recognized at the present value of its cash flows
discounted using the non-convertible debt borrowing rate at the date of issuance. The resulting
debt discount from this present value calculation is to be recognized as the value of the equity
component and recorded to additional paid in capital. The discounted convertible debt is then
required to be accreted up to its face value through interest expense over the expected life of the
convertible debt. In addition, deferred financing costs associated with the convertible debt are
required to be allocated between the debt and equity components based upon relative values. During
the first quarter of fiscal 2010, the Company adopted this standard; however, there was no impact
to the fiscal 2010 consolidated financial statements because the Companys $300.0 million 2%
Convertible Senior Debentures, to which this standard applies, were extinguished in fiscal 2009.
Due to the required retrospective application to prior periods, the Company adjusted the prior
period comparative consolidated financial statements presented in this Form 10-Q.
In December 2007, the FASB issued authoritative guidance which establishes the requirements
for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities
assumed, any non-controlling interest in the acquiree and the goodwill acquired. The standard
requires acquisition costs be expensed instead of capitalized as was required under prior purchase
accounting standards and also establishes disclosure requirements for business combinations. The
standard, which is effective beginning in the Companys first quarter of fiscal 2010, did not have
a material impact on the Companys consolidated statement of operations based upon the Companys
level of acquisition activity during the first quarter of fiscal 2010.
In December 2007, the FASB issued authoritative guidance which changes the accounting and
reporting for minority interests, which are now termed non-controlling interests. The standard
requires non-controlling interests to be presented as a separate component of equity and requires
the amount of net income attributable to the parent and to the non-controlling interest to be
separately identified on the consolidated statement of operations. The standard, which is effective
for the Companys first quarter of fiscal 2010, did not have a material impact on the Companys
consolidated financial statements as the Company does not currently have any material
non-controlling interests.
In February 2008, the FASB issued authoritative guidance which delayed the effective date of
the fair value measurement guidance
for all non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed as fair value in the financial statements on a recurring basis (at least
annually). The standard, which is effective for the Companys first quarter of fiscal 2010, did not
have a material impact on the Companys consolidated financial statements.
20
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company seeks to reduce earnings and cash flow volatility associated with changes in
interest rates and foreign currency exchange rates by entering into financial arrangements, from
time to time, which are intended to provide a hedge against all or a portion of the risks
associated with such volatility. The Company continues to have exposure to such risks to the extent
they are not hedged.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Companys
Annual Report on Form 10-K for the year ended June 27, 2009 for further discussion of market risks
associated with interest rates and foreign currency exchange. Avnets exposure to foreign exchange
risks have not changed materially since June 27, 2009 as the Company continues to hedge the
majority of its foreign exchange exposures. Thus, any increase or decrease in fair value of the
Companys foreign exchange contracts is generally offset by an opposite effect on the related
hedged position.
See Liquidity and Capital Resources Financing Transactions appearing in Item 2 of this Form
10-Q for further discussion of the Companys financing facilities and capital structure. As of
October 3, 2009, 85% of the Companys debt bears interest at a fixed rate and 15% of the Companys
debt bears interest at variable rates. Therefore, a hypothetical 1.0% (100 basis point) increase in
interest rates would result in a $0.4 million impact on income before income taxes in the Companys
consolidated statement of operations for the quarter ended October 3, 2009.
Item 4. | Controls and Procedures |
The Companys management, including its Chief Executive Officer and Chief Financial Officer,
have evaluated the effectiveness of the Companys disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) as of the end of the reporting period covered by this quarterly report on Form
10-Q. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, the
Companys disclosure controls and procedures are effective such that material information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified by the Securities
and Exchange Commissions rules and forms and is accumulated and communicated to management,
including the Companys principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
During the first quarter of fiscal 2010, there were no changes to the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
21
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
As a result primarily of certain former manufacturing operations, Avnet has incurred and may
have future liability under various federal, state and local environmental laws and regulations,
including those governing pollution and exposure to, and the handling, storage and disposal of,
hazardous substances. For example, under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA) and similar state laws, Avnet is and may be liable for
the costs of cleaning up environmental contamination on or from certain of its current or former
properties, and at off-site locations where the Company disposed of wastes in the past. Such laws
may impose joint and several liability. Typically, however, the costs for cleanup at such sites are
allocated among potentially responsible parties based upon each partys relative contribution to
the contamination, and other factors.
Pursuant to SEC regulations, including but not limited to Item 103 of Regulation S-K, the
Company regularly assesses the status of and developments in pending environmental legal
proceedings to determine whether any such proceedings should be identified specifically in this
discussion of legal proceedings, and has concluded that no particular pending environmental legal
proceeding requires public disclosure. Based on the information known to date, management believes
that the Company has appropriately accrued in its consolidated financial statements for its share
of the estimated costs associated with the environmental clean up of sites in which the Company is
participating.
The Company and/or its subsidiaries are also parties to various other legal proceedings
arising from time to time in the normal course of business. While litigation is subject to inherent
uncertainties, management currently believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on the Companys
financial position, cash flow or results of operations.
Item 1A. | Risk Factors |
This Report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended, with respect to the financial condition, results of operations and business of Avnet, Inc.
and its subsidiaries (Avnet or the Company). You can find many of these statements by looking
for words like believes, expects, anticipates, should, will, may, 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. Any
forward-looking statement speaks only as of the date on which that statement is made. The Company
assumes no obligation to update any forward-looking statement to reflect events or circumstances
that occur after the date on which the statement is made.
The discussion of Avnets business and operations should be read together with the risk
factors contained in Item 1A of its 2009 Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, which describe various risks and uncertainties to which the Company is or may
become subject. These risks and uncertainties have the potential to affect Avnets business,
financial condition, results of operations, cash flows, strategies or prospects in a material and
adverse manner. As of October 3, 2009, there have been no material changes to the risk factors set
forth in the Companys 2009 Annual Report on Form 10-K.
22
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table includes the Companys monthly purchases of common stock during the first
quarter ended October 3, 2009:
Maximum Number | ||||||||||||||||
(or Approximate | ||||||||||||||||
Total Number of | Dollar Value) of | |||||||||||||||
Shares Purchased | Shares That May | |||||||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | ||||||||||||||
of Shares | Average Price | Announced Plans or | Under the Plans or | |||||||||||||
Period | Purchased | Paid per Share | Programs | Programs | ||||||||||||
July |
6,400 | $ | 20.90 | | | |||||||||||
August |
6,100 | $ | 24.59 | | | |||||||||||
September |
5,100 | $ | 26.47 | | |
The purchases of Avnet common stock noted above were made on the open market to obtain shares
for purchase under the Companys Employee Stock Purchase Plan. None of these purchases were made
pursuant to a publicly announced repurchase plan and the Company does not currently have a stock
repurchase plan in place.
Item 6. | Exhibits |
Exhibit | |||
Number | Exhibit | ||
31.1 | * | Certification by Roy Vallee, Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | * | Certification by Raymond Sadowski, Chief Financial Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 | ** | Certification by Roy Vallee, Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | ** | Certification by Raymond Sadowski, Chief Financial Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
|
** | Furnished herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AVNET, INC. (Registrant) |
||||
By: | /s/ RAYMOND SADOWSKI | |||
Raymond Sadowski | ||||
Senior Vice President and Chief Financial Officer |
Date: October 30, 2009
24
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EXHIBIT INDEX
Exhibit | |||
Number | Exhibit | ||
31.1 | * | Certification by Roy Vallee, Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | * | Certification by Raymond Sadowski, Chief Financial Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 | ** | Certification by Roy Vallee, Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | ** | Certification by Raymond Sadowski, Chief Financial Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
|
** | Furnished herewith. |