SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the quarterly period ended September 28, 2001
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 26, 2001 — 117,914,976 shares.
TABLE OF CONTENTS
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:
Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by them. We caution you not to place undue reliance on these statements, which speak only as of the date of this report.
We do 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
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF OPERATIONS
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Inventories:
7. Number of shares of common stock reserved for stock option and stock incentive programs as of
8. Comprehensive income:
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9. Earnings (loss) per share:
Net earnings (loss) per share including discontinued operations:
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10. Additional cash flow information:
11. Segment information:
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12. Accounts receivable securitization:
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Organization
The Company currently consists of three major operating groups: Electronics Marketing (“EM”), Computer Marketing (“CM”) and Applied Computing (“AC”), which began operating in the Americas and in Europe effective as of the beginning of the second and third quarters of fiscal 2000, respectively, and in Asia beginning in fiscal 2001. EM focuses on the global distribution of, and value-added services associated with, electronics components; CM focuses on middle-to-high-end, value-added computer products distribution and related services; and AC serves the needs of personal computer original equipment manufacturers (“OEMs”) and system integrators by providing the latest technologies such as microprocessors, DRAM modules and motherboards and serves the needs of embedded systems OEMs that require technical services such as product prototyping, configurations and other value-added services.
Acquisitions
The results for the current year include a number of acquisitions completed by the Company subsequent to the end of last year’s first fiscal quarter that affect the comparative financial results discussed below. In October 2000, the Company acquired certain European operations of VEBA Electronics Group (consisting of EBV, WBC, Atlas Logistics and RKE Systems), in February 2001, the Company acquired RDT Technologies Ltd. and, in May 2001, the Company completed the acquisition of Sunrise Technology Ltd. Also, effective June 8, 2001, the Company acquired Kent Electronics Corporation (“Kent”) in a transaction accounted for as a “pooling-of-interests.” Accordingly, the accompanying consolidated financial statements and notes as well as the information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for periods prior to the acquisition have been restated to reflect the acquisition of Kent.
The Company has pursued and expects to continue to pursue strategic acquisitions to expand its business. However, the Company currently does not anticipate further material acquisitions until it has completed the integration of its recent acquisitions and strengthened its balance sheet. Management believes that the Company has the ability to generate sufficient capital resources from internal or external sources in order to continue its expansion program. In addition, as with past acquisitions, management does not expect that future acquisitions will materially impact the Company’s liquidity.
Stock Split
On August 31, 2000, the Company’s Board of Directors declared a two-for-one stock split to be effected in the form of a stock dividend (the “Stock Split”). The additional common stock was distributed on September 28, 2000 to shareholders of record on September 18, 2000. All references in this MD&A, and elsewhere in this Report, to the number of shares, per share amounts and market prices of the Company’s common stock have been restated to reflect the stock split and the resulting increased number of shares outstanding.
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RESULTS OF OPERATIONS
Sales
Consolidated sales were $2.20 billion in the first quarter of fiscal 2002 ended September 28, 2001, down 31% as compared with $3.19 billion in the prior year period. Sales for EM in the first quarter of fiscal 2002 of $1.24 billion were down 44% as compared with last year’s first quarter. As far as EM’s sales by region are concerned, EM Americas’ sales were $676.2 million in the first quarter of this fiscal year, down approximately 60% as compared with the first quarter of the prior year. Sales for EM EMEA and EM Asia in the current year’s first fiscal quarter were $421.3 million and $140.1 million, respectively, representing a 1% decrease for EM EMEA and a 13% increase for EM Asia as compared with last year’s first quarter. CM’s sales for the first fiscal quarter of 2002 were $572.0 million, down 17% as compared with $688.2 million in the first quarter of last year. AC had sales of $391.6 million in this year’s first fiscal quarter, up 43% as compared with $273.5 million in the first quarter of last year. The results for the quarter ended September 28, 2001 reflect an extremely difficult environment across all of the Company’s operating groups, although the EM business has been most severely affected, offset only to a limited extent by acquisitions completed since the first fiscal quarter of 2001.
Gross Margins
Consolidated gross margins of 14.1% in the first quarter of fiscal 2002 were lower by 1.2% of sales as compared with 15.3% in the first quarter of last year. Consolidated gross margins decreased by 138 basis points from last year’s fourth fiscal quarter (excluding special charges recorded in that quarter) primarily due to the changing mix of business occurring across all operating groups.
The changing mix of product sales with generally lower gross margins from the AC and CM businesses was the principal catalyst in lower gross margins for the Company. AC and CM revenues combined represented approximately 44% of total Avnet revenues for the September 2002 quarter as compared with 30% in last year’s first fiscal quarter. Specifically, the AC group experienced growth in disk drive and microprocessor sales during the quarter, both low gross margin products, contributing to its overall sequential revenue growth of 8%. AC, on its own, represented nearly 18% of Avnet’s total revenues this quarter.
The two computing technology businesses (AC and CM), which service distinct sectors of the technology supply chain, are becoming a significant counterbalance to the heavily cyclical components business. As a result, the mix of business factor is an ever-important one in determining Avnet’s consolidated gross margins.
Special Charges
As required by the recent changes in accounting principles generally accepted in the United States (“GAAP”) related to accounting for goodwill, the Company is currently evaluating the book value of its goodwill and the associated one-time charge related to the change in accounting principle, the amount of which could be material, but cannot yet be estimated. The Company expects to complete its evaluation of goodwill by the end of its second quarter of fiscal 2002 and will restate its first quarter of fiscal 2002 results to include this one-time charge related to the change in accounting principle. The impact of this restatement will be to reduce the book value of goodwill with the offset being recorded as a charge to the income statement in a special category entitled “cumulative effect of change in accounting principle.”
The current quarter results take into account the positive impact related to the discontinuance of amortization of goodwill pursuant to recent changes in GAAP amounting to approximately $0.08 per share on a diluted basis.
Operating Expenses
Operating expenses were lower in the first quarter of fiscal 2002 as compared with the fiscal 2001 first quarter, however, they increased as a percentage of sales from 9.7% in fiscal 2001 to 13.9% in the current fiscal
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Operating Income
Operating income of $3.6 million in the first quarter of fiscal 2002 represented 0.2% of sales as compared with $179.0 million, or 5.6% of sales, in the first quarter of 2001. EM’s operating loss before the allocation of corporate expenses was $5.0 million in the first quarter of fiscal 2002 as compared with income of $173.5 million in the prior year first quarter. CM’s operating income before the allocation of corporate expenses was $10.8 million in the first quarter of fiscal 2002 as compared with $19.7 million in the first quarter of the prior year. AC produced operating income before the allocation of corporate expenses of $14.5 million in the first quarter of 2002 as compared with $11.1 million in the first quarter of last year. Operating expenses recorded at the corporate level were $16.7 million in the first quarter of fiscal 2002 as compared to $25.3 million in the prior year first quarter.
Interest Expense and Net Income (Loss)
Interest expense for the first quarter of fiscal 2002 amounting to $38.1 million was slightly higher as compared with last year’s first quarter but was substantially below interest expense of $46.3 million in the immediately preceding fourth quarter of fiscal 2001. This decrease was due primarily to lower debt levels as a result of the decline in working capital as described below.
As a result of the factors described above, the net loss from continuing operations in the first quarter of fiscal 2002 was $19.2 million, or $0.16 per share on a diluted basis, as compared with income from continuing operations of $82.4 million, or $0.68 per share on a diluted basis, in the prior year first quarter. Including income from discontinued operations, net income in last year’s first quarter was $85.1 million, or $0.70 per share on a diluted basis. The Company expects the second quarter of fiscal 2002 to be beneficially impacted by the typical seasonality which should drive sales growth at CM and AC, offset somewhat by slightly lower top line expectations for EM. Coupled with the significant cost reductions described above, and based upon current trends, the Company anticipates sequential earnings growth in its second fiscal quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
During the first quarter of fiscal 2002, the Company generated $9.2 million from income before depreciation, amortization, deferred taxes and other non-cash items, and generated $372.6 million from a reduction in working capital, resulting in $381.8 million of net cash flows being generated from operations. In addition, the Company used $27.3 million for other normal business operations including purchases of property, plant and equipment ($22.7 million) and dividends ($8.8 million), offset somewhat by cash generated from other items ($4.2 million). This resulted in $354.5 million being generated from normal business operations. The Company also used $25.0 million for acquisitions. Of this net generation of cash of $329.5 million, $323.7 million was used for net repayments of debt and $5.8 million increased the Company’s available cash and cash equivalents.
Currently, the Company does not have any material commitments for capital expenditures.
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Capital Structure
Debt Analysis
On October 25, 2001, the Company entered into agreements providing $1 billion in financing with a syndicate of banks led by Bank of America in order to replace the existing $1.25 billion 364-day credit facility and $700 million five-year credit facility. This new bank financing is divided into three separate credit facilities: a multi-year facility, a 364-day facility and a term loan facility.
The multi-year facility is a three-year revolving multi-currency facility that matures on October 23, 2004 and provides up to $428.75 million in financing. The 364-day facility is a revolving, multi-currency facility that matures on October 23, 2002 and provides up to $488.75 million in financing. The term loan facility is a U.S. dollar facility that provides up to $82.5 million in financing and matures on January 31, 2002. The Company may select from various interest rate options and maturities under these facilities, although the Company intends to use a significant amount as a back-up for its commercial paper program pursuant to which the Company is authorized to issue short-term notes for current operational business requirements. The credit agreements contain various covenants, none of which management believes materially limit the Company’s financial flexibility to pursue its intended business strategy.
In June 2001, the Company entered into a five-year $350 million accounts receivable securitization program whereby it sells, on a revolving basis, an undivided interest in a pool of its trade accounts receivable. Under the program, the Company sells receivables in securitization transactions and retains a subordinated interest and servicing rights to those receivables. At September 28, 2001, the Company had sold $350 million of receivables under the program, which is reflected as a reduction of receivables in the accompanying balance sheet. The cash received from the sale of receivables was used primarily to pay down outstanding short-term borrowings.
In October 2000, the Company issued $250.0 million of 8.20% Notes due October 17, 2003 (the “8.20% Notes”) and issued $325.0 million of Floating Rate Notes due October 17, 2001 (the “Floating Rate Notes”). The proceeds from the sale of the 8.20% Notes and the Floating Rate Notes were approximately $572.0 million after deduction of underwriting discounts and other expenses associated with the sale. The Floating Rate Notes were repaid upon their maturity in October 2001. The Floating Rate Notes bore interest at an annual rate equal to three-month LIBOR, reset quarterly, plus 87.5 basis points (.875%). After temporarily using the net proceeds from the 8.20% Notes and the Floating Rate Notes to pay down commercial paper and make investments in short-term securities, the net proceeds were used to fund the acquisition of certain European operations of the VEBA Electronics Group as described in the “Acquisitions” section above.
On October 27, 2000, the Company entered into a $1.25 billion 364-day credit facility with a syndicate of banks. This facility provided additional working capital capacity. The Company was able to select from various interest rate options and maturities under this facility, although the Company utilized the facility primarily as back-up for its commercial paper program. This facility expired upon maturity and was replaced by the $1.0 billion of credit facilities described above.
The Company also has several small credit facilities available to fund the short term working capital, foreign exchange, overdraft and letter of credit needs of its European and Asian operations.
Equity Analysis
During the first quarter of fiscal 2002, the Company’s shareholders’ equity increased by $27.7 million to $2,402.3 million at September 28, 2001 (principally as a result of cumulative translation adjustments of $54.8 million offset in part by a net loss of $19.2 million), while total debt decreased by $277.8 million, net of exchange rate impact, to $1,943.8 million. As a result, the total debt to capital (shareholders’ equity plus total debt) ratio was 44.7% at September 28, 2001 as compared with 48.3% at June 29, 2001.
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Liquidity Analysis
The Company’s quick assets at September 28, 2001 totaled $1.517 billion as compared with $1.727 billion at June 29, 2001. At September 28, 2001, quick assets were less than the Company’s current liabilities by $707.5 million as compared with $843.2 million at the end of fiscal 2001. Working capital was $1.177 billion at both September 28, 2001 and at June 29, 2001. At September 28, 2001, to support each dollar of current liabilities, the Company had $0.68 of quick assets and $0.85 of other current assets, for a total of $1.53 as compared with $1.46 at June 29, 2001.
Management is not now aware of any commitments, contingencies or events within the Company’s control which may significantly change its ability to generate sufficient cash from internal or external sources to meet its needs.
MARKET RISK
Legal/Regulatory Risk Analysis
The Company and the former owners of a Company-owned site in Oxford, North Carolina have entered into a Consent Decree and Court Order with the Environmental Protection Agency (“EPA”) for the environmental clean-up of the site, the cost of which, according to the EPA’s remedial investigation and feasibility study, is estimated to be approximately $6.3 million, exclusive of the $1.5 million in EPA past costs paid by the potentially responsible parties. Pursuant to a Consent Decree and Court Order entered into between the Company and the former owners of the site, the former owners have agreed to bear at least 70% of the clean-up costs of the site, and the Company will be responsible for not more than 30% of those costs. In addition, the Company has become aware of claims that may be made against it and/or its Sterling Electronics Corp. subsidiary, which was acquired as part of the acquisition of Marshall Industries. Sterling once owned 92.46% of the capital stock of Phaostron, Inc. In August 1995, Sterling sold the interest in Phaostron to Westbase, Inc. At the time of the sale, Sterling and Westbase entered into an agreement related to environmental costs resulting from alleged contamination at a facility leased by Phaostron that is a part of the San Gabriel Valley Superfund Site. The agreement provided that Sterling would pay up to $800 thousand for environmental costs associated with the site. The Company does not believe that Sterling or the Company will be responsible for environmental costs in excess of $800 thousand and has established what it believes to be adequate reserves for any share of such costs that may be borne by Sterling or the Company. Based upon the information known to date, management believes that the Company has appropriately accrued for its share of the costs of the clean-ups with respect to the above mentioned sites. The Company is also a defendant in a lawsuit brought against it at an environmental clean-up site in Huguenot, New York. At this time, management cannot estimate the amount of the Company’s potential liability, if any, for clean-up costs in connection with this site, but does not anticipate that this matter or any other contingent matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.
Impact of Foreign Currency and Exchange Rate Fluctuations
Many of the Company’s operations, primarily its international subsidiaries, occasionally purchase and sell products in currencies other than their functional currencies. This subjects the Company to the risks associated with fluctuations of 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 market risk related to the foreign exchange contracts is offset by the changes in valuation of the underlying items being hedged. The amount of risk and the use of derivative financial instruments described above is not material to the Company’s financial position or results of operations. As of October 26, 2001, approximately 59% of the Company’s outstanding debt (including as debt the $350 million outstanding under the Company’s accounts receivable securitization program) was in variable rate short-term instruments and 41% was in fixed rate instruments. Accordingly, the Company will be impacted by any change in short-term interest rates. The Company does not hedge either its investment in its foreign operations or its floating
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Other Market Risks
The tragic events of September 11th did not have a significant impact on the Company’s first quarter results and, based upon what the Company has experienced so far, there has also been no meaningful impact on the Company’s second quarter results to date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended June 29, 2001 and the “Liquidity and Capital Resources” and “Market Risks” sections of the MD&A in Item 2 of this Form 10-Q.
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PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits:
B. Reports on Form 8-K:
During the first quarter of fiscal 2002, the Company filed the following Current Reports on Form 8-K: (1) Current Report on Form 8-K bearing cover date of August 9, 2001 in which the Company reported under Item 9 that it issued a press release announcing a fiscal 2001 and fourth quarter fiscal 2001 earnings conference call to be held on August 15, 2001; (2) Current Report on Form 8-K bearing cover date of August 15, 2001 in which the Company reported under Item 9 that it issued a press release announcing its operating results for fiscal 2001 and fourth quarter fiscal 2001; (3) Current Report on Form 8-K bearing cover date of August 23, 2001 in which the Company reported under Item 9 that it issued a press release announcing that Roy Vallee would be speaking at the Wit Soundview “Semiconductor Bus Tour Conference” in Santa Clara, California on August 29, 2001; and (4) Current Report on Form 8-K bearing cover date of September 25, 2001 in which the Company filed certain exhibits under Item 5.
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SIGNATURES
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.
Date: November 13, 2001
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INDEX TO EXHIBITS
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