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AVNET INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
For a description of the Company's critical accounting policies and an
understanding of the significant factors that influenced the Company's
performance during the quarter ended December 31, 2011, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") should be read in conjunction with the consolidated financial
statements, including the related notes, appearing in Item 1 of this Report, as
well as the Company's Annual Report on Form 10-K for the year ended July 2,
2011.
There are references to the impact of foreign currency translation in the
discussion of the Company's results of operations. Results for the second
quarter of fiscal 2012 were not significantly impacted by the movement of
foreign currency exchange rates in comparison to the second quarter of fiscal
2011. For example, the U.S. Dollar has strengthened against the Euro by less
than 1% when comparing the second quarter of fiscal 2012 with the second quarter
of fiscal 2011. However, when comparing the first half of fiscal 2012 to the
same period in fiscal 2011, exchange rates had a more pronounced impact as, for
example, the U.S. Dollar weakened against the Euro by approximately 4%;
therefore, part of the fluctuation between the first six months of fiscal 2012
results of operations and the same period in the prior year are a result of
changes in foreign currency exchange rates. When the weaker U.S. Dollar exchange
rates of the current year are used to translate the results of operations of
Avnet's subsidiaries denominated in foreign currencies, the resulting impact is
an increase in U.S. Dollars of reported results. In the discussion that follows,
this is referred to as the "translation impact of changes in foreign currency
exchange rates" and is also referred to as "constant currency."
In addition to disclosing financial results that are determined in accordance
with U.S.generally accepted accounting principles ("GAAP"), the Company also
discloses certain non-GAAP financial information, including:
• Income or expense items as adjusted for the translation impact of
changes in foreign currency exchange rates, as discussed above.
• Sales adjusted for certain items that impact the year-over-year analysis, which included: (i) the impact of acquisitions by adjusting
Avnet's prior periods to include the sales of businesses acquired as if
the acquisitions had occurred at the beginning of the period presented;
(ii) the impact of a divestiture by adjusting Avnet's prior periods to
exclude the sales of the business divested as if the divestiture had
occurred at the beginning of the period presented; and (iii) the impact
of the transfer at the beginning of fiscal 2012 of the Latin America
computing components business from TS Americas to EM Americas, which is
being managed as part of the EM embedded business. Sales taking into
account the combination of these adjustments are referred to as "pro
forma sales" or "organic sales."
• Operating income excluding restructuring, integration and other charges
incurred in the second quarter of fiscal 2011 (see Restructuring,
Integration and Other Charges in this MD&A). The reconciliation to GAAP
is presented in the following table.
Second Quarter Second Quarter First Half First Half
Fiscal 2012 Fiscal 2011 Fiscal 2012 Fiscal 2011
(Thousands)
GAAP operating income $ 230,889 $ 227,602 $ 453,953 $ 422,064
Restructuring, integration
and other charges 34,505 29,112 34,505 57,179
Adjusted operating income $ 265,394 $ 256,714 $ 488,458 $ 479,243
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.
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OVERVIEWOrganization
Avnet, Inc., incorporated in New York in 1955, together with its consolidated
subsidiaries (the "Company" or "Avnet"), is one of the world's 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 world's
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 that can be
customized to meet the requirements of both customers and suppliers.
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") and embedded products for more than
300 of the world's 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 throughout 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.
• As a global IT solutions distributor, TS collaborates with its customers
and suppliers to create and deliver services, software and hardware
solutions that address the business needs of end-user customers locally
and around the world. TS focuses on the global value-added distribution
of enterprise computing servers and systems, software, storage, services
and complex solutions from the world's foremost technology manufacturers,
marketing and selling them to and through the VAR channel. TS also serves
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. The operating group has sales and marketing divisions dedicated
to these customer segments as well as independent software vendors.
Results of Operations
Executive Summary
Revenue for the second quarter of fiscal 2012 was $6.69 billion, a decrease of
1.1% from the second quarter of fiscal 2011 revenue of $6.77 billion while
revenue on an organic basis was down 0.8% year over year. Although the current
macro economic environment impacted revenue growth, the Company's continuing
focus on profitability helped improve gross profit margin and operating income
margin from the prior year second quarter. The improved profitability at TS,
which had operating income margin within management's target range for the first
time in eight quarters, combined with the improvement in EM Americas due
primarily to higher prices for hard disk drives, resulted in higher than
expected diluted earnings per share for the quarter.
EM organic revenue growth, which decreased 3.5% over the prior year second
quarter, was impacted by the supply chain inventory correction and resulted in
the second consecutive quarter of negative year-over-year organic growth.
However, EM operating income margin was better than expected due primarily to
the benefit from a temporary lift in margins in hard disk drives as a result of
supply constraints coupled with expense reduction actions implemented in light
of business conditions. TS revenue declined 3.5% over the prior year second
quarter, while organic revenue grew 2.5% year over year. Although sales declined
year over year, TS significantly improved gross profit margin and operating
income margin driven by profitable revenue growth and restructuring initiatives.
Gross profit margin of 11.7% increased 28 basis points over prior year second
quarter. EM gross profit margin was down 7 basis points year over year as margin
expansion in the Americas and EMEA regions were offset by a decline in Asia. TS
gross profit margin increased 60 basis points year over year with all three
regions contributing to the improvement, most notably EMEA which increased more
than 100 basis points.
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Consolidated operating income margin was 3.5% as compared with 3.4% in the prior
year second quarter, which included restructuring, integration and other charges
in both periods. Excluding these charges, operating income margin was 4.0%
compared with 3.8% in the prior year second quarter driven by the significant
improvement at TS, partially offset by a decline at EM. TS operating income
margin increased 56 basis points year over year to 3.8% with all three regions
contributing to the improvement. This was the first time in eight quarters that
TS operating income margin was within management's target range of 3.4% to 3.9%.
EM operating income margin declined 30 basis points year over year to 4.9% but,
as mentioned previously, was better than expected.
Sales
The table below provides the comparison of second quarter fiscal 2012 and 2011
sales for the Company and its operating groups. In addition, there were several
items that impacted the comparison of second quarter sales to sales in the prior
year second quarter; therefore, the table below also provides pro forma (or
organic) sales which represents sales adjusted for (i) the impact of
acquisitions by adjusting Avnet's prior periods to include the sales of
businesses acquired as if the acquisitions had occurred at the beginning of the
period presented; (ii) the impact of a divestiture by adjusting Avnet's prior
periods to exclude the sales of the business divested as if the divestiture had
occurred at the beginning of the period presented; and (iii) the impact of the
transfer at the beginning of fiscal 2012 of the Latin America computing
components business from TS Americas to EM Americas which is being managed as
part of the EM embedded business. Sales taking into account the combination of
these adjustments are referred to as "pro forma sales" or "organic sales."
Pro forma Pro forma Pro forma
Q2-Fiscal FY Q2-Fiscal FY Year-Year Q2-Fiscal FY Q2-Fiscal FY Year-Year
'12 '11 % Change '12 '11 % Change
(Dollars in thousands)
Avnet, Inc. $ 6,693,573 $ 6,767,495 (1.1 )% $ 6,694,193 $ 6,746,982 (0.8 )%
EM 3,595,607 3,558,614 1.0 3,596,227 3,725,802 (3.5 )
TS 3,097,966 3,208,881 (3.5 ) - 3,021,180 2.5
EM
Americas $ 1,401,751 $ 1,219,879 14.9 % $ - $ 1,331,236 5.3 %
EMEA 943,335 1,079,121 (12.6 ) 943,955 1,081,937 (12.8 )
Asia/Pacific 1,250,521 1,259,614 (0.7 ) - 1,312,629 (4.7 )
TS
Americas $ 1,648,250 $ 1,823,773 (9.6 )% $ - $ 1,561,966 5.5 %
EMEA 1,006,173 1,045,476 (3.8 ) - 1,071,519 (6.1 )
Asia/Pacific 443,543 339,632 30.6 - 387,695 14.4
Totals by Region
Americas $ 3,050,001 $ 3,043,652 0.2 % $ - $ 2,893,202 5.4 %
EMEA 1,949,508 2,124,597 (8.2 ) 1,950,128 2,153,456 (9.4 )
Asia/Pacific 1,694,064 1,599,246 5.9 - 1,700,324 (0.4 )
The following tables present the reconciliation of the reported sales to pro
forma sales for the second quarters of fiscal 2012 and 2011.
As Acquisition Pro forma
Q2 Fiscal 2012 Reported Sales(1) Sales
(Thousands)
Avnet, Inc. $ 6,693,573 $ 620 $ 6,694,193
EM 3,595,607 620 3,596,227
EM EMEA 943,335 620 943,955
_____________________(1) Includes the business acquired in November 2011 in EM EMEA (see table
below).
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Transfer of
As Acquisition/ TS Business Pro forma
Q2 Fiscal 2011 Reported Divested Sales(1) to EM Sales
(Thousands)
Avnet, Inc. $ 6,767,495 $ (20,513 ) $ - $ 6,746,982
EM 3,558,614 56,121 111,067 3,725,802
TS 3,208,881 (76,634 ) (111,067 ) 3,021,180
EM
Americas $ 1,219,879 $ 291 $ 111,067 $ 1,331,237
EMEA 1,079,121 2,816 - 1,081,937
Asia/Pacific 1,259,614 53,014 - 1,312,628
TS
Americas $ 1,823,773 $ (150,740 ) $ (111,067 ) $ 1,561,966
EMEA 1,045,476 26,043 - 1,071,519
Asia/Pacific 339,632 48,063 - 387,695
_____________________
(1) Includes the following acquisitions which impacted the second quarter
year-over-year comparison:
Center Cell acquired November 2010 in the EM Americas region
itX Technologies acquired January 2011 in the TS Asia region
Amosdec acquired in July 2011 in the TS EMEA region
Prospect Technology acquired in August 2011 in the EM Asia region
JC Tally Trading Co and its subsidiary acquired in August 2011 in the EM Asia
region
DE2 acquired in November 2011 in the EM EMEA region
Also reflects the divestiture of New Prosys in January 2011
Consolidated sales for the second quarter of fiscal 2012 were $6.69 billion, a
decrease of 1.1%, or $73.9 million, from the prior year second quarter
consolidated sales of $6.77 billion. Organic sales (as defined earlier in this
MD&A) were essentially flat with a decrease of 0.8%. On a sequential basis,
sales increased 4.2% and 5.9% excluding the translation impact of changes in
foreign currency exchange rates. This was below the normal seasonal revenue
growth of 8% to 12%. Although EM experienced lower than normal seasonal revenue
growth and TS revenue growth was towards the low end of normal seasonality, it
was expected considering the current market and economic environment.
EM sales of $3.60 billion in the second quarter of fiscal 2012 increased 1.0%
over the prior year second quarter sales of $3.56 billion. The comparison to
prior year was impacted by the transfer of the Latin America computing
components business from TS Americas to EM Americas as well as by acquisitions,
primarily in Asia. Excluding the impact of these items, organic revenue was down
3.5% year over year, which was the second consecutive quarter of revenue
contraction as the supply chain inventory correction continued during the
December quarter. On a regional basis, declines in EMEA and Asia of 12.8% and
4.7%, respectively, offset organic revenue growth of 5.3% in the Americas, which
benefited from the increased demand for hard disk drives as a result of supply
constraints and the associated temporary lift in pricing on those components.
TS sales of $3.10 billion in the second quarter of fiscal 2012 decreased 3.5%
over the prior year second quarter sales of $3.21 billion. The year-over-year
revenue decrease was due primarily to the Americas and EMEA regions which were
down 9.6% and 3.8%, respectively, partially offset by growth of 31% in Asia. The
comparison with prior year was impacted by the transfer of the Latin America
computing components business from TS Americas to EM Americas as well as by
acquisitions. Organic revenue increased 2.5% year over year driven by 5.5%
growth in the Americas and 14.4% growth in Asia, which was partially offset by a
decline in EMEA of 6.1%. On a product level, industry standard servers and
software revenue increased more than 35% year over year while storage device
revenue increased more than 20%.
Consolidated sales for the first half of fiscal 2012 were $13.12 billion, up
1.3%, over sales of $12.95 billion for the first half of fiscal 2011. On an
organic basis excluding the impact of changes in foreign currency exchange
rates, sales for the first half of fiscal 2012 were essentially flat as compared
with the same period in the prior year. EM sales of $7.41 billion for the first
half of fiscal 2012 were up 3.2% as compared with the first half of the prior
year. This increase was primarily driven by growth in the Americas region which
offset a decline in the EMEA region. Organic revenue was down 1.8% year over
year with growth in the
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Americas offset by declines in EMEA and Asia. TS sales of $5.71 billion for the
first half of fiscal 2012 were down 1.1% as compared with the first half of
fiscal 2011 and organic revenue was up 5.7% year over year, primarily driven by
sales growth in the Americas and Asia regions, partially offset by a decline in
the EMEA region.
Gross Profit and Gross Profit Margins
Consolidated gross profit for the second quarter of fiscal 2012 was $784.1
million, an increase of $10.9 million, or 1.4%, from the prior year second
quarter and increased 1.2% on a pro forma basis in constant currency. Gross
profit margin of 11.7% improved 28 basis points over the prior year second
quarter and was essentially flat sequentially. EM gross profit margin was down 7
basis points year over year. The year-over-year decline in EM gross profit
margin was primarily the result of the higher margin EMEA region representing a
lower percentage of total EM sales as EMEA sales were 26% of EM sales in the
current year second quarter as compared with 30% in the prior year second
quarter. This impact was somewhat offset by the Americas region which benefited
from the temporary lift in margins in hard disk drives as a result of supply
constraints. TS gross profit margin improved 60 basis points year over year and
13 basis points sequentially. All three regions contributed to the
year-over-year improvement highlighted by the EMEA region which improved its
gross profit margin over 100 basis points.
Consolidated gross profit and gross profit margins were $1.54 billion and 11.7%,
respectively, for the first half of fiscal 2012 as compared with $1.50 billion
and 11.6%, respectively, for the first half of fiscal 2011. For the first half
of fiscal 2012, EM gross profit margin decreased 18 basis points year over year
and TS gross profit margin improved 50 basis points year over year driven
largely by the same factors as discussed in the quarterly gross profit margin
analysis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A expenses") were $518.7
million in the second quarter of fiscal 2012, an increase of $2.3 million, or
0.4%, from the prior year second quarter. Of the $2.3 million increase,
approximately $7 million related to additional expenses from businesses
acquired, which was offset by a decrease in expenses for the existing business
due primarily to the cost reduction actions taken. 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 second quarter
of fiscal 2012, SG&A expenses as a percentage of sales were 7.7% and were 66.2%
as a percentage of gross profit as compared with 7.6% and 66.8%, respectively,
in the second quarter of fiscal 2011. SG&A expenses as a percentage of gross
profit at TS decreased over 300 basis points year over year and was at its
lowest level in eight quarters. SG&A expenses for the first half of fiscal 2012
were $1.05 billion, or 8.0% of consolidated sales, as compared with $1.02
billion, or 7.9% of consolidated sales, in the first half of fiscal 2011. SG&A
expenses were 68.2% of gross profit in the first half of fiscal 2012 as compared
with 68.0% in the first half of 2011.
Restructuring, Integration and Other Charges
During the second quarter of fiscal 2012, the Company initiated certain actions
to reduce costs in both operating groups in response to current market
conditions and incurred acquisition and integration costs associated with
recently acquired businesses. As a result, the Company recorded restructuring,
integration and other charges of $34.5 million pre-tax, $23.6 million after tax
and $0.16 per share on a diluted basis for the second quarter and first half of
fiscal 2012. Restructuring charges of $28.9 million pre-tax consisted of $19.8
million for severance, $7.4 million for facility exit costs and $1.7 million for
other restructuring charges, primarily other onerous lease liabilities.
Integration costs and transactions costs were $3.4 million pre-tax and $3.1
million pre-tax, respectively. In addition, the Company recorded the reversal of
$0.9 million pre-tax to adjust reserves related to prior year restructuring
activity that were no longer required.
Severance charges recorded in the second quarter of fiscal 2012 related to over
350 employees in sales, administrative and finance functions in connection with
the cost reduction actions taken in all three regions in both operating groups
with employee reductions of approximately 250 in EM and 100 in TS. Facility exit
costs for vacated facilities related to nine facilities in the Americas, three
in EMEA and two in Asia and consisted of reserves for remaining lease
liabilities and the write-down of leasehold improvements and other fixed assets.
The Company expects to generate approximately $25 million to $30 million in
annualized savings by the end of fiscal 2012 as a result of the restructuring
initiatives.
Integration costs incurred related to the integration of acquired businesses and
incremental costs incurred as part of the consolidation and closure of certain
office and warehouse locations. Integration costs included IT consulting costs
for system integration assistance, facility moving costs, legal fees, travel,
meeting, marketing and communication costs that were incrementally incurred as a
result of the integration activity. Also included in integration costs are
incremental salary costs associated with the consolidation and closure
activities as well as costs associated with acquisition activity, primarily
related to the acquired businesses' personnel who were retained by Avnet for
extended periods following the close of the acquisitions solely to assist in the
integration of the acquired businesses' IT systems and administrative and
logistics operations into those of Avnet. These identified personnel have no
other meaningful day-to-day operational responsibilities outside of the
integration effort. Transaction costs consisted
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primarily of professional fees for brokering the acquisitions, due diligence
work and other legal costs.
Comparatively, in the second quarter of fiscal 2011, restructuring, integration
and other charges amounted to $29.1 million pre-tax, $20.8 million after tax and
$0.14 per share on a diluted basis and were due primarily to the integration of
the acquired Bell business into the existing EM Americas, TS Americas and TS
EMEA regions and, to a lesser extent, other cost reduction actions. These
pre-tax charges included the following: $10.7 million of severance, $11.4
million pre-tax of facility exit costs, $8.8 million of integration costs, $1.3
million of transaction costs, $0.4 million of other charges, and a reversal of
$3.5 million to adjust reserves related to prior year restructuring activity
which were no longer required. During the first half of fiscal 2011,
restructuring, integration and other charges amounted to $57.2 million pre-tax,
$41.0 million after tax and $0.27 per share on a diluted basis and consisted of
$18.9 million pre-tax for severance, $13.9 million pre-tax for facility exit
costs for lease liabilities, fixed asset write-downs and other related charges
associated with vacated facilities, $16.1 million pre-tax for integration costs,
$12.1 million pre-tax for transactions costs associated with acquisitions and
$0.4 million for other charges. The Company also recorded a reversal of $4.2
million to adjust reserves related to prior year restructuring activity.
Operating Income
During the second quarter of fiscal 2012, the Company generated operating income
of $230.9 million, up 1.4%, as compared with $227.6 million in the prior year
second quarter. Consolidated operating income margin increased to 3.5% as
compared with 3.4% in the prior year second quarter. Both periods included
restructuring, integration and other charges as described in Restructuring,
Integration and Other Charges above. Excluding these charges from both periods,
operating income was $265.4 million, or 4.0% of sales, in the second quarter of
fiscal 2012 as compared with $256.7 million, or 3.8% of sales, in the prior year
second quarter. EM operating income of $174.9 million was down 4.7% year over
year and operating income margin declined 30 basis points year over year to 4.9%
which dropped just below management's target range of 5.0% to 5.5%. TS operating
income of $118.9 million increased 13.1% year over year and operating income
margin increased 56 basis points to 3.8% with all three regions contributing to
the improvement, which was driven by the combination of profitable revenue
growth and restructuring initiatives. This was the first time in eight quarters
that TS operating income margin was within management's target range of 3.4% to
3.9%. Corporate operating expenses were $28.4 million in the second quarter of
fiscal 2012 as compared with $31.9 million in the second quarter of fiscal 2011,
which was a decrease of $3.5 million, due primarily to higher equity
compensation costs incurred in the prior year second quarter.
Operating income for the first half of 2012 was $454.0 million, or 3.5% of
consolidated sales, as compared with $422.1 million, or 3.3% of consolidated
sales for the first half of fiscal 2011. The 20 basis point increase in
operating income margin as compared with the first half of fiscal 2011 was
similarly a function of the factors discussed in the quarterly analysis. In
addition, during the first half of fiscal 2012, restructuring, integration and
other charges amounted to $34.5 million pre-tax, $23.6 million after tax and
$0.16 per share on a diluted basis as compared with $57.2 million pre-tax, $41.0
million after tax and $0.27 per share for the first half of the prior year.
Interest Expense and Other Income (Expense), Net
Interest expense for the second quarter of fiscal 2012 was $22.2 million, down
$2.1 million or 8.5%, from interest expense of $24.2 million in the second
quarter of fiscal 2011. Interest for the first half of fiscal 2012 was $44.1
million, down $2.2 million or 4.8%, as compared with interest expense of $46.3
million for the first half of fiscal 2011. The decrease in interest expense was
primarily due to (i) lower interest expense incurred under foreign bank credit
facilities as compared with the same periods in the prior year and (ii) the
repayment in March 2011 of $104.4 million of the 3.75% convertible debt that was
assumed in the acquisition of Bell Microproducts, Inc. See Financing
Transactions for further discussion of the Company's outstanding debt.
During the second quarter of fiscal 2012, the Company recognized $0.7 million of
other income, primarily due to interest income which was partially offset by
foreign exchange losses, as compared with other expense of $0.4 million in the
prior year. During the first half of fiscal 2012, the Company incurred $4.6
million in other expense as compared with other income of $3.0 million in the
first half of fiscal 2011. The year-over-year increase in other expense was due
primarily to foreign exchange losses as compared with interest income partially
offset by foreign currency exchange losses in the prior year.
Gain on Bargain Purchase and Other
During the second quarter and first half of fiscal 2012, the Company recognized
other charges of $1.4 million pre-tax, $0.9 million after tax and $0.01 per
share on a diluted basis related to the write-down of an investment in a small
technology company and the write-off of certain deferred financing costs
associated with the early termination of a credit facility (see Financing
Transactions for further discussion).
During the first half of fiscal 2011, the Company acquired Unidux, a Japanese
publicly traded company, through a tender
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offer. After reassessing all assets acquired and liabilities assumed, the
consideration paid was below the fair value of the acquired net assets and, as a
result, the Company recognized a gain on bargain purchase of $31.0 million pre-
and after tax and $0.20 per share on a diluted basis. In addition, the Company
recognized other charges of $2.0 million pre-tax primarily related to an
impairment of buildings in EMEA.
Income Tax Provision
The Company's effective tax rate on its income before income taxes was 29.3% in
the second quarter of fiscal 2012 as compared with 30.5% in the second quarter
of fiscal 2011. For the first half of 2012 and 2011, the Company's effective tax
rate was 29.2% and 31.5%, respectively. During the first half of fiscal 2011,
the Company recognized an income tax adjustment of $16.9 million primarily
related to the non-cash write-off of a deferred tax asset associated with the
integration of acquired legal entities which was partially offset by the
non-taxable gain on a bargain purchase as mentioned above.
The tax rate is impacted primarily by the statutory tax rates of the countries
in which the Company operates and the related levels of income in those
jurisdictions as well as assessment of tax risks that are common to
multinational enterprises and assessments of realizability of deferred tax
assets and the associated establishment or release of tax valuation allowances.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the
Company's consolidated net income for the second quarter of fiscal 2012 was
$147.0 million, or $0.98 per share on a diluted basis, as compared with $141.0
million, or $0.91 per share on a diluted basis, in the prior year second
quarter. Net income for the first half of fiscal 2012 was $286.1 million, or
$1.88 per share on a diluted basis, as compared with $279.2 million, or $1.81
per share on a diluted basis for the first half of fiscal 2011.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the second quarter and first half of fiscal 2012, the Company generated
$450.0 million and $245.8 million, respectively, of cash from its operating
activities as compared with cash usage of $79.2 million and $191.5 million in
the second quarter and first half of fiscal 2011, respectively. These results
are comprised of: (i) 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 (ii) cash flow used for working capital, excluding cash and cash
equivalents. Cash generated by working capital during the second quarter of
fiscal 2012 included an increase in payables of $420.4 million, driven primarily
by TS due to the December quarter being its seasonally strongest due to the
calendar-year-end-based budgeting cycles of many of its customers. In addition,
inventory decreased $91.7 million, primarily attributable to EM. These cash
inflows were partially offset by an increase in accounts receivable of $224.7
million, primarily related to TS and its double-digit sequential revenue growth
in the December quarter. Net days outstanding decreased almost three days during
the second quarter as receivable days continue to be at or near pre-recession
levels as there have not been any significant change in terms provided to
customers and the Company has not experienced an overall deterioration in timely
customer payments. Comparatively, cash used for working capital during the
second quarter of fiscal 2011 consisted of accounts receivable growth of $434.3
million, inventory growth of $71.3 million, partially offset by growth in
payables of $164.7 million.
Cash Flow from Financing Activities
During the second quarter and first half of fiscal 2012, the Company received
net proceeds of $78.5 million and $467.5 million, respectively, primarily from
borrowings under the accounts receivable securitization program and bank credit
facilities. In addition, during the second quarter and first half of fiscal
2012, the Company used $139.0 million and $221.0 million, respectively, of cash
to repurchase common stock under the $500 million share repurchase program
authorized by the Board in August 2011 (see Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds in this Form 10-Q). During the second quarter and
first half of fiscal 2011, the Company received net proceeds of $259.4 million
and $520.9 million, respectively, primarily from borrowings under the accounts
receivable securitization program and bank credit facilities which, along with
available cash, were used primarily to fund acquisitions and the working capital
needs of the business to support the growth in revenue in prior fiscal year.
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Cash Flow from Investing Activities
During the second quarter and first half of fiscal 2012, the Company used $4.3
million and $107.6 million, respectively, of cash for acquisitions, net of cash
acquired, and $31.2 million and $70.9 million, respectively, for capital
expenditures primarily related to system development costs and computer hardware
and software. During the second quarter and first half of fiscal 2011, the
Company used $52.1 million and $626.9 million, respectively, of cash for
acquisitions, net of cash acquired, and $38.3 million and $70.2 million,
respectively, for capital expenditures related to building and leasehold
improvements, system development costs and computer hardware and software.
Capital Structure and Contractual Obligations
The following table summarizes the Company's capital structure as of the end of
the second quarter of fiscal 2012 with a comparison to fiscal 2011 year-end:
December 31, % of Total July 2, % of Total
2011 Capitalization 2011 Capitalization
(Dollars in thousands)
Short-term debt $ 800,563 13.7% $ 243,079 4.4%
Long-term debt 1,184,688 20.3 1,273,509 22.8
Total debt 1,985,251 34.0 1,516,588 27.2
Shareholders' equity 3,855,082 66.0 4,056,070 72.8
Total capitalization $ 5,840,333 100.0 $ 5,572,658 100.0
For a description of the Company's long-term debt and lease commitments for the
next five years and thereafter, see Long-Term Contractual Obligations appearing
in Item 7 of the Company's Annual Report on Form 10-K for the year ended July 2,
2011. With the exception of the Company's 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
During the second quarter of fiscal 2012, the Company entered into a five-year
$1.0 billion senior unsecured revolving credit facility (the "2012 Credit
Facility") with a syndicate of banks which expires November 2016. In connection
with the 2012 Credit Facility, the Company terminated its existing unsecured
$500.0 million credit facility (the "2008 Credit Facility") which was to expire
in September 2012. Under the 2012 Credit Facility, the Company may elect from
various interest rate options, currencies and maturities. As of the end of the
second quarter of fiscal 2012, there were $23.2 million in borrowings
outstanding under the 2012 Credit Facility included in "long-term debt" in the
consolidated financial statements. In addition, there were $17.1 million in
letters of credit issued under the 2012 Credit Facility which represent a
utilization of the 2012 Credit Facility capacity but are not recorded in the
consolidated balance sheet as the letters of credit are not debt. As of July 2,
2011, there were $122.1 million in borrowings outstanding included in "long-term
debt" in the consolidated financial statements and $16.6 million in letters of
credit issued under the 2008 Credit Facility.
In August 2011, the Company amended its accounts receivable securitization
program (the "Securitization Program" or "Program") with a group of financial
institutions to allow the Company to sell, on a revolving basis, an undivided
interest of up to $750.0 million ($600.0 million prior to the amendment) 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 December 31, 2011. The Program has a one year term
that expires in August 2012. There were $610.0 million in borrowings outstanding
under the Program at December 31, 2011 and $160.0 million outstanding at July 2,
2011.
Notes outstanding at December 31, 2011 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
• $300.0 million of 5.875% Notes due June 15, 2020
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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.
Covenants and Conditions
The 2012 Credit Facility 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. Management does not believe that the covenants in
the 2012 Credit Facility limit the Company's ability to pursue its intended
business strategy or future financing needs. The Company was in compliance with
all covenants of the 2012 Credit Facility as of December 31, 2011.
The Securitization Program requires the Company to maintain certain minimum
interest coverage and leverage ratios in order to continue utilizing the
Program. The 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 Company's ability to
meet the required covenants and conditions of the Program include the Company's
ongoing profitability and various other economic, market and industry factors.
Management does not believe that the covenants under the Program limit the
Company's ability to pursue its intended business strategy or future financing
needs. The Company was in compliance with all covenants of the Program as of
December 31, 2011.
See Liquidity below for further discussion of the Company's availability under
these various facilities.
Liquidity
As mentioned previously, the Company amended its accounts receivable
securitization program in August 2011 to increase the borrowing capacity from
$600.0 million to $750.0 million. In addition, during the second quarter of
fiscal 2012, the Company entered into a five-year $1.0 billion senior unsecured
revolving credit facility and terminated its existing $500 million facility. The
Company had total borrowing capacity of $1.75 billion at December 31, 2011 under
the 2012 Credit Facility and the Program. There were $23.2 million in borrowings
outstanding and $17.1 million in letters of credit issued under the 2012 Credit
Facility and $610.0 million outstanding under the Program, resulting in $1.10
billion of net availability at the end of the second quarter. During the second
quarter of fiscal 2012, the Company had an average daily balance outstanding
under the 2012 Credit Facility of approximately $60 million and approximately
$640 million under the Program. During the second quarter of fiscal 2011, the
Company had an average daily balance outstanding under the 2008 Credit Facility
of approximately $100 million and approximately $230 million under the Program.
The Company had cash and cash equivalents of $968.5 million as of December 31,
2011, of which $843.5 million was held outside the U.S. As of July 2, 2011, the
Company had cash and cash equivalents of $675.3 million, of which $613.2 million
was held outside of the U.S. Liquidity is subject to many factors, such as
normal business operations as well as general economic, financial, competitive,
legislative, and regulatory factors that are beyond the Company's control. Cash
balances generated and held in foreign locations are used for on-going working
capital, capital expenditure needs and to support acquisitions. These balances
are currently expected to be permanently reinvested outside the U.S. If these
funds were needed for general corporate use in the U.S., the Company would incur
significant income taxes to repatriate cash held in foreign locations but only
to the extent the repatriated cash is in excess of outstanding intercompany
loans due to Avnet, Inc. from the foreign subsidiaries. In addition, local
government regulations may restrict the Company's ability to move funds among
various locations under certain circumstances. Management does not believe such
restrictions would limit the Company's ability to pursue its intended business
strategy.
During the first half of fiscal 2012, the Company utilized $107.6 million of
cash, net of cash acquired, for acquisitions. The Company has been making and
expects to continue to make strategic investments through acquisition activity
to the extent the investments strengthen Avnet's competitive position and meet
management's return on capital thresholds.
In addition to continuing to make investments in acquisitions, the Company may
repurchase up to an aggregate of $500 million of shares of the Company's common
stock through a share repurchase program approved by the Board of Directors in
August 2011. The Company plans to repurchase stock from time to time at the
discretion of management, subject to strategic considerations, market conditions
and other factors. The Company may terminate or limit the stock repurchase
program at any time without prior notice. The timing and actual number of shares
purchased will depend on a variety of factors such as price, corporate and
regulatory requirements, and prevailing market conditions. Since inception of
the program in August through the end of the second quarter of fiscal 2012, the
Company repurchased 8.1 million shares at average market price of $28.01 per
share for total cost of $225.9
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million. This amount differs from the cash used for repurchases of common stock
on the consolidated statement of cash flows to the extent repurchases were not
settled at the end of the quarter. Shares repurchased were retired.
During periods of weakening demand in the electronic component and enterprise
computer solutions industry, the Company typically generates cash from operating
activities. Conversely, the Company is also more likely to use operating cash
flows for working capital requirements during periods of higher growth. During
the second quarter and first half of fiscal 2012, the Company generated $450.0
million and $245.8 million, respectively, of cash from operations and has
generated $715.4 million of cash from operations over the trailing twelve month
period. Management believes that Avnet's borrowing capacity, its current cash
availability and the Company's expected ability to generate operating cash flows
in the future are sufficient to meet its projected financing needs.
COMPARATIVE ANALYSIS - LIQUIDITY
(Dollars in millions)
The following table highlights the Company's liquidity and related ratios as of
the end of the second quarter of fiscal 2012 with a comparison to the fiscal
2011 year-end:
December 31, July 2, Percentage
2011 2011 Change
Current Assets $ 8,455.2 $ 8,227.2 2.8%
Quick Assets 5,724.1 5,439.6 5.2
Current Liabilities 5,022.9 4,477.7 12.2
Working Capital (1) 3,432.2 3,749.5 (8.5)
Total Debt 1,985.2 1,516.6 30.9
Total Capital (total debt plus total
shareholders' equity) 5,840.3 5,572.7 4.8
Quick Ratio 1.1:1 1.2:1
Working Capital Ratio 1.7:1 1.8:1
Debt to Total Capital 34.0 % 27.2 %
(1) This calculation of working capital is defined as current assets less
current liabilities.
The Company's quick assets (consisting of cash and cash equivalents and
receivables) increased 5.2% and current assets increased 2.8% from July 2, 2011
to December 31, 2011 due primarily to the increase in cash and cash equivalents
since the prior fiscal year end which was partially offset by the impact of the
change in foreign currency exchange spot rates at December 31, 2011 as compared
with July 2, 2011. Current liabilities increased 12.2% primarily due to an
increase in short-term borrowings partially offset by the impact of the change
in foreign currency exchange spot rates. As a result of the factors noted above,
total working capital decreased by 8.5% during the first six months of fiscal
2012. Total debt increased by 30.9% primarily due to the increase in short-term
borrowings, total capital increased 4.8% and the debt to capital ratio increased
as compared with July 2, 2011 to 34.0%.
Recently Issued Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board issued authoritative
guidance that requires an entity to disclose information about offsetting and
related arrangements to enable users of its financial statements to understand
the effect of those arrangements on its financial position. This guidance is
effective for annual reporting periods beginning on or after January 1, 2013 and
interim periods within those annual periods. The adoption of this guidance may
expand existing disclosure requirements, which the Company is currently
evaluating.
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