Avnet, Inc. (NYSE:AVT) today reported revenue of $4.42 billion for third quarter fiscal 2008 ended March 29, 2008, representing an increase of 13.3% over third quarter fiscal 2007 and 8.4% excluding the impact of changes in foreign currency exchange rates. Pro forma revenue growth, as defined in the Non-GAAP Financial Information Section, was 7.1% over the prior year third quarter. Net income for third quarter fiscal 2008 was $107.2 million, or $0.71 per share on a diluted basis, as compared with net income of $105.2 million, or $0.70 per share, for the third quarter last year. Included in the current quarter and year ago quarter results are restructuring, integration and other items amounting to $0.05 and $0.03 per share on a diluted basis, respectively. Excluding these items, diluted earnings per share in the third quarter fiscal 2008 was $0.76, representing an increase of 4.1% over the year-ago period.
Operating income for third quarter fiscal 2008 was $166.8 million, down 3.4% as compared with operating income of $172.6 million in the year-ago quarter. Included in operating income for the current and prior year third quarters are restructuring, integration and other charges totaling $10.9 million and $8.5 million, respectively. Excluding these charges, operating in-come for the third quarter fiscal 2008 was $177.6 million, down 1.9% as compared with oper-ating income of $181.1 million in last year's third quarter. Operating income as a percentage of sales, excluding the charges in both periods, was 4.0% in the current year quarter, down 62 basis points as compared with last year. The charges in the current quarter related to the integration of recently acquired businesses and initial cost reductions required to improve performance at certain business units in the Company's portfolio. Actions taken in the March 2008 quarter will reduce annualized expenses by approximately $15 million. Further targeted actions in the June 2008 quarter are expected to reduce costs by an additional $23 million to $27 million on an annualized basis.
Roy Vallee, Chairman and Chief Executive Officer, commented, "We are extremely disap-pointed with our earnings for the third quarter as both operating groups were below our profit forecast. Our Electronics Marketing Group managed to slightly improve its margins and gen-erated higher returns despite lower-than-expected sales. However, revenue weakness in some business units at Technology Solutions resulted in lower gross profit volume, which was further exacerbated by lower gross margins due primarily to the impact of rebates. This com-bination led to some unacceptable operating margin performances and, as a result, we have begun to take targeted corrective actions. We remain steadfastly committed to achieving our long-term margin and return goals."
Operating Group Results
Electronics Marketing (EM) sales of $2.62 billion in the third quarter fiscal 2008 were up 7.3% year over year on a reported basis and up 2.5% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EM revenue increased 5.0% year over year. EM sales in the Americas, EMEA and Asia regions increased 4.3%, 6.6% and 13.0%, respectively, year over year on a reported basis with EMEA's revenue down 6.0% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EM sales in EMEA and Asia in the third quarter fiscal 2008 increased 4.6% and 6.6%, respectively, as compared with last year. EM operating income of $153.5 million for third quarter fiscal 2008 was up 8.4% over the prior year third quarter operating income of $141.6 million and operating income margin of 5.9% was up 6 basis points as compared with the prior-year quarter.
Mr. Vallee added, "Even though EM's year-over-year margin expansion was somewhat muted this quarter by a sales decline in constant currency in the EMEA region, diligent working capi-tal management resulted in an increase in working capital velocity both sequentially and year over year, and return on working capital increased 68 basis points over the prior year third quarter."
Technology Solutions (TS) sales of $1.80 billion in the third quarter fiscal 2008 were up 23.2% year over year on a reported basis and up 18.3% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, TS revenue increased 10.2%. On a reported basis, third quarter fiscal 2008 sales in the Americas, EMEA and Asia were up 2.9%, 72.4%, and 78.9%, respectively, year over year with EMEA's revenue up 53.9% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA and Asia third quarter fiscal 2008 sales increased by 21.4% and 32.4%, respec-tively, on a year over year basis. TS operating income was $41.3 million in the third quarter fiscal 2008, a 31.7% decrease as compared with third quarter fiscal 2007 operating income of $60.6 million, and operating income margin of 2.3% decreased by 185 basis points over the prior year third quarter.
Mr. Vallee further added, "Technology Solutions experienced a confluence of negative events towards the end of the March quarter. In the Americas, we realized much lower-than-expected revenues in one large business unit, lackluster sales in some other key products and lower gross margins due primarily to rebate issues contributing to a substantial operating profit shortfall. In EMEA, lower than expected sales in local currencies combined with signifi-cant changes made by a major IT supplier in its rebate programs for the quarter had a materi-al negative impact on our gross profit. Also, the weaker than expected environment in Europe has caused us to fall behind our financial plans for this region We are taking targeted correc-tive actions in both regions to adjust the cost structure at the affected business units and, in cooperation with our supplier partners, many of our quarterly rebate goals have already been reset for the June quarter, including the previously mentioned major supplier program change in EMEA."
Cash Flow
During the third quarter of fiscal 2008, the Company produced cash flow from operations of $156.4 million and on a rolling four quarter basis generated $497.5 million. As a result, the Company ended the quarter with $381.5 million of cash and cash equivalents and net debt (total debt less cash and cash equivalents) of $847.2 million.
Ray Sadowski, Chief Financial Officer, stated, "We had another strong quarter of cash flow generation which, when combined with our strong balance sheet, provides us with the finan-cial flexibility to take advantage of value creating acquisition opportunities. This is ex-emplified by the recently announced transaction to acquire Horizon Technology Group plc which is expected to be accretive to earnings by approximately $0.10 per share in fiscal 2009."
Outlook
For Avnet's fourth quarter fiscal year 2008, management expects normal seasonality at EM with anticipated sales to be in the range of $2.60 billion to $2.70 billion and sales for TS to be slightly below normal seasonality with sales between $1.95 billion and $2.05 billion. There-fore, Avnet's consolidated sales are forecasted to be between $4.55 billion and $4.75 billion for the fourth quarter fiscal year 2008. Management expects fourth quarter fiscal year 2008 earnings to be in the range of $0.79 to $0.83 per share. The above EPS guidance does not include the amortization of intangible assets or integration charges related to acquisitions that have closed or will close in the June quarter and restructuring charges, which will be offset by the previously announced gain on the sale of the Company's interest in Calence LLC.
Forward Looking Statements
This press release contains certain "forward-looking statements" within the meaning of Sec-tion 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Ex-change Act of 1934, as amended. These statements are based on management's current expectations and are subject to uncertainty and changes in facts and circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as "will," "anticipate," "expect," be-lieve," and "should," and other words and terms of similar meaning in connection with any discussions of future operating or financial performance or business prospects. Actual results may vary materially from the expectations contained in the forward-looking state-ments.
The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: the Company's ability to retain and grow market share and to generate additional cash flow, risks associated with any acquisition activities and the successful integration of acquired companies, any significant and unanticipated sales decline, changes in business conditions and the economy in general, changes in market demand and pricing pressures, any material changes in the allocation of product or product rebates by suppliers, allocations of products by suppliers, other com-petitive and/or regulatory factors affecting the businesses of Avnet generally.
More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K, Form 10-Q and Form 8-K. Avnet is under no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles ("GAAP"), the Company also discloses in this press release certain non-GAAP financial information including adjusted operating income, adjusted net income and adjusted diluted earnings per share. The Company also discloses revenue ad-justed for the impact of acquisitions and the change to net revenue accounting treatment of sales of supplier service contracts ("pro forma revenue" or "organic revenue"). Management believes pro forma revenue is a useful measure for evaluating current period performance as compared with prior periods and understanding underlying trends.
Management believes that operating income adjusted for restructuring, integration and other charges is a useful measure to help investors better assess and understand the Company's operating performance, especially when comparing results with previous periods or forecast-ing performance for future periods, primarily because management views the excluded items to be outside of Avnet's normal operating results. Management analyzes operating income without the impact of restructuring, integration and other charges as an indicator of ongoing margin performance and underlying trends in the business. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring per-formance for compensation purposes.
Management believes net income and diluted earnings per share adjusted for the impact of restructuring, integration and other charges is useful to investors because it provides a meas-ure of the Company's net profitability on a more comparable basis to historical periods and provides a more meaningful basis for forecasting future performance. Additionally, because of management's focus on generating shareholder value, of which net profitability is a primary driver, management believes net income and diluted EPS excluding the impact of this item provides an important measure of the Company's net results of operations for the investing public. However, analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
Pro Forma (Organic) Revenue
Pro forma or Organic revenue, is defined as revenue adjusted for (i) the impact of acquisi-tions to include the revenue recorded by these businesses as if the acquisitions had oc-curred at the beginning of fiscal 2007, and (ii) the impact of the classification of sales of supplier service contracts on an agency (net) basis, which was effective beginning in the third quarter of fiscal 2007, as if the net revenue accounting was applied to periods prior to the change. Prior period revenue adjusted for these impacts is presented below:
"Acquisition Revenue" as presented in the table above includes the following acquisitions.
Third Quarter Fiscal 2008 and 2007
The results for the third quarter of fiscal year 2008 and 2007 include restructuring, integration and other items, the mention of which management believes is useful to investors when com-paring operating performance with other periods (in thousands, except per share data).
Cash Flow Activity
The following table summarizes the Company's cash flow activity for the third quarters and first nine months of fiscal 2008 and 2007, including the Company's computation of free cash flow and a reconciliation of this metric to the nearest GAAP measures of net income and net cash flow from operations. Management's computation of free cash flow consists of net cash flow from operations plus cash flows generated from or used for purchases and sales of property, plant and equipment, acquisition and divestiture of operations, effects of exchange rates on cash and cash equivalents and other financing activities. Management believes that the non-GAAP metric of free cash flow is a useful measure to help management and investors better assess and understand the Company's operating performance and sources and uses of cash. Management also believes the analysis of free cash flow assists in identifying underlying trends in the business. Computations of free cash flow may differ from company to company. Therefore, the analysis of free cash flow should be used as a complement to, and in conjunction with, the Company's consolidated statements of cash flows presented in the accompanying financial statements.
Management also analyzes cash flow from operations based upon its three primary compo-nents noted in the table below: net income, non-cash and other reconciling items and cash flow used for working capital. Similar to free cash flow, management believes that this presentation is an important measure to help management and investors better understand the trends in the Company's cash flows, including the impact of management's focus on asset utilization and efficiency through its management of the net balance of receivables, inventories and accounts payable.
Operating income for third quarter fiscal 2008 was $166.8 million, down 3.4% as compared with operating income of $172.6 million in the year-ago quarter. Included in operating income for the current and prior year third quarters are restructuring, integration and other charges totaling $10.9 million and $8.5 million, respectively. Excluding these charges, operating in-come for the third quarter fiscal 2008 was $177.6 million, down 1.9% as compared with oper-ating income of $181.1 million in last year's third quarter. Operating income as a percentage of sales, excluding the charges in both periods, was 4.0% in the current year quarter, down 62 basis points as compared with last year. The charges in the current quarter related to the integration of recently acquired businesses and initial cost reductions required to improve performance at certain business units in the Company's portfolio. Actions taken in the March 2008 quarter will reduce annualized expenses by approximately $15 million. Further targeted actions in the June 2008 quarter are expected to reduce costs by an additional $23 million to $27 million on an annualized basis.
Roy Vallee, Chairman and Chief Executive Officer, commented, "We are extremely disap-pointed with our earnings for the third quarter as both operating groups were below our profit forecast. Our Electronics Marketing Group managed to slightly improve its margins and gen-erated higher returns despite lower-than-expected sales. However, revenue weakness in some business units at Technology Solutions resulted in lower gross profit volume, which was further exacerbated by lower gross margins due primarily to the impact of rebates. This com-bination led to some unacceptable operating margin performances and, as a result, we have begun to take targeted corrective actions. We remain steadfastly committed to achieving our long-term margin and return goals."
Operating Group Results
Electronics Marketing (EM) sales of $2.62 billion in the third quarter fiscal 2008 were up 7.3% year over year on a reported basis and up 2.5% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EM revenue increased 5.0% year over year. EM sales in the Americas, EMEA and Asia regions increased 4.3%, 6.6% and 13.0%, respectively, year over year on a reported basis with EMEA's revenue down 6.0% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EM sales in EMEA and Asia in the third quarter fiscal 2008 increased 4.6% and 6.6%, respectively, as compared with last year. EM operating income of $153.5 million for third quarter fiscal 2008 was up 8.4% over the prior year third quarter operating income of $141.6 million and operating income margin of 5.9% was up 6 basis points as compared with the prior-year quarter.
Mr. Vallee added, "Even though EM's year-over-year margin expansion was somewhat muted this quarter by a sales decline in constant currency in the EMEA region, diligent working capi-tal management resulted in an increase in working capital velocity both sequentially and year over year, and return on working capital increased 68 basis points over the prior year third quarter."
Technology Solutions (TS) sales of $1.80 billion in the third quarter fiscal 2008 were up 23.2% year over year on a reported basis and up 18.3% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, TS revenue increased 10.2%. On a reported basis, third quarter fiscal 2008 sales in the Americas, EMEA and Asia were up 2.9%, 72.4%, and 78.9%, respectively, year over year with EMEA's revenue up 53.9% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA and Asia third quarter fiscal 2008 sales increased by 21.4% and 32.4%, respec-tively, on a year over year basis. TS operating income was $41.3 million in the third quarter fiscal 2008, a 31.7% decrease as compared with third quarter fiscal 2007 operating income of $60.6 million, and operating income margin of 2.3% decreased by 185 basis points over the prior year third quarter.
Mr. Vallee further added, "Technology Solutions experienced a confluence of negative events towards the end of the March quarter. In the Americas, we realized much lower-than-expected revenues in one large business unit, lackluster sales in some other key products and lower gross margins due primarily to rebate issues contributing to a substantial operating profit shortfall. In EMEA, lower than expected sales in local currencies combined with signifi-cant changes made by a major IT supplier in its rebate programs for the quarter had a materi-al negative impact on our gross profit. Also, the weaker than expected environment in Europe has caused us to fall behind our financial plans for this region We are taking targeted correc-tive actions in both regions to adjust the cost structure at the affected business units and, in cooperation with our supplier partners, many of our quarterly rebate goals have already been reset for the June quarter, including the previously mentioned major supplier program change in EMEA."
Cash Flow
During the third quarter of fiscal 2008, the Company produced cash flow from operations of $156.4 million and on a rolling four quarter basis generated $497.5 million. As a result, the Company ended the quarter with $381.5 million of cash and cash equivalents and net debt (total debt less cash and cash equivalents) of $847.2 million.
Ray Sadowski, Chief Financial Officer, stated, "We had another strong quarter of cash flow generation which, when combined with our strong balance sheet, provides us with the finan-cial flexibility to take advantage of value creating acquisition opportunities. This is ex-emplified by the recently announced transaction to acquire Horizon Technology Group plc which is expected to be accretive to earnings by approximately $0.10 per share in fiscal 2009."
Outlook
For Avnet's fourth quarter fiscal year 2008, management expects normal seasonality at EM with anticipated sales to be in the range of $2.60 billion to $2.70 billion and sales for TS to be slightly below normal seasonality with sales between $1.95 billion and $2.05 billion. There-fore, Avnet's consolidated sales are forecasted to be between $4.55 billion and $4.75 billion for the fourth quarter fiscal year 2008. Management expects fourth quarter fiscal year 2008 earnings to be in the range of $0.79 to $0.83 per share. The above EPS guidance does not include the amortization of intangible assets or integration charges related to acquisitions that have closed or will close in the June quarter and restructuring charges, which will be offset by the previously announced gain on the sale of the Company's interest in Calence LLC.
Forward Looking Statements
This press release contains certain "forward-looking statements" within the meaning of Sec-tion 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Ex-change Act of 1934, as amended. These statements are based on management's current expectations and are subject to uncertainty and changes in facts and circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as "will," "anticipate," "expect," be-lieve," and "should," and other words and terms of similar meaning in connection with any discussions of future operating or financial performance or business prospects. Actual results may vary materially from the expectations contained in the forward-looking state-ments.
The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: the Company's ability to retain and grow market share and to generate additional cash flow, risks associated with any acquisition activities and the successful integration of acquired companies, any significant and unanticipated sales decline, changes in business conditions and the economy in general, changes in market demand and pricing pressures, any material changes in the allocation of product or product rebates by suppliers, allocations of products by suppliers, other com-petitive and/or regulatory factors affecting the businesses of Avnet generally.
More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K, Form 10-Q and Form 8-K. Avnet is under no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles ("GAAP"), the Company also discloses in this press release certain non-GAAP financial information including adjusted operating income, adjusted net income and adjusted diluted earnings per share. The Company also discloses revenue ad-justed for the impact of acquisitions and the change to net revenue accounting treatment of sales of supplier service contracts ("pro forma revenue" or "organic revenue"). Management believes pro forma revenue is a useful measure for evaluating current period performance as compared with prior periods and understanding underlying trends.
Management believes that operating income adjusted for restructuring, integration and other charges is a useful measure to help investors better assess and understand the Company's operating performance, especially when comparing results with previous periods or forecast-ing performance for future periods, primarily because management views the excluded items to be outside of Avnet's normal operating results. Management analyzes operating income without the impact of restructuring, integration and other charges as an indicator of ongoing margin performance and underlying trends in the business. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring per-formance for compensation purposes.
Management believes net income and diluted earnings per share adjusted for the impact of restructuring, integration and other charges is useful to investors because it provides a meas-ure of the Company's net profitability on a more comparable basis to historical periods and provides a more meaningful basis for forecasting future performance. Additionally, because of management's focus on generating shareholder value, of which net profitability is a primary driver, management believes net income and diluted EPS excluding the impact of this item provides an important measure of the Company's net results of operations for the investing public. However, analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
Pro Forma (Organic) Revenue
Pro forma or Organic revenue, is defined as revenue adjusted for (i) the impact of acquisi-tions to include the revenue recorded by these businesses as if the acquisitions had oc-curred at the beginning of fiscal 2007, and (ii) the impact of the classification of sales of supplier service contracts on an agency (net) basis, which was effective beginning in the third quarter of fiscal 2007, as if the net revenue accounting was applied to periods prior to the change. Prior period revenue adjusted for these impacts is presented below:
"Acquisition Revenue" as presented in the table above includes the following acquisitions.
Third Quarter Fiscal 2008 and 2007
The results for the third quarter of fiscal year 2008 and 2007 include restructuring, integration and other items, the mention of which management believes is useful to investors when com-paring operating performance with other periods (in thousands, except per share data).
Cash Flow Activity
The following table summarizes the Company's cash flow activity for the third quarters and first nine months of fiscal 2008 and 2007, including the Company's computation of free cash flow and a reconciliation of this metric to the nearest GAAP measures of net income and net cash flow from operations. Management's computation of free cash flow consists of net cash flow from operations plus cash flows generated from or used for purchases and sales of property, plant and equipment, acquisition and divestiture of operations, effects of exchange rates on cash and cash equivalents and other financing activities. Management believes that the non-GAAP metric of free cash flow is a useful measure to help management and investors better assess and understand the Company's operating performance and sources and uses of cash. Management also believes the analysis of free cash flow assists in identifying underlying trends in the business. Computations of free cash flow may differ from company to company. Therefore, the analysis of free cash flow should be used as a complement to, and in conjunction with, the Company's consolidated statements of cash flows presented in the accompanying financial statements.
Management also analyzes cash flow from operations based upon its three primary compo-nents noted in the table below: net income, non-cash and other reconciling items and cash flow used for working capital. Similar to free cash flow, management believes that this presentation is an important measure to help management and investors better understand the trends in the Company's cash flows, including the impact of management's focus on asset utilization and efficiency through its management of the net balance of receivables, inventories and accounts payable.
