Avnet, Inc. Reports Fourth Quarter Fiscal Year 2011 Results
Record Revenue and EPS; Strong Cash Flow Announces $500 Million Share Repurchase
Phoenix, August 10, 2011 - Avnet, Inc. (NYSE:AVT) today announced results for the fourth quarter and fiscal year ended July 2, 2011.
- Sales for the fiscal year ended July 2, 2011 increased 38.5% over the prior fiscal year to a record $26.5 billion; pro forma revenue (as defined later in this release) was up 17.1% year over year
- Adjusted operating income increased 52.4% to over $1 billion and 3.8% of sales
- Adjusted diluted earnings per share of $4.32 increased 56% year over year; GAAP diluted earnings per share were $4.34, up 61.9% year over year
Rick Hamada, Chief Executive Officer, commented, "We began our fiscal year with three significant value-creating acquisitions that expanded our global footprint in higher growth markets and increased our customer base and franchised supplier line card. These investments, combined with double-digit, year-over-year organic growth, added over $7 billion to our top-line. Adjusted operating income grew 1.4 times faster than revenue to over $1 billion, driven by operating leverage and acquisition synergies. As a result, return on capital employed (ROCE) improved 76 basis points year over year to 15.4%, which is within our target range of 14%-16% for the full fiscal year. Based on this record financial performance, our historical run rate of investments in acquisitions, our strong balance sheet and the current valuation of our stock, Avnet's Board of Directors has determined that it is an appropriate time to authorize a $500 million share buyback program. As we begin fiscal 2012, we are comfortable that we have adequate liquidity to continue to grow shareholder value by investing in organic growth and value-creating M&A while opportunistically returning cash to shareholders through a buyback program."
- Sales for the quarter ended July 2, 2011 increased 32.6% year over year, to a record $6.91 billion; pro forma revenue was up 13.5% year over year and 8.5% in constant currency
- Adjusted operating income increased year over year and sequentially every quarter in fiscal 2011, and was up almost 25% year over year in the fourth quarter, to $270.9 million or 3.9% of sales
- The effective tax rate for the fourth quarter was positively impacted by a net tax benefit of $52.7 million, or $0.34 per share on a diluted basis, primarily related to the release of valuation reserves on deferred tax assets as described later in this press release
- Adjusted diluted earnings per share was $1.22 setting a record for the fifth consecutive quarter
- ROCE was 15.6% and remained within our target range of 14% to 16% for the seventh consecutive quarter
Mr. Hamada, continued, "The Avnet team closed out the fiscal year with another quarter of record-breaking results. Revenue for the fourth quarter increased 32.6% year over year in reported dollars to a record $6.91 billion while pro forma revenue increased 13.5%. Gross profit margin increased sequentially for the second quarter in a row as we continue applying our value-based management (VBM) discipline to newly acquired businesses along with continued improvement in the western regions. This strong performance resulted in our fifth consecutive quarter of return on capital employed (ROCE) above 15% and our fifth consecutive quarter of record-breaking adjusted diluted earnings per share. While it appears that the global economic recovery may be slowing, the technology markets we serve continue to lead the recovery and we are vigilantly monitoring customer and supplier input as we enter the second half of the calendar year. As we begin fiscal 2012, we are committed to building on the momentum from fiscal 2011 as we move beyond the major integrations in fiscal 2011 and start to capitalize on the expanded profitable growth opportunities in both operating groups."
- Record sales of $3.96 billion were up 26.8% year over year and up 21.3% in constant currency
- Operating income margin increased 105 basis points to 5.5% for the full fiscal year and increased 30 basis points, year over year, to 5.9% for the fourth quarter
- Full fiscal year operating income grew 1.8 times faster than sales to $832 million
- Full fiscal year return on working capital (ROWC) increased 460 basis points and was above Avnet's stated goal of 30%
Mr. Hamada added, "EM closed the fiscal year with a strong fourth quarter as gross profit margin, operating income margin and economic profit dollars increased both sequentially and year over year. Revenue grew 26.8% year over year to $3.96 billion, which represented the seventh consecutive quarter of double-digit growth. Pro forma revenue growth was 11.8% year over year with both EMEA and Asia, excluding Japan, delivering double-digit organic growth. As concerns over supply chain disruptions related to the national disasters in Japan have dissipated and lead times have come in, our book to bill ratio dropped below one in the June quarter for the first time in nine quarters. It appears the concerns over slowing economic growth and more normalized lead times are influencing customers to be cautious placing new orders. With operating margins at the high end of our target range and ROWC above our goal, we expect EM to continue to solidly grow economic profit."
- Reported revenue grew 41.2% and pro forma revenue grew 15.8%
- Industry standard servers (ISS), storage and software all grew over 60% year over year
- Operating income increased 18% sequentially to $67.5 million
- Operating income margin increased 20 basis points sequentially to 2.3%
Mr. Hamada further added, "Although sequential growth was at the high end of typical seasonality, stronger growth in Asia and the Americas was offset by continuing sluggish growth in EMEA. While ISS and storage continue to be the biggest drivers of year-over-year growth, we also saw double-digit, year-over-year growth in software, networking and services. Operating income dollars increased 18% sequentially to $68 million and operating profit margin improved 20 basis points to 2.3% with all three regions contributing to the improvement. While operating income margin was down year over year due primarily to the impact of acquisitions, TS Asia operating margin increased year over year for the third consecutive quarter. While multiple integrations and a tepid recovery in Europe presented unique challenges in fiscal 2011, the entire TS team stayed focused on profitable growth and we are confident that as we enter fiscal 2012, we are poised to continue improving our financial performance across the portfolio."
- Cash flow from operations was $281 million for the quarter due to strong growth in profits and improved working capital velocity
- Cash flow from operations for the full fiscal year was $278 million, inclusive of our investments in working capital to support strong pro forma sales growth of 17%
- The Board of Directors authorized a $500 million share repurchase program
- Cash and cash equivalents at the end of the quarter was $675 million; net debt (total debt less cash and cash equivalents) was $841 million
Ray Sadowski, Chief Financial Officer, stated, "As year-over-year growth rates slowed through fiscal 2011 after the strong V-shaped recovery, we generated significant cash flow from operations of $470 million in the second half of the fiscal year. Given the expectation for more moderate growth rates, the significant increase in Avnet's business and our ability to consistently deliver returns within our target range, we expect to generate higher cash flow from operations than pre-recession levels. Consistent with our long-standing capital allocation strategy, this expectation of higher cash flow generation coupled with our strong liquidity position and the current valuation of our stock has led Avnet's Board of Directors to approve a $500 million share repurchase program."
Outlook For 1st Quarter of Fiscal 2012 Ending on October 1, 2011
- EM sales are expected to be in the range of $3.75 billion to $4.05 billion and TS sales are expected to be between $2.50 billion and $2.80 billion
- Reflected in the operating groups revenue guidance is an internal move of the Latin America computing components business from TS to EM, which occurred at the beginning of fiscal 2012
- Consolidated sales are forecasted to be between $6.25 billion and $6.85 billion
- Adjusted diluted earnings per share ("EPS") is expected to be in the range of $0.90 to $0.98 per share
- The EPS guidance assumes no share repurchases, a typical sequential SG&A increase for stock based compensation and a tax rate of 29% to 31%
The above EPS guidance does not include any potential restructuring charges or any charges related to acquisitions and post-closing integration activities. In addition, the above guidance assumes that the average Euro to U.S. Dollar currency exchange rate for the first quarter of fiscal 2012 is $1.44 to €1.00. This compares with an average exchange rate of $1.29 to €1.00 in the first quarter of fiscal 2011 and $1.44 to €1.00 in the fourth quarter of fiscal 2011.
Share Repurchase Program
The Board of Directors has approved the repurchase of up to an aggregate of $500 million of shares of the Company's common stock through a share repurchase program. The Company plans to repurchase stock from time to time at the discretion of management in open market or privately negotiated transactions or otherwise, subject to applicable laws, regulations and approvals, strategic considerations, market conditions and other factors. The Company may terminate or limit the stock repurchase program at any time without prior notice.
Forward Looking Statements
This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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," believe," and "should," and other words and terms of similar meaning in connection with any discussions of future operating or financial performance, business prospects or market conditions. Actual results may vary materially from the expectations contained in the forward-looking statements.
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, declines in sales, 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 competitive 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. Except as required by law, 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 in the United States ("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, as well as revenue adjusted for the impact of acquisitions and other items (as defined in the Pro forma (Organic) Revenue section of this release). Management believes pro forma revenue is a useful measure for evaluating current period performance as compared with prior periods and for understanding underlying trends.
Management believes that operating income adjusted for restructuring, integration and other items is a useful measure to help investors better assess and understand the Company's operating performance, especially when comparing results with previous periods or forecasting 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 these items 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 performance for compensation purposes.
Management believes net income and EPS adjusted for the impact of the items described above is useful to investors because it provides a measure 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 EPS excluding the impact of these items provides an important measure of the Company's net results of operations for the investing public.
Other metrics management monitors in its assessment of business performance include return on working capital (ROWC), return on capital employed (ROCE) and working capital velocity (WC velocity).
- ROWC is defined as annualized operating income, excluding restructuring, integration and other items, divided by the sum of the monthly average balances of receivables and inventory less accounts payable.
- ROCE is defined as annualized tax affected operating income, excluding restructuring, integration and other items, divided by the monthly average balances of interest-bearing debt and equity (including the impact of restructuring, integration, impairment charges and other items) less cash and cash equivalents ("average capital").
- WC velocity is defined as annualized sales divided by the sum of the monthly average balances of accounts receivable and inventory less accounts payable.
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.
Items impacting the fourth quarter of 2011 consisted of the following (see the Notes to Consolidated Statements of Operations later in this release for further discussion):
- restructuring, integration and other charges of $7.3 million pre-tax related to the integration of businesses acquired;
- a credit of $3.6 million pre-tax related to the reversal of restructuring and purchase accounting reserves established in prior years; and
- a net tax benefit of $52.7 million related primarily to the release of tax reserves against deferred tax assets that were determined to be realizable during the fourth quarter of fiscal 2011.
Items impacting the fiscal year 2011 consisted of the following (see the Notes to Consolidated Statements of Operations later in this release for further discussion):
- restructuring, integration and other charges of $88.4 million pre-tax related to the acquisition and integration of businesses acquired during fiscal 2011;
- a credit of $11.3 million pre-tax related to the reversal of restructuring and purchase accounting reserves established in prior years;
- a gain on bargain purchase and other of $22.7 million pre-tax related primarily to the acquisition of a business in Japan; and
- a net tax benefit of $32.9 million related primarily to the release of tax reserves against deferred tax assets that were determined to be realizable and, to a lesser extent, net favorable audit settlements, partially offset by changes to existing tax positions.
Items impacting the full fiscal year 2010 consisted of the following (see the Notes to Consolidated Statements of Operations later in this release for further discussion):
- restructuring, integration and other charges of $25.4 million pre-tax, of which $18.9 million pre-tax related to the Company's previously announced cost reduction actions and integration of businesses, $6.5 million pre-tax for a value-added tax exposure in Europe, $3.2 million of acquisition-related costs and a credit of $3.2 million related to the reversal of restructuring reserves established in prior periods;
- a gain of $8.8 million pre-tax associated with the prior sale of its equity investment in Calence LLC; and
- a net increase in taxes of $0.8 million related to adjustments for prior year tax returns and additional tax reserves, net of a benefit from a favorable income tax audit settlement.
Pro Forma (Organic) Revenue
Pro forma or Organic revenue is defined as reported revenue 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 fiscal 2010; (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; (iii) the impact of the extra week of sales in the prior year first quarter due to the "52/53 week" fiscal year; and (iv) the impact of the transfer of the existing embedded business from TS Americas to EM Americas that occurred in the first quarter of fiscal 2011, which did not have an impact to Avnet on a consolidated basis but did impact the pro forma sales for the groups by $98 million in the fourth quarter of fiscal 2010. Sales taking into account the combination of these adjustments is referred to as "pro forma sales" or "organic sales".
"Acquisition Revenue" as presented in the preceding table includes the acquisitions listed below. The preceding table also reflects the divestiture of New ProSys Corp. which occurred in January 2011.
Teleconference Webcast and Upcoming Events
Avnet will host a Webcast of its quarterly teleconference today at 2:00 p.m. Eastern Time. The live Webcast event, as well as other financial information including financial statement reconciliations of GAAP and non-GAAP financial measures, will be available through www.ir.avnet.com. Please log onto the site 15 minutes prior to the start of the event to register or download any necessary software. An archive copy of the presentation will also be available after the Webcast.
For a listing of Avnet's upcoming events and other information, please visit Avnet's investor relations website at www.ir.avnet.com.
Avnet, Inc. (NYSE:AVT), a Fortune 500 Company, is one of the largest distributors of electronic components, computer products and embedded technology serving customers in more than 70 countries worldwide. Avnet accelerates its partners' success by connecting the world's leading technology suppliers with a broad base of more than 100,000 customers by providing cost-effective, value-added services and solutions. For the fiscal year ended July 2, 2011, Avnet generated revenue of $26.5 billion. For more information, visit www.avnet.com. (AVT_IR)
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS
FOURTH QUARTER AND FISCAL YEAR 2011
(1)The results for the fourth quarter of fiscal 2011 included restructuring, integration and other charges which totaled $7,297,000 pre-tax, $5,812,000 after tax and $0.04 per share on a diluted basis and were incurred primarily in connection with the acquisitions and integrations of acquired businesses. The charges included restructuring charges consisting of severance of $5,223,000 pre-tax and facility exit related costs, fixed asset write downs and related costs of $1,071,000 pre-tax which were incurred primarily as a result of the integration activities associated with the acquisitions. Integration costs of $1,003,000 pre-tax included professional fees associated with legal and IT consulting, facility moving costs, travel, meeting, marketing and communication costs that were incrementally incurred as a result of the integration activity. The Company also recorded a credit of $3,573,000 pre-tax related to (i) the reversal of restructuring reserves established in prior years that were determined to be no longer required and (ii) the reversal of exit-related reserves originally established through goodwill in prior year which were determined to be no longer required and were credited to restructuring, integration and other charges because the associated goodwill was impaired in fiscal 2009.
Results for the full fiscal year 2011 included restructuring, integration and other charges which totaled $88,428,000 pre-tax, $63,838,000 after tax and $0.41 per share on a diluted basis and consisted of $28,584,000 pre-tax for severance, $17,331,000 pre-tax for facilities related costs, fixed asset write downs and related costs, $25,068,000 pre-tax for integration costs, $15,597,000 pre-tax for transactions costs associated with acquisitions and $1,848,000 of other charges. Integration costs included incremental salary and associated employee benefit costs, primarily of 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 business' 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 primarily of broker fees, professional fees for legal and accounting due diligence and related costs. In addition, the Company recorded a credit of $11,252,000 pre-tax, $7,669,000 after tax and $0.05 per share on a diluted basis primarily related to the reversal of restructuring reserves established in prior years, the reversal of exit-related reserves established through goodwill (as discussed above) and the release of liabilities associated with a prior acquisition.
Results for the full fiscal year 2010 included restructuring, integration and other charges which totaled $25,419,000 pre-tax, $18,789,000 after tax and $0.12 per share on a diluted basis. Restructuring costs of $15,991,000 pre-tax related to the remaining cost reductions that began in fiscal 2009 and consisted of severance, facility exit costs and fixed asset write-downs associated with the exited facilities. The Company also recognized $2,931,000 of integration costs associated with acquired businesses, $6,477,000 pre-tax for a value-added tax exposure in Europe related to an audit of prior years, $3,261,000 of other charges including acquisition-related costs and a credit of $3,241,000 related to the reversal of restructuring reserves established in prior periods.
(2) The Company recognized a gain on the sale of assets amounting to $8,751,000 pre-tax, $5,370,000 after tax and $0.03 per share on a diluted basis for the full fiscal year 2010 as a result of certain earn-out provisions associated with the sale of the Company's prior equity investment in Calence LLC.
(3) During fiscal 2011, the Company recognized a gain on bargain purchase and other of $22,715,000 pre-tax, $25,720,000 after tax and $0.17 per share on a diluted basis. During the first quarter of fiscal 2011, the Company acquired Unidux, Inc., a Japanese publicly traded electronics component distributor, through a tender offer. Even though the purchase price per share offered by Avnet, Inc. was below book value, it represented a premium to the trading levels at that time and 95% of the Unidux shareholders tendered their shares. After evaluating 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 $30,990,000 pre- and after tax, and $0.20 per share on a diluted basis. In addition, the Company recognized other charges of $8,275,000 pre-tax, $5,271,000 after tax and $0.03 per share on a diluted basis primarily related to a loss on investments of $6,308,000 pre-tax and the write down of $1,967,000 pre-tax related to two buildings in EMEA.
(4) During fiscal 2011, the Company's effective tax rate was impacted by the release of a tax reserve (valuation allowance) on certain deferred tax assets that were determined to be realizable as discussed further below, and, to a lesser extent, net favorable tax audit settlements, partially offset by changes to existing tax positions. The net tax benefit for the fourth quarter was $52,726,000 and $0.34 per share on a diluted basis and $32,901,000 and $0.21 per share on a diluted basis for the full fiscal year.
Prior to fiscal 2011, the Company had a full reserve against significant tax assets related to a legal entity in EMEA due to, among several other factors, a history of losses in that entity. Recently, the legal entity has been experiencing improved earnings which has required the partial release of the reserve to the extent the entity had taxable income during each of the first three quarters of fiscal 2011 and, therefore, positively impacted (decreased) the Company's effective tax rate. During the fourth quarter of fiscal 2011, the Company determined a portion of the tax reserve related to this entity was no longer required due to the expected continuation of improved earnings in the future and, as a result, the Company's effective tax rate was positively impacted (decreased) upon the release of the tax reserve. The Company will continue to evaluate the need for a reserve against the tax assets associated with this legal entity and may release additional reserves in the future.
Investor Relations Contact: