Press release
Counter Cyclical Balance Sheet Delivers Strong Cash Flow
Avnet, Inc. (NYSE:AVT) today reported revenue of $4.27 billion for second quarter fiscal 2009 ended December 27, 2008, representing a decrease of 10.2% over second quarter fiscal 2008 and 6.4% excluding the impact of changes in foreign currency exchange rates. On a pro forma (organic) basis, as defined in the Non-GAAP Financial Information Section, revenue was down 14.9% over the prior year second quarter. Net income for second quarter fiscal 2009 was $112.3 million, or $0.75 per share on a diluted basis, as compared with net income of $142.2 million, or $0.93 per share on a diluted basis, for the second quarter last year. Excluding certain items in both periods as noted below, net income for the current year second quarter was $95.0 million, or $0.63 per share on a diluted basis, as compared with prior year net income of $135.9 million, or $0.89 per share on a diluted basis.
Operating income for second quarter fiscal 2009 was $140.1 million, down 32.6% as compared with operating income of $207.9 million in the year-ago quarter. Included in "Selling, general and administrative expenses" are restructuring, integration and other items amounting to $13.1 million pre-tax, $10.0 million after tax and $0.06 per share on a diluted basis as more fully described in the Non-GAAP Financial Information section of this release. Excluding these items in the current period, operating income for the second quarter fiscal 2009 was $153.2 million, down 26.3% as compared with the prior year second quarter. Operating income as a percentage of sales, excluding the items noted above, was 3.6% in the current year quarter as compared with 4.4% last year. The Company also recorded a net tax benefit of $27.3 million, or $0.18 per share on a diluted basis, primarily related to the settlement of income tax audits in Europe.
Roy Vallee, Chairman and Chief Executive Officer, commented, "Our second fiscal quarter was unusually challenging as demand weakened through the quarter culminating with lower-than-expected revenue in the month of December. This slowdown was widespread as all three regions and both operating groups contributed to a double digit year-over-year organic revenue decline for the quarter. Based on these results and our expectation of continued market weakness over the next few quarters, we have initiated additional cost reductions of $50 million in annualized savings and are expected to be fully implemented by the end of our fiscal year. We continue to actively manage costs and working capital to keep our P+L and balance sheet aligned with market realities. Our value-based management culture and counter cyclical balance sheet, coupled with our industry leading scale and scope, should allow us to gain market share during this downturn and emerge an even stronger company when growth returns."
Operating Group Results
Electronics Marketing (EM) sales of $2.27 billion in the second quarter fiscal 2009 were down 8.5% year over year on a reported basis and down 5.6% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EM revenue decreased 12.0% year over year. EM sales in the Americas, EMEA and Asia regions decreased 6.9%, 13.0% and 5.6%, respectively, year over year on a reported basis. Excluding the impact of changes in foreign currency exchange rates, revenue in the EMEA region was down 3.5% year over year. On a pro forma basis, EM sales in the Americas, EMEA and Asia in the second quarter fiscal 2009 decreased 8.9%, 16.1% and 11.1%, respectively, as compared with the year ago quarter. EM operating income of $99.1 million for second quarter fiscal 2009 was down 21.7% over the prior year second quarter's operating income of $126.6 million and operating income margin of 4.4% was down 74 basis points as compared with the prior year quarter.
Mr. Vallee added, "We knew demand was slowing going into the December quarter, but the rapid change in momentum was beyond our expectations as the electronics supply chain reacted with unprecedented speed to reduce inventories and backlog. Deceleration in our Asia business in November caused us to lower expectations and a weaker-than-expected month of December in the Americas resulted in EM revenue finishing at the low end of our expectations. This weakness in our more profitable Americas region was a major contributor to the year-over-year decline in operating income dollars and margin. Some of the additional cost actions announced in this release have already been taken within our EM operating group and additional actions to adjust expenses and working capital will be taken over the next couple of quarters."
Technology Solutions (TS) sales of $2.00 billion in the second quarter fiscal 2009 were down 12.0% year over year on a reported basis and down 7.3% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, TS revenue was down 18.0% year over year. On a reported basis, second quarter fiscal 2009 sales in Americas, EMEA and Asia were down 12.5%, 8.1% and 26.2%, respectively, year over year. EMEA revenue was up 5.2% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, the second quarter fiscal 2009 sales in the Americas, EMEA and Asia declined by 12.5%, 25.2% and 29.3%, respectively, year over year. TS operating income was $66.9 million in the second quarter fiscal 2009, a 32.7% decrease as compared with second quarter fiscal 2008 operating income of $99.4 million, and operating income margin of 3.3% decreased by 103 basis points versus the prior year second quarter.
Mr. Vallee further added, "Technology Solutions experienced a below normal calendar year-end surge as revenue finished at the low end of expectations due primarily to a weaker-than-expected final week in the Americas region. Similar to EM, the shortfall in the more profitable Americas region negatively impacted profit volume and margins. Therefore, we are taking more cost reduction actions in the TS business to continue aligning our cost structure to expected revenues. We are pleased with our progress this quarter in EMEA where previously announced restructuring and the addition of Horizon Technology are having the expected positive impact on performance."
Cash Flow
During the second quarter of fiscal 2009, the Company generated $320 million of cash from operations and on a rolling four quarter basis generated $728 million. As a result, the Company ended the quarter with $671 million of cash and cash equivalents and net debt (total debt less cash and cash equivalents) of $550 million.
Ray Sadowski, Chief Financial Officer, stated, "We were able to further strengthen our liquidity position with the generation of significant cash flow during the quarter. Our balance sheet continues to be the strongest it has been in years. Regarding our profitability, we continue to monitor the global economic slowdown and are taking appropriate corrective actions as needed. Our long term goals have not changed and we remain committed to creating shareholder value for the long term."
Outlook
For Avnet's third quarter fiscal year 2009, management expects less-than-normal seasonality at both EM and TS and is providing a wider range of forecasts due to the unpredictable nature of the current economic environment. EM sales are anticipated to be in the range of $2.15 billion to $2.45 billion and sales for TS are expected to be between $1.45 billion and $1.75 billion. Therefore, Avnet's consolidated sales are forecasted to be between $3.60 billion and $4.20 billion for the third quarter fiscal year 2009. Management expects third quarter fiscal year 2009 earnings to be in the range of $0.45 to $0.53 per share. The above EPS guidance does not include anticipated restructuring and integration charges related to the cost reductions noted earlier in this release and the integration of businesses acquired. In addition, the above guidance assumes that the average Euro to U.S. Dollar currency exchange rate for the third fiscal quarter of the current fiscal year is $1.30 to €1.00. This compares with an average exchange rate of $1.49 to €1.00 in the third quarter of fiscal 2008.
While management currently does not believe that the current recessionary environment will have a long term material impact on the Company's business and its ability to reach its long-term goals, a prolonged economic downturn and deteriorating business conditions may result in the impairment of the book value of the goodwill. However, the drop of the Company's stock price since September 2008, although inline with the decrease of the overall market downturn in percentage terms, has resulted in a market capitalization that is significantly smaller as compared with the end of the Company's last fiscal year. As a result, the Company is continuing to evaluate the necessity of an impairment of goodwill which could result in a non-cash charge.
