SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
.........................................
FORM 10-Q
.........................................
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1999
........................................
Commission File #1-4224
AVNET, INC.
Incorporated in New York
........................................
IRS Employer Identification No. 11-1890605
2211 South 47th Street, Phoenix, Arizona 85034
(480) 643-2000
.......................................
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The total number of shares outstanding of the registrant's Common Stock (net of
treasury shares) as of October 29, 1999 - 41,944,647 shares.
<PAGE>
AVNET, INC. AND SUBSIDIARIES
INDEX
Page
No.
Forward-Looking Statements................................................3
Part I. Financial Information
Item 1.Financial Statements
Consolidated Balance Sheets
October 1, 1999 and July 2, 1999..........................4
Consolidated Statements of Income - First Quarters
Ended October 1, 1999 and October 2, 1998.................5
Consolidated Statements of Cash Flows - First Quarters
Ended October 1, 1999 and October 2, 1998.................6
Notes to Consolidated Financial Statements............7 - 9
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations ................10 - 16
Item 3.Quantitative and Qualitative Disclosures About
Market Risk .............................................17
Part II. Other Information:
Item 6.Exhibits and Reports on Form 8-K.........................17
Signature Page .........................................................18
<PAGE>
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial
condition, results of operations and business of Avnet, Inc. ("Avnet" or the
"Company"). You can find many of these statements by looking for words like
"believes," "expects," "anticipates," "estimates" or similar expressions in this
report or in documents incorporated by reference in this report.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by the forward-looking statements include, among others,
the following:
o Competitive pressures in the industry may increase significantly through
industry consolidation, entry of new competitors or otherwise.
o General economic or business conditions, domestic and foreign, may be less
favorable than expected, resulting in lower sales than expected.
o Costs or difficulties related to the integration of newly-acquired
businesses may be greater than expected.
o Possible loss of customers or suppliers as a result of the merger of Avnet
with newly-acquired businesses.
o Legislative or regulatory changes may adversely affect the businesses in
which Avnet is engaged.
o Adverse changes may occur in the securities markets.
o Changes in interest rates and currency fluctuations may reduce profit
margins.
o Possible allocation of products by suppliers.
Because forward-looking statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by them.
You are cautioned not to place undue reliance on these statements, which speak
only as of the date of this report.
Avnet does not undertake any obligation to release publicly any revisions to
any forward-looking statements to reflect events or circumstances after the date
of this report to reflect the occurrence of unanticipated events.
<PAGE>
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
October 1, July 2,
1999 1999
(unaudited) (audited)
Assets:
Current assets:
Cash and cash equivalents............................$ 92,850 $ 311,982
Receivables, less allowances of $25,727 and
$27,626, respectively.............................. 1,048,937 960,639
Inventories (Note 3)................................. 1,144,668 997,247
Other................................................ 55,493 43,455
---------- ------------
Total current assets............................... 2,341,948 2,313,323
Property, plant & equipment, net....................... 209,705 194,012
Goodwill, net of accumulated amortization of $63,208
and $60,404, respectively............................ 391,308 385,648
Other assets........................................... 100,738 91,714
---------- ----------
Total assets.......................................$3,043,699 $2,984,697
========== ==========
Liabilities:
Current liabilities:
Borrowings due within one year......................$ 825 $ 288
Accounts payable..................................... 596,904 480,377
Accrued expenses and other........................... 206,964 315,198
--------- ----------
Total current liabilities.......................... 804,693 795,863
Long-term debt, less due within one year............... 818,791 791,226
----------- ----------
Total liabilities.................................. 1,623,484 1,587,089
----------- ----------
Commitments and contingencies (Note 4)
Shareholders' equity (Notes 5 and 6):
Common Stock $1.00 par, authorized 120,000,000
shares, issued 44,439,000 shares and 44,416,000
shares, respectively 44,439 44,416
Additional paid-in capital............................. 436,789 435,930
Retained earnings...................................... 1,513,224 1,496,357
Cumulative translation adjustments..................... (41,165) (46,041)
Treasury stock at cost, 9,225,207 shares and 9,224,599
shares, respectively.................................. (533,072) (533,054)
---------- -----------
Total shareholders' equity......................... 1,420,215 1,397,608
---------- ----------
Total liabilities and shareholders' equity.........$3,043,699 $2,984,697
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
First Quarters Ended
October 1, October 2,
1999 1998
(unaudited) (unaudited)
Sales................................................... $1,654,323 $1,581,603
Cost of sales (Note 7) ................................ 1,423,520 1,349,693
---------- ----------
Gross profit............................................ 230,803 231,910
Selling, shipping, general and administrative
expenses (Note 7) 182,360 190,784
---------- ----------
Operating income........................................ 48,443 41,126
Other income, net....................................... 813 693
Interest expense....................................... (9,866) (13,148)
----------- -----------
Income before income taxes.............................. 39,390 28,671
Income taxes............................................ 17,244 13,013
------------ -----------
Net income..............................................$ 22,146 $ 15,658
=========== ===========
Earnings per share (Note 8):
Basic................................................. $0.63 $0.43
===== =====
Diluted............................................... $0.63 $0.42
===== =====
Shares used to compute earnings per share (Note 8):
Basic................................................. 35,200 36,428
====== ======
Diluted............................................... 35,405 36,956
====== ======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
First Quarters Ended
October 1, October 2,
1999 1998
(unaudited) (unaudited)
Cash flows from operating activities:
Net income............................................$ 22,146 $ 15,658
Non-cash and other reconciling items:
Depreciation and amortization....................... 13,406 12,679
Deferred taxes...................................... 3 (891)
Other, net (Note 7)................................. 2,115 12,676
--------- ----------
37,670 40,122
Changes in (net of effects of businesses acquired):
Receivables....................................... (81,592) 15,847
Inventories....................................... (139,053) (54,985)
Payables, accruals and other, net................. (2,825) 14,831
---------- ----------
Net cash flows (used for) provided from operating
activities (185,800) 15,815
Cash flows from financing activities:
Repurchase of common stock............................ - (915)
Issuance of notes in public offering, net of
issuance costs - 198,603
Proceeds from (payment of) commercial paper and bank
debt, net 17,686 (178,435)
Payment of other debt, net............................ (42) (31)
Cash dividends (Note 9)............................... (5,279) (11,117)
Other, net............................................ 523 -
---------- -----------
Net cash flows provided from financing activities... 12,888 8,105
---------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment............ (24,744) (11,256)
Acquisition of operations (Note 9).................... (21,890) (447)
---------- -----------
Net cash flows used for investing activities........ (46,634) (11,703)
---------- -----------
Effect of exchange rate changes on cash and cash
equivalents 414 929
---------- -----------
Cash and cash equivalents:
- (decrease)/increase............................... (219,132) 13,146
- at beginning of year.............................. 311,982 82,607
---------- -----------
- at end of period..................................$ 92,850 $ 95,753
========== ===========
Additional cash flow information (Note 9)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of October 1, 1999 and July 2, 1999; the
results of operations for the first quarters ended October 1, 1999 and
October 2, 1998; and the cash flows for the first quarters ended October
1, 1999 and October 2, 1998. For further information, refer to the
consolidated financial statements and accompanying footnotes included in
the Company's Annual Report on Form 10-K for the fiscal year ended July
2, 1999.
2. The results of operations for the first quarter ended October 1, 1999 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories: October 1, July 2,
(Thousands) 1999 1999
Finished goods....................................$1,077,732 $ 909,609
Work in process................................... 4,458 5,625
Purchased parts and raw materials................ 62,478 82,013
----------- ------------
$1,144,668 $ 997,247
========== ==========
4. From time to time, the Company may become liable with respect to
pending and threatened litigation, taxes, and environmental and other
matters. The Company has been designated a potentially responsible party
or has had other claims made against it in connection with environmental
clean-ups at several sites. Based upon the information known to date,
management believes that the Company has appropriately reserved for its
share of the costs of the clean-ups and it is not anticipated that any
contingent matters will have a material adverse impact on the Company's
financial condition, liquidity or results of operations.
5. Number of shares of common stock reserved for stock option
and stock incentive programs as of October 1, 1999: ...........$4,977,394
==========
6. Comprehensive income - Effective as of the beginning of fiscal 1999,
the Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
reporting standards designed to measure all of the changes in
shareholders' equity that result from transactions and other economic
events of the period excluding transactions with owners ("Comprehensive
Income"). Comprehensive Income for the Company consists only of net
income and equity foreign currency translation adjustments.
Comprehensive Income for the first quarters of fiscal years 2000 and 1999
was $27,022,000 and $29,033,000, respectively.
<PAGE>
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. During the first quarter of fiscal 2000, the Company recorded
$6,112,000 pre-tax and $3,976,000 after-tax ($0.11 per share on a diluted
basis) of incremental special charges associated with the reorganization
of its Electronics Marketing European operations consisting primarily of
costs related to the consolidation of warehousing operations. The entire
$6,112,000 is included in operating expenses most of which has required
or will require an outflow of cash. These charges include severance,
adjustments of the carrying value of fixed assets, real property lease
terminations and other items.
During the first quarter of fiscal 1999, the Company recorded $26,519,000
pre-tax and $15,740,000 after-tax ($0.43 per share on a diluted basis) of
incremental special charges associated principally with the reorganization
of its Electronics Marketing European sales and marketing activities.
Approximately $18,613,000 of the pre-tax charge was included in operating
expenses, most of which required an outflow of cash, and $7,906,000 was
included in cost of sales, which represented a non-cash write-down. These
charges included severance, inventory reserves required related to supplier
terminations and other items.
8. Earnings per share - The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during
fiscal 1998. Under SFAS 128, basic earnings per share is computed based
on the weighted average number of common shares outstanding and excludes
any potential dilution; diluted earnings per share reflects potential
dilution from the exercise or conversion of securities into common
stock. The number of dilutive securities for the first quarters of
fiscal years 2000 and 1999 amounting to 205,000 shares and 528,000
shares, respectively, relate to stock options and restricted stock
awards.
9. Additional cash flow information:
Other non-cash and other reconciling items primarily includes the provision
for doubtful accounts and certain non-recurring items (see Note 7).
Due to the Company's fiscal calendar and its historical dividend payment
dates, the first quarter of fiscal 1999 contained two quarterly dividend
payments as compared with one payment in the current year's first quarter.
Acquisition of operations in the first quarter of fiscal 2000 includes
primarily the cash expended in connection with (1) an investment in
Questlink Technology Inc., which provides an internet-based resource of
technical information for electronics engineering, (2) the acquisition of
Integrand Solutions, the largest Compaq Computer solutions integrator in
Australia and (3) businesses acquired in prior years. Acquisition of
operations, in the first quarter of fiscal 1999 included primarily a payment
due in connection with a business acquired in fiscal 1998.
Interest and income taxes paid in the first quarters were as follows:
Fiscal Fiscal
(Thousands) ....................................... 2000 1999
-------- --------
Interest........................................... $ 14,826 $14,051
Income taxes........................................$125,531 $ 1,261
<PAGE>
10.Segment information: The company currently consists of two major operating
groups, Electronics Marketing ("EM") and the Computer Marketing Group
("CMG"). EM focuses on the global distribution of value-added services
associated with electronics components and CMG focuses on middle-to-high-end,
value-added computer products distribution and related services.
Quarters Ended
October 1, October 2,
1999 1998
---------- ----------
(Thousands)
Sales:
Electronics Marketing $1,226,053 $1,229,176
Computer Marketing 428,270 352,427
----------- -----------
$1,654,323 $1,581,603
Operating Income:
Electronics Marketing $ 59,280 $ 67,374
Computer Marketing 8,555 13,530
Corporate & Special Charges (19,392) (39,778)
----------- -----------
$ 48,443 $ 41,126
=========== ===========
Assets:
Electronics Marketing $1,864,551 $1,766,156
Computer Marketing 556,863 400,592
Corporate 622,285 648,708
---------- ----------
$3,043,699 $2,815,456
========== ==========
Sales, by geographic area:
Americas $1,253,918 $1,229,214
EMEA 305,250 308,050
Asia/Pacific 95,155 44,339
---------- ----------
$1,654,323 $1,581,603
========== ==========
Assets, by geographic area:
Americas $2,230,160 $2,155,707
EMEA 641,879 568,556
Asia/Pacific 171,660 91,193
---------- ----------
$3,043,699 $2,815,456
========== ==========
11. Subsequent to the end of the first quarter of fiscal year 2000 on October
20, 1999 the Company completed its acquisition of Marshall Industries.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Effective as of the beginning of fiscal 1999, the Company changed its
organizational structure to strengthen its focus on its core businesses and
thereby better meet the needs of both its customers and its suppliers. This
change involved dividing the former Electronic Marketing Group into its two
major lines of business: the distribution of electronic components and the
distribution of computer products. Accordingly, the Company currently consists
of two major operating groups, Electronics Marketing ("EM") and the Computer
Marketing Group ("CMG"). (Through the end of fiscal 1998, these two units
comprised the former Electronic Marketing Group.) EM, which focuses on the
global distribution of and value-added services associated with electronic
components, is comprised of three regional operations -- EM Americas, EM EMEA
(Europe, Middle East and Africa) and EM Asia. CMG, which focuses on middle-to
high-end value-added computer products distribution and related services,
consists of Avnet Computer, Hall-Mark Global Solutions and a number of other
specialty businesses. References below under Results of Operations to "EM" and
"CMG" are to the new group structure. In the first quarter of fiscal 2000, the
Company announced the creation of a third operating group -- Avnet Applied
Computing ("AAC"). AAC, which is being created by carving out certain business
segments from EM and CMG, will begin recording sales and operational activity in
the second quarter of fiscal 2000. Accordingly, this discussion and analysis
will not include any additional reference to AAC.
Results of Operations
Consolidated sales were a record $1.65 billion in the first quarter of fiscal
2000 ended October 1, 1999, up 5% as compared with $1.58 billion in the prior
year period. Due to the Company's fiscal calendar - a "52/53 week" fiscal year
which ends on the Friday closest to June 30th - last year's first quarter
included fourteen weeks of sales as compared with thirteen weeks in the current
year quarter. Taking that into account, consolidated sales per day in the first
quarter of fiscal 2000 were 13% higher than a year ago. The impact on
consolidated sales from companies acquired during or subsequent to the first
quarter of fiscal 1999 was substantially offset by the impact on sales of the
disposition of Allied Electronics which was sold on the last day of fiscal 1999.
Sales for EM in the first quarter of fiscal 2000 of $1.23 billion were virtually
the same as in last year's first quarter. However, excluding the impact of
acquisitions and dispositions, sales were up almost 2% in the aggregate, and on
a per day basis were up almost 10% as compared with the prior year's first
quarter. On a sequential quarterly basis, EM's sales excluding the impact of
acquisitions and the disposition of Allied were up 4% as compared with the
fourth quarter of fiscal 1999. As far as sales by region are concerned, EM
Americas' sales were $871.8 million in the first quarter of this year, up
slightly more than 1% in the aggregate and 9% on a per day basis excluding the
impact of the disposition of Allied. Sales for EM EMEA and EM Asia in the
current year's first quarter were $272.5 million and $81.8 million,
respectively, representing a 5% decrease for EM EMEA and an 86% increase for EM
Asia as compared with last year's first quarter. Excluding the impact of
acquisitions, EM EMEA's sales were down 6% in the aggregate but up 2% on a per
day basis, and EM Asia's sales were up 56% in the aggregate and up 68% on a per
day basis. On a sequential quarterly basis, EM EMEA's first quarter fiscal 2000
sales were up 6% while EM Asia's sales were up 24%, neither being impacted by
acquisitions. CMG's sales for the first quarter of fiscal 2000 were $428.3
million, up 22% (13% excluding the impact of acquisitions) as compared with
$352.4 million in the first quarter of last year and up 1% as compared with the
immediately preceding fourth quarter of fiscal 1999. CMG's sales on a per day
basis excluding acquisitions were almost 22% higher than last year's first
quarter.
In connection with the change in organizational structure referred to above, the
Company reorganized both its EM Americas and EM EMEA operations. Both the
current year and prior year first quarter results were negatively impacted by
incremental special charges associated primarily with the reorganization of the
European portion of EM EMEA's operations. Management expects that the Company's
future results of operations will benefit from the expected cost savings
resulting from these reorganizations, and that the impact on liquidity and
sources and uses of capital resources will not be material. Included in the
Company's current year first quarter results are $6.1 million pre-tax (included
in operating expenses), $4.0 million after-tax and $0.11 per share on a diluted
basis of incremental special charges related to the final phase of the European
reorganization consisting primarily of costs related to the centralization of
European warehouse operations in the Company's new facility located in Tongeren,
Belgium. These charges, most of which have required or will require an outflow
of cash, include severance, adjustments of the carrying value of fixed assets,
real property lease termination and other items. The balance of cash to be
expended in connection with the first quarter of fiscal 2000 special charges,
amounting to approximately $5.4 million, is expected to be paid by the end of
the third quarter of fiscal 2000, except for amounts associated with long-term
real property lease terminations, the amounts of which are not material. The
Company expects to incur additional incremental costs in the second quarter of
fiscal 2000 related to the actual movement of inventory from the various local
country warehouses to the central warehouse in Belgium.
The fiscal 1999 first quarter results included $26.5 million pre-tax, $15.7
million after-tax and $0.43 per share on a diluted basis of incremental special
charges associated principally with the reorganization of the Company's
Electronics Marketing sales and marketing activities. Approximately $18.6
million of the pre-tax charge was included in operating expenses, most of which
required an outflow of cash, and $7.9 million was included in cost of sales,
which represented a non-cash write-down. These charges included severance,
inventory reserves required related to supplier terminations and other items.
The first quarter charges in fiscal 1999 also included some incremental costs
associated with the completion of the reorganization of EM Americas, most of the
costs for which were recorded in the fourth quarter of fiscal 1998. These costs
included primarily employee relocations and special incentive payments as well
as some additional severance costs. At October 1, 1999, the only cash remaining
to be expended in connection with the first quarter fiscal 1999 special charges
were amounts associated with long-term real property lease terminations and
contractual commitments, the amounts of which are not material.
Consolidated gross profit margins (before special charges) of 14.0% in the first
quarter of fiscal 2000 were lower by 1.2% of sales as compared with 15.2% in the
first quarter of last year. This downward trend is due primarily to the
competitive environment in the electronics distribution marketplace as a result
of the global industry cyclical downtrend as well as to the increased sales of
computer products, including microprocessors, DRAM's, disk drives, etc., which
have lower gross profit margins than other products in the Company's product
line. In addition, the disposition of Allied Electronics, which had higher gross
margins than the remaining Avnet businesses, also somewhat negatively impacted
consolidated gross profit margins. Although operating expenses (before special
charges) in absolute dollars were higher in the first quarter of fiscal 2000 as
compared with the fiscal 1999 first quarter, they decreased as a percentage of
sales from 10.9% in fiscal 1999 to 10.7% in the current year. As a result,
operating income (before special charges) of $54.6 million in the first quarter
of fiscal 2000 represented 3.3% of sales as compared with $67.6 million or 4.3%
of sales in the first quarter of 1999. EM's operating income before special
charges and before the allocation of corporate expenses was $59.3 million in
first quarter of fiscal 2000 as compared with $67.4 million in the prior year.
Excluding the impact of Allied Electronics, EM's operating income was down less
than 2% as compared with last year's first quarter. CMG's operating income
before the allocation of corporate expenses was $8.6 million in the first
quarter of fiscal 2000 as compared with $13.5 million in the first quarter of
last year. Operating expenses recorded at corporate headquarters and for the
recently created AAC were $13.3 million in both the first quarter of fiscal 2000
and the first quarter of fiscal 1999.
Interest expense for the first quarter of fiscal 2000 was significantly lower
than for last year's first quarter due primarily to the impact of cash received
in connection with the disposition of Allied Electronics.
As a result of the factors described above, net income, excluding special
charges, in the first quarter of fiscal 2000 was $26.1 million, or $0.74 per
share on a diluted basis, as compared with $31.4 million, or $0.85 per share on
a diluted basis, in the prior year's first quarter. Including the special charge
referred to above, the current year's first quarter net income was $22.1
million, or $0.63 per share on a diluted basis, as compared with $15.7 million,
or $0.42 per share on a diluted basis, in the prior year's first quarter. The
current year's first quarter earnings per share were negatively impacted by
approximately $0.04 due to the disposition of Allied Electronics. This negative
impact is the result of the interest benefit on the cash proceeds from the
disposition being less than the earnings of Allied, with such condition
continuing until the cash proceeds were more effectively used in connection with
the recently completed acquisition of Marshall Industries (see below).
Liquidity and Capital Resources
During the first quarter of fiscal 2000, the Company generated $37.7 million
from income before depreciation, amortization and other non-cash items, and used
$223.5 million to increase working capital, resulting in $185.8 million of net
cash flows being used for operations. Approximately $120.0 million of the cash
used for operations related to the income taxes paid during the first quarter in
connection with the gain on the sale of Allied. In addition, the Company used
$29.1 million for other normal business operations including purchases of
property, plant and equipment ($24.7 million) and dividends ($5.3 million),
offset by cash generated from other immaterial items ($0.9 million). This
resulted in $214.9 million being used for normal business operations. The
Company also used $21.9 million for acquisitions and the payment of other debt.
Of this overall use of cash of $236.8 million, $17.7 million was provided from
an increase in debt and $219.1 million was provided from available cash and cash
equivalents.
The Company's quick assets at October 1, 1999 totaled $1.142 billion as compared
with $1.273 billion at July 2, 1999. At October 1, 1999, quick assets exceeded
the Company's current liabilities by $337.1 million as compared with a $476.8
million excess at the end of fiscal 1999. Working capital at October 1, 1999 was
$1.537 billion as compared with $1.517 billion at July 2, 1999. At October 1,
1999 to support each dollar of current liabilities, the Company had $1.42 of
quick assets and $1.49 of other current assets, for a total of $2.91 as compared
with the same amount at the end of the prior fiscal year. The above balance
sheet amounts at July 2, 1999 were significantly impacted by the $377.0 million
of cash received on that day in connection with the sale of Allied Electronics.
On July 2, 1999, cash and cash equivalents included $240.1 million of before-tax
proceeds from the sale of Allied Electronics with the balance of the cash
received at closing having been used to reduce commercial paper outstanding. In
addition, current liabilities at July 2, 1999 included approximately $134.7
million of accrued income taxes payable as a result of the gain on the sale of
Allied Electronics, payment of which was made in the current year's first
quarter.
In order to partially finance the cash component of the acquisition of Marshall
Industries as described below and to provide additional working capital
capacity, the Company entered into a $500 million 364-day credit facility in
October 1999 with a syndicate of banks led by Banc America. The Company may
select from various interest rate options and maturities under this facility,
although the Company intends to utilize the facility primarily as a back-up of
its commercial paper program pursuant to which the Company is authorized to
issue short-term notes for current operational business requirements. The credit
agreement contains various covenants, none of which management believes limit
the Company's financial flexibility to pursue its intended financial strategy.
In the first quarter of fiscal 1999, the Company issued $200.0 million of 6.45%
Notes due August 15, 2003 (the "Notes"). The net proceeds received by the
Company from the sale of the Notes were approximately $198.6 million after
deduction of the underwriting discounts and other expenses associated with the
sale of the Notes. The net proceeds from the Notes have been used to repay
indebtedness which the Company may re-borrow for general corporate purposes,
including capital expenditures, acquisitions, repurchase of the Company's common
stock and working capital needs.
The Company has separate credit agreements with Banca Commerciale Italiana and
UniCredito Italiano which agreements provide eighteen-month facilities with
lines of credit totaling 83 billion Italian Lira (USD equivalent of
approximately $43.8 million). The facilities are currently being used primarily
as a source of working capital financing for the Company's Italian subsidiary.
In addition, the Company has an agreement with KBC, a Belgian bank, to finance
the construction of the new Avnet Europe, NV/SA distribution center in Tongeren,
Belgium. The agreement provides for multiple term loans totaling 665 million
Belgian Francs (USD equivalent of approximately $16.9 million) which may be
converted into term loans with maturities between three and fifteen years. The
facilities are currently being used to finance real estate, computer equipment,
infrastructure and project consultancy costs related to the new European
distribution center.
On September 25, 1998, the Company's Board of Directors authorized a new $100
million stock repurchase program. The stock is to be purchased in the open
market from time-to-time or in directly negotiated purchases. This program is in
addition to the $200 million and $250 million programs authorized by the Board
of Directors in August 1996 and November 1997, respectively, and which were
completed during fiscal 1998. During fiscal 1999, the Company repurchased
approximately 1.4 million shares of its common stock for an aggregate purchase
price of approximately $70.1 million. Taking into account the Board of
Directors' authorizations since August 1996, the Company has purchased almost
8.9 million shares using approximately $520 million in the process. The Company
suspended its stock repurchase program in January 1999 as softer operating
earnings caused its interest coverage ratio to fall below the Company's
self-imposed limit.
During the first quarter of fiscal 2000, the Company's shareholders' equity
increased by $22.6 million to $1,420.2 million at October 1, 1999, while total
debt increased by $28.1 million to $819.6 million. As a result, the total debt
to capital (shareholders' equity plus total debt) ratio was 36.6% at October 1,
1999 as compared with 36.2% at July 2, 1999. The Company's favorable balance
sheet ratios would facilitate additional financing, if, in the opinion of
management, such financing would enhance the future operations of the Company.
Currently, the Company does not have any material commitments for capital
expenditures. The Company and the former owners of a Company-owned site in
Oxford, North Carolina have entered into a Consent Decree and Court Order with
the Environmental Protection Agency (EPA) for the environmental clean-up of the
site, the cost of which, according to the EPA's remedial investigation and
feasibility study, is estimated to be approximately $6.3 million, exclusive of
the $1.5 million in EPA past costs paid by the potentially responsible parties
(PRP's). Pursuant to a Consent Decree and Court Order entered into between the
Company and the former owners of the site, the former owners have agreed to bear
at least 70% of the clean-up costs of the site, and the Company will be
responsible for not more than 30% of those costs. In addition, the Company has
received notice from a third party of its intention to seek indemnification for
costs it may incur in connection with an environmental clean-up at a site in
Rush, Pennsylvania resulting from the alleged disposal of wire insulation
material at the site by a former unit of the Company. Based upon the information
known to date, management believes that the Company has appropriately accrued in
its financial statements for its share of the costs of the clean-ups at all the
above mentioned sites. The Company is also a PRP, or has been notified of claims
made against it, at an environmental clean-up site in Huguenot, New York. At
this time, management cannot estimate the amount of the Company's potential
liability, if any, for clean-up costs in connection with this site, but does not
anticipate that this matter or any other contingent matters will have a material
adverse impact on the Company's financial condition, liquidity or results of
operations.
Management is not now aware of any commitments, contingencies or events within
the Company's control which may significantly change its ability to generate
sufficient cash from internal or external sources to meet its needs.
Acquisitions
During the last few months, the Company has acquired or agreed to acquire three
businesses which are expected to have a substantial positive impact on the
Company. In June 1999, the Company entered into a merger agreement to acquire
Marshall Industries and its wholly-owned subsidiary, Sterling Electronics, one
of the world's largest distributors of electronic components and computer
products, for a combination of cash and Avnet stock. Following the approval of
the shareholders of both Avnet and Marshall, the transaction was completed on
October 20, 1999. Holders of Marshall common stock who elected to receive all
Avnet common stock in the transaction received 0.82063 of a share of Avnet
common stock for each share of Marshall common stock and cash in lieu of any
fractional shares. The other holders of Marshall common stock who did not elect
to receive Avnet common stock received the following in exchange for each share
of Marshall common stock: (1) $22.91835 in cash, (2) 0.33839 of a share of Avnet
common stock and (3) cash in lieu of any fractional share interest. The exchange
ratio as well as the price paid for fractional shares was based on the $42.7719
average closing price of Avnet common stock on the New York Stock Exchange for
the twenty (20) consecutive trading days ending on October 12, 1999. The total
cost of the acquisition of Marshall including estimated expenses was
approximately $741.8 million, consisting of the cost for the Marshall shares of
$326.8 million in cash, $269.3 million in Avnet stock and $7.0 million in Avnet
stock options (net of related tax benefits of $4.8 million) as well as $11.5
million for direct transaction expenses and $127.2 million for the refinancing
of Marshall net debt. The above dollar value of Avnet stock assumes the issuance
of 6,817,943 shares of Avnet stock valued at a price of $39.50 based on the
average closing price of Avnet common stock for a period commencing two trading
days before and ending two trading days after the October 12, 1999 measurement
date, the day on which the exchange ratio for the Avnet stock component of the
purchase price was determined pursuant to the merger agreement.
The Company has also entered into separate agreements to acquire 84% of
Eurotronics, B.V. (which does business under the name SEI), a pan-European
electronics components distributor headquartered in the Netherlands, and 94% of
the SEI Macro Group, an electronics components distributor headquartered in the
United Kingdom. The combined transaction value of these two acquisitions,
including the assumption of debt, is in the range of $200.0 -- $250.0 million to
be paid for with a combination of cash and Avnet common stock. The acquisition
of the SEI Macro Group was completed on October 14, 1999, while the acquisition
of Eurotronics is awaiting antitrust approval. The Company acquired the
remaining 16% of Eurotronics from Marshall (which held the 16%) and will acquire
the remaining 6% of the SEI Macro Group when it completes the acquisition of
Eurotronics. The combined annual sales of Eurotronics and the SEI Macro Group
are approximately $750 million.
To capitalize on growing world markets for electronic components and computer
products, the Company has pursued and expects to continue to pursue strategic
acquisitions to expand its business. Management believes that the Company has
the ability to generate sufficient capital resources from internal or external
sources in order to continue its expansion program. In addition, as with past
acquisitions, management does not expect that future acquisitions will
materially impact the Company's liquidity.
Market Risks
Certain of the Company's operations, primarily its international subsidiaries,
occasionally purchase and sell products in currencies other than their
functional currencies. This subjects the Company to the risks associated with
fluctuations of foreign currency exchange rates. The Company reduces this risk
by utilizing natural hedging (offsetting receivables and payables) as well as by
creating offsetting positions through the use of derivative financial
instruments, primarily forward foreign exchange contracts with maturities of
less than sixty days. The market risk related to the foreign exchange contracts
is offset by the changes in valuation of the underlying items being hedged. The
amount of risk and the use of derivative financial instruments described above
is not material to the Company's financial position or results of operations. As
of October 1, 1999, approximately 37% of the Company's outstanding debt was in
fixed rate instruments and 63% was subject to variable short-term interest
rates. Accordingly, the Company will be impacted by any change in short-term
interest rates. The Company does not hedge either its investment in its foreign
operations or its floating interest rate exposures.
The Year 2000 Issue
With the calendar year 2000 less than two months away, many companies, including
Avnet, are engaged in modifying their computer systems and applications which
currently use two-digit fields to designate a year ("Year 2000 Issue").
Management has assessed and continues to assess the impact of the Year 2000
Issue on the Company's reporting systems and operations. The Company has engaged
several outside consulting firms and is using internal resources to perform a
comprehensive remediation of the Company's computer systems before the year
2000. The Company's remediation plan with respect to its critical internal
systems has consisted of four phases: (i) high level assessment of systems, (ii)
detailed assessment, remediation and unit testing, (iii) deployment and (iv)
integration testing. The Company has already completed all four phases on most
of its critical internal systems, and is in the deployment and integration
testing phases for the remaining critical systems. All phases for all critical
systems are expected to be completed during the second quarter of fiscal 2000.
The costs to modify the existing computer systems and applications are
significant; however, they have not been and will not be material to the
Company's financial position or results of operations. The current estimate
(including potential capital expenditures) is in the range of $16.0 million to
$18.0 million, of which the Company has already incurred or has committed to
incur approximately $15.0 million.
Management believes that the Company's most reasonably likely worst case year
2000 scenario would involve the failure by third parties to provide products or
services to the Company as a result of problems experienced by such third
parties with respect to the Year 2000 Issue. Third party system failures could
cause the Company to experience disruption of receipt of products from
suppliers, interruption of telecommunication and transportation services, or
interruption of other critical services. While it is unpredictable at this point
in time whether such a worst case scenario is likely to occur, it is possible
that any such disruptions of sufficient magnitude could have a material adverse
effect on the Company's operations, liquidity and financial condition. The
Company is in contact with all its major suppliers to ascertain their progress
in implementing year 2000 remediation. Although the Company cannot control the
efforts of the many third parties with which it interfaces, management does not
currently anticipate that there will be any significant disruption of the
Company's ability to transact business. If, however, the Company determines that
critical supplies or services from third parties are in jeopardy as a result of
the Year 2000 Issue, the Company will immediately adopt or develop contingency
plans which are responsive to the circumstances. The Company has already
developed and is continuing to implement systems which will identify
interchangeable products for many of the products the Company sells. These
systems would be an important part of the Company's overall contingency plan in
the event a particular supplier becomes unable to meet the Company's
requirements for delivering products to it.
The Euro
Effective on January 1, 1999, a single European currency (the "Euro") was
introduced and certain member countries of the European Union established fixed
conversion rates between their existing national currencies and the Euro. The
participating countries adopted the Euro as their common legal currency on that
date, and during the transition period through January 1, 2002 either the Euro
or the participating country's national currency will be accepted as legal
currency. The Company is addressing the issues raised by the introduction of the
Euro including, among other things, the potential impact on its internal
systems, tax and accounting considerations, business issues and foreign exchange
rate risks. Although management is still evaluating the impact of the Euro,
management does not anticipate, based upon information currently available, that
the introduction of the Euro will have a material adverse impact on the
Company's financial condition or results of operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Note 1 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended July 2, 1999 and the "Liquidity
and Capital Resources" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 of this Form 10-Q.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
A. Exhibits:
Exhibit No.
2. Amended and Restated Agreement and Plan of Merger dated as of June
25, 1999, between the Company and Marshall Industries (incorporated
herein by reference to Appendix A to the Joint Proxy
Statement/Prospectus included in the Company's Registration
Statement on Form S-4, Registration Number 333-86721).
3A. Restated Certificate of Incorporation of the Company (incorporated
herein by reference to the Company's Current Report on Form 8-K
bearing cover date of May 6, 1999, Exhibit 3(i)(b)).
3B. By-laws of the Company (incorporated herein by reference to the
Company's Current Report on Form 8-K bearing cover date of February
12, 1996, Exhibit 3(ii)).
4. Note: The total
amount of securities authorized under any instrument which
defines the rights of holders of the Company's long-term debt
does not exceed 10% of the total assets of the Company and its
subsidiaries on a consolidated basis. Therefore, none of such
instruments are required to be filed as exhibits to this Report.
The Company agrees to furnish copies of such instruments to the
Commission upon request.
27. Financial Data Schedule (electronic filings only).
B. Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
quarter for which this report is filed: (1) Current Report on Form 8-K
bearing cover date of July 2, 1999 whereby it reported under Items 2 and 7
that it had agreed to sell all of the outstanding shares of Allied
Electronics, Inc., a wholly-owned subsidiary, and that the sale was
consummated as of the close of business on July 2, 1999; and (2) Current
Report on Form 8-K bearing cover date of September 28, 1999 whereby it
reported under Items 5 and 7 that it filed Powers of Attorney for its form
10K and an Employment Agreement between the Company and George Smith.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avnet, Inc.
(Registrant)
By: s/Raymond Sadowski
Raymond Sadowski
Senior Vice President,
Chief Financial Officer
and Assistant Secretary
By: s/John F. Cole
John F. Cole
Controller and Principal
Accounting Officer
November 12, 1999
------------------------
Date
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