SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
.........................................
FORM 10-Q
.........................................
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 1999
........................................
Commission File #1-4224
AVNET, INC.
A New York Corporation
........................................
IRS Employer Identification No. 11-1890605
2211 South 47th Street, Phoenix, Arizona 85034
(602) 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 preceeding 12 months (or for such shorter period that the registrant was
required to file such report(s) 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 January 29, 1999 - 35,139,581 shares.
<PAGE>
AVNET, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
January 1, 1999 and June 26, 1998........... .................3
Consolidated Statements of Income - First Halves
Ended January 1, 1999 and December 26, 1997...................4
Consolidated Statements of Income - Second Quarters
Ended January 1, 1999 and December 26, 1997...................5
Consolidated Statements of Cash Flows - First Halves
Ended January 1, 1999 and December 26, 1997...................6
Notes to Consolidated Financial Statements................7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................9 - 14
Item 3. Quantitative and Qualitative Disclosues About
Market Risk .................................................14
Part II. Other Information..............................................15 - 16
Signature Page ...........................................................17
FORWARD-LOOKING STATEMENTS
Any statements made in this Report which are not historical facts are
forward-looking statements that involve risks and uncertainties. Among the
factors which could cause actual results to differ materially are (i) major
changes in business conditions and the economy in general, (ii) risks associated
with foreign operations, such as currency fluctuations, (iii) allocations of
products by suppliers, and (iv) changes in market demand and pricing pressure.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
January 1, June 26,
1999 1998
(unaudited) (audited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.......................................$ 52,614 $ 82,607
Receivables, less allowances of $28,189 and $31,807,
respectively.................................................. 901,069 894,289
Inventories (Note 3)............................................ 1,106,144 1,061,739
Other........................................................... 35,252 29,722
----------- ----------
Total current assets......................................... 2,095,079 2,068,357
Property, plant & equipment, net................................... 161,148 155,491
Goodwill, net of accumulated amoritzation of $69,524 and $62,461,
respectively..................................................... 465,230 460,882
Other assets....................................................... 68,626 48,967
----------- ----------
Total assets................................................. $2,790,083 $2,733,697
========== ==========
Liabilities:
Current liabilities:
Borrowings due within one year................................. .$ 271 $ 243
Accounts payable................................................ 445,430 451,441
Accrued expenses and other...................................... 167,349 155,423
----------- -----------
Total current liabilities.................................... 613,050 607,107
Long-term debt, less due within one year........................... 883,772 810,695
----------- -----------
Total liabilities............................................ 1,496,822 1,417,802
---------- -----------
Commitments and contingencies (Note 4)
Shareholders' equity (Notes 5 and 6):
Common Stock $1.00 par, authorized 120,000,000 shares, issued
44,358,000 shares and 44,335,000 shares, respectively........... 44,358 44,335
Additional paid-in capital......................................... 435,833 434,695
Retained earnings.................................................. 1,374,347 1,342,988
Cumulative translation adjustments................................. (30,258) (41,804)
Treasury stock at cost, 9,217,000 shares and 7,872,000 shares,
respectively..................................................... (531,019) (464,319)
----------- -----------
Total shareholders' equity................................... 1,293,261 1,315,895
---------- ----------
Total liabilities and shareholders' equity................... $2,790,083 $2,733,697
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Halves Ended
January 1, December 26
1999 1997
(unaudited) (unaudited)
<S> <C> <C>
Sales ...........................................................$3,108,505 $2,859,570
Cost of sales (Note 7) ........................................... 2,647,805 2,371,700
---------- ----------
Gross profit....................................................... 460,700 487,870
Selling, shipping, general and administrative
expenses (Notes 7 and 8) 361,398 339,058
---------- ----------
Operating income................................................... 99,302 148,812
Other income, net.................................................. 1,446 682
Interest expense................................................... (26,169) (16,562)
Gain on the sale of Channel Master (Note 8)........................ - 33,795
----------- ----------
Income before income taxes......................................... 74,579 166,727
Income taxes....................................................... 32,387 72,542
---------- ----------
Net income......................................................... $ 42,192 $ 94,185
========= ==========
Earnings per share:
Basic............................................................ $1.17 $2.32
===== =====
Diluted.......................................................... $1.16 $2.29
===== =====
Shares used to compute earnings per share (Note 9):
Basic............................................................ 36,029 40,608
====== ======
Diluted.......................................................... 36,480 41,130
====== ======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Second Quarters Ended
January 1, December 26
1999 1997
(unaudited) (unaudited)
<S> <C> <C>
Sales ...........................................................$1,526,902 $1,460,738
Cost of sales .................................................... 1,298,112 1,214,826
---------- ----------
Gross profit....................................................... 228,790 245,912
Selling, shipping, general and administrative expenses (Note 8).... 170,614 178,019
---------- ----------
Operating income................................................... 58,176 67,893
Other income, net.................................................. 753 446
Interest expense................................................... (13,021) (7,926)
Gain on the sale of Channel Master (Note 8) ....................... - 33,795
----------- ----------
Income before income taxes......................................... 45,908 94,208
Income taxes....................................................... 19,374 42,135
---------- ----------
Net income.........................................................$ 26,534 $ 52,073
========== =========
Earnings per share:
Basic............................................................ $0.74 $1.29
===== =====
Diluted.......................................................... $0.74 $1.27
===== =====
Shares used to compute earnings per share (Note 9):
Basic............................................................ 35,629 40,382
====== ======
Diluted.......................................................... 36,004 40,887
====== ======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
First Halves Ended
January 1, December 26
1999 1997
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 42,192 $ 94,185
Non-cash and other reconciling items:
Depreciation and amortization................................. 25,392 25,362
Deferred taxes................................................ (1,756) (1,413)
Gain on the sale of Channel Master ........................... - (33,795)
Other, net (Note 10).......................................... 17,226 10,800
-------- --------
83,054 95,139
Receivables...................................................... (2,779) (76,506)
Inventories...................................................... (41,632) (105,553)
Payables, accruals and other, net................................ (17,164) 46,388
--------- --------
Net cash flows provided from (used for) operating activities.. 21,479 (40,532)
-------- ---------
Cash flows from financing activities:
Repurchase of common stock....................................... (63,640) (87,685)
Issuance of notes in public offering, net of issuance costs...... 198,242 -
(Payment of) proceeds from commercial paper and bank debt, net... (137,684) 61,061
(Payment of) proceeds from other debt............................ (63) 3,033
Cash dividends .................................................. (11,117) (12,436)
Other, net....................................................... (3,671) 2,783
--------- --------
Net cash flows used for financing activities.................. (17,933) (33,244)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment....................... (17,986) (19,303)
(Acquisition) disposition of operations, net (Note 10)........... (16,542) 89,561
--------- --------
Net cash flows (used for) provided from investing activities.. (34,528) 70,258
--------- --------
Effect of exchange rate changes on cash and cash equivalents....... 989 (974)
--------- ---------
Cash and cash equivalents:
- decrease................................................... (29,993) (4,492)
- at beginning of year....................................... 82,607 59,312
-------- --------
- at end of period........................................... $ 52,614 $ 54,820
======== ========
Additional cash flow information (Note 10)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<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
financial position as of January 1, 1999 and June 26, 1998; the results of
operations for the first halves and second quarters ended January 1, 1999
and December 26, 1997; and the cash flows for the first halves ended
January 1, 1999 and December 26, 1997. 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 year ended June 26,
1998.
2. The results of operations for the first half and second quarter ended
January 1, 1999 are not necessarily indicative of the results to be
expected for the full year.
3. Inventories: January 1, June 26,
(Thousands) 1999 1998
---------- ---------
Finished goods................................. $1,037,526 $ 967,472
Work in process................................ 5,236 8,244
Purchased parts and raw materials.............. 63,382 86,023
---------- -----------
$1,106,144 $1,061,739
========== ===========
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 January 1, 1999: 5,206,218
=========
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 halves of fiscal years 1999 and 1998 was $53,738,000 and $88,371,000,
respectively, and for the second quarters of fiscal years 1999 and 1998 was
$24,705,000 and $47,784,000, respectively.
7
<PAGE>
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 Group's European operations. Approximately
$18,613,000 of the pre-tax charge is included in operating expenses, most
of which has or will require an outflow of cash, and $7,906,000 is included
in cost of sales, which represents a non-cash writedown. These charges
include severance, inventory reserves required related to supplier
terminations, and other items.
8. Included in the Company's prior year second quarter and first half results
is the gain on the sale of the Company's former Channel Master business
amounting to approximately $33,795,000 before income taxes. Also included
in the prior year second quarter and first half results as operating
expenses are $13,300,000 of costs relating to the anticipated divestiture
of Avnet Industrial, the closure of the Company's Corporate Headquarters in
Great Neck, NY, and the anticipated loss on the sale of Company-owned real
estate. The net effect of these items was to increase pre-tax income, net
income, and diluted earnings per share by approximately $20,500,000,
$8,700,000, and $0.21 per share, respectively.
9 Earnings per share - The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") during fiscal 1998.
Under the new standard, 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 halves of fiscal years 1999 and 1998
amounting to 451,000 shares and 522,000 shares, respectively, and for the
second quarters of fiscal years 1999 and 1998 amounting to 375,000 shares
and 505,000 shares, respectively, relate to stock options and restricted
stock awards. 10. Additional cash flow information:
Other non-cash and reconciling items primarily includes the provision for
doubtful accounts and certain non-recurring items (see Notes 7 and 8).
(Acquisition)/disposition of operations, net, in the first half of fiscal
1999 includes primarily the cash expended in connection with the
acquisition of joint venture interests in Avnet Max, Ltd, the largest
electronics distributor in India, and in Avnet-Gallium, a leading
distributor of specialty electronic components in Israel. In the first half
of fiscal 1998, (acquisition)/disposition of operations, net, includes
primarily the cash received in connection with the sale of Channel Master,
offset somewhat by cash paid in connection with the acquisition of ECR
Sales Management, Inc.
Interest and income taxes paid in the first halves were as follows:
(Thousands)
1999 1998
------- ---------
Interest....................................... $22,133 $ 8,265
Income taxes................................... $27,787 $66,788
8
<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 better focus on its core businesses in order to
better meet the needs of both its customers and suppliers. This change to the
Company's organizational structure involved dividing the former Electronic
Marketing Group into its two major lines of businesses: the distribution of
electronic components and the distribution of computer products. Accordingly,
the Company currently consists of two major operating groups, the Electronics
Marketing Group ("EMG") and the Computer Marketing Group ("CMG"). (Through the
end of fiscal 1998, these two units comprised the former Electronic Marketing
Group.) EMG, which focuses on the global distribution of and value-added
services associated with electronic components, is comprised of three regional
operations - EMG Americas, EMG EMEA (Europe, Middle East and Africa) and EMG
Asia. CMG, which focuses on middle- to high-end computer products and
value-added services, consists of Avnet Computer, Hall-Mark Computer and a
number of other speciality businesses.
RESULTS OF OPERATIONS
For the second quarter of fiscal 1999 ended January 1, 1999, consolidated sales
were $1.527 billion, up 5% as compared with last year's second quarter sales of
$1.461 billion and down 3% as compared with sales of $1.582 billion in the
immediately preceding first quarter of fiscal 1999. It should be noted that due
to the Company's fiscal calendar, the first quarter of fiscal 1999 had 68
shipping days as compared with 61 days in the second quarter of both this year
and last year. Sales for EMG for the second quarter of fiscal 1999 were $1.152
billion, up almost 6% as compared with sales of $1.091 billion in the prior year
period. Excluding the sales for businesses acquired during or subsequent to the
end of the second quarter of last year, EMG's sales for the second quarter of
fiscal year 1999 were approximately 3% higher than a year ago. On a sequential
quarterly basis, EMG's sales were approximately 6% lower than in the first
quarter of fiscal 1999 which, as noted above, had 7 more shipping days than in
the second quarter. As far as sales by region are concerned, EMG Americas' sales
were $801.3 million in the second quarter of this year, up 2% as compared with
prior year sales of $788.1 million, and down 11% as compared with the
immediately preceding first quarter of fiscal 1999. Sales for EMG EMEA and EMG
Asia in the current year's second quarter were $297.6 million and $53.0 million,
respectively, representing a 12% increase for EMG EMEA (6% excluding the impact
of acquisitions) and a 41% increase for EMG Asia (a less than 1% increase
excluding the impact of acquisitions) as compared with last year's second
quarter. On a sequential basis, EMG EMEA's quarterly sales were up 4% (3%
excluding the impact of acquisitions) while EMG Asia's sales were up 21% (3%
excluding the impact of acquisitions). CMG's sales for the second quarter of
fiscal 1999 were $375.0 million, up 3% (down almost 4% excluding the impact of
acquisitions) as compared with sales of $365.0 million in the second quarter of
last year, and up 6% as compared with the immediately preceding first quarter of
fiscal 1999. Channel Master, which was sold in October 1997, had minimal sales
in the second quarter of last year.
Included in the Company's prior year second quarter results is the gain on the
sale of the Company's former Channel Master business amounting to approximately
$33.8 million before income taxes. Also included in the prior year second
quarter results as operating expenses are $13.3 million of costs relating to the
anticipated divestiture of Avnet Industrial, the closure of the Company's
Corporate Headquarters in Great Neck, NY, and the anticipated loss on the sale
of Company-owned real estate. The net effect of these items was to increase
pre-tax income, net income, and diluted earnings per share by approximately
$20.5 million, $8.7 million, and $0.21 per share, respectively.
9
<PAGE>
Consolidated gross profit margins of 15.0% in the second quarter of fiscal 1999
were lower by 1.8% of sales as compared with 16.8% in the second 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
correction cycle as well as the increased sales of computer products, including
microprocessors, which have lower gross margins than other products in the
Company's product line. However, even though gross profit margins in the secnd
quarter of fiscal year 1999 were significantly lower than last year's second
quarter margins, EMG's gross profit margins held relatively stable as compared
with the immediately preceding first quarter of fiscal 1999 while CMG's gross
profit margins came under pressure during the second quarter. Although operating
expenses (before special charges) in absolute dollars were higher in the second
quarter of fiscal 1999 as compared with the prior year second quarter, they
decreased as a percentage of sales from 11.3% in fiscal 1998 to 11.2% in the
current year. As a result of the above, operating income (before special
charges) of $58.2 million in the second quarter of fiscal 1999 represented 3.8%
of sales as compared with $81.2 million or 5.6% of sales in the second quarter
of 1998. EMG's operating income (before special charges and after allocation of
corporate expenses) in the second quarter of fiscal year 1999 was $50.7 million,
down 23.0% as compared with $65.9 million in the prior year period. CMG's
operating income (after allocation of corporate expenses) was $7.5 million in
the second quarter of fiscal 1999, down 48% as compared with $14.3 million in
the second quarter of last year. Channel Master, which was sold in October 1997,
had operating income (after allocation of corporate expenses) of $1.0 million in
the second quarter of fiscal 1998.
Interest expense for the second quarter of fiscal 1999 was significantly higher
than in last year's comparable period primarily due to the impact of cash used
to fund the Company's stock repurchase program and to fund the additional
working capital requirements to support the growth in business. The Company's
effective tax rate in the second quarter of last year was higher than the
current year primarily due to the impact of certain amounts of the special items
which were not subject to income taxes and, to a lesser extent, the mix of
income in foreign operations to which different tax rates apply.
As a result of the factors described above, net income in the second quarter of
fiscal 1999 was $26.5 million, or $0.74 per share on a diluted basis, as
compared with last year's second quarter net income, excluding special items, of
$43.4 million, or $1.06 per share on a diluted basis. Including the special
items referred to above, net income in last year's second quarter was $52.1
million, or $1.27 per share on a diluted basis. Although net income excluding
special charges was down approximately 39% as compared with last year's second
quarter, diluted earnings per share was down only 30% due primarily to the
impact of the Company's stock repurchase program.
Consolidated sales for the first half of fiscal 1999 were $3.109 billion, up 9%
as compared with $2.860 billion in the first half of last year. EMG's sales of
$2.381 billion and CMG's sales of $728 million in the first half of fiscal 1999
were up 10% and 11%, respectively, as compared with the prior year first half
sales of $2.167 billion for EMG and $654 million for CMG. Channel Master's sales
in the first half of last year were almost $39 million.
Consolidated gross profit margins (before special charges) in the first half of
1999 were 15.1% as compared with 17.1% in the prior year period. Even though
operating expenses (before special charges) as a percentage of sales decreased
to 11.0% in the first half of 1999 from 11.4% in the first half of last year,
the decrease was not enough to fully offset the decline in gross profit margins.
As a result, operating income (before special charges) as a percentage of sales
decreased to 4.0% in this year's first half as compared with 5.7% in the same
period last year. Interest expense was substantially higher in the first half of
1999 as compared with the first half of 1998 due primarily to increased
borrowings to fund the Company's stock repurchase program and to fund the
additional working capital requirements to support the growth in business.
10
<PAGE>
The first half of fiscal 1999 results mentioned above do not include $26.5
million pre-tax, $15.7 million after-tax and $0.43 per share on a diluted basis
of incremental special charges (recorded in the first quarter) associated
principally with the reorganization of the Company's EMG European operations.
Approximately $18.6 million of the pre-tax charge is included in operating
expenses, most of which has or will require an outflow of cash, and $7.9 million
is included in cost of sales, which represents a non-cash writedown. These
charges include severance, inventory reserves required related to supplier
terminations and other items. The first quarter charges also include some
incremental costs associated with the completion of the reorganization of EMG
Americas. These costs include primarily employee relocation and special
incentive payments as well as some additional severance costs. The balance of
cash to be expended in connection with the first quarter special charges
amounting to approximately $11.0 million at January 1, 1999 is expected to be
paid by the end of fiscal 1999, except for amounts associated with long-term
real property lease terminations and contractual commitments, the amounts of
which are not material. Management expects that the Company's future results of
operations will benefit from the expected cost savings resulting from the
reorganizations, and that the impact on liquidity and sources and uses of
capital resources will not be material. The reorganization of EMG's European
operations will have one more phase which has not yet been finalized. That phase
relates to the consolidation of warehousing operations in Europe. Management has
selected a location in Belgium for the central warehouse and is currently
working toward the construction and occupancy of the site. It is currently
anticipated that the warehouse will be in operation by the first quarter of
fiscal year 2000. The implementation of this final phase will result in some
incremental special charges which management is not yet in a position to
estimate. In addition, the Company is in the process of rolling out a structural
change in its EMG Asian operation, which will have a structure similar to that
of EMG Americas. This change in structure will result in some incremental
special charges which management cannot estimate at this time.
Net income (before special items) for the first half of 1999 was $57.9 million,
or $1.59 per share on a diluted basis, as compared with $85.5 million, or $2.08
per share on a diluted basis, in the first half of last year. Including the
special items referred to above, net income in the first half of 1999 was $42.2
million, or $1.16 per share on a diluted basis, as compared with net income of
$94.2 million, or $2.29 per share on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal 1999, the Company generated $83.1 million from
income before depreciation and other non-cash items, and used $61.6 million for
working capital needs resulting in $21.5 million of net cash flows being
generated from operations. In addition, the Company used $31.8 million for other
normal business operations including purchases of property, plant and equipment
($18.0 million), dividends ($11.1 million) and other items ($2.7 million). This
resulted in $10.3 million being used for normal business operations. The Company
also used $80.2 million for other items including the repurchase of common stock
($63.6 million) and the payment of acquisition related expenditures ($16.6
million). This overall net use of cash of $90.5 million was funded by the
proceeds from the issuance of certain Notes (as hereinafter defined) ($198.2
million) and the use of available cash ($30.0 million), offset by a decrease in
outstanding bank debt and commercial paper ($137.7 million).
The Company's quick assets at January 1, 1999 totaled $953.7 million as compared
with $976.9 million at June 26, 1998 and exceeded the Company's current
liabilities by $340.6 million as compared with a
11
<PAGE>
$369.8 million excess at June 26, 1998. Working capital at January 1, 1999 was
$1.482 billion as compared with $1.461 billion at June 26, 1998. At the end of
the second quarter to support each dollar of current liabilities, the Company
had $1.56 of quick assets and $1.86 of other current assets for a total of $3.42
of current assets as compared with $3.41 at June 26, 1998.
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 $198.2 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, possible acquisitions, repurchase of the Company's common stock
and working capital needs.
During the first half of fiscal 1999, shareholders' equity decreased by $22.6
million to $1,293.3 million at January 1, 1999, while total debt increased by
$73.1 million to $884.0 million. The decrease in shareholders' equity was the
net result of the positive impact of net income ($42.2 million), cumulative
translation adjustments ($11.5 million) and other items, net, principally
related to stock options and incentive programs ($1.4 million), offset by
dividends ($10.8 million) and the repurchase of common stock ($66.9 million). As
a result, the total debt to capital (shareholders' equity plus total debt) ratio
was 40.6% at January 1, 1999 as compared with 38.1% at June 26, 1998. 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.
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 year 1998. During the first half of fiscal 1999, the
Company repurchased 1.3 million shares of its common stock for an aggregate
purchase price of approximately $66.9 million ($3.3 million of which had not
been paid at the end of the quarter due to transactions which had not yet
settled). Taking into account the Board of Directors' authorization since August
1996, the Company has purchased almost 8.8 million shares using approximately
$517 million in the process.
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.
Including the recently issued Notes, approximately 34% of the Company's
outstanding debt is in fixed rate instruments and 66% is 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.
With the year 2000 less than one year away, many companies, including Avnet, are
having to modify 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
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<PAGE>
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 consists 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 the high level assessment
of systems phase and is in the midst of the remaining phases of the plan, all of
which are expected to be completed by the end of fiscal year 1999. The costs to
modify the existing computer systems and applications are significant; however,
they 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 $12.0 million to $15.0 million, of which the Company has
currently incurred or has committed to incur approximately $8.0 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 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.
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 the Company 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.
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.
Currently, the Company does not have any material commitments for capital
expenditures except for the costs associated with its future Belgium warehouse
referred to above, the cost of which is currently
13
<PAGE>
estimated to be in the range of $25 to $30 million. 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 (PRPs). 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 it
has appropriately accrued in its financial statements for its share of the costs
of the clean-up at all of 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 its potential liability, if any, for clean-up costs in connection with this
site, but does not currently 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
its control which may significantly change its ability to generate sufficient
cash from internal or external sources to meet its needs.
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 June 26, 1998 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a)The 1998 Annual Meeting of Shareholders of the Company was held on
November 23, 1998.
(b)Not required. Proxies were solicited by the Company pursuant to
Regulation 14 under the Securities Exchange Act of 1934, and no
solicitation in opposition to management's nominees for the board of
directors was made. All of the nominees were elected.
(c)The shareholders of the Company were asked to vote upon (i) an
amendment to the Avnet Employee Stock Purchase Plan, increasing the
number of shares of Common Stock reserved for sale under the Plan
from 500,000 to 1,000,000, (ii) ratification of the appointment of
Arthur Anderson LLP as independent auditors for fiscal year 1999, and
(iii) election of Directors. All proposals were adopted by the
shareholders by the following votes:
Matter For Against Abstain
Amendment of the Employee
Stock Purchase Plan 32,139,411 214,003 109,784
Ratification of Appointment
of Auditors 32,410,965 22,515 29,718
Election of Directors: For Withheld
Eleanor Baum 32,400,886 62,312
J. Veronica Biggins 32,392,306 70,892
Joseph F. Caligiuri 32,395,278 67,920
Lawrence W. Clarkson 32,379,675 83,523
Ehud Houminer 32,401,801 61,397
Salvatore J. Nuzzo 32,399,188 64,010
Frederic Salerno 32,378,292 84,906
Roy Vallee 32,398,209 64,989
Frederick S. Wood 32,394,005 69,193
(d) Not applicable
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
A. Exhibits
Exhibit No.
3A(i). Certificate of Incorporation of the Company as currently in
effect (incorporated by reference).
3A(ii). Certificate of Amendment of the Certificate of Incorporation of
Avnet, Inc., filed with the New York Department of State on
August 13, 1998 (incorporated herein by reference to the
Company's Current Report on Form 8-K bearing cover date of
September 18,
1998, Exhibit 3).
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
No reports on Form 8-K were filed during the quarter for which this report
is filed.
16
<PAGE>
S I G N A T U R E
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
February 12, 1999
Date
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and income statement and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-END> JAN-01-1999
<CASH> 52,614
<SECURITIES> 0
<RECEIVABLES> 929,258
<ALLOWANCES> 28,189
<INVENTORY> 1,106,144
<CURRENT-ASSETS> 2,095,079
<PP&E> 361,638
<DEPRECIATION> 200,490
<TOTAL-ASSETS> 2,790,083
<CURRENT-LIABILITIES> 613,050
<BONDS> 883,772
0
0
<COMMON> 44,358
<OTHER-SE> 1,248,903
<TOTAL-LIABILITY-AND-EQUITY> 2,790,083
<SALES> 3,108,505
<TOTAL-REVENUES> 3,109,951
<CGS> 2,647,805
<TOTAL-COSTS> 3,009,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,169
<INCOME-PRETAX> 74,579
<INCOME-TAX> 32,387
<INCOME-CONTINUING> 42,192
<DISCONTINUED> 0
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<NET-INCOME> 42,192
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.16
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