Avnet, Inc. Reports Fourth Quarter and Fiscal Year 2007 Results
Records Set for Revenue and Operating Income
Operating Margin and Return on Capital Employed Achieve Targeted Levels
Phoenix - Avnet, Inc. (NYSE:AVT) today reported record revenue of $4.24 billion for fourth quarter fiscal 2007, ended June 30, 2007, representing an increase of 17.3% over fourth quarter fiscal 2006. Organic (pro forma) revenue growth, as defined in the Non-GAAP Financial Information section, was 4.0% over the prior year fourth quarter. Net income for fourth quarter fiscal 2007 was $124.7 million, or $0.81 per share on a diluted basis, as compared with net income of $58.8 million, or $0.40 per share on a diluted basis, for the fourth quarter last year. Excluding certain items noted below, net income was a record $123.9 million, or $0.81 per share on a diluted basis, representing a 42.4% and 37.3% increase, respectively, over the year-ago period. The Company’s effective tax rate for the 2007 fiscal year came in at approximately 33%, thereby positively impacting its fourth quarter results by roughly $0.02 per share.
Operating income for fourth quarter fiscal 2007 was $196.9 million, up 35.8% as compared with operating income of $145.0 million in the year ago quarter. Excluding certain items in both periods as noted below, operating income increased 29.0% over the prior-year quarter to a record $195.8 million. Operating income as a percent of sales, excluding certain items in both periods, was 4.6%, up 42 basis points from last year’s fourth quarter, with both operating groups performing within their targeted range for the second consecutive quarter.
Roy Vallee, Chairman and Chief Executive Officer, commented, ’Our fourth quarter results continued to demonstrate the operating leverage in our business model as strong execution in both operating groups resulted in record setting performances. Record revenue and operating income combined with strong asset velocity drove return on capital employed above our 12.5% target. I am very pleased with our fourth quarter results and the consistent improvement in our key financial metrics.’
Revenue of $15.68 billion for fiscal 2007, also a record, was up 10.0% over fiscal 2006 revenue of $14.25 billion. Organic revenue growth, as defined in the Non-GAAP Financial Information section, was up 5.7% over the prior year. Net income for fiscal 2007 was $393.1 million, or $2.63 per share on a diluted basis, as compared with net income of $204.5 million, or $1.39 per share on a diluted basis, in fiscal 2006. Excluding certain items noted below, net income and diluted earnings per share for fiscal 2007 were up 50.1% and 47.6% to a record $413.1 million and $2.76, respectively, as compared with fiscal 2006.
Including items described in the table below, fiscal 2007 operating income grew 56.6% to $678.3 million as compared with fiscal 2006 operating income of $433.1 million. Excluding these items in both fiscal years, operating income grew 36.3% year over year to $685.6 million and operating income as a percent of sales was 4.4%, an increase of 84 basis points over fiscal year 2006 operating income margin of 3.5%. This represents the fifth consecutive year of year over year growth in both operating income and operating income margin.
Mr. Vallee further commented, ’Fiscal 2007 was another example of the impact that our value based management initiatives have had on our business operations as operating income grew more than three times faster than revenue. While growth in our end markets slowed this year, our global team stayed focused and executed well on the things we can control. As a result, we were able to deliver consistent improvement in our financial metrics over each of the past four quarters. I would like to congratulate and thank Avnet employees around the world for achieving all of our key financial targets including operating margin, working capital velocity and return metrics simultaneously.’
Certain Items Impacting Results
The results for the fourth quarter and fiscal year of fiscal 2007 and 2006 include certain items as described herein, the mention of which management believes is useful to investors when comparing operating performance with prior periods. More detail on the reasons for providing this information are set forth in the Non-GAAP Financial Information section which appears on page 4 of this press release. The items affecting the current fourth quarter and fiscal year are described below and the items affecting the prior year quarter and fiscal year are described on page 5.
Fourth Quarter and Fiscal Year 2007:
Restructuring, integration and other items amounted to a pre-tax benefit in the fourth quarter of $1.2 million, which consisted of (i) a prior year acquisition-related benefit of $12.5 million, net of (ii) restructuring, integration and other charges of $11.3 million related to further cost-reduction initiatives across the Company as well as Access integration-related costs. Pre-tax restructuring, integration and other items for the fiscal year ended 2007 amounted to $7.4 million and consisted of $19.9 million of restructuring, integration and other charges, net of the acquisition-related benefit of $12.5 million.
Gain on sale of business lines for the fiscal year ended 2007 resulted from the receipt of contingent purchase price proceeds related to the prior year divestitures of the Technology Solutions’ single tier businesses in the Americas.
Debt extinguishment costs for the fiscal year ended 2007 related to the Company’s election to redeem all of its outstanding 9¾% Notes due February 15, 2008 during the first quarter.
Operating Group Results
Electronics Marketing (EM) sales of $2.47 billion in the fourth quarter fiscal 2007 were up 0.8% year over year and 1.3% adjusted for a divestiture in the prior year quarter. EM sales in the EMEA and Asia regions increased 0.6% (2.3% adjusted for divestitures in the year-ago quarter) and 7.3%, respectively, year over year while the Americas decreased 3.4%. Excluding the impact of foreign currency translation and adjusted for divestitures, year over year revenue at EM EMEA was down 4.6%. EM operating income of $143.6 million for fourth quarter fiscal 2007 was up 6.5% over the prior year fourth quarter operating income of $134.9 million and operating income margin of 5.8% was up 31 basis points over the prior year quarter, representing the sixth consecutive quarter of operating margin in excess of 5.0%.
Mr. Vallee added, ’EM closed out the fiscal year with another quarter of consistent progress toward our long-term financial goals. Through continuous process improvement and further collaboration with our trading partners, EM was able to reduce inventory by $48 million sequentially which resulted in record working capital velocity and a five day reduction in its cash cycle from the fourth quarter of fiscal 2006. Combined with growth in operating income, return on working capital increased 258 basis points, nearing our goal of 30%.’
Technology Solutions (TS) sales of $1.77 billion in the fourth quarter fiscal 2007 were up 52.1% year over year on a reported basis and up 8.0% on a pro forma basis, as defined in the Non-GAAP Financial Information section. On a pro forma basis, fourth quarter fiscal 2007 sales in Asia and EMEA were up 115.0% and 20.9%, respectively, year over year while sales in the Americas were down 0.9%. TS operating income was $68.7 million in the fourth quarter fiscal 2007, a 70.5% increase as compared with fourth quarter fiscal 2006 operating income of $40.3 million, and operating income margin of 3.9% increased by 42 basis points over the prior year fourth quarter, benefited (38 basis points) by the change to net revenue treatment of the sales of supplier service contracts.
Mr. Vallee further added, ’We are encouraged by the fiscal year 2007 growth in our enterprise computer product business, the largest business unit within TS, as reported revenue grew 31.7% to nearly $4.5 billion, with pro forma year over year growth of 6.1%. With the integration of Access Distribution complete at the end of June, we now look forward to completing the recently announced acquisition of the Magirus enterprise computer business in Europe by early October. Magirus will significantly increase our presence in two of the largest European IT markets, Germany and UK, while expanding our existing operations in six additional countries. TS is becoming the leading pan-European value added distributor with unique scale and scope advantages that further differentiate the value we can deliver to our customers and suppliers.’
During the fourth quarter of fiscal 2007, the Company generated $297 million of free cash flow (as defined later in this release), and $746 million for the fiscal year, excluding cash used for acquisitions. As a result, the Company ended the quarter with $557 million of cash and cash equivalents and net debt (total debt less cash and cash equivalents) of $652 million.
Ray Sadowski, Chief Financial Officer, stated, ’Our cash generation over the past year is further validation of what the focus on return on capital can mean to our business model. While growth moderated in our end markets, we were able to generate a significant amount of cash with over 80% coming from profits and the remainder from working capital efficiencies. This performance allowed us to reduce net debt and net interest expense while paying for the Access acquisition without impairing our investment grade credit statistics. We are well positioned to finance the Magirus acquisition with cash on hand and still maintain substantial flexibility to pursue additional growth opportunities.’
For Avnet’s first quarter fiscal 2008, management expects sales at EM to be in the range of $2.40 billion to $2.50 billion and anticipates sales for TS to be between $1.60 billion to $1.70 billion. Therefore, Avnet’s consolidated sales are forecasted to be $4.0 billion to $4.2 billion for the first quarter of fiscal 2008. As a result, management expects the first quarter earnings to be in the range of $0.65 to $0.69 per share, up 18% - 25% as compared with last year’s first quarter. First quarter guidance includes approximately $0.04 per share related to the expensing of stock-based compensation as compared with $0.02 per share in the fourth quarter fiscal 2007. In addition, full year fiscal 2008 earnings per share are currently expected to grow approximately 15% - 20% as compared with $2.76 in fiscal 2007, excluding certain items and the impact of acquisitions not yet completed.
Sequentially, as compared with the fourth quarter fiscal 2007, earnings per share for the first quarter of fiscal 2008 will be negatively impacted by the year end effective tax rate true up affecting the fourth quarter as noted above, and by normal seasonality which now includes the effect of the Access business which has a particularly strong June quarter coinciding with its largest supplier’s fiscal year end.
Forward Looking Statements
This press release contains certain ’forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on management’s current expectations and are subject to uncertainty and changes in factual circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as ’will,’ ’anticipate,’ ’expect,’ believe,’ and ’should,’ and other words and terms of similar meaning in connection with any discussions of future operating or financial performance or business prospects. Actual results may vary materially from the expectations contained in the forward-looking statements.
The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: the Company’s ability to retain and grow market share and to generate additional cash flow, risks associated with any acquisition activities and the successful integration of acquired companies, any significant and unanticipated sales decline, changes in business conditions and the economy in general, changes in market demand and pricing pressures, allocations of products by suppliers, other competitive and/or regulatory factors affecting the businesses of Avnet generally.
More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission, including the Company’s reports on Form 10-K, Form 10-Q and Form 8-K. Avnet is under no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles (’GAAP’), the Company also discloses in this press release certain non-GAAP financial information including adjusted operating income, adjusted net income and adjusted diluted earnings per share. The non-GAAP financial information is used to reflect the Company’s results of operations excluding certain items that have arisen from restructuring, integration and other charges in the periods presented. The company also discloses sales adjusted for the impact of certain acquisitions, divestitures and the change to net revenue treatment of sales of supplier services contracts (pro forma sales or organic revenue). Management believes pro forma sales is another useful measure for evaluating current period performance as compared with prior periods and understanding underlying trends.
Management believes that operating income adjusted for restructuring, integration and other items is a useful measure to help investors better assess and understand the Company’s operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because management views the excluded items to be outside of Avnet’s normal operating results. Management analyzes operating income without the impact of restructuring, integration and other charges as an indicator of ongoing margin performance and underlying trends in the business. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring performance for compensation purposes.
Management similarly believes net income and diluted earnings per share adjusted for the impact of the items discussed above is useful to investors because it provides a measure of the Company’s net profitability on a more comparable basis to historical periods and provides a more meaningful basis for forecasting future performance. Additionally, because of management’s focus on generating shareholder value, of which net profitability is a primary driver, management believes net income and diluted EPS excluding the impact of these items provides an important measure of the Company’s net results of operations for the investing public. However, analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
Fourth Quarter and Fiscal Year 2006
The results for the fourth quarter and fiscal year 2006 include certain items as described below, the mention of which management believes is useful to investors when comparing operating performance with other periods.
Restructuring, integration and other charges, which resulted primarily from (i) the Company’s acquisition and integration of Memec into Avnet’s existing business, including inventory write-downs for terminated lines (recorded in cost of sales), and (ii) actions taken following the divestitures of certain TS businesses.
Loss on sale of business lines recorded in the fourth quarter of fiscal 2006 resulted from the sale of two EM specialty businesses in EMEA for which no tax benefit was available. The fiscal year 2006 loss on sale of business lines is also net of a third quarter gain on the sale of the TS single tier businesses in the Americas which partially offset the loss recorded in the fourth quarter.
Debt extinguishment costs for the fiscal year ended 2006 related to the repurchase of $254.1 million principal amount of the Company’s 8.00% Notes due November 15, 2006 in the first quarter and the $113.6 million repurchase of the Company’s 9¾% Notes due February 15, 2008 in the fourth quarter.
Organic (Pro Forma) Sales
Organic revenue, or pro forma sales, is defined as sales adjusted for the impact of the classification of sales of supplier service contracts on an agency (net) basis, which was effective beginning in the third quarter of fiscal 2007, the impact of divestitures affecting both EM and TS and the impact of the Access Distribution acquisition which was acquired on December 31, 2006 and the Azure Technologies acquisition that closed during April 2007. Sales adjusted for these impacts are presented below:
Cash Flow Activity
The following table summarizes the Company’s cash flow activity for the fourth quarters and the twelve months of fiscal 2007 and 2006, including the Company’s computation of free cash flow and a reconciliation of this metric to the nearest GAAP measures of net income and net cash flow from operations. Management’s computation of free cash flow consists of net cash flow from operations plus cash flows generated from or used for purchases and sales of property, plant and equipment, acquisitions of operations, effects of exchange rates on cash and cash equivalents and other financing activities. Management believes that the non-GAAP metric of free cash flow is a useful measure to help management and investors better assess and understand the Company’s operating performance and sources and uses of cash. Management also believes the analysis of free cash flow assists in identifying underlying trends in the business. Computations of free cash flow may differ from company to company. Therefore, the analysis of free cash flow should be used as a complement to, and in conjunction with, the Company’s consolidated statements of cash flows presented in the accompanying financial statements.
Management also analyzes cash flow from operations based upon its three primary components noted in the table below: net income, non-cash and other reconciling items and cash flow generated from (used for) working capital. Similar to free cash flow, management believes that this breakout is an important measure to help management and investors better understand the trends in the Company’s cash flows, including the impact of management’s focus on asset utilization and efficiency through its management of the net balance of receivables, inventories and accounts payable.
Teleconference Webcast and Upcoming Events
Avnet will host a Webcast of its quarterly teleconference today at 2:00 p.m. Eastern Time. The live Webcast event, as well as other financial information including financial statement reconciliations of GAAP and non-GAAP financial measures, will be available through www.ir.avnet.com. Please log onto the site 15 minutes prior to the start of the event to register or download any necessary software. An archive copy of the presentation will also be available after the Webcast.
For a listing of Avnet’s upcoming events and other information, please visit Avnet’s investor relations website at www.ir.avnet.com.
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