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Avnet, Inc. Reports Fourth Quarter and Fiscal Year 2008 Results
Record Sales and EPS For The Fiscal Year
Operating income for fourth quarter fiscal 2008 was $170.6 million, down 13.4% as compared with operating income of $196.9 million in the year-ago quarter. Excluding certain items in both periods as noted below, operating income for the fourth quarter fiscal 2008 was $198.7 million, up 1.5% as compared with operating income of $195.8 million in last year's fourth quarter. Operating income as a percentage of sales, excluding the items noted below, was 4.25% in the current year quarter, down 37 basis points as compared with 4.62% last year.
Roy Vallee, Chairman and Chief Executive Officer, commented, "We are pleased with our better than expected fourth quarter results. Excluding certain items, our sequential performance improved significantly with operating income growing roughly 12% while return on capital employed improved by 113 basis points."
Record revenue of $17.95 billion for fiscal 2008 was up 14.5% over fiscal 2007 revenue of $15.68 billion. Organic revenue growth, as defined in the Non-GAAP Financial Information section, was 4.9% over the prior year. Net income for fiscal 2008 was a record $499.1 million, or $3.27 per share on a diluted basis, as compared with net income of $393.1 million, or $2.63 per share on a diluted basis, in fiscal 2007. Excluding certain items noted below, net income and diluted earnings per share also reached record levels for fiscal 2008 up 17.3% and 15.2% to $484.4 million and $3.18, respectively, as compared with fiscal 2007.
Fiscal 2008 operating income grew 4.7% to $710.4 million as compared with fiscal 2007 operating income of $678.3 million. Excluding certain items in both fiscal years, operating income grew 9.3% year over year to $749.3 million and operating income as a percent of sales was 4.2%.
Mr. Vallee also noted, "In fiscal 2008, our focus on value based management and value creating M&A resulted in record financial results despite the challenging macro-economic forces impacting our markets. During fiscal year 2008, we completed seven acquisitions and in early fiscal 2009 we added three more to our portfolio that expanded our geographic coverage and enhanced our competitive position. This disciplined acquisition activity combined with a strong operating performance from our global team resulted in a slight improvement in return on capital and economic profit volume year over year. We decided to take some targeted corrective actions in the second half of fiscal 2008, but we are also continuing to invest in organic strategies and value-creating M&A that positions Avnet for stronger future growth while remaining committed to achieving our long-term financial goals."
Certain Items Impacting Results The results for the fourth quarter and fiscal year of fiscal 2008 and 2007 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 year 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 2008:
Restructuring, integration and other charges amounted to $28.1 million pre-tax ($23.9 million after tax) in the fourth quarter consisted of (i) restructuring, integration and other charges of $19.1 million pre-tax ($14.4 million after tax) related to further cost-reduction initiatives across the Company as well as integration-related costs associated with various acquisitions, (ii) settlement of an indemnification amounting to $6.0 million pre-tax ($7.7 million after tax) paid to a former executive of an acquired company as a result of the tax settlement described below, and (iii) additional costs of $3.0 million pre-tax ($1.8 million after tax) associated with long outstanding environmental matters. Pre-tax restructuring, integration and other charges for the fiscal year ended 2008 amounted to $38.9 million pre-tax ($31.5 million after tax) and consisted of the $28.1 million pre-tax ($23.9 million after tax) recorded in the fourth quarter as described above and $10.8 million pre-tax ($7.6 million after tax) of restructuring, integration and other charges recorded in the prior quarters of fiscal 2008.
Gain on sale of the Company's investment in Calence LLC in the fourth quarter amounting to $42.4 million pre-tax ($25.9 million after tax). In addition to this gain, included in the fiscal 2008 results are a gain of $4.5 million pre-tax ($4.5 million after tax) on the sale of a building and an additional $3.0 million pre-tax ($1.8 million after tax) gain resulting from the receipt of contingent purchase price proceeds related to a prior sale of a business.
Income tax net benefit of $13.9 million from the settlement of a tax audit and adjustment to tax contingencies.
Operating Group Results Electronics Marketing (EM) sales of $2.73 billion in the fourth quarter fiscal 2008 were up 10.8% year over year on a reported basis and up 5.3% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EM revenue increased 7.3% year over year. EM sales in the Americas, EMEA and Asia regions increased 2.4%, 20.8% and 10.3%, respectively, year over year on a reported basis with EMEA's revenue up 5.0% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EM sales in EMEA and Asia in the fourth quarter fiscal 2008 increased 15.6% and 3.7%, respectively, as compared with last year. EM operating income of $154.0 million for fourth quarter fiscal 2008 was up 7.3% over the prior year fourth quarter operating income of $143.6 million and operating income margin of 5.64% was down 18 basis points as compared with the prior-year quarter.
Mr. Vallee added, "Electronics Marketing delivered another solid quarter of year-over-year revenue growth as its diversified account base and limited exposure to consumer products mitigated some of the macro economic headwinds. More importantly, our EM team has well managed our portfolio of businesses within the current business conditions as evidenced by the consistent year-over-year increase in quarterly return on capital employed (ROCE) throughout fiscal 2008. In the June quarter, EM's return on capital employed increased 73 basis points over the year-ago quarter and for fiscal 2008 this important metric was improved by 117 basis points."
Technology Solutions (TS) sales of $1.95 billion in the fourth quarter fiscal 2008 were up 9.9% year over year on a reported basis and up 5.6% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, TS revenue was flat year over year. On a reported basis, fourth quarter fiscal 2008 sales in EMEA and Asia were up 43.1% and 1.6%, respectively, year over year, while the Americas was essentially flat. EMEA revenue was up 26.4% excluding the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA fourth quarter fiscal 2008 sales increased by 4.2% year over year while pro forma sales in Asia declined 11.3% due primarily to lower sales of microprocessors. TS operating income was $61.8 million in the fourth quarter fiscal 2008, a 10% decrease as compared with fourth quarter fiscal 2007 operating income of $68.7 million, and operating income margin of 3.18% decreased by 70 basis points versus the prior year fourth quarter.
Mr. Vallee further added, "Technology Solutions rebounded from the disappointing March quarter as double digit sequential growth in servers, storage, and software along with higher gross margin drove an 88 basis point improvement in operating income margin. In the Americas region, both operating income margin and return on capital employed were at the high end of our long-range business model. The cost reduction initiatives at certain TS business units that we announced last quarter are essentially complete and we expect the full savings to be realized in the September quarter. With the recently completed acquisitions of Horizon Technologies and Ontrack Solutions, TS is continuing to build out its international footprint while also investing in new organic growth opportunities."
Cash Flow During the fourth quarter of fiscal 2008, the Company generated cash flow from operations of $257.2 million and for the full year of fiscal 2008 generated $453.6 million. As a result, the Company ended the quarter with $640.4 million of cash and cash equivalents and net debt (total debt less cash and cash equivalents) of $584.9 million.
Ray Sadowski, Chief Financial Officer, stated, "Our disciplined approach of managing our business to drive return on capital and create shareholder value is enabling us to work through this soft economic environment while maintaining a strong balance sheet and generating significant cash flow. For fiscal 2008, we improved working capital velocity, reduced our cash cycle by two days and generated substantial cash from operations. This performance gives us the financial flexibility to continue to invest in value-creating M&A that supplements our growth and adds to our global scale and scope."
Outlook For Avnet's first quarter fiscal year 2009, management expects normal seasonality at both EM and TS with EM sales anticipated to be in the range of $2.65 billion to $2.75 billion and sales for TS to be between $1.88 billion and $1.98 billion. Therefore, Avnet's consolidated sales are forecasted to be between $4.53 billion and $4.73 billion for the first quarter fiscal year 2009. Management expects first quarter fiscal year 2009 earnings to be in the range of $0.70 to $0.74 per share. First quarter 2009 guidance includes approximately $0.05 per share related to the expensing of stock-based compensation as compared with $0.02 and $0.04 per share, respectively, in the fourth and first quarters of fiscal 2008. The above EPS guidance does not include the amortization of intangible assets or integration charges related to acquisitions that have closed or will close in the September quarter and anticipated restructuring charges.
Forward Looking Statements This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management's current expectations and are subject to uncertainty and changes in facts and circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as "will," "anticipate," "expect," believe," and "should," and other words and terms of similar meaning in connection with any discussions of future operating or financial performance 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, any material changes in the allocation of product or product rebates by suppliers, allocations of products by suppliers, other competitive and/or regulatory factors affecting the businesses of Avnet generally.
More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K, Form 10-Q and Form 8-K. 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 Company also discloses revenue adjusted for the impact of acquisitions and the change to net revenue accounting treatment of sales of supplier service contracts ("pro forma revenue" or "organic revenue"). Management believes pro forma revenue is a 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 charges 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 believes net income and diluted earnings per share adjusted for the impact of restructuring, integration and other charges and gain on sale of assets 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. Other metrics management monitors in its assessment of business performance include return on working capital (ROWC), return on capital employed (ROCE) and economic profit. ROWC is defined as annualized operating income, excluding restructuring, integration and other items, divided by the monthly average balances of trade receivables and inventory less accounts payable. ROCE is defined as annualized tax effected operating income, excluding restructuring, integration and other items, divided by the monthly average balances of interest-bearing debt and equity less cash and cash equivalents ("average capital"). Economic profit is defined as tax effected operating income, excluding restructuring, integration and other items, less a capital charge (assumed to be 10%) on average capital. 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 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 assets for the fiscal year ended 2007 resulted from the receipt of contingent purchase price proceeds related to a prior sale of a business.
Debt extinguishment costs for the fiscal year ended 2007 related to the Company's election to redeem all of its outstanding 93/4% Notes due February 15, 2008 during the first quarter.
Pro Forma (Organic) Revenue Pro forma or Organic revenue, is defined as revenue adjusted for (i) the impact of acquisitions to include the revenue recorded by these businesses as if the acquisitions had occurred at the beginning of fiscal 2007, and (ii) 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, as if the net revenue accounting was applied to periods prior to the change. Prior period revenue adjusted for these impacts is presented below:
"Acquisition Revenue" as presented in the table above include the following acquisitions.
Cash Flow Activity The following table summarizes the Company's cash flow activity for the fourth quarters and fiscal year 2008 and 2007, 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, acquisition and divestiture 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 presentation 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.
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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