Avnet, Inc. (AVT)

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Avnet Inc. (AVT)

F2Q13 Earnings Call

January 24, 2013 2:00 pm ET

Executives

Vincent Keenan – Vice President-Investor Relations

Rick Hamada – Chief Executive Officer and Chair of the Avnet Executive Board

Kevin Moriarty – Chief Financial Officer

Harley Feldberg – President, Avnet Electronics Marketing Global

Ray Sadowski – Chief Administrative Officer

Phil Gallagher – President, Avnet Technology Solutions Global

Analysts

Shawn M. Harrison – Longbow Research LLC

Amitabh Passi – UBS Securities LLC

Scott D. Craig – Bank of America Merrill Lynch

Ananda Baruah – Brean Capital LLC

Sherri Ann Scribner – Deutsche Bank Securities, Inc.

Brian Alexander – Raymond James

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Jim Suva – Citigroup, Inc.

Steven B. Fox – Cross Research LLC

Brendan Furlong – Miller Tabak & Co. LLC

Presentation

Operator

Please stand by. Our presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet’s Vice President of Investor Relations.

Vincent Keenan

Good afternoon, and welcome to Avnet’s Second Quarter Fiscal Year 2013 Business and Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today’s event.

As we provide the highlights for our second quarter fiscal year 2013, please note that in the accompanying presentation and slides, we have excluded the gain on bargain purchase associated with an acquisition and restructuring, integration and other items for all periods presented.

When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of divestitures. In addition when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet’s non-US dollar-based financial statement into U.S. dollars.

And finally, when addressing working capital, return on working capital employed, and return on working capital, the definitions are included in the non-GAAP section of our presentation.

Before we get started with the presentation from Avnet’s management, I would like to review Avnet’s Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet.

Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission.

In just a few moments, Rick Hamada, Avnet’s CEO will provide Avnet’s second quarter fiscal year 2013 highlights. Following Rick, our new Chief Financial Officer, Kevin Moriarty will review some additional financial highlights, our return on capital performance and provide third quarter fiscal 2013 guidance. At the conclusion of Kevin’s remarks, a Q&A will follow.

Also here today to take any questions you may have related to Avnet’s business operations is Ray Sadowski, Avnet’s, Chief Administrative Officer; Phil Gallagher, President of Technology Solutions; and Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Rick Hamada to discuss Avnet’s second quarter fiscal 2013 business highlights.

Rick Hamada

Thank you, Vince, and good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet.

After several quarters of a somewhat cautious technology spending environment, certain segments of our served markets demonstrated relatively better strength in the December quarter. At Technology Solutions, calendar year end spending on IT infrastructure was stronger than expected, while component sales in Asia also exceeded expectations for the second quarter in a row.

As a result, enterprise revenue grew 14% sequentially to $6.7 billion, and pro forma revenue was up 9.4% in constant currency, which is in line with normal seasonality after two quarters of below seasonal growth.

On a year-over-year basis, reported revenue was roughly flat and pro forma revenue declined 4.8% in constant currency. Gross profit increased $84 million, or 12% sequentially due primarily to the strong double-digit growth at Technology Solutions.

On a sequential gross profit margin decline of 19 basis points included the impact of the enterprise business mix shift is our lower gross profit margin TS business grew to represent 45% of enterprise sales as compared with 38% in the September quarter.

The combination of strong growth in revenue and our previously communicated cost reduction actions drove adjusted operating income up 60% sequentially and adjusted operating income margin up 95 basis points sequentially to 3.3%.

Adjusted operating income margin was down 67 basis points year-over-year due primarily to the temporary benefit from hard disk drive shortages included in the year ago quarter, as well as lower operating income margin at EM in the current year.

As a result of these factors, adjusted EPS increased $0.42, or 71% sequentially to $1.1. Despite the significant sequential improvement, adjusted EPS was down $0.14 from the year ago quarter, which included a positive impact of approximately $0.05 to $0.07 from the temporary benefit related to hard disk drive shortages in the second quarter of fiscal 2012. The remainder of the decline was due to lower net income, somewhat offset by the benefits of our share repurchase program.

Return on capital employed increased 403 basis points sequentially to a 11.8%, but was down 245 basis points year-over-year due primarily to the decline in net income as working capital velocity was essentially consistent with the prior year. Our sequential increase in net income combined with a reduction in working capital drove cash flow from operations to $326 million for the quarter, bringing the total to $690 million for our trailing 12 months.

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