Avnet: Signs of relief

Avnet enjoys the recovery and the fruits of its labor.

By Heidi Elliott -- Movers & Shakers, 11/1/2004

After three years of economic slump, Avnet is enjoying some of its best financial results in many, many quarters. The component-distribution segment has seen a return to fiscal health over the past year and, at long last, is declaring the industry's worst downturn officially over.

Roy Vallee, Chairman and CEO, Avnet

For its part, Avnet enjoyed double-digit growth from its components business in all three regions during the first half of 2004. In the June quarter, its computer-systems distribution unit also experienced double-digit growth. "My data say we are in an up-cycle," says Roy Vallee, Avnet's Chairman and CEO.

Those data are certainly compelling. Sales for Avnet's fiscal year, which ended in June, rose 13.2 percent to $10.24 billion. Excluding special charges, net income reached $125.6 million, up from $27.8 million in the prior year. Avnet also increased its operating income by 116 percent to $257.9 million, excluding restructuring charges.

"During fiscal 2004, the Avnet team was focused on delivering higher returns on capital through quality revenue growth and operational excellence," wrote Ray Sadowski, chief financial officer, in releasing the results. "As we look into fiscal 2005, we see additional opportunities to improve operational efficiency, thereby facilitating our ability to continue to improve our customer service and our bottom line, as well as to strengthen our balance sheet."

Avnet's history stretches back to 1921, when Charles Avnet began selling surplus parts on "radio row" at a time when radio hobbyists, engineers, and inventors purchased surplus parts from the guys that bought from suppliers. Avnet began assembling connectors in 1955 in New York, and that same year the founder incorporated his company. A year later, Avnet hit the $1 million mark in sales.

Avnet and rival Arrow Electronics stand head-and-shoulders above the rest of the distribution industry. With combined sales of about $20 billion, they take the lion's share of the top 25 distribution companies' total sales. Both top distributors offer an array of supply-chain services to the electronics industry. Avnet and Arrow are similar in that both are global, broadline distributors with a presence in all major market segments. The two chose a growth-through-acquisition path to get them to where they are. Since 1991, Avnet has made more than 40 acquisitions, bringing it to its current operations in 68 countries.

One area where Arrow bests Avnet is in financial ratios. Avnet has worked to improve that aspect over the last several years, even as it worked to get through the economic downturn. "The two years prior to last were the two most challenging in my career," Vallee says. "It was all about reducing costs and reducing debt. The team did a good job, but it sure wasn't fun. We took all the hard work and agony of fiscal 2002 and fiscal 2003, married cost and debt reduction with revenue growth, and we produced strong financial growth."

Avnet has worked to improve its expense and asset productivity metrics. It has done that through cost-cutting and operational changes, including last year's merger of its two computer-systems operating groups into one, called Avnet Technology Solutions (ATS). In the ensuing fiscal year, ATS saw its revenue grow by 7 percent, while the year before was flat. At the same time, operating income grew 75 percent, or 10 times faster than sales.

Avnet's other operating group, Electronics Marketing (EM), also fared well. EM is the larger of the two operating groups and brings in the bulk of Avnet's revenue. The Electronics Marketing group in Europe, the Middle East and Africa (EMEA), grew its sales by 23 percent, and operating income increased 388 percent. "For the last two quarters, EM Europe has been our most profitable business," Vallee says. "I have to put EM EMEA as the crown jewel."

The Asia region, meanwhile, also grew substantially. Revenue there grew by 50 percent, to $1.3 billion, with profit rising 70 percent from the prior year. Avnet has invested more than $500 million in assets across the region to date. The company employs approximately 1,100 people, nearly half of whom are in China. Avnet is ahead of rival Arrow in this region, though it has not made the kind of market inroads as semiconductor specialist Memec, which boasts more than 25 percent of its total sales from Asia.

Looking ahead, Avnet should at least sustain its lead over Arrow, according to analyst Rob Damron, managing director of Twenty First Century Equity Research. "Avnet is larger than Arrow in Asia, and that's the fastest-growing market, so it's a positive for them," he says.

Another plus is that Avnet has continued making strategic adjustments. With the start of its fiscal year in July, the company unveiled a new business unit focused on logistics and tapped Andy Bryant to serve as president of Avnet Logistics. His role includes oversight of warehousing, value-added services, shipping, and supply-chain services for both of Avnet's operating groups on a global basis. He is also responsible for marketing Avnet's logistics expertise and positioning the group as a third-party logistics provider to the technology supply chain.

The move represents an important new direction for Avnet. "We identified the opportunity to build a new business around logistics," says Vallee, noting that Avnet already had about 1,000 employees working in this area. "It struck me that we're running a logistics company inside our distribution company."

Focusing on services is critical to the distribution industry's future. The best potential for growth lies in offering such services, says Robin Gray, executive vice president of the National Electronic Distributors Association (NEDA). "The biggest opportunity [for distributors] is in providing services that deliver the most value to the supply chain, like logistics management, inventory management," Gray says. "The growth areas are in services that the customers are willing to pay for. When everything is a commodity, you can't win on price. You need to differentiate yourself with services."

Avnet Logistics aims to do just that, and it's getting praise. "Distribution and logistics go hand-in-hand," Damron says. "Avnet should be able to compete well against other 3PLs [third-party logistics providers], and it may even have a leg up because of its technology focus."