Avnet M&A strategy credited for sales gains

By Suzanne Deffree, News Editor -- Electronic News, 10/25/2007

Avnet Inc. credited its merger and acquisition strategy for its 12.3 percent year-over-year sales growth in the September quarter, yet another challenging period for organic growth within the distribution market.

Sales of $4.1 billion were accompanied by net income of $105.5 million, or $0.69 per share, for the quarter, which started Avnet’s fiscal 2008. Net income was also up significantly year-over-year from fiscal Q1 2007’s $64.1 million. Sequentially, sales and net income for Avnet’s quarter were down, however, as compared to the previous quarter’s sales of $4.24 billion and income of $124.7 million. Avnet’s fiscal Q1 2008 operating income was $165.2 million, up 14 percent as compared with operating income of $145 million in the year-ago quarter.
 
“While year-over-year organic revenue growth slowed to 2.3 percent this quarter, positive contributions from acquisitions contributed to continued year-over-year improvement in key quarterly financial metrics including operating income, EPS and return on capital employed,” Roy Vallee, chairman and CEO of Phoenix-based Avnet, said in a statement. “With another $700-plus million of annual revenue from acquisitions completed or announced in the current quarter, our acquisition strategy continues to broaden our revenue base, create cross selling opportunities and add further operating leverage to our business model going forward.” 

Indeed, Avnet has made its plans to gain revenue and market share through acquisitions well known. The company has made several acquisitions in recent weeks, including U.K.-based electronics distributor Acal, Germany-based passive components distributor Betronik, and Germany-based Magirus EID, the infrastructure distribution business of the German Magirus Group. 
 
Broken out, Avnet’s Electronics Marketing (EM) sales of $2.49 billion in the quarter were up 2.3 percent year-over-year. EM sales in the Europe, Middle East and Africa (EMEA) and Asia regions increased 4.6 percent and 9.5 percent, respectively, year-over-year, while the Americas decreased 4.8 percent. EM operating income of $130.2 million was up 3.6 percent over the prior-year’s fiscal Q1 operating income of $125.6 million and operating income margin of 5.2 percent was up 7 basis points over the prior year’s quarter.
 
“EM’s results were a reflection of the seasonally slower September quarter, but were better than our expectations as inventories throughout the supply chain continue to decline,” Vallee said. “Even though sales in the lower margin Asia region increased to 30 percent of total EM as compared with 28 percent in the year-ago quarter, EM’s global operating income margin improved year-over-year for the eighth consecutive quarter. Our Asia team’s disciplined approach to profitable growth with higher asset velocity translated 9.5 percent year-over-year top line growth into a 48 basis point improvement in operating income margin and a 673 basis point improvement in return on working capital, resulting in record quarterly sales and profits for the region.”
 
Avnet’s Technology Solutions (TS) sales of $1.61 billion in fiscal Q1 2008 were up 32.5 percent year-over-year on a reported basis and up 2.6 percent on a pro forma basis.  On a pro forma basis, first quarter fiscal 2008 sales in Asia and EMEA were up 31.6 percent and 20.1 percent, respectively, year-over-year, while sales in the Americas were down 5.1 percent. TS operating income was $58.5 million, a 50.1 percent increase as compared with fiscal Q1 2007 operating income of $39 million, and operating income margin of 3.6 percent increased by 42 basis points over the prior fiscal year’s Q1, which Avnet said was due to the change to net revenue accounting treatment of the sales of supplier service contracts. 
 
“With the Magirus and Acal acquisitions in EMEA, TS will become the leading pan-European value-add distributor with roughly $2.5 billion of projected annual revenue in the region,” Vallee continued. “These acquisitions will not only strengthen TS’ competitive position in new markets, they will also further diversify our revenue base as TS will soon be generating close to 40 percent of its revenue from outside the Americas as compared with 30 percent just a year ago.”
 
Looking to Avnet’s fiscal Q2 2008, the company said it expects normal seasonality at both operating groups with sales at EM to be in the range of $2.4 billion to $2.5 billion and anticipates sales for TS to be between $2.05 billion and $2.15 billion, placing Avnet’s consolidated sales estimate between $4.45 billion and $4.65 billion. Avnet forecasted earnings for the December quarter will be in the range of $0.83 to $0.87 per share, up 24 percent to 30 percent year-over-year.


For more on distribution's preformance in the September quarter, see "Arrow Q3 solid, despite harsh EMS market."