Avnet Inc. (AVT) posted an adjusted net income (excluding the impact of restructuring, integration and other one-time items) of $169.7 million or $1.10 per share in the third quarter of fiscal 2011 compared with a net income of $115.8 million or 76 cents per share in the year-earlier quarter.

The results surpassed management’s guidance range of 93 cents – $1.01 and the Zacks Consensus Estimate of 98 cents.

Based in Phoenix, AZ, Avnet is one of the world’s largest distributors of electronic components and computer products.  

Avnet reported sales of $6.7 billion in the third quarter of fiscal 2011, up 40% from the year-earlier quarter. Excluding the impact of acquisitions, sales grew 16% from the year-earlier quarter. Revenues were ahead of management’s guidance range of $5.95 billion – $6.55 billion and the Zacks Consensus Estimate of $6.345 billion.

On a segmental basis, revenues from Electronics Marketing (EM) increased 36% from the year-earlier quarter to $3.93 billion, exceeding management’s guidance range of $3.55 billion – $3.85 billion. During the quarter, demand for electronic components was solid and seasonal trends were better than expectations in all the three regions. At the end of the quarter, book-to-bill ratio was was above one.

Revenues from Technology Solutions (TS) improved 47% from the year-earlier quarter to $2.74 billion, ahead of management’s guidance range of $2.40 billion – $2.70 billion. The growth was attributed to less than normal seasonal decline in the Americas and Asia.

Based on product level, year-over-year growth was led by sales of servers and storage. Further, there was an increase in demand for microprocessors and hard disc drives, but the earthquake in Japan affectied the hard disc drives supply chain.

Gross margin declined to 11.8% from 12.25% in the year-earlier quarter, due to the acquisitions with lower gross profit margin compared with Avnet’s existing businesses.

Adjusted operating margin was 3.85%, up 18 basis points from the year- earlier quarter, led by an organic revenue growth and operating leverage partially offset by acquisitions with lower margin. EM operating margin increased 73 basis points from the year-earlier quarter to 5.73%. TS operating margins declined to 2.09% from 2.67% in the year-earlier quarter. 

During the quarter, Avnet generated net cash of $188 million from operations and used $35 million for capital expenditure.  Avnet ended the quarter with cash and cash equivalents of $782 million, up $25 million from the previous quarter.


For fourth quarter of fiscal 2011, the company projects consolidated sales in the range of $6.60 billion and $7.30 billion. Avnet expects EM sales and TS sales to be in the range of $3.85 billion – $4.25 billion and $2.75 billion – $3.05 billion, respectively.

Adjusted EPS is expected in the range of $1.10- $1.22.

Management stated that it is difficult to evalute the impact of the earthquake in Japan on Avnet’s business. Thus, the company raised its June quarter sales expectation for  EM and, consequently, Avnet’s revenue and EPS expectation were also increased.

We believe that Avnet is well positioned to accelerate revenues due to its aggressive acquisition strategy, including itX Group Limited, Bell Microproducts and Unidux Inc.

However, we remain concerned about margins. Thus, we have a long-term Neutral recommendation on the stock and prefer to wait on the sidelines for expansion of margins and realization of synergies from acquisitions. Based on better-than- expected results of the quarter, we have a Zacks #2 Rank , which translates into a short-term Buy rating.

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