Avnet yesterday posted a 4% increase in revenue to $2.76bn for its most recent quarter ending April 2, from $2.64bn a year ago. Profit grew 55% to $41.4m, or 34 cents a share, compared with $26.7m, or 22 cents a share, including charges, a year ago.
Without those charges, it would have earned $40.9m, or 34 cents a share, in the year-ago quarter. The results fell slightly short of analysts’ expectations of nearly 35 cents per share, according to a Thomson Financial poll.
Looking forward, Avnet expects revenue of between $2.8bn to $2.9bn and earnings in the range of 35 cents to 39 cents for the current quarter. However, this guidance does not take into account its acquisition of Memec Group Holdings, announced Tuesday. Financial analysts project Avnet to earn 37 cents per share on $2.75bn in sales this quarter.
Phoenix, Arizona-based Avnet bought privately held semiconductor distributor Memec for $482m in cash and stock, and will assume about $194m worth of the company’s debt. Memec shareholders will receive about 24 million Avnet shares, plus about $64m cash. The deal is expected to close within 90 days, pending regulatory approval.
By buying Memec, Avnet pushes past Arrow in the global market for electronics distribution, said Carter Shoop, an analyst at Deutsche Bank, which has an investment banking relationship with both distributors.
Last year, the growth of Arrow’s main business units outpaced Avnet’s and Arrow was more profitable, by far. However, the combined annual sales of Avnet and Memec will total $13bn, compared to Arrow’s $10.5bn, Shoop said.
The Memec deal will generate $130m in cost savings for Avnet, including $10m from lower interest expense, which will affect earnings immediately, the company said. Memec will be integrated into Avnet’s electronics marketing group, which will now generate more than $8.5bn across operations in 69 countries, according to Avnet.
Last year, Memec had sales of about $2.3bn. It has 2,400 employees in 33 countries. Initially, Memec had planned to go public to pay down its debt and filed for an initial public offering last May. However, it decided that merging with Avnet provides the best future for Memec.
The Memec deal marks Avnet’s entrance into the Japanese market and strengthens its position in the Asia region, which is growing fast, the company said. San Diego-based Memec generates roughly $150m worth of business in Japan, making it one of the top 25 distributors in the country, said Avnet CEO Roy Vallee, in a conference call. The deal also will bolster Avnet’s design capabilities in component distribution.
From our perspective, it creates a beach head. We’re not expecting overnight success, but I do believe we will be able to add suppliers and supply-chain services, Vallee said.
In response to the Memec deal, Avnet will now likely be expected to beef up its presence in the Asian market, analyst Shoop said. I think Arrow’s going to come under a fair amount of pressure to gain a larger footprint in Asia to increase its scale and scope there, Shoop said. There’s a good chance they will do that through acquisitions.
He said Arrow is now a distant No. 3 in the Asian market, behind Avnet and Taiwan’s World Peace Industrial.
On Wednesday, Arrow missed Wall Street’s expectations when it announced its quarterly earnings, but said it plans to continue to cut costs by streamlining operations.
Arrow posted a profit of $57.2m, or 49 cents a share, a 94% increase from $29.5m, or 28 cents a share, in the same quarter last year. For the quarter, revenue grew nearly 4% to $2.73bn from $2.63bn a year earlier. Melville, New York-based Arrow missed analysts’ earnings target of 54 cents a share, according to a Thomson Financial poll.
To some degree, cost-cutting moves were behind the distributor’s results, said Arrow chief executive William Mitchell. Our initiatives to be better organized, lower our cost structure and manage working capital more efficiently continue to drive improving operating results, he said in a statement.
Worldwide electronics component sales at Arrow were $2.09bn, up 3% from a year ago. Global computer product sales rose 7 % year-over-year to $632m. Mitchell said its North American computer products businesses’ saw their 15th consecutive quarter of year-on-year growth in operating income by expanding product lines and strictly managing costs.
Previously, Arrow had said it would reduce real-estate costs and become more efficient in its distribution centers. This will further cut costs by about $40m this year, the company said. This quarter, roughly $7m of that expected cost reduction was achieved, but the company was charged about $2.6m in taxes related to those actions.
Looking forward, Arrow CFO Paul Reilly said next quarter’s revenues will total between $2.7bn and $2.8bn on earnings per share of between 29 cents and 53 cents. Analysts project $2.84bn in revenues and earnings of 56 cents per share.
Yesterday, shares in Arrow closed on the New York Stock Exchange at $23.40, down nearly 2%. Avnet shares closed down almost 1% on the NYSE at $17.56.
Analyst Shoop said the improvement in both distributors’ businesses is in step with the overall pick-up in the broader information technology markets.
