Avnet Inc. (AVT) reported adjusted earnings (excluding restructuring, integration and other charges, gain on bargain purchase and other, amortization of intangibles, and tax gains) of $1.17 per share in the second quarter of fiscal 2014, beating the Zacks Consensus Estimate of $1.11 per share. Earnings not only beat management’s guidance range of $1.05 to $1.15 but were also up 11.3% on a year-over-year basis.
Revenues came in at $7.42 billion, up 10.8% from the year-ago quarter. Revenues in the quarter surpassed management’s guidance range of $6.65 billion to $7.25 billion and beat the Zacks Consensus Estimate of $6.95 billion. The year-over-year increase was primarily due to strength in the Asia region. Moreover, the company recorded strong organic growth across its business segments.
On a segmental basis, revenues from Electronics Marketing (:EM) grew 13.1% from the year-ago quarter to $4.15 billion and came ahead of management’s guided range of $3.80 billion–$4.10 billion. The year-over-year increase was primarily boosted by high-volume fulfillment business in the Asia region. Organic growth was 11.4% year over year.
Revenues from Technology Solutions (TS) grew 7.9% from the year-ago quarter to $3.27 billion. Segmental revenues also came ahead of management’s guidance range of $2.85 billion–$3.15 billion. The year-over-year growth was mainly due to continued strong demand in America and Asia. Organic growth was 4.1% year over year.
Gross profit for the quarter increased 10.4% year over year to $848.6 million, while gross margin in the quarter was 11.4%, down 4 basis points (bps) on a year-over-year basis. The margin contraction was due to unfavorable business mix.
Adjusted operating income increased 15.2% from the year-ago quarter to $263.2 million, while operating margin came in at 3.5% compared to 3.4% in the year-ago quarter. The increase was primarily due to increase in EM.
Adjusted net income was $163.9 million or $1.17 per share compared with $145.6 million or $1.05 in the year-ago quarter. Adjusted net income excluded restructuring, integration and other charges, gain on bargain purchase and other, amortization of intangibles, and tax gains.
Balance Sheet and Cash Flow
Avnet ended the quarter with cash and cash equivalents of $779.3 million compared with $865.6 million in the previous quarter. Long-term debt was $1.23 billion compared with $1.20 billion in the previous quarter.
The company used $28 million cash in operating activities. Avnet paid a dividend of $20.6 million (15 cents per share) in the quarter.
For third-quarter fiscal 2014, the company projects consolidated sales in the range of $6.6 billion to $7.2 billion, while the Zacks Consensus Estimate is pegged at $6.63 billion. Avnet projects EM and TS sales in the range of $4.0 billion–$4.3 billion and $2.6 billion–$2.9 billion, respectively.
Adjusted earnings per share (excludes restructuring and integration charges related to costs reductions and acquisitions and amortization of intangibles) is likely to be within $1.02 and $1.12 per share while tax rate is likely to be in a range of 27%–31%. The Zacks Consensus Estimate is pegged at $1.05.
Avnet posted better-than-expected second-quarter results. However, the guidance was less-than-encouraging due to seasonality in the western regions and below-normal seasonality in the Asia region due to a possible slump in the high volume fulfillment business.
Avnet’s leading position in electronics distribution, continuous cost cutting initiatives and acquisition synergies are encouraging. It does, however, face stiff competition for both its domestic and foreign operations, especially from archrival Arrow Electronics Inc. (ARW). However, we look forward to management’s decision to optimize costs and investments to tap the changing demand.
Currently, Avnet has a Zacks Rank #3 (Hold). Investors can also consider other technology stocks such as Seagate Technology (STX) and Western Digital Corporation (WDC). Both the stocks sport a Zacks Rank #2 (Buy).