Can the Channel Maintain Record Results?

Although the current economic environment is filled with turmoil and uncertainty, many electronics companies continue to report strong results for the most recent earnings period. {complink 577|Avnet Inc.} closed its fiscal Q4 and 2011 year-end on July 2 with record sales of $26.5 billion — an increase of 38.5 percent over the prior fiscal year. Operating income grew by 52.4 percent over the prior year to more than $1 billion.

Just a few weeks ago, Avnet's largest competitor, {complink 453|Arrow Electronics Inc.}, reported record-level sales of $5.54 billion for the quarter, compared with $4.61 billion in the second quarter of 2010. (See: Market Keeps Close Eye on Inventory.)

Although both distributors expect their businesses will continue to perform well in the next quarter, executives are seeing signs that electronics customers are being extremely cautious about their upcoming component orders. Avnet noted in its earnings press release that its book-to-bill (BtB) ratio for components fell below 1 for the first time in nine quarters, echoing a trend noted by Arrow a few weeks earlier. (A BtB above 1 indicates orders are outpacing actual sales (or “billings”); a BtB below 1 indicates orders are slowing down.)

Distribution is considered a bellwether for the electronics market because it is a link between the supplier base — components makers — and customers in the OEM, EMS, and other industries. Arrow and Avnet, along with Asia's WPG, are the world's largest distributors and therefore represent regional as well as overall electronics market trends. US-based Arrow and Avnet are striving for equal balance among three global regions — the Americas; Europe, the Middle East, and Africa (EMEA); and Asia/Pacific — as well as a product array of semiconductors; interconnect passive and electromechanical products (IP&E); and computer systems.

In spite of this balance, distributors have had a tough time convincing Wall Street that their stock prices can command a premium. Although stock prices will continue to be in the control of the market, distribution executives can control the internal operations of their companies to deliver the best possible value for their shareholders. Former Avnet CEO Roy Vallee was an early adopter of a practice known as value-based management (VBM), and Avnet's full-year 2011 results can stand as a testament to this program's success.

EBN recently had the chance to talk to Vallee — now Avnet's executive chairman — about his legacy as he handed Avnet's CEO title over to Rick Hamada. Vallee said that one of the things he'd like to be remembered for is the company's financial discipline. “Starting in the 2000 time frame, we figured [VBM] is the right way to run the 'railroad,' ” he said. During the 1980s and 1990s, Avnet grew with the success of the electronics industry and a lot of mergers and acquisitions, particularly in Europe. “What happened in the late 1990s is our EPS began to slow and our market valuation contracted,” Vallee said.

Vallee contacted a number of consulting companies and all of them said Avnet's return on capital (ROC) was too low. “That caused us to dig deeper, and we found a philosophy called VBM that focuses on economic profits [via ROC], as opposed to accounting profits,” said Vallee. “Once I understood that, it was clear to me that was the right answer.” Then, he said, “Our attention focused on how to roll out VBM and how we achieve the results.”

Avnet's Q4 2011 is the last reporting period under Vallee as CEO. Hamada, who took the reins on July 1, had this to say about the most recent results:

    The Avnet team closed out the fiscal year with another quarter of record-breaking results. Revenue for the fourth quarter increased 32.6% year over year in reported dollars to a record $6.91 billion while pro forma revenue increased 13.5%. Gross profit margin increased sequentially for the second quarter in a row as we continue applying our value-based management (VBM) discipline to newly acquired businesses along with continued improvement in the western regions. This strong performance resulted in our fifth consecutive quarter of return on capital employed (ROCE) above 15% and our fifth consecutive quarter of record-breaking adjusted diluted earnings per share. While it appears that the global economic recovery may be slowing, the technology markets we serve continue to lead the recovery and we are vigilantly monitoring customer and supplier input as we enter the second half of the calendar year. As we begin fiscal 2012, we are committed to building on the momentum from fiscal 2011 as we move beyond the major integrations in fiscal 2011 and start to capitalize on the expanded profitable growth opportunities in both operating groups.

3 comments on “Can the Channel Maintain Record Results?

  1. SunitaT
    August 11, 2011

    In spite of this balance, distributors have had a tough time convincing Wall Street that their stock prices can command a premium.


     May be Wall street is expecting slowdown in coming quarter because there is belief “Market is always right”. Just wondering how will the valuations of these companies going to get affected if double dip recession happens.

  2. Jay_Bond
    August 11, 2011

    This is great news that Arrow and Avnet have seen significant sales and profit increases this past fiscal year. With the way Wall Street has been behaving lately in light of all the economic turmoil, I think these companies best bet is to focus on their internal workings and delivering results to their shareholders. Wall Street will eventually catch on as soon as they can see clearly.

  3. Daniel
    August 12, 2011

    Barbara, it’s happy to know that most of the companies had booked profit for the last quarter. But I don’t think they can carry forward such profits to coming quarters because of the recent economic instability in market. Other thing is so far the Japan Tsunami effects are not reflected in supply industry because still most of the companies are using the products developed before tsunami.

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