Avnet 2000 Annual Report Download - page 21

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the various average foreign currency exchange rates remained the same
during 2000 as compared with 1999, Avnet’s consolidated 2000 sales and
net income would have been less than 4% and 1%, respectively, higher than
the actual reported results for 2000.
LIQUIDITY AND CAPITAL RESOURCES
Over the last three years, cash generated from income before depreciation,
amortization, the pre-tax gain on the dispositions of Allied Electronics and
Channel Master, and other non-cash items amounted to $482.5 million.
During that period, $900.4 million was used for working capital (excluding
cash) needs resulting in $417.9 million of net cash flows used for opera-
tions. In addition, $241.9 million, net, was needed for other normal business
operations including purchases of property, plant and equipment ($198.4
million) and dividends ($69.5 million), offset by cash generated from other
items ($26.0 million). This resulted in $659.8 million being used for normal
business operations. During that three-year period, the Company also used
$598.8 million, net, for the repurchase of its common stock ($378.4 million)
and the net cash used for acquisitions of operations in excess of the cash
provided from dispositions ($220.7 million), offset somewhat by cash
generated from other debt ($0.3 million). This overall use of cash of
$1.258 billion was financed by the $1.366 billion raised from the issuance
of commercial paper, the issuance in February 2000 of the 7 7/ 8% Notes
due 2005, the issuance in August 1999 of the 6.45% Notes due 2003 and
an increase in bank debt, offset by a $107.9 million addition to cash and
cash equivalents.
In 2000, the Company generated $263.3 million from income before depre-
ciation, amortization and other non-cash items, and used $759.2 million for
working capital (excluding cash) needs, resulting in $495.9 million of net
cash flows being used for operating activities. In addition, the Company
used $81.7 million for other normal business operations including purchas-
es of property, plant and equipment ($86.9 million) and dividends ($18.2
million), offset by cash generated from other items ($23.4 million). This
resulted in $577.6 million being used for normal business operations. The
Company also used $646.3 million for acquisitions and the payment of other
debt. This overall use of cash of $1.224 billion was financed by a $1.079 bil-
lion increase in bank debt, commercial paper and the issuance of the 7 7/ 8%
Notes due February 15, 2005, and a $145.0 million decrease in cash and
cash equivalents.
In 1999, the Company generated $9.8 million from income before deprecia-
tion, amortization, the pre-tax gain on the sale of Allied Electronics and other
non-cash items, and generated $62.2 million by reducing working capital
(excluding cash), resulting in $72.0 million of net cash flows provided from
operations. In addition, the Company used $99.5 million for other normal
business operations including purchases of property, plant and equipment
($73.0 million) and dividends ($26.8 million), offset by cash generated from
other immaterial items ($0.3 million). This resulted in $27.5 million being
used for normal business operations. The Company also used $70.1 million
to repurchase its common stock and generated $338.4 million from its dis-
position of Allied Electronics, net of cash used for acquisitions, and the
issuance of other debt. Of this overall generation of cash of $240.8 million,
$11.4 million was used to reduce debt and $229.4 million was added to cash
and cash equivalents.
The Company’s quick assets at June 30, 2000 totaled $1.918 billion as com-
pared with $1.273 billion at July 2, 1999. At June 30, 2000, quick assets
exceeded the Company’s current liabilities by $14.2 million as compared
with $476.8 million excess at the end of 1999. Working capital at June 30,
2000 was $1.969 billion as compared with $1.517 billion at July 2, 1999. At
June 30, 2000 to support each dollar of current liabilities, the Company had
$1.01 of quick assets and $1.03 of other current assets, for a total of $2.04
as compared with $2.91 at the end of the prior fiscal year. However, the
above balance sheet amounts at July 2, 1999 were significantly impacted by
the $377.0 million of cash received on that day in connection with the sale
of Allied Electronics. On July 2, 1999, cash and cash equivalents included
$240.1 million of before-tax proceeds from the sale of Allied Electronics with
the balance of the cash received at closing having been used to reduce com-
mercial paper outstanding. In addition, current liabilities at July 2, 1999
included approximately $134.7 million of accrued income taxes payable as a
result of the gain on the sale of Allied Electronics. As indicated below,
during 2000 the Company entered into a $500.0 million syndicated credit
facility, which at June 30, 2000 was used to back-up a portion of its out-
standing commercial paper. This short-term borrowing was the principal
reason for the decline in the working capital ratio and the decrease in the
quick ratio indicated above. These borrowings also contributed to an
increase in the Company’s debt to capital ratio at June 30, 2000. The
Company is evaluating its capital structure and may, if deemed appropriate,
issue equity or equity-linked securities.
In order to partially finance the cash component of the acquisition of
Marshall Industries as described below and to provide additional working
capital capacity, the Company entered into a $500.0 million 364-day credit
facility in October 1999 with a syndicate of banks led by Bank of America.
The Company may select from various interest rate options and maturities
under this facility, although the Company intends to utilize the facility pri-
marily as a back-up for its commercial paper program pursuant to which the
Company is authorized to issue short-term notes for current operational
business requirements. The credit agreement contains various covenants,
none of which management believes materially limit the Company’s finan-
cial flexibility to pursue its intended business strategy.
On February 8, 2000, the Company issued $360.0 million of 7 7/ 8% Notes
due February 15, 2005 (the “7 7/ 8% Notes”). The proceeds from the sale
of the 7 7/ 8% Notes were approximately $358.3 million after deduction of
the underwriting discounts and other expenses associated with the sale of
the 7 7/ 8% Notes. In August 1998, the Company issued $200.0 million of
6.45% Notes due August 15, 2003 (the “6.45% Notes”). The net proceeds
received by the Company from the sale of the 6.45% Notes were approxi-
mately $198.3 million after deduction of the underwriting discounts and
other expenses associated with the sale of the 6.45% Notes. The net pro-
ceeds from the 7 7/ 8% Notes and the 6.45% Notes have been used to repay
indebtedness which the Company may re-borrow for general corporate pur-
poses, including capital expenditures, acquisitions, repurchase of the
Company’s common stock and working capital needs.
In June 1999, the Company entered into separate credit agreements with
Banca Commerciale Italiana and UniCredito Italiano. The agreements pro-
vide eighteen-month facilities with lines of credit totaling 83 billion Italian
Lira (US dollar equivalent of approximately $40.4 million). The facilities are
currently being used primarily as a source of working capital financing for
one of the Company’s Italian subsidiaries. In addition, in September 1998,
the Company entered into an agreement with KBC, a Belgian bank, to
finance the construction of the new Avnet Europe, NV/ SA distribution cen-
ter in Tongeren, Belgium. The agreement provides for multiple term loans
totaling 665 million Belgian Francs (US dollar equivalent of approximately
$15.6 million) which may be converted into term loans with maturities
between three and fifteen years. The facilities are currently being used to
finance real estate, computer equipment, infrastructure and project consul-
tancy costs related to the new European distribution center.
The Company also has a five-year facility with a syndicate of banks led by
Bank of America which expires in September 2002 and which provides a line
of credit of up to $700.0 million. The Company may select from various
interest rate options and maturities under this facility. This credit facility
serves as a primary funding vehicle as well as a backup for the Company’s
commercial paper program. The credit agreement contains various
covenants, none of which management believes materially limit the
Company’s financial flexibility to pursue its intended financial strategy.
During the last three years, the Company’s shareholders’ equity increased
by $399.8 million to $1.902 billion at June 30, 2000, while total debt
increased by $1.423 billion to $1.938 billion. The increase in shareholders’
equity during that three-year period was the net result of the positive impact
of net income ($471.0 million), shares issued in connection with the acqui-
sitions of Marshall Industries and Eurotronics B.V. (SEI) ($351.9 million) and
other items, net, principally related to stock option and incentive programs
($49.4 million), offset by the repurchase of common stock ($372.8 million),
dividends ($69.9 million) and cumulative translation adjustments ($29.8 mil-
lion). The Company’s debt to capital (shareholders’ equity plus total debt)
ratio was approximately 51% at June 30, 2000 and 36% at July 2,1999. The
Company’s favorable balance sheet ratios would facilitate additional financ-
ing, if, in the opinion of management, such financing would enhance the
future operations of the Company.
Currently, the Company does not have any material commitments for
capital expenditures.
The Company and the former owners of a Company-owned site in Oxford,
North Carolina have entered into a Consent Decree and Court Order with
the Environmental Protection Agency (EPA) for the environmental clean-up
of the site, the cost of which, according to the EPA’s remedial investigation
and feasibility study, is estimated to be approximately $6.3 million, exclusive
of the $1.5 million in EPA past costs paid by the potentially responsible par-
ties (PRP’s). Pursuant to a Consent Decree and Court Order entered into
between the Company and the former owners of the site, the former owners
have agreed to bear at least 70% of the clean-up costs of the site, and the
Company will be responsible for not more than 30% of those costs. In addi-
tion, the Company has become aware of claims that may be made against it
and/ or its Sterling Electronics Corp. subsidiary, which was acquired as part
of the acquisition of Marshall Industries. Sterling once owned 92.46% of the
capital stock of Phaostron, Inc. In August 1995, Sterling sold the interest in
Phaostron to Westbase, Inc. At the time of the sale, Sterling and Westbase
entered into an agreement related to environmental costs resulting from
alleged contamination at a facility leased by Phaostron that is a part of the
San Gabriel Valley Superfund Site. The agreement provided that Sterling
would pay up to $800,000 for environmental costs associated with the site.
The Company does not believe that Sterling or the Company will be respon-
sible for environmental costs in excess of $800,000 and has establised what
it believes to be adequate reserves for any share of such costs that may be
borne by Sterling or the Company. In addition, the Company has received
notice from a third party of its intention to seek indemnification for costs it
may incur in connection with an environmental clean-up at a site in Rush,
Pennsylvania resulting from the alleged disposal of wire insulation material at
the site by a former unit of the Company. Based upon the information known
to date, management believes that the Company has appropriately accrued
in its financial statements for its share of the costs of the clean-ups with
respect to the above mentioned sites. The Company is also a defendant in a
lawsuit brought against it at an environmental clean-up site in Huguenot,
New York. At this time, management cannot estimate the amount of the
Company’s potential liability, if any, for clean-up costs in connection with this
site, but does not anticipate that this matter or any other contingent matters
will have a material adverse impact on the Company’s financial condition,
liquidity or results of operations.