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Avnet Inc. (AVT - Analyst Report) reported adjusted earnings per share (EPS) of $1.01 in the second quarter of fiscal 2013, which surpassed the Zacks Consensus Estimate of 83 cents and management’s guidance range of 79 cents to 89 cents per share for the quarter. But the result came below the year-ago quarter level.

Revenues

Revenues came in at $6.70 billion, relatively flat compared with $6.69 billion recorded in the year-ago quarter, reflecting tough spending environment. But the company posted 14.0% sequential growth on strong performance by the Technology Solutions segment and better component business in Asia. Revenues in the quarter, however, were above management’s guidance range of $5.95 billion to $6.65 billion and the Zacks Consensus Estimate of $6.25 billion.

On a segmental basis, revenues from Electronics Marketing (EM) grew 2.2% from the year-ago quarter to $3.67 billion; inching past management’s guidance range of $3.35 billion - $3.65 billion. Revenue improvement was led by double-digit growth in the volume fulfillment business in Asia, which offset weak performances in America and Europe.

Revenues from Technology Solutions (TS) fell 2.3% from the year-ago quarter to $3.03 billion. Segmental revenues were slightly above management’s guidance range of $2.60 billion – $3.00 billion. Low demand from the Europe, the Middle East and Africa (EMEA) region continued to pervasively affect the segment’s yields. But the segment’s sequential double-digit growth was attributable to strong contributions across all regions.

Operating Results

Reported gross margin in the quarter was 11.5%, down 20 basis points from the year- ago level. Operating margin was 2.9% versus 3.4% in the year-ago quarter. The year-over-year contraction was mainly due to softer margin performances by both the segments.

Electronics Marketing operating margin came in at 3.8%, down from 4.9% in the year-ago quarter. The lower gross margin in the Western regions and a geographic mix shift toward low-margin Asian region and difficult comparison due to hard drive pricing benefit (due to Thailand flood) adversely impacted segment margin during the quarter.

Technology Solutions operating margin decreased to 3.6% from 3.8% in the year-ago quarter due to the fall in the EMEA region margin.

Reported net income was $137.5 million or 99 cents compared with $147.1 million or 98 cents in the year-ago quarter. Excluding restructuring, integration and other charges, gain on bargain purchase and other, tax gains, adjusted net income came to $140.0 million or $1.01 per share compared with $172.0 million or $1.15 per share in the year-earlier quarter.

Balance Sheet and Cash Flow

Avnet ended the quarter with cash and cash equivalents of $805.3 million, down from $1.0 billion in the prior quarter. Long-term debt was $2.0 billion, significantly up from $1.4 billion in the previous quarter.

The company generated $326.4 million of cash from operating activities, up from $81.0 million in the prior quarter. Capital spending in the quarter amounted to $30.9 million.

Avnet bought back 2.5 million shares for a value of $68.9 million. Since August 2011, Avnet has bought-back 17.9 million shares worth $525.5 million.

Guidance

For the third quarter of fiscal 2013, the company projects consolidated sales in the range of $5.95 billion and $6.55 billion. Avnet projects EM sales and TS sales to be in the range of $3.625–$3.925 billion and $2.325–$2.625 billion, respectively. Adjusted EPS (excluding restructuring charges, acquisitions charges and post-closing integration activities) is likely to be within 81 cents to 91 cents per share along with a tax rate of 27% – 31%.

Avnet believes that IT spending will remain muted in the coming quarters. But it remains optimistic about investing heavily in new growth opportunities.

Our Take

The company’s second quarter results exceeded our expectations, with EPS and revenue beating the Zacks Consensus Estimates. But year-over-year comparisons were disappointing due to continued soft industry demand driven by macroeconomic uncertainty, weak PC demand, and inventory rebalancing. Continuous margin contraction is another negative. The company also guided for a weak third quarter citing tough spending environment.

The company has been prudent in acquiring companies to boost its product portfolio as well as revenue streams. But we don’t see much contribution from the acquisitions, which are disappointing enough. Moreover, its competitor Arrow Electronics (ARW - Analyst Report) is also making acquisitions to strengthen its market position, which is a cause of concern.

Currently, Avnet has a Zacks Rank #4 (Sell).

You can also consider other stocks that are going to report this earnings season and have positive Zacks Ranks and Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

Geospace Technologies Corp. (GEOS - Snapshot Report) has a Zacks Rank #2 (Buy) with an Earnings ESP of +21.2%. Interdigital Inc. (IDCC - Snapshot Report) has a Zacks Rank #2 (Buy) with an Earnings ESP of +350.0%.

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