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Avnet Inc. (AVT - Analyst Report) reported adjusted earnings per share (EPS) of 90 cents in the third quarter of fiscal 2013, which surpassed the Zacks Consensus Estimate of 87 cents and was toward the higher end of management’s guidance range of 81 cents to 91 cents per share. But the result came below the year-ago quarter level.

Revenues

Revenues came in at $6.30 billion, relatively flat compared with $6.25 billion recorded in the year-ago quarter and down 6.0% sequentially, reflecting tough spending environment. Revenues in the quarter were toward the higher end of management’s guidance range of $5.95 billion to $6.65 billion and above the Zacks Consensus Estimate of $6.13 billion.

On a segmental basis, revenues from Electronics Marketing (EM) grew 1.1% from the year-ago quarter to $3.80 billion; within management’s guidance range of $3.625 billion - $3.925 billion. Marginal improvement in revenues was led by double-digit growth in the volume fulfillment business in Asia, which offset weak performances in America (especially due to the exit of the Latin American commercial component business).

Revenues from Technology Solutions (TS) fell 0.9% from the year-ago quarter to $2.50 billion. Segmental revenues were within management’s guidance range of $2.325 billion – $2.625 billion. The year-over-year decline was mainly due to a 5.1% decrease in Americas revenues partially offset by growth in Europe, Middle East & Africa (EMEA) and Asia.

Operating Results

Reported gross margin in the quarter was 12.0%, flat year over year. Operating margin was 2.7% versus 3.5% 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 4.3%, down from 5.2% in the year-ago quarter. Margin decline was mainly due to lower profitability in the western regions, given slow recovery and increased competitive pressure in the EMEA region.

Technology Solutions operating margin decreased to 2.5% from 2.7% in the year-ago quarter due to the fall in the EMEA region margin.

Reported net income was $86.2 million or 62 cents compared with $147.6 million or $1.00 in the year-ago quarter. Excluding restructuring, integration and other charges, gain on bargain purchase and other, and tax gains, adjusted net income came to $125.4 million or 90 cents per share compared with $151.6 million or $1.03 per share in the year-earlier quarter.

Balance Sheet and Cash Flow

Avnet ended the quarter with cash and cash equivalents of $820.9 million, up from $805.3 million in the prior quarter. Long-term debt was $2.08 billion, up from $2.0 billion in the previous quarter.

The company generated $22.0 million of cash from operating activities, down from $326.4 million in the prior quarter. Capital spending in the quarter amounted to $20.1 million.

Avnet did not buy back any shares during the quarter. At the quarter end, Avnet had roughly $225.0 million outstanding under the $750.0 million stock repurchase program.

Guidance

For the fourth quarter of fiscal 2013, the company projects consolidated sales in the range of $6.15 billion and $6.75 billion. Avnet projects EM sales and TS sales to be in the range of $3.70–$4.0 billion and $2.45–$2.75 billion, respectively. Adjusted EPS (excluding restructuring charges, acquisitions charges and post-closing integration activities) is likely to be within 90 cents to $1.00 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 reducing annualized costs and investing heavily in new growth opportunities. Specifically, management expects to reduce roughly $140.0 million in costs in fiscal 2013.

Our Take

The company’s third quarter results exceeded our expectations, with EPS and revenues beating the Zacks Consensus Estimate. But year-over-year comparisons were disappointing due to continued soft industry demand owing to macroeconomic uncertainty, weak PC demand, and softness in geographical contributions, specifically from Americas. Continuous margin contraction is another negative. The company also guided a relatively flat to slightly up sequential fourth quarter citing macro uncertainty.

The company has been prudent in acquiring companies to boost its product portfolio as well as revenue streams. Recently, Avnet acquired Hong Kong-based value-added distributor, RTI Holdings Ltd. and strengthened its Electronics Marketing segment. With RTI Holdings, Avnet will be able extend its geographical reach in Asia (mainly in China). Nevertheless, its archrival Arrow Electronics (ARW - Analyst Report) is also making acquisitions to strengthen its market position, which is a cause of concern.

But 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).

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):

LinkedIn Corp. (LNKD - Analyst Report) with a Zacks Rank #2 (Buy) and an Earnings ESP of +120.0% and  Facebook Inc. (FB - Analyst Report) with a Zacks Rank #2 (Buy) and an Earnings ESP of +12.5%.

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