EMS/Distributors
Market analysis
Analysts believe excess return on capital in this industry will not be possible going forward because companies are intensely rivaling over what they offer suppliers, competing away any value created. Distributors are continually enhancing the depth and sophistication of their offerings, as IT distribution is an industry with low barriers to entry and suppliers possess strong bargaining power.1
Although Avnet has generated excess shareholder returns by robust management of balance sheet and strong execution around acquisitions, it will have a tough time improving its performance in a challenging industry. Avnet’s margins have declined during the year reflecting a deliberate change in its product mix. According to analysts, its key competitor Arrow Electronics is placing more and more emphasis on winning market share.1
Arrow’s global components business segment sales declined by 10.0% YoY in 2012 primarily due to a decline in demand, reflecting a weaker economic condition in the Americas, EMEA, and Asia Pacific regions. On the other hand, the global Enterprise Computing Solutions (ECS) sales grew by 7.8% YoY, driven by higher demand for products in both North America and the EMEA region.
Flextronics announced a restructuring plan of US$225mn to right-size the business and improve profitability for printed circuit boards. According to analysts, Flextronics’ cash flow remains strong and the company is focused on buybacks. It also is implementing an aggressive restructuring plan to react to the component headwinds.2
- Morningstar - Jan 2013
- RBC Capital Markets - Jan 2013
Revenue and gross margin
Both Arrow Electronics and Avnet witnessed growth in their QoQ revenues, while Flextronics’ revenue slightly decreased. Avnet’s revenues increased by 14.1% QoQ, primarily attributable to a 10% growth in organic sales. Arrow Electronics’ sales increased 8.9% sequentially, driven by a 39.6% increase in its global ECS business segment sales. Flextronics’ revenue decreased 18.0% YoY to US$6.1bn from US$7.5bn in 4Q11, as a result of a US$1.4bn decrease in the HVS market, reflecting the company’s strategy to rebalance its portfolio mix. As a result of the strategy, the company exited the ODM PC business during fiscal 2012 and reduce d its concentration of business with a well known smart phone OEM. Arrow Electronics and Avnet experienced 0.7% decrease and 1% increase in YoY revenues, respectively.
Gross margins decreased for all the three companies compared to 3Q12. Arrow Electronics and Avnet witnessed a 27 basis points and 19 basis points decline, respectively, on account of an increase in their cost of sales. Flextronics’ gross margin decreased by 31 basis points, reflecting a greater QoQ decrease in its revenue compared to the decrease in its cost of sales during the same period.
Net income
Arrow Electronics’ net income increased 68.6% QoQ, primarily impacted by a US$79,158 gain from settlement of legal matters. Net income increased by 0.4% YoY.
Avnet’s net income increased 37.1% sequentially boosted by a 12.3% increase in its gross profit. However, net income decreased by 6.5% YoY, largely owing to a 5.6% increase in S,G&A expenses.
Flextronics’s net income decreased 83.4% QoQ and 75.5% YoY. The primary reason behind the sharp fall in 4Q12 is a US$98mn restructuring expense. To tackle the challenging macroeconomic condition Flextronic is trying to improve its operational efficiencies by reducing excess workforce and capacity.
Inventory and receivables
Days inventory on hand (DOI) decreased for all three companies. Arrow and Avnet’s days inventory on hand decreased QoQ by 4 days and 7 days, respectively, due to an increase in the cost of sales. Flextronics witnessed a decrease by 3 days, reflecting a 6.8% QoQ fall in its total inventory.
Days sales in receivables (DSO) increased for Arrow and Avnet by 8 and 5 days YoY respectively, primarily driven by higher amounts of accounts receivable during 4Q12. Flextronics’ also increased by 5 days YoY, as the decrease in accounts receivables was more than offset by the decline in revenues in 4Q12. DSO increased QoQ by 3 and 1 days for Arrow and Avnet respectively, and remained flat for Flextronics.
EPS
EPS for Arrow increased 72% sequentially and 5.9% from the prior year quarter. The sequential increase reflected a higher net income in 4Q12 compared to 3Q12. The increase YoY was due to a decrease in the number of shares outstanding vis-à-vis a flat net income. Avnet’s EPS was flat YoY, but increased by 41% QoQ, mainly due to a higher net income in 4Q12. Flextronics witnessed 82.0% and 71.4% declines in its EPS QoQ and YoY respectively. Lower net income in 4Q12 due to restructuring charges of US$102.7mn primarily contributed to the above-mentioned declines.
Market cap for all the EMS companies increased from the previous quarter. Arrow’s market cap increased by 12.2% QoQ owing to a surge in its stock price compared to 3Q12, but decreased 3.5% YoY due to a fall in shares outstanding vis-à-vis a flat share price. Avnet’s market cap increased by 0.6% QoQ, but decreased by 7.4% YoY, reflecting a decrease in the number of shares outstanding amidst a flat share price. Flextronics’ market cap improved by 1.7% QoQ and 0.8% YoY.
benchmarks