10-Q 1 h84076e10-q.txt KENT ELECTRONICS CORPORATION - DECEMBER 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 30, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ -------------------------- Commission file number 0-14643 ------- KENT ELECTRONICS CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 74-1763541 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1111 Gillingham Lane, Sugar Land, Texas 77478 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (281) 243-4000 -------------- Not applicable -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At February 12, 2001, 28,634,737 shares of common stock, no par value, were outstanding. 2 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)

The accompanying notes are an integral part of these statements. 2 3 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

The accompanying notes are an integral part of these statements. 3 4 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - In thousands, except per share data)

The accompanying notes are an integral part of these statements. 4 5 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

(Continued) 5 6 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

The accompanying notes are an integral part of these statements. 6 7 KENT ELECTRONICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting Policies The consolidated balance sheet as of December 30, 2000, and the consolidated statements of earnings and cash flows for the thirteen and thirty-nine week periods ended December 30, 2000 and January 1, 2000, have been prepared by the Company without audit. In the opinion of management, the financial statements include all adjustments necessary for a fair presentation. All adjustments made were of a normal recurring nature. Interim results are not necessarily indications of results for a full year. For further financial information, refer to the audited financial statements of the Company and notes thereto for the fiscal year ended April 1, 2000, included in the Company's Form 10-K for that period. Business Acquisitions In November 1999, the Company acquired all the outstanding common stock of Orange Coast Datacomm, Inc., Orange Coast Cabling, Inc. and Go Telecomm, Inc., collectively known as Orange Coast, for an aggregate purchase price of approximately $17.7 million, which included an unsecured promissory note in the amount of $9.0 million. Orange Coast, which reported sales of approximately $19.0 million for the year ended December 31, 1998, provided comprehensive end-to-end voice and data network solutions to major corporations from offices in Irvine and Santa Clara, California. In June 1999, the Company acquired certain assets and assumed certain liabilities of Advacom, Inc. (Advacom) for a cash purchase price of $33.0 million plus the assumption of approximately $21.8 million of interest bearing obligations which were retired on the day of closing. Advacom was a Pennsylvania based distributor of electronic connectors, passive and electromechanical components and generated approximately $112.0 million in revenue for the year ended December 31, 1998. Sale of Assets On May 23, 2000, the Company completed the sale of certain assets of its specialty distribution business to Houston Wire & Cable Company. The sale included assets related to the redistribution of high voltage specialty wire and cable to electrical distributors. These assets generated approximately $93.0 million in revenues for the fiscal year ended April 1, 2000. 7 8 Discontinued Operations On October 10, 2000, the Company sold K*TEC Electronics Corporation, its contract manufacturing operation, for $238.3 million, consisting of $175.0 million in cash, a $50.0 million senior secured note, which was redeemed on January 26, 2001, and a $12.2 million unsecured note maturing on October 10, 2001. The unsecured note is subject to a post-closing adjustment based upon K*TEC's net asset value as of October 7, 2000. A pretax gain on the sale of K*TEC of approximately $30.0 million, $18.0 million after tax or $0.62 per diluted share, was recorded in the third quarter of fiscal 2001. The net assets and operations of K*TEC are reflected as discontinued operations. Corporate, and shared general and administrative costs of the Company were not allocated to discontinued operations. Certain information with respect to the discontinued operations of K*TEC is as follows:

8 9 Cash and Cash Equivalents Temporary investments may be greater than the cash and cash equivalents balance because they may be offset by individual bank accounts with a book overdraft position within the same bank where multiple accounts are maintained. Earnings Per Share Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Incremental shares of 0.5 million and 1.0 million were used in the calculation of diluted earnings per common share for the thirteen and thirty-nine week periods ended December 30, 2000, respectively. Incremental shares of 0.9 million and 0.7 million were used in the calculation of diluted earnings per common share for the thirteen and thirty-nine week periods ended January 1, 2000, respectively. Options to purchase 1.1 million and 0.2 million shares of common stock for the thirteen week periods, and 0.5 million and 0.8 million for the thirty-nine week periods ended December 30, 2000 and January 1, 2000, respectively, were not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock. The calculation of earnings per share does not include approximately 4.2 million shares issuable upon conversion of the 4 1/2% Convertible Subordinated Notes due 2004 because inclusion of such shares would be antidilutive. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONTINUING OPERATIONS Results of Continuing Operations Net sales for the thirteen and thirty-nine week periods ended December 30, 2000 increased $40.8 million, or 20.6%, and $171.8 million, or 32.9%, compared to the same periods a year ago. The sales increase from the prior year periods reflects internal growth resulting from increased demand for networking products and services, and interconnect, passive and electromechanical products, partially offset by the loss of sales associated with the wire and cable redistribution assets sold in May 2000. Sales from the acquired businesses of Advacom and Orange Coast benefited the thirty-nine weeks in fiscal 2001 compared to sales contributed since the respective acquisition dates in the thirty-nine week period a year ago. The Company's two core businesses, specialty distribution and network solutions, accounted for 53.8% and 46.2% of sales in the third fiscal quarter and posted 9 10 growth of 26.6% and 48.7%, respectively, for the thirteen weeks and 45.0% and 54.8%, respectively, for the thirty-nine weeks compared to the prior year periods. Gross profit increased $6.3 million, or 14.4%, for the thirteen weeks and $34.8 million, or 31.8%, for the thirty-nine weeks compared to the corresponding periods a year ago primarily due to increased sales partially offset by a decrease in the gross profit percentage. Gross profit as a percentage of sales decreased to 20.9% from 22.0% for the thirteen weeks and to 20.8% from 20.9% for the thirty-nine weeks. The decrease in the gross profit percentage was primarily due to a change in business mix, a more competitive pricing environment for certain network integration products, and the impact of the sale of the wire and cable redistribution assets in May 2000. The gross profit percentage increased in the third quarter from the 20.7% reported in the second quarter of fiscal 2001 primarily due to an increase in service sales as a percentage of total sales. Selling, general and administrative (SG&A) expenses increased $4.0 million, or 12.4%, and $19.5 million, or 22.5%, for the thirteen and thirty-nine week periods, respectively. The increase in SG&A expenses for both periods was primarily due to expenses necessary to support the growth in the Company's operations, including the expansion of network solutions services, partially offset by the sale of the wire and cable redistribution assets. Operating expenses from the acquired businesses of Advacom and Orange Coast contributed to the increase in SG&A expenses for the thirty-nine weeks in fiscal 2001 compared to the SG&A expenses contributed since the respective acquisition dates in the thirty-nine week period a year ago. As a percentage of sales, SG&A expenses decreased to 15.0% and 15.3% in the thirteen and thirty-nine week periods, respectively, compared to 16.1% and 16.6% in the corresponding periods last year. SG&A expenses as a percentage of sales also decreased sequentially from the 15.2% reported in the second quarter of fiscal 2001. The decrease as a percentage of sales was the result of leveraging operating expenses on higher sales, the sale of the wire and cable redistribution assets, the continued focus on cost containment, and an increase in service sales as a percentage of total sales. Interest expense consists primarily of interest on the 4 1/2% Convertible Subordinated Notes due 2004. Other-net consists principally of interest and dividend income generated by cash, cash equivalents and notes receivable. 10 11 Earnings from continuing operations were $9.7 million for the thirteen week period compared to $6.2 million in the corresponding period a year ago. For the thirty-nine week period, earnings from continuing operations were $22.4 million compared to $11.4 million last year. The increase in earnings from continuing operations was primarily the result of increased gross profit and increased interest income, partially offset by an increase in SG&A expenses. Liquidity and Capital Resources Working capital excluding assets of discontinued operations was $455.9 million, an increase of $194.6 million, or 74.5%, since April 1, 2000. The increase was primarily due to the proceeds from the sale of K*TEC Electronics and certain redistribution assets, combined with growth in accounts receivable in relation to sales, partially offset by growth in other accrued liabilities. Included in the Company's working capital at December 30, 2000 are temporary investments of $228.7 million, an increase of $123.6 million since April 1, 2000, which was primarily due to proceeds from the sale of K*TEC Electronics and certain redistribution assets, partially offset by funding sales growth and accounts receivable. The Company's investment strategy is low-risk and short-term, keeping the funds readily available to meet capital requirements as they arise in the normal course of business. At December 30, 2000, funds were invested in institutional money market funds, which are compatible with the Company's stated investment strategy. On January 26, 2001, subsequent to the end of the third quarter of fiscal 2001, the Company received cash of $51.1 million in payment of the senior secured note and accrued interest related to the sale of K*TEC Electronics. On October 6, 2000, the Company obtained a $25.0 million line of credit with a bank. As of the date of this filing, there was no indebtedness outstanding under the line of credit. The Company intends to apply its capital resources to expand its business by establishing or acquiring similar specialty distribution and network solutions operations in geographic areas that are attractive to the Company, by acquiring new facilities and by enlarging or improving existing facilities. In addition to the capital required to purchase existing businesses or to fund start-up operations, the expansion of the Company's operations at both new and existing locations will require greater levels of capital to finance the purchase of additional equipment, increased levels of inventory and greater accounts 11 12 receivable. The Company believes that current resources, including the line of credit, along with funds generated from operations, should be sufficient to meet its current capital requirements. Risks Relating to Forward-Looking Statements The Company is including the following cautionary statements to secure the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for all forward-looking statements made by the Company in this Quarterly Report on Form 10-Q. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or trends, and may contain the words "should," "will" or words or phrases of similar meaning. In addition, the forward-looking statements speak only of the Company's view as of the date the statement was made, and the Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. Forward-looking statements involve risks and uncertainties which could cause actual results, performance or trends to differ materially from those expressed in the forward-looking statements. The Company believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that management's expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, the factors discussed in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2000. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, the Company could be exposed to market risk from changes in interest rates. The Company continually monitors exposure to market risk and, when appropriate, develops strategies to manage this risk. Management does not use derivative financial instruments for trading or to speculate on changes in interest rates. Currently, the Company's interest rate risk, if any, relates to its temporary investments, notes receivable and 4 1/2% Convertible Subordinated Notes Due 2004. 12 13 PART II - OTHER INFORMATION Items 1, 2, 3, 4 and 5 are not applicable and have been omitted. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.1 - Consulting Agreement dated effective April 1, 2001 by and between Morrie K. Abramson and Kent Electronics Corporation. 10.2 - Amended and Restated 1998 Stock Option Plan. 10.3 - Amended and Restated 1999 Stock Option Plan. 10.4 - 2001 Stock Option Plan. 11 - Computation of Earnings Per Share. (b) Reports on Form 8-K: (i) The Company filed a Current Report on Form 8-K/A dated December 20, 2000 reporting under "Item 7. Financial Statements and Exhibits" the pro forma financial information omitted from the current report on Form 8-K filed on October 10, 2000. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENT ELECTRONICS CORPORATION ------------------------------------- (Registrant) Date: February 13, 2001 By: /s/ Larry D. Olson ----------------------------- -------------------------------- Larry D. Olson Chief Executive Officer, President and Director (Principal Executive Officer) Date: February 13, 2001 By: /s/ Stephen J. Chapko ----------------------------- -------------------------------- Stephen J. Chapko Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) Date: February 13, 2001 By: /s/ David D. Johnson ----------------------------- -------------------------------- David D. Johnson Vice President, Corporate Controller (Principal Accounting Officer) 15 EXHIBIT INDEX

KENT ELECTRONICS CORP 10-Q