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 26, 1998
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
- ---------------------------------------------------------------------------
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 1, 1999, 27,962,842 shares of common stock, no par value, were
outstanding.
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 26, March 28,
1998 1998
------------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (including temporary
investments of $198,662 at December 26 and
$174,325 at March 28).......................... $202,211 $179,907
Trading securities, net.......................... --- 29,946
Accounts receivable, less allowance of $1,296
at December 26 and $1,207 at March 28.......... 107,958 106,132
Inventories
Materials and purchased products............... 113,282 112,964
Work in process................................ 5,886 2,128
-------- --------
119,168 115,092
Other............................................ 14,001 5,754
-------- --------
Total current assets......................... 443,338 436,831
PROPERTY AND EQUIPMENT
Land............................................. 8,168 8,761
Buildings........................................ 43,627 42,766
Equipment, furniture and fixtures................ 121,052 109,079
Leasehold improvements........................... 2,664 2,657
-------- --------
175,511 163,263
Less accumulated depreciation and amortization (46,671) (36,577)
-------- --------
128,840 126,686
DEFERRED INCOME TAXES................................. 18 93
OTHER ASSETS.......................................... 12,965 12,193
COST IN EXCESS OF NET ASSETS ACQUIRED,
less accumulated amortization of $3,204 at
December 26 and $2,856 at March 28............... 15,559 15,907
-------- --------
$600,720 $591,710
======== ========
The accompanying notes are an integral part of these statements.
Page 2 of 16
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 26, March 28,
1998 1998
------------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 44,918 $ 49,178
Accrued compensation.............................. 11,323 11,193
Other accrued liabilities......................... 12,952 7,032
Income taxes...................................... --- 2,946
-------- --------
Total current liabilities..................... 69,193 70,349
LONG-TERM DEBT......................................... 207,000 207,000
LONG-TERM LIABILITIES.................................. 2,394 1,792
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value per share;
authorized 2,000,000 shares; none issued........ --- ---
Common stock, no par value; authorized
60,000,000 shares; 28,012,842 shares issued
and 27,962,842 shares outstanding at
December 26 and 27,230,640 shares issued
and 27,180,640 shares outstanding at March 28 65,131 55,457
Additional paid-in capital........................ 117,431 117,189
Retained earnings................................. 140,548 140,900
-------- --------
323,110 313,546
Less common stock in treasury - at cost,
50,000 shares................................... (977) (977)
-------- --------
322,133 312,569
-------- --------
$600,720 $591,710
======== ========
The accompanying notes are an integral part of these statements.
Page 3 of 16
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited - In thousands, except per share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- -----------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
----------- ------------ ----------- ------------
Net sales....................................... $ 155,424 $ 177,426 $ 459,981 $ 496,993
Cost of sales................................... 131,715 137,276 385,833 384,076
---------- --------- --------- ---------
Gross profit............................... 23,709 40,150 74,148 112,917
Selling, general and administrative expenses.... 25,434 23,875 75,439 67,087
---------- --------- --------- ---------
Operating profit (loss).................... (1,725) 16,275 (1,291) 45,830
Other income (expense)
Interest expense........................... (2,575) (2,559) (7,723) (2,697)
Other - net................................ 2,754 3,032 8,432 3,987
---------- --------- --------- ---------
Earnings (loss) before income taxes...... (1,546) 16,748 (582) 47,120
Income taxes.................................... (607) 6,620 (230) 18,612
---------- --------- --------- ---------
NET EARNINGS (LOSS)...................... $ (939) $ 10,128 $ (352) $ 28,508
========== ========= ========= =========
Earnings (loss) per common share:
Basic...................................... $ (.03) $ .38 $ (.01) $ 1.08
========== ========= ========= =========
Diluted.................................... $ (.03) $ .36 $ (.01) $ 1.01
========== ========= ========= =========
Weighted average shares:
Basic...................................... 27,916 26,664 27,577 26,450
========== ========= ========= =========
Diluted.................................... 27,916 28,374 27,577 28,145
========== ========= ========= =========
The accompanying notes are an integral part of these statements.
Page 4 of 16
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
Thirty-Nine Weeks Ended
----------------------------
December 26, December 27,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings...................................... $ (352) $ 28,508
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization................... 10,995 8,387
Provision for losses on accounts receivable..... 89 295
(Gain) loss on sale of property and equipment (340) 4
Stock option expense............................ 242 360
Loss on sale of trading securities.............. 327 84
Net sales (purchases) of trading securities..... 29,619 (30,000)
Change in assets and liabilities
Increase in accounts receivable................ (1,915) (34,631)
Increase in inventories........................ (4,076) (15,764)
Increase in other.............................. (8,247) (692)
Decrease in deferred income taxes.............. 75 75
Increase in other assets....................... (772) (7,193)
Increase (decrease) in accounts payable........ (4,260) 19,233
Increase in accrued compensation............... 130 2,397
Increase in other accrued liabilities.......... 5,920 3,694
Decrease in income taxes....................... (2,946) (2,345)
Increase in long-term liabilities.............. 602 545
------- --------
Total adjustments............................. 25,443 (55,551)
------- --------
Net cash provided (used) by operating
activities................................... 25,091 (27,043)
(Continued)
Page 5 of 16
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
Thirty-Nine Weeks Ended
----------------------------
December 26, December 27,
1998 1997
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................... $(14,948) $(36,338)
Proceeds from sale of property and equipment....... 2,487 5
-------- --------
Net cash used by investing activities............ (12,461) (36,333)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long-term debt......................... --- 207,000
Issuance of common stock........................... 4,148 4,707
Tax effect of common stock issued upon exercise
of employee stock options......................... 5,526 7,218
-------- --------
Net cash provided by financing activities....... 9,674 218,925
-------- --------
NET INCREASE IN CASH................................. 22,304 155,549
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 179,907 25,050
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $202,211 $180,599
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for Interest............. $ 4,658 $ ---
Income taxes........................................ $ 5,308 $ 13,857
The accompanying notes are an integral part of these statements.
Page 6 of 16
KENT ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
The consolidated balance sheet as of December 26, 1998, and the consolidated
statements of earnings and cash flows for the thirteen and thirty-nine week
periods ended December 26, 1998 and December 27, 1997, 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 March 28, 1998, included in the Company's Form 10-K for
that period.
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 1.7 million for both the thirteen and thirty-nine week periods ended
December 27, 1997 were used in the calculation of diluted earnings per common
share. Incremental shares of 0.4 million and 0.5 million were not used in the
calculation of diluted earnings per common share for the thirteen and thirty-
nine week periods ended December 26, 1998, respectively, since the effect of
their inclusion would be antidilutive. 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.
Page 7 of 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the thirteen and thirty-nine week periods ended December 26, 1998
decreased $22.0 million, or 12.4%, and $37.0 million, or 7.4%, compared to the
same periods a year ago. The decrease reflected a decline in orders in the
Company's contract manufacturing division from computer and semiconductor
capital equipment sectors. For the quarter, net sales increased $7.9 million,
or 5.4% when compared to the second quarter ended September 26, 1998. The
sequential increase resulted primarily from higher sales volume in the Company's
contract manufacturing division than in the second quarter.
Gross profit decreased $16.4 million, or 40.9%, for the thirteen weeks and $38.8
million, or 34.3%, for the thirty-nine weeks compared to the corresponding
periods a year ago. For the thirteen week period, gross profit as a percentage
of sales declined to 15.3% compared to 22.6% in the corresponding period last
year. For the thirty-nine week period, the gross profit percentage was 16.1%,
down from 22.7% reported in the comparable period of the previous year. The
decrease in gross profit was primarily due to plant and equipment under-
utilization in the Company's contract manufacturing facilities, the ramp up of
new contract manufacturing customers, product mix changes and continued pricing
pressures. Gross profit increased $4.4 million, or 22.5%, from the quarter
ended September 26, 1998. In addition, the gross profit percentage increased
from 13.1% in the second fiscal quarter. The sequential increase was a result
of increased plant and equipment utilization and improved operating efficiencies
in the Company's contract manufacturing operations in the third quarter as
compared to the second quarter.
Selling, general and administrative ("SG&A") expenses increased $1.6 million, or
6.5%, and $8.4 million, or 12.4%, for the thirteen and thirty-nine week periods,
respectively, when compared to the same periods last year. As a percentage of
sales, SG&A expenses increased to 16.4% from 13.5% in the thirteen week period
and to 16.4% from 13.5% in the thirty-nine week period,
Page 8 of 16
compared to the corresponding periods a year ago. The increase in SG&A expenses
was primarily due to costs associated with the ramp-up of new customers in the
contract manufacturing division and expenses necessary to support the Company's
existing operations. The Company continues to focus on cost containment and
expense reduction initiatives, aligning the cost structure with current revenues
that enable the Company to reduce the impact of current business conditions on
profit margins. SG&A expenses as a percentage of sales declined from 17.2% in
the quarter ended September 26, 1998. The sequential decrease as a percentage
of sales was a result of the Company's cost containment efforts.
Interest expense for the thirty-nine week period ended December 26, 1998
increased $5.0 million when compared to the prior year period due to interest on
the 4 1/2% Convertible Subordinated Notes due 2004 (the "Notes") issued in
September and October 1997.
Other-net consists principally of interest and dividend income generated by cash
and cash equivalents and trading securities. The decrease in interest and
dividend income for the thirteen week period compared to the corresponding
period a year ago was primarily due to lower short-term interest rates. The
increase in interest and dividend income for the thirty-nine week period
resulted from investment of the net proceeds from the Notes.
The Company reported a net loss $0.9 million for the thirteen week period ended
December 26, 1998, compared to net earnings of $10.1 million in the
corresponding period a year ago. For the thirty-nine week period, the net loss
was $0.4 million compared to net earnings of $28.5 million last year. The
decrease in net earnings for both the thirteen and thirty-nine week periods was
primarily due to the decrease in net sales and the decrease in the gross profit
percentage combined with an increase in SG&A expenses.
Page 9 of 16
Liquidity and Capital Resources
Working capital at December 26, 1998 was $374.1 million, an increase of $7.7
million, or 2.1%, since March 28, 1998. The increase was primarily due to
growth in other current assets that resulted from an income tax receivable.
Included in the Company's working capital at December 26, 1998 are investments
of $198.7 million, a decrease of $5.6 million since March 28, 1998. 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 26, 1998, funds were invested in institutional
money market funds, which are compatible with the Company's stated investment
strategy.
The Company intends to apply its capital resources to expand its business by
establishing or acquiring similar distribution and manufacturing 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 receivable. The
Company believes that current resources including funds generated from
operations should be sufficient to meet its current capital requirements.
Year 2000 Statement
The Year 2000 Issue results from computer hardware and software systems that
were not designed to distinguish between centuries and may not accommodate some
or all dates beyond the year 1999. Therefore, computer hardware and software
systems will need to be modified prior to the year 2000 in order to remain
functional.
Page 10 of 16
State of Readiness and Costs to Address Year 2000 Issues:
The Company has substantially completed a comprehensive inventory of its
systems, equipment and facilities. The Company's business information
technology (IT) systems include business applications, computing hardware and
software and related networking equipment and software. Non-IT systems are
primarily embedded technology such as microcontrollers, used in its facilities
and the manufacture or distribution of the Company's products. As a result of
the Company's strategic migration to new application systems that began in 1995,
substantially all of the Company's IT systems use hardware and software
platforms that the vendors have represented to be Year 2000 compliant. In
addition, the majority of the Company's non-IT systems are Year 2000 compliant.
In general, the Company expects to resolve any remaining Year 2000 Issues
through planned upgrades or replacements of its IT and non-IT systems, equipment
and facilities that have been deemed to be critical to the business operations.
The Company is primarily using internal resources to remediate or upgrade and
test these systems for Year 2000 compliance. Based on the information currently
available, the Company estimates that the costs of planned upgrades or
replacements of facility and equipment systems will not exceed $500 thousand.
This estimate assumes that the Company will not incur significant Year 2000
related costs on behalf of its suppliers, customers or third parties. In
addition, the Company is monitoring Year 2000 compliance efforts of suppliers,
service providers and other entities with which it has a business relationship.
Until the assessments of these third parties are complete, the Company cannot
state with certainty whether it has, or will have, significant Year 2000 Issues.
Furthermore, as the Company is relying, in large measure, on statements made by
such third parties in order to prepare those assessments, the lack of
responsiveness or accuracy in such statements could materially affect those
assessments. As a result, the Company cannot predict the potential consequences
if these or other third parties or their products are not Year 2000 compliant.
Risks of Year 2000 Issues and Contingency Plans:
While the Company believes its efforts to address the Year 2000 Issues will be
successful in avoiding any material adverse effect on the Company's operations
Page 11 of 16
or financial condition, it recognizes that a most reasonably likely worst case
Year 2000 scenario would be the failure of a third party or a component of the
infrastructure, including national banking systems, electrical power,
transportation facilities, communication systems and governmental activities to
conduct their respective operations after 1999 such that the Company's ability
to obtain, manufacture and distribute its products and services would be limited
for a period of time. If this were to occur, it would likely cause temporary
financial losses and inability to provide products and services to customers.
The Company continues to assess the Year 2000 Issues relating to its physical
plant and equipment, products, suppliers and customers. The Company is starting
its contingency planning for critical operational areas that might be affected
by the Year 2000 Issues if compliance by the Company is delayed and/or if third
parties with which the Company has a business relationship fail to achieve Year
2000 compliance. In certain cases, especially third party infrastructure
failures, there may be no practical alternative course of action available to
the Company.
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
Page 12 of 16
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 under the caption "Risks of Year 2000 Issues and
Contingency Plans" above and under the caption "Risks Relating to Forward-
Looking Statements" in the Company's Annual Report on Form 10-K for the fiscal
year ended March 28, 1998.
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 - Amendment No. 2 to Employment Agreement between Kent
Electronics Corporation, Morrie K. Abramson and Rolaine S.
Abramson dated November 10, 1998.
10.2 - Severance Agreement between Kent Electronics Corporation and
Terrence M. Hunt dated November 10, 1998.
10.3 - Severance Agreement between Kent Electronics Corporation and
Larry D. Olson dated November 10, 1998.
10.4 - Severance Agreement between Kent Electronics Corporation and
Frank M. Billone dated November 11, 1998.
10.5 - Severance Agreement between Kent Electronics Corporation and
Stephen J. Chapko dated November 11, 1998.
10.6 - Severance Agreement between Kent Electronics Corporation and
Richard J. Hightower dated November 11, 1998.
10.7 - Severance Agreement between Kent Electronics Corporation and
Mark A. Zerbe dated November 11, 1998.
11 - Statement re computation of per share earnings.
27 - Financial Data Schedule
(b) Reports on Form 8-K:
Not applicable.
Page 13 of 16
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 5, 1999 By: /s/ Morrie K. Abramson
----------------------------- --------------------------------
Morrie K. Abramson
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 1999 By: /s/ Stephen J. Chapko
----------------------------- ---------------------------------
Stephen J. Chapko
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
Date: February 5, 1999 By: /s/ David D. Johnson
---------------------------- ---------------------------------
David D. Johnson
Vice President, Corporate
Controller (Principal Accounting
Officer)
Page 14 of 16
EXHIBIT INDEX
Exhibit numbers are in accordance with the
Exhibit Table in Item 601 of Regulation S-K
Exhibit No. Exhibit Description Sequential Page No.
- ----------- ---------------------- -------------------
10.1 Amendment No. 2 to Employment Agreement between Kent Electronics Corporation, --
Morrie K. Abramson and Rolaine S. Abramson dated November 10, 1998.
10.2 Severance Agreement between Kent Electronics Corporation and Terrence M. Hunt --
dated November 10, 1998.
10.3 Severance Agreement between Kent Electronics Corporation and Larry D. Olson --
dated November 10, 1998.
10.4 Severance Agreement between Kent Electronics Corporation and Frank M. Billone --
dated November 11, 1998.
10.5 Severance Agreement between Kent Electronics Corporation and Stephen J. Chapko --
dated November 11, 1998.
10.6 Severance Agreement between Kent Electronics Corporation and Richard J. --
Hightower dated November 11, 1998.
10.7 Severance Agreement between Kent Electronics Corporation and Mark A. Zerbe --
dated November 11, 1998.
11 Statement re computation of per share 16
earnings
27 Financial Data Schedule --
Page 15 of 16