Value of Avnet's Customer Relationships Questionable
Avnet's recently announced that it needs more time to tie up its books for the December quarter and will be late in filing its Form 10Q with the SEC. The electronics wholesaler has historically been a timely filer, but asset impairment issues have the Avnet accountants working late. The company says it needs more time to complete tests of goodwill and other intangible assets to determine if the assets are "impaired"--do the assets still have the earning power to justify values carried on the company's balance sheet?
The December 2008 quarter results included a $10.0 million after-tax charge for restructuring and integration, but made not mention of other unusual charges. However, in the late filing notice, Avnet disclosed it has already determined that the assets are indeed impaired and that a "significant charge" will be recorded in the December quarter. It is just a matter of checking the math and then parsing the explanation of just how many apples in Avnet's barrel have gone rotten.
It would seem Avnet apples have a very short shelf life, with nearly a third of goodwill and over half of intangible assets arising from a series of twelve acquisitions Avnet completed over just the past two years. Deals done in the frenzy of an equity market bubble rarely hold up well against the test of time.
Avnet held $1.8 billion in goodwill on its balance sheet at the end of December 2008, representing a 30% increase in the last two years. Goodwill is composed of $1.2 billion related to electronics marketing and $644.1 million related to the company's technology solutions. The company also had $114.9 million in net intangible assets (last disclosed at the end of September 2008) associated with customer relationships, over half of which arose from the June 2008 purchase of Horizon Technology Group Plc.
Customer relationships might be the most vulnerable of Avnet's intangible assets. At the end of last year Avnet claimed relationships with over three hundred of the world's leading electronic component and computer product manufacturers and software developers. It is these supply relationships that Avnet uses to serve its customer base of more than 100,000 electronics designers, manufacturers, and resellers. It is a "who is who" that includes the likes of Siemens, Jabil Circuit, Flextronics, and Garmin.
Jabil is cutting its workforce and Flextronics already charged of all of its goodwill assets in a $5.9 billion charge recorded at the end of 2008. Indeed, it may be Flextronics action, announced just six days after Avnet announced its December quarter results that made Avnet auditors take a second look at the value of Avnet goodwill and intangible assets.
Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.