Avnet, Inc., incorporated in New York in 1955, together with its consolidated subsidiaries, is one of the world’s largest industrial distributors, based on sales, of electronic components, enterprise computer and storage products and embedded subsystems. Avnet creates a vital link in the technology supply chain that connects more than 300 of the world’s leading electronic component and computer product manufacturers and software developers with a global customer base of more than 100,000 original equipment manufacturers (“OEMs”), electronic manufacturing services (“EMS”) providers, original design manufacturers (“ODMs”), and value-added resellers (“VARs”). Avnet distributes electronic components, computer products and software as received from its suppliers or with assembly or other value added by Avnet. Additionally, Avnet provides engineering design, materials management and logistics services, system integration and configuration, and supply chain services that can be customized to meet the requirements of both customers and suppliers. Acquisitions
Avnet has historically pursued a strategic acquisition program to grow its geographic and market coverage in world markets for electronic components and computer products and solutions. This program was a significant factor in Avnet becoming one of the largest industrial distributors of such products and services worldwide. Avnet expects to continue to pursue strategic acquisitions as part of its overall growth strategy, with its focus likely directed primarily at smaller targets in markets where the
Company is seeking to expand its market presence, increase its scale and scope and/or increase its product or service offerings. On July 6, 2010, subsequent to fiscal 2010, the Company completed its previously announced acquisition of Bell Microproducts Inc. (“Bell”), a value-added distributor of storage and computing technology providing integration and support services to OEMs, VARs, system builders and end users in the US, Canada, EMEA and Latin America. Bell operated both a distribution and single tier reseller business and generated sales of approximately $3.0 billion in calendar 2009, of which 42%, 41% and 17% was generated in North America, EMEA and Latin America, respectively. The consideration for the transaction consisted of $7.00 in cash per share of Bell common stock, which represented an equity value of approximately $252 million, including the accelerated vesting of, and payment in cash for, Bell equity awards of approximately $25 million (which will be expensed in the first quarter of fiscal 2011), and the assumption of approximately $323 million in net debt, thereby resulting in an aggregate transaction value of approximately $575 million. The transaction is expected to be immediately accretive to earnings excluding integration and transaction costs. The Company is integrating Bell into both the EM and TS operating groups and expects cost saving synergies of approximately $50 million to $60 million upon completion of the integration activities, which are anticipated to be completed by the end of fiscal 2011. Characteristics
Market capitalization: $ 4,947.6 million
Total Assets: $ 7,782 million
Number of employees: 14 200
Stage: Growth company
Financial Statements: refer to Figure 2
a) The company financial performance and recommendation for improvement Analysis
The financial performance of the company over the last past year is presented in Figure 2. Over the five past five year, the average growth rate of the company was 11% whereas the industry growth rate where only 3%. The Gross
profit margin is declining since 2008. Consolidated gross profit for fiscal 2010 was $2.28 billion, up $257.2 million, or 12.7%, over the prior year primarily due to the increase in sales volume. Gross profit margin of 11.9% declined 56 basis points over the prior year with all regions in each operating group experiencing declines in margins. SG&A expenses were 8.5% of sales and 71.0% of gross profit in fiscal 2010 as compared with 9.4% of sales and 75.7% of gross profit in fiscal 2009. Operating income for fiscal 2010 was $635.6 million, or 3.3% of consolidated sales, as compared with an operating loss of $1.02 billion for fiscal 2009. The performance of the company compared to the industry is presented below: Financial Stats| Competitors| AVNET|
Revenue Growth| | | 3%| 11%|
EBITDA Margin| | | 13%| 4%|
EBIT Margin| | | 11%| 3%|
Cash Flow Margin| | | 8%| 2%|
Taxes| | | 31%| 23%|
Debt / Equity| | | 14%| 18%|
Return On Equity| | | 9%| 10%|
We would recommend the company to remain competitive in its pricing of goods and services. The Company could enhances its competitive position by offering a variety of value-added services which entail the performance of services and/or processes tailored to individual customer specifications and business needs such as point of use replenishment, testing, assembly, supply chain management and materials management. Due to the decline in gross profit margin which began late in fiscal 2008 and accelerated further during fiscal 2009, we recommend significant cost reduction actions to realign its expense structure with market conditions. The cost reduction plan should include severance costs, facility exit costs and other charges related to contract termination costs and fixed asset write-downs. Severance charges recorded related to personnel reductions in administrative, finance and sales. Facility exit costs of consists of lease liabilities and fixed asset write-downs associated with seven vacated facilities in the Americas, EMEA
and the Asia/Pac region. Other charges consisted primarily of contractual obligations with no on-going benefit to the Company.
b) Analysis of the sources of finance and the capital structure of the company. Comment on the short- and long-term financial strategy of the company. Source of finance and Capital Structure
Cash Flows from Operating Activities: Historically, during periods of growth, the Company has utilized operating cash flows to meet the working capital requirements of funding growth. Cash Flows from Investing Activities: During fiscal 2010, the company received proceeds of $11.8 million related to earn-out provisions from the prior sale of an equity method investment as well as the sale of a small cost method investment. Credit: The Company has a five-year $500.0 million unsecured revolving credit facility with a syndicate of banks which expires in September 2012. Under the Credit Agreement, the Company may elect from various interest rate options, currencies and maturities. Accounts receivable securitization program: The Company has an accounts receivable securitization program (the “Securitization Program”) with a group of financial institutions that allows the Company to sell, on a revolving basis, an undivided interest of up to $450.0 million in eligible receivables while retaining a subordinated interest in a portion of the receivables. Notes: In June 2010, the Company issued $300.0 million of 5.875% Notes due June 15, 2020. The Company received proceeds of $296.5 million from the offering, net of discount and underwriting fees. Capital Structure
The following table summarizes the Company’s capital structure as of the end of fiscal 2010 with a comparison with the end of fiscal 2009: | 2010| | 2009|
| Thousands of US Dollars| % Cap | | Thousands of US Dollars| % Cap| | | | | | |
Short-term debt| 36,549| 0.8| | 23,294| 0.6|
Long-term debt| 1,243,681| 29| | 946,573| 25.4|
| | | | | |
Total debt| 1,280,230| 30| | 969,867| 26|
Shareholders’ equity| 3,009,117| 70| | 2,760,857| 74| | | | | | |
Total capitalization| 4,289,347| 100| | 3,730,724| 100| The company has a leverage ratio close to the Industry average Leverage in 2010: 27.7%. Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/dbtfund.htm).
Short and long-term financial strategy of the company
The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations. The Company also uses diversified sources of funding so that it does not become overly dependent on one source and to achieve lower cost of funding through these different alternatives. These financing arrangements include public bonds, short-term and long-term bank loans and an accounts receivable securitization program. Short-term debt consists of the following:
Short term debt| | 2010| | 2009|
| | (Thousands)|
Bank credit facilities| | 35,617| | 20,882|
Other debt due within one year| | 932| | 2,412|
| | | | |
Short-term debt| | 36,549| | 23,294|
Bank credit facilities consist of various committed and uncommitted lines of credit with financial institutions utilized primarily to support the working capital requirements of foreign operations. The weighted average interest rate on the bank credit facilities was 4.0% and 1.8% at the end of fiscal 2010 and 2009, respectively. Long-term debt consists of the following:
Notes | 2010| | 2009|
5.875% Notes due March 15, 2014| 300,000| | 300,000| 6.00% Notes due September 1, 2015| 250,000| | 250,000| 6.625% Notes due September 15, 2016| 300,000| | 300,000| 5.875% Notes due June 15, 2020| 300,000|
Other long-term debt| 97,217| | 98,907|
| | | |
Subtotal| 1, 247,217| | 948,907|
Discount on notes| -3,536| | -2,334|
| | | |
Long-term debt| 1,243,681| | 946,573|
c) Report detailing the factors contributing to the selection of the dividend policy of the company and recommendations on the decision-making process and the range of influences considered The Company has not paid dividends since fiscal 2002 and does not currently contemplate any future dividend payments. The company has profitable projects and has decided to retain the earnings. The agreements governing the Company’s financing, including its five-year, $500 million credit facility and the indentures governing the Company’s outstanding notes, contain various covenants and restrictions such as restricted payments of dividends. Future decisions concerning the payment of cash dividends will depend upon the general state of economy, the company results of operations, financial condition, strategic investment opportunities, capital expenditure plans, terms of credit agreements, and other factors that the Board of Directors may consider relevant.
d) Capital investment process of the company and areas for improvement Findings of investigation
We have investigated the capital investment process in use and concluded that: – There is no apparent structure or formalized process for evaluation of capital investment projects – Post completion controls do not exist in any meaningful way.
Capital investment project evaluation and control should include the following key elements:
1. Initial investigation
Before the proposal is subject to detailed evaluation, it is useful to undertake preliminary investigation to see if the proposal appears to be a feasible project. This initial investigation will consider such factors as the resources required, the technical and commercial feasibility, the risks of the project and how the project matches the firm’s strategic objectives.
2. Detailed evaluation: If a project is feasible, a detailed investigation of all relevant factors should be undertaken. This will include identification and analysis of the expected cash flows from the project and possibly calculation of the NPV, IRR or other relevant techniques.
3. Authorisation: In the case of large investment projects, the decision to accept a particular proposal should be made by senior management, or perhaps the board of directors. They must satisfy themselves that the proposal meets the necessary profitability criteria and is compatible with the overall strategy of the business.
4. Project implementation: Once the decision to proceed has been taken, the appointment of a project manager or the assignment of responsibility for the project will be necessary. The person given the responsibility will need to be allocated the required resources and to be given specified targets to achieve.
5. Monitoring the project: Once the project is underway, senior managers should be kept informed of progress on a regular basis. Revised project forecasts need to be regularly updated to reassess the original expected costs and benefits. This will facilitate more effective project control which could result in project expansion, continuity of the existing plan or lead to project abandonment.
6. Post completion audit: Auditing the performance of a project can result in a number of advantages, improving the quality of existing decisions, the possibility that a manager’s investment assumptions, procedures, judgements and recommendations will be audited at a later date will help curb.
e) Risk exposure and the risk-return profile of the company. Analysis of the implications and recommendations – Uncertainties in the current global economic recovery make it very difficult to forecast with a great deal of confidence the overall supply and demand throughout the IT supply chain. The company could regularly assess and anticipate economic conditions.
– Failure to maintain its relationships with key suppliers could adversely affect the Company’s sales. We recommend suppliers diversification.
– Declines in the value of the Company’s inventory or unexpected order cancellations by the Company’s customers could materially and adversely affect its business, results of operations, financial condition and liquidity. During an industry or general economic downturn, it is possible that prices will decline due to an oversupply of products and, as a result of the price declines; there may be greater risk of declines in inventory value. We recommend to adoption of a policy with many of the Company’s suppliers which offer Avnet certain protections from the loss in value of inventory (such as price protection and limited rights of return). We also recommend long-term supply arrangements with customers.
– Substantial defaults by the Company’s customers on its accounts receivable or the loss of significant customers could have a significant negative impact on the Company’s business, results of operations, financial condition or liquidity.
– The Company’s non-US locations represent a significant and growing portion of its revenue, and consequently, the Company is increasingly exposed to risks associated with operating internationally but not limited to, the following: potential restrictions on the Company’s ability to repatriate funds from its foreign subsidiaries; foreign currency fluctuations and the impact on the Company’s reported results of operations; import and export duties and value-added taxes; compliance with foreign and domestic import and export regulations and anti-corruption laws, the failure of which could result in severe penalties including monetary fines, criminal proceedings and suspension of export privileges; changing tax laws and regulations;
regulatory requirements and prohibitions that differ between jurisdictions; political instability, terrorism and potential military conflicts; differing employment practices and labour issues; and the risk of non-compliance with local laws. – If the Company fails to maintain effective internal controls, it may not be able to report its financial results accurately or timely or detect fraud, which could have a material adverse effect on the Company’s business or stock price.
– The Company’s acquisition strategy may not produce the expected benefits, which may adversely affect the Company’s results of operations. There is a necessity to conduct a relevant due diligence before acquisition and carry out post acquisition integration plan.
f) Analysis of the debtor, creditor and working capital management policy of the company and recommend | 2,010| 2,009|
Receivables| 3, 574,541| 2, 618,697|
Sales| 19, 160,172| 16, 229,896|
Receivables Ratio (in days)| 68| 59|
| | |
Accounts payable| 2, 862,290| 1, 957,993|
Cost of sales| 16, 879,955| 14, 206,903|
Account payable Ratio (in days)| 62| 50|
It takes on average 68 days to collect receivables whereas the official credit payment of total invoice amount, without offset or deduction, is due 30 days from the invoice date or as otherwise approved in writing by Avnet. The Company has an accounts receivable securitization program (the “Program”) with a group of financial institutions that allows the Company to sell, on a revolving basis, an undivided interest of up to $450,000,000 in eligible US receivables while retaining a subordinated interest in a portion of the receivables. The eligible receivables are sold through a wholly-owned bankruptcy-remote special purpose entity that is consolidated for financial reporting purposes. It takes on average 62 pay to suppliers. The company negotiated credit terms ( 60 days) to pay suppliers and not to defer payment which could your affect its reputation, the quality of service. Management
focuses on managing working capital velocity, defined as annual sales (or quarterly sales annualized when calculating the velocity for a quarter) divided by the sum of the monthly average of receivables plus inventory less accounts payable). This focus resulted in working capital velocity improving to a record 7.8 times in fiscal 2010. As a result, the Company used only $30 million in cash from operations in fiscal 2010 to fund the 18% growth in revenue. | | 2010| | 2009| | Change|
| | (Dollars in millions)| | | | |
Current Assets| | 6,630.20| | 5,144.30| | 28.9| Quick Assets| | 4,666.60| | 3,562.60| | 31|
Current Liabilities| | 3,439.60| | 2,455.90| | 40.1| Working Capital | | 3,190.60| | 2,688.40| | 18.7| Quick Ratio| | 1.4:1| | 1.5:1| | |
The Company’s quick assets (consisting of cash and cash equivalents and receivables) increased 31.0% from June 27, 2009 to July 3, 2010 primarily due to the accelerated revenue growth experienced since the prior fiscal year end.
g) Evaluation of the business strategies of the company
AVNET formed a Global Executive Council, comprising our “C-level” executives and regional presidents, which meet quarterly to develop and drive Avnet’s strategies. Avnet’s goal is to be the premier technology distribution company in the world. The company has established three strategic pillars that the company is managed to:
More than eight years ago, the company turned its attention to profitable growth with return on capital and economic profits. The goal is to deliver more value and getting paid fairly for it. The company objective is to outpace the markets served on the top line and grow economic profits substantially faster than sales. For the Electronics Marketing operating group with superior technical expertise and supply chain solutions, the company are taking advantage of synergistic opportunities to sell more components, services and solutions to customers throughout the design-to
manufacturing process. For computer products division, Technology Solutions, AVNET are now targeting vertical markets with value-added scalable services. The company is expanding its line card to embrace emerging technologies and complementary new suppliers. Avnet has historically pursued a strategic acquisition program to grow its geographic and market coverage in world markets for electronic components and computer products and solutions. This program was a significant factor in Avnet becoming one of the largest industrial distributors of such products and services worldwide. Avnet expects to continue to pursue strategic acquisitions as part of its overall growth strategy, with its focus likely directed primarily at smaller targets in markets where the Company is seeking to expand its market presence, increase its scale and scope and/or increase its product or service offerings.
Everyone at Avnet is encouraged to seek opportunities for process improvement and is given tools and training to foster innovation. The corporate team supports efforts throughout the company to streamline processes and eliminate steps that do not add value. Operational excellence directly impacts top line and bottom line performance by increasing customer satisfaction while increasing productivity, which further distances AVNET from competitors. People Development
Avnet strives to help all employees meet their potential. In each of the past five years, the company has conducted a comprehensive survey gathering employees’ input and benchmarking the company against other leading companies. Survey results show that Avnet’s people have an excellent understanding of Avnet’s business goals and how their jobs contribute to achieving them. All employees are expected to maintain professional development plans; The Company continually refines training programs at every level of the business, from classes tailored to our top 300 executives to an online catalogue of courses for supervisors and individual contributors.
h) Analysis of the acquisition motives, process, planning and integration.
Recommendations for improvement should any future acquisitions / mergers be contemplated.
On July 6, 2010, subsequent to fiscal 2010, AVNET completed the acquisition of its competitor Bell Microproducts, a distributor of storage and computing technology providing integration and support services to OEMs, VARs, system builders and end users in the US, Canada, EMEA and Latin America. Bell operated both a distribution and single tier reseller business and generated sales of approximately $3.0 billion in calendar 2009, of which 42%, 41% and 17% was generated in North America, EMEA and Latin America, respectively.
According to AVNET’s Management, the acquisition of Bell Micro marks an inflection point in Avnet’s history as the clear leader in value-added technology distribution. The acquisition should improve AVNET’s global scale and scope competitiveness. It should strengthen the company position in the Americas and Europe, and expands the company presence in the fast-growing Latin America market. The CEO claimed Bell’s position in datacentre products and embedded systems complemented Avnet’s strategies and created opportunities for cross-selling. The transaction is expected to be immediately accretive to earnings excluding integration and transaction costs.
Process concern: No Tax due diligence and no completed evaluation before acquisition As of the end of the third quarter of 2010, the Company had not yet completed its evaluation of the fair value of certain assets and liabilities acquired, primarily (i) the final valuation of certain income tax accounts, and (ii) certain contingent liabilities associated with the former Bell Latin America business. Subsequent to acquisition and during the second quarter of fiscal 2011, the Company completed its valuation of the identifiable amortizable intangible assets and recognized a final valuation of $60,000,000. During the second quarter of fiscal 2011, the Company recognized a contingent liability of $18,000,000 for potential unpaid import
duties associated with the former Bell Latin America business. Prior to the acquisition of Bell by Avnet, the US Customs and Border Protection (“CBP”) initiated a review of the importing process at one of Bell’s subsidiaries and identified compliance deficiencies. Subsequent to the acquisition of Bell by Avnet, CBP began a compliance audit to identify any duty owed as a result of the prior non-compliance. Depending on the ultimate resolution of the matter with CBP, there may be additional exposure in excess of the recorded amount. During the third quarter of fiscal 2011, the Company continued to evaluate the potential exposure based upon further activities associated with the audit and the Company’s ability to obtain appropriate documentation for certain transactions under audit. Due diligence prior to the acquisition could have been useful to anticipate this fiscal risk.
Integration concern: No details Integration Plan
Avnet CEO admitted in a teleconference that it had not developed detailed integration plans. Source : http://www.microscope.co.uk/news/distributor-news/how-will-avnet-integrate-bell-micro/. More importantly from a UK and European perspective is the emphasis AVNET Management placed on the US and Latin American aspects of the acquisition. It raises the question of what value Avnet places on Bell’s European and UK businesses. They did not seem to be the Management’s main priorities when the deal was announced, but any operation which contributes 42% to overall group sales, as Bell’s European business did in the distributor’s fourth quarter, cannot be ignored.
The company should evaluate the fair value of all assets and liabilities of the target company prior to acquisition. This evaluation should be a key element to discuss the acquisition price. Moreover, prior to acquisition, the company should carry out due diligence. The relevant areas of concern may include the financial, legal, and labour but also tax. Finally, senior management’s attention must be focused on developing a post-transaction strategy and integration plan that will generate the revenue enhancements and cost savings that initially prompted the merger or acquisition. The integration plan should be the detailed and cover the following areas:
Communication, Human Resources Management Information Systems Integration, Product and Technology Integration, Operations.
i) Analyse the investment ratios of the company. Write a report for the shareholders on the overall financial performance of the company. | 2010| 2009| 2008| 2007| 2006|
| In Millions| | | | |
Dividends| 0| 0| 0| 0| 0|
Earnings available| 410| -1129| 490| 393| 205|
Market value| 4300| 2730| 3980| 5680| 3330|
Number of shares| 152| 151| 150| 150| 147|
| | | | | |
Dividend Pay-out Ratio| 0| 0| 0| 0| 0|
Dividend yield ratio| 0| 0| 0| 0| 0|
Earnings Per Share| 2.70| -7.48| 3.27| 2.62| 1.39|
P/E| 10.49| -2.42| 8.12| 14.45| 16.24|
The Company has not paid dividends since fiscal year 2002. Avnet may need to satisfy cash needs through external financing, that’s why The Company needs to keep getting access to credit facilities ($ 500M). That’s why Avnet needs to maintain certain ratios in order to succeed to some tests. In order to reach this objective, it has been decided to make restricted payments, including paying dividends. That’s the main reason of the last years’ dividends policy. However, comparing the last five years cumulative total returns, including dividends, shows the following results: Avnet: 5.59%
S&P 500: -4.91%
Average electronics: -10.48%
As we can see, despite the no dividends policy, Avnet has a higher return than average. On July, 2007, before the crisis, Avnet exhibits a total return of 74.55%, comparing to the average 31 and 30% of the Index and Peer Group, respectively. The Earnings per share ratio hugely increased from -7.48 to 2.7 this year, above the last 5 years average EPS of 0.5. And the ratio keeps growing: on the first quarter for fiscal 2011, EPS reaches 93
cents, up from 44 cents in Q1 2010 and 12 cents ahead of estimations. Next quarter estimations are between $1 and $1.07. Keeping on these skyrocket performances will allow The Company to reach its past before-crisis high ratios. Here EPS is very relevant for Avnet, as the number of outstanding shares remains approximately constant, and the continuing growing of EPS is a good indicator to the good health of The Company and its possible expansion on the market. The P/E ratio increased from a negative value to 10.49 this year. This is above the average on the last 5 years, is equal to 9.38, but beneath the more relevant 12.33 average excluding 2009’s negative result. The P/E ratio may be considered as a fair value, near the average of similar companies and between the usual 10-17range. Keeping on the growing trend, according to the first quarterly results, P/L can be expected to reach 13 next year, increasing the potential price of Avnet and growing possibilities. Recommendations
After almost 10 years of no dividends paying, Avnet should find a way to revise its policy about it. Revenues growing should help the Company to deal with its cash issues, reducing debts and meet more easily the “credit lines tests”. At a longer term, it will help Avnet to invest in new projects-which is currently financially difficult- , and support the expansion of The Company. All these actions should lead to keep making EPS growing, without any outstanding stocks number variation. But Avnet expansion shouldn’t be a final concern. IF EPS grows, P/E ratio will grow only if the market stock prices rise quickly than EPS. P/E ratio should reach a level between 15 and 17. More than 17 would reveal an overvaluation of The Company; that could lead to a correction that would wound Avnet. That’s why Avnet should, after cash needs concerns resolutions, take coordinated decisions between Dividends payments, investments and shares issues policy.
j) In what ways could the company take steps to ensure greater efficiency of the stock market pricing of its shares? Share prices increase and decrease as a response to news. This news can either be broad, as in the case of changing interest rates or specific news pertaining to the company. Among the internal factors that can influence the demand and supply of a company’s shares are the attractiveness of the company itself, company news and
announcements. The company should use press announcements which shows consistent returns, good growth prospects and has good management that will attract investors and in so doing increase the demand for its shares. Stock price reflects investors’ expectations of its future earnings. If the company publishes a report in a future quarter that is above that expectation, its stock is likely rise, respectively. The Company could also use repurchasing shares on the open market. In the share repurchase plan, the company buys back outstanding shares from its stockholders, reducing the number of shares on the market and increasing the earnings per share, due to the lower number of available shares. Share repurchase plans are generally used to boost a stock whose price is flagging. By purchasing its own shares, the company may be indicating that it feels that the best place to invest its money is with itself, which increases investors’ confidence.
Pernod Ricard, founded in 1975 by the link-up between Pernod and Ricard, is a French company that produces distilled beverages. The Group has based its development on both organic growth and acquisitions. The purchase of part of Seagram businesses (2001), and acquisitions of British company Allied Domecq (2005) and Vin&Spirit (2008) have boosted Pernod-Ricard’s growth and propelled The Group to the position of co-leader in Wines & Spirits, and leader in premium segment. Characteristics
Market capitalization: € 16.906 billion (on June 30 2010)
Total Assets: € 27,107 million
Number of employees: 14 200
Stage: Growth company
Financial Statements: refer to Figure 4
a) The company financial performance and recommendation for improvement
| 2010| 2009| Growth|
Net Sales| € 7,081 M| € 7,203 M| -2% (but +2% in organic growth)| Profit from recurring operations| € 1,795 M25.4%| € 1, 846 M25.6%| -3% (organic growth 4%)| Group Net Profit| € 951 M| € 945 M| +1%|
Free Cash Flow| € 1160 M| € 1037 M| +12%|
Net Debt/Ebidta ratio| 4.9| 5.4| -9%|
Return on Equity| 10%| 13%| -23%|
Pernod Ricard is the world’s co-leader in spirits and wines market. After the purchase of Allied Domecq in 2005 and V&S (Absolut) in 2008, the company focuses on organic growth. In 2009/10, although the sales decreased of 2% to €7,081 million, there was an organic growth of 2%, which is an improvement to last year stability. The decrease of sales is due to the disposal of certain brands like Wild Turkey or Dia Maria, and foreign exchange effect. Organic growth has been driven by TOP 14 products, with a growth in volume of 2% and 4% in sales. Profit from recurring operations has reached €1,785 million after an organic growth of 4% despite an increase in advertising expenses. A big improvement in the gross margin after logistics expenses helped to maintain the operating margin at 25.4%, close to the last year result of 25.6%. Pernod-Ricard has a return on equity of 10%, below the previous year 13%; mainly due to capital dilution after the capital expand in 2009. Again this year, Pernod Ricard managed to produce a strong free cash flow of € 1160 million, increasing of 12% the good results of previous year. Free Cash Flows are used to reduce debt weight of The Company, and this strategy has strong results, as we can see that the Net Debt/Ebitda ratio has fallen of 9% to 4.9. This ratio must be maintained below 6:25 in order to respect agreements with Banks.
We would recommend the company to focus on the TOP 14, and increase gross margin of its products, according to the premiumisation strategy. Moreover, continue to support the penetration in new economy markets, as Europe, the
main market of Pernod Ricard do not offer high growth opportunity. A growth of 8% sales in these new markets would be a good goal. The stop of the external growth, preferring the internal growth should lead to a significant debt reduction, and increase in Advertising expenditures to support strategic brands, in new markets, and in older market, to support the new strategy. Another important thing is to hedge more against currency fluctuations, as, this year, currency fluctuations had a huge impact on results, and managed to cancel the organic growth. We can see that the only Venezuelan depreciation had an €63 million negative impact on results. Currency fluctuations threat has to be managed for a worldwide group like Pernod Ricard.
b) Analysis of the sources of finance and the capital structure of the company. Comment on the short- and long-term financial strategy of the company
Pernod Ricard is engaged in a debt reduction strategy, after several acquisitions that increased the leverage of the company. That’s why The Company seeks to use cash flows as a premium source of financing. In 2010, cash flows represent the following:
Cash Flows from Operating Activities: €1205 million
Cash Flows from Investing Activities: €46 million
Obviously, it’s not enough in a growth market like Wines and Spirits. Pernod Ricard has recourse to debt to finance itself. The main credit has been set in 2008, before the acquisition of V&S.
Facility A – a medium-term loan in euros for €1,000 million; Facility B – medium-term loans, including a facility in euros for €665 million and another in US dollars for $3,620 million; Facility C – five-year loans, including a facility in euros for €713 million and another in US dollars for $6,518 million; Facility D – a five-year loan in euros for €600 million to refinance a bond issue by Allied Domecq Financial Services Ltd amounting to
€600 million at a nominal rate of 5.875% due on 12 June 2009; Facility E – two multi-currency revolving credit lines for €1,200 million and €820 million
At June 30th 2010, amounts drawn under this agreement are approximately €6.9 billion. Facility A has been fully repaid, and there is a residual of €300 million in facility B. Facility E, of €2 billion had not been drawn and is still available.
Bonds have also been issued in 2009 and 2010, respectively for €800 million and €1.2 million, with fixed rates.
Debt is now constituted as the following:
| | Amount| % Debt |
Bonds| | 3826| 34%|
Bank loans – current| | 314| 3%|
Syndicated loan| | 176| 2%|
Commercial paper| | 138| 1%|
Other property, plant and equipment| | | |
Bank loans – non-current| | 6868| 61%|
Syndicated loan| | 6868| 61%|
Commercial paper| | | |
Other property, plant and equipment| | | |
Finance lease obligations| | 61| 1%|
Derivative instruments – liabilities| | 236| 2%|
GROSS FINANCIAL DEBT| | 11305| |
The objective of Pernod Ricard is to reach a 50% ratio between Banks loans and Bonds issued, in order to minimize costs. That’s the main reason why next financing operations will be bonds issues. We can also see that current debt stays very low, as a result of cash flows generated by PR. The Company doesn’t need to use much of its commercial papers or credits line, which saves money and increase yearly results by avoid interest payments. Due to the crisis, rates are very volatile, and that volatility could highly impact Results of Pernod Ricard; which is present in over 70 countries and have credits in different currencies. That’s the reason why hedging is a not an
option, but a necessity, allowing The Group to focus on operating profits. Make money thanks to rates fluctuations are not the core business of Pernod Ricard and should be avoided. The following figure shows how The Group hedges its debt: | | Amount| %Debt|
Fixed Rate| | 3571| 32%|
Floating Rate| | 7498| 68%|
Gross Debt before Hedging| | 11069| 100%|
Fixed Rate| | 6085| 55%|
Floating rate with collar| | 1565| 14%|
Floating rate| | 3419| 31%|
Gross debt after hedging| | 11069| 100%|
Fair Value of bonds and derivatives| | 216| |
Cash and Cash equivalent| | 701| |
TOTAL NET DEBT| | 10584| |
Equity has also been used in 2009. As Pernod Ricard made several acquisitions, and continued to grow through these acquisitions but also through organic growths, the Capital increase can be considered as relevant, to match with the evolution of The Company.
| Number | Amount|
Share capital at 30.06.2008| 219682974| 341|
Capital increase held on 14 May 2009| 38786220| 60|
Exercise of stock options (plan of 18 December 2001)| 102880| 0| Exercise of stock options (plan of 17 December 2002)| 65062| 0| Exercise of stock options (plan of 11 February 2002)| 3400| 0| Share capital at 30 June 2009| 258640536| 401|
Issue of 1 bonus share for each 50 shares held | 5174153| 8| Exercise of stock options (plan of 18 December 2001)| 207563| 0| Exercise of stock options (plan of 17 December 2002)| 13977| 0| Exercise of stock options (plan of 11 February 2002)| 196084| 0| SHARE CAPITAL AT 30 JUNE 2010| 264232313| 410|
All this funds raised during the past two years have consequences on the
capital structure; that are shown on the figure below.
| 2010| 2009|
Debt in €M| 11305| 11408|
Equity in €M| 9337| 7608|
Debt on (Debt+ Equity) ratio| 54.8%| 60%|
After several acquisitions, which led to an aggressive capital structure and high leverage in 2009, Pernod Ricard decided to deleverage, by issuing new shares, in order to reach, in the next years, to a 50% debt ratio. In 2010, the ratio was down to 54.8%, which is a good improvement in only one year. The capital structure follows the current strategy of Pernod Ricard: debt decreasing and deleveraging. We can also mention the disposal of Wild Turkey for $575 million to Campari.
Capital Structure of Pernod Ricard is in perfect adequacy with its strategy: High leveraging and aggressive capital structure for big acquisitions (like V&S), and immediate efforts to return to a more safe capital structure when focusing on organic growth (As claimed by Chief Executive Pierre Pringuet on February 23th, 2011). The quick variation of the capital structure, in only one year, shows its flexibility and is a strong asset for The Company. In fact, if a new opportunity of acquisition comes out, Pernod Ricard will be able to raise funds easily, and on this disputed market, reactivity and velocity are strong assets against competitors.
c) Report detailing the factors contributing to the selection of the dividend policy of the company and recommendations on the decision-making process and the range of influences considered
In 2010, dividends have been set to €1.34 per share. An interim dividend of €0.61 has been paid on 7 July 2010, followed by a payment of €0.73 on 17 November 2010. This particular dividend policy, to pay shareholders in two-times, is a tradition in Pernod Ricard. It allows the company to spread
the payment during the year, optimize cash flows and be able to delay (as the law allows it) second payment in case of major crisis. Concerning the dividend amount, this year has seen Pernod Ricard to returns to its historical dividend policy of one third of the net operating income, after a parenthesis in 2008/2009, where an annual dividend of €0.50 (in one payment), due to the crisis. Still, paying dividend during this major crisis was a sign of solidity and good will. By its will to reassure its historical and predictable dividend payout policy, Pernod Ricard seeks to drag current shareholders and future investors’ confidence. Confidence from them is needed to achieve the main two goals of the company: premiumisation of its offer and debt reducing. A regular and strong dividend policy, chosen by the board, is a sign of a mature company, which has reached standardization of its product lifecycle, with regular income and cash flow and moderate growth financing, after years of acquisitions.
d) Capital investment process of the company and areas for improvement In 2009/2010, the Group made €173 million investments in its industrial sites, which represents 2.4% of consolidated sales. This figure is 28% lower than the previous year, as part of the Group’s cautious strategy due to the crisis and uncertainty in the global market. Some non-urgent investments have been postponed. As in the past, significant investment went into the aged alcohols businesses (whiskies, cognac). In addition to replacing the casks used to age alcohols, investments notably involved the expansion of ageing warehouses and construction of other ones in Ireland and Scotland. Capacity increases were also carried out or completed in the wine business (bottling of sparkling wines in Australia and the wine cellar in Age, Spain). A new vatting unit was built in Bohatice, Czech Republic, to group all the Jan Becher businesses. Lastly, investments were made in Scotland to transfer the business from the Newbridge site for its future sale.
Capital Investment Process
-After investigations, no structure or formalized process has been found in Pernod Ricard. For big investments, the project must have the board’s agreement, but that’s all. -Post completions control exists, as audits and ISO certifications are always made after tangible assets are bought.
Pernod Ricard should follow the following step-by step process:
e) Risk exposure and the risk-return profile of the company. Analysis of the implications and recommendations Due to its worldwide presence, Pernod Ricard is exposed to many different risks.
Risks of Business Activity
The Company is sensitive to general economic conditions. Wines and Spirits consumption tends to decline during recession and inflation times. This has been recently proven during the last crisis. But, the diversity of products offered by Pernod Ricard offers consumers to switch between standard and premium products, which allow Pernod Ricard to keep selling during hard times. Moreover, The Group operates in competitive markets, where brand recognition, innovation and local products (such as 51 in South of France) are differencing factors among competitors. Advertising, promotion and price control are key factors to protect market shares. The competition will harden, due to the further consolidation in the industry, as well as retailers. This could negatively impact Pernod Ricard results, as for example, less attention and fewer resources allocated to its brands, as competitors will have greater leverage in negotiating. Relating to the geographic footprint, the group produces and sells its products in more than 70 countries. Activities in emerging countries could easily be affected by political and economic risks from changes in government policy. In Western Countries, recent policies have been made to reduce people’s consumption of alcoholic beverages, which could hit Pernod-Ricard sales. There is also a high risk relating to raw materials and energy prices. A significant number of raw material used for producing Pernod-Ricard’s products are commodities, subject to volatility, as well as the energy. Operating costs could be significantly increased, which will reduce margin, or increase retail prices. But increasing prices would have an impact of volumes. In both cases, earnings are threatened. Legal Risks
Recognition of intellectual property is a fundamental part of competiveness.
The Group decided to take strict actions, with a policy implemented by a team of 30 specialists. However, in few markets (China, Thailand, Vietnam), no guarantee can be made on intellectual property respect. Counterfeiters’ acts in these countries could lead to unfavorable consequences on Pernod Ricard. Moreover, in some countries, third parties can also contest ownership of certain brands, like “Havana Club” in the US market, where Bacardi sells its own-produced Rhum called Havana Club. Regulatory environment are serious threats. It could concern, sales, consumption, or advertising. The Group has to be very vigilant about it, and should keep lobbying to avoid reinforcement of regulation. Increase of import taxes could also have an impact on costs or reduce in consumption. A change in legislation relative to duty free is a current concern for The Group. Industrial and environmental Risks
Risks can be created by The Group’s activity, such as Fire Hazard. As alcohol is inflammable, this is the main risk in the spirits’ production and storage. On the 107 industrial sites, 7 are classified as High-threshold Sevesso (European directive), because of the high storage. To prevent fire hazards, use of fire-resistant material, water reserves and rigorous working and fire prevention/fighting procedures have been implemented. Risks for consumers also exist. Consumption of alcoholic beverages could lead to health risk, and responsible drinking has to be encouraged. Other risks relate to product quality: foreign bodies in the bottles or contamination. Control and certification (ISO 22000) of its facilities have been decided by the Group to prevent that kind of risks. Pernod Ricard could also suffer from natural disasters, or climate changes that could affect agricultural supplies. All these risks are covered by several insurances.
Liquidity and Market risks
As a company, Pernod Ricard could face liquidity risks when it has to pay debts interest, taxes or suppliers. On June 2010, cash and cash equivalent totaled €701 Million (compared to €520 million on the previous year). To manage risk, an additional €2,200 million of credit facilities with banks are undrawn. Short and long-term debts also finance The Group, but that include covenants concerning two ratios: EBIDTA/Net financing cost above 2.5
and Total Net Debt/EBIDTA below 6.75. As the group consolidates its financial statement in euro, it is exposed to currency fluctuations against euro of its assets and its transactions. While hedging has been used to manage this risk, there is no absolute protection against rate-fluctuations
f) Analysis of the debtor, creditor and working capital management policy of the company and recommendations | 2010| 2009|
Average account receivables| 1189| 1284|
Sales| 7081| 7203|
Debtor collection period| 61| 65|
| | |
Average account payables| 997| 889|
Cost of sales| 2863| 2995|
Creditor payment period| 127| 108|
In 2010, creditor payment period is 127 days, approximately as twice as the 61 days debtor collection period. It allows Pernod Ricard to draw free cash flows from its operations and avoid using credit lines. That is in adequacy with the strategy to reduce group’s debt. The 61 days debtor collection period could easily be explained, as Pernod Ricard signed agreements to get paid in 60 days, which is very close to the real period. Concerning the 127 days period for creditor payments, nothing is explained in the annual report. But we would easily guess that, as Pernod Ricard is the co-leader of the industry, with a large portfolio and a presence all around the world, it gives a high leverage to the Group in negotiations with creditors, and they can be imperative with them. The continual growth of Pernod Ricard seems to help them to improve their creditor payment period, as there was a growth of 17.6%, or 19 days.
| 2010| 2009|
Current Liabilities| 3975| 2810|
Current Assets| 5918| 5435|
Net Working Capital| 1945| 2625|
The Net Working Capital is positive, which is not the case in every company.
It allows Pernod Ricard to always have Cash Flows to finance its operations. But Pernod Ricard should be aware of Current Liabilities, as there was a 33% growth from last year.
g) Evaluation of the business strategies of the company Pernod Ricard profile is based on 6 historic fundamentals
1. A portfolio of prestigious global brands
With leading brands in each category, Pernod Ricard holds one of the most comprehensive and Premium portfolios in the industry including ABSOLUT, Ricard anise and Scotch whiskies led by Chivas Regal, as well as Ballantine’s, The Glenlivet, and Royal Salute, Jameson Irish whiskey, Martell cognac, Havana Club rum, Beefeater gin, Kahlúa and Malibu liqueurs, Mumm and Perrier-Jouët champagnes and Jacob’s Creek, Brancott (formerly Montana), Campo Viejo and Graffigna wines. 2. Strategic focus on Premiumisation and innovation
Pernod Ricard has upscalled its brands and creating more Premium categories its strategic priority. This approach, known as ‘Premiumisation’, generates greater profitability and is underpinned by substantial marketing expenditure. As a recognized brand-builder Pernod Ricard understands the importance of innovation as a driver of growth. From product extensions to new digital media and event planning, innovation is not limited to marketing—it infiltrates every area in the company: Sales, Human Resources, Production, and Finance. 3. A unique organizational model: decentralization and control of distribution The Pernod Ricard organization is made up of Brand Companies and Market Companies representing more than 18,000 employees in 70 countries. The Market Companies locally adapt the global strategy defined by the Brand Companies. This flexible and responsive organization guarantees the best understanding of the specifics of each market and the expectations of its consumers. It is supported by complete control of distribution in the form of a proprietary global distribution network.
4. Active in 70 countries, Pernod Ricard is the Asian market leader Pernod Ricard is now a major player in mature markets, and in recent years has
become the industry leader in Asia, holding the leading position in China and India. This provides Pernod Ricard with a competitive edge that allows it to leverage future sources of growth in the industry. 5. 18,000 ‘Créateurs de convivialité’, united by a strong corporate culture In a decentralized organization, it is corporate culture that binds the whole. The Pernod Ricard spirit is best captured by the Group’s own byword: ‘Conviviality’. This is reflected in the new corporate tagline, ‘Créateurs de convivialité’. It is both a managerial approach; built around simple, direct relationships between employees, and a sentiment that each of the Group’s brands strives to create with its consumers. The culture relies on three values: entrepreneurial spirit, mutual trust, and a sense of ethics. 6. Historically committed to ethics and social responsibility For several decades, the Group has been committed to a policy of social responsibility. Today, this policy embraces three priorities: responsible drinking, environmental ethics, and the development of cultural initiatives or social entrepreneurial projects.
The current strategy for Pernod Ricard can be divided into 4 points: * Investing first and foremost in world class strategic brands; * Adding Premium brands to position the company at the top end of the market and so accelerate growth and boost margin and profitability; * expanding in emerging markets, which offer the strongest growth outlook; * Keep growing through acquisitions, once leverage has been reduced, to remain a dynamic player in the consolidation of the Wines & Spirits sector.
As we can see, the current strategy is in line with the fundamentals of the company. The willing to invest in world class strategic brands, and adding premium brands matches to the goal of Pernod Ricard to be the World Premium Wines and Spirits supplier. This strategy is called “premiumisation” and is very interesting regarding to competition between Pernod Ricard and Diageo. Pernod Ricard cannot reach its opponent’s sales volume. That’s why they need to define a specific position on the market, to avoid frontal opposition which wouldn’t be profitable. By focusing on premium brands, Pernod Ricard attacks a segment where Diageo isn’t as powerful as the whole market, and will comfort its place of Premium Leader. In the same time, this market
boosts profitability and will allow Pernod Ricard to generate bigger earnings and cash flows. With this extra-money, The Group will be able to massively invest and to become the sole leader of the whole Wines and Spirits market. Expanding in the new rising markets matches with the willing of Pernod Ricard to be a worldwide company, present everywhere. Moreover, in these countries, The Group doesn’t start with a lack of notoriety relatively to Diageo (like in the US), and with targeted acquisition of local producers, Pernod Ricard should be able to implement itself very easily in those profitable markets. Finally, the willing to grow through acquisitions matches with the company decentralized organization. Its flexibility permits to easily integrate the bought companies, and creates synergies very quickly. Besides, the Debt Reduction program engaged after the V&S acquisition will allow Pernod Ricard to lower its leverage, and be ready to acquire new companies if there’s an opportunity, as the leverage will be reduced. To sum up, Pernod Ricard current strategies, actions and profile fit very well together. The strategy is well established, all the points are connected which leads to a coherent strategy, very profitable, that can go easily through crisis and growing periods.
h) Analysis of the acquisition motives, process, planning and integration. Recommendations for improvement should any future acquisitions / mergers be contemplated. In 2008, Ricard has completed the acquisition of Vin & Spirit AB, after a favorable decision by the European Commission. Procedure
Pernod Ricard has bought 100% of the shares of V&S, for a total amount of €5280 million. The company was then valued to €5626 million including €346 million debt. It was bought on the December 31 2007 Balance Sheet Basis.
Deal was finally conclude on March 31th, 2008, and finalized after the agreement of European Commission on July 27, 2008. * V&S paid €85millions dividend to Sweden before the closing date. * Shares’ purchase price will increase of 2% between January 1st 2008 and the closing date. * But Pernod Ricard will benefit from cash flows generated during this period. This acquisition was totally debt financed, for an initial cost
of the debt around 5%. € 12 billion loan has been underwritten by a 6 banks consortium (BNP Paribas, Calyon, JPMorgan, Natixis, Royal Bank of Scotland and Société Générale) to cover acquisition and refinancing of bank debt. The debt is divided in two currencies, 55% in USD and 45% in EURO to match with The Group’s cash flows. The ratio net Debt/EBITDA after the acquisition has grown from 3.6% to at circa 6%, which is in line with leverage of the group after previous acquisitions of Seagram and Allied Domecq. Consequences
With this acquisition, Pernod Ricard becomes co-leader on the Spirits and Wines industry. * Accrued presence in the World, especially in America where Absolut is the First Premium Vodka on the market. Pernod Ricard becomes the number 2 in the country. * Complete portfolio, with premium, high premium and standard products. * Premium offer growth, with the acquisition of the biggest brand of premium white alcohol, in line with the premiumisation strategy. Pernod Ricard officially becomes the leader of Premium segment. * Consolidated growth potential: Absolut is leader on the most growing segment (vodka premium) of the market, with 40% of sales in the world and a recent growth of 9% | PR | PR + V&S| Diageo| Growth|
Volumes of 9L cases| 75 M| 91 M| 93 M| 21%|
Volumes of 9L cases in Int Western Style Spirits| 55 M| 68 M| 88 M| 24%| Market Share| 15.2%| 18.6%| 24.2%| 22%|
Brands in TOP 100| 17| 19| 17| 12%|
Market Shares in Premium Segment| 21%| 27%| 24%| 29%|
US market shares| 8.6%| 13.8%| 25.9%| 60%|
As we can see, the acquisition leads to incredible growth for Pernod Ricard, in line with its strategy. It reinforces its position of number 2 in Western Style Spirits market and in the US, but also propels The Group as a leader in the premium segment, in line with the premiumisation strategy.
Volumes sold per category
| PR| PR + V&S| Diageo|
Super Premium| 2%| 2%| 1%|
Premium| 13%| 11%| 10%|
Standard Premium| 53%| 58%| 38%|
Standard| 32%| 29%| 51%|
To conclude, 2 years after the acquisition, in addition to the previous effects on the position of Pernod Ricard and its strategy, others comments can be made. Total amount of synergies is approximately €150 M (before taxes), from reductions in structure and distribution costs. The integration of V&S has been made easier by the decentralized organization of Pernod Ricard: V&S is now a brand company inside PR (The Absolut Company) and an important distribution platform in North Countries, cluster of European market company “Pernod Ricard Europe”. Recommendations
This acquisition has been driven perfectly by Pernod-Ricard. V&S has been easily integrated in the Decentralized Pernod Ricard structure, with the help of the former CEO, who stayed in charge during few months to facilitate the integration, and the transition of V&S to two different companies: Absolut Companies which will own several brands, and a company market, part of Pernod Ricard Europe, for Northern Europe countries. In result, it created synergies between Pernod Ricard and V&S the first year.
i) Analyse the investment ratios of the company. Write a report for the shareholders on the overall financial performance of the company. |
| 2010| 2009| 2008| Diageo 2010|
| | | | |
Dividends per share in €| 1.34| 0.5| 1.32| |
Earning available in €M| 951| 945| 840| |
Market value in €M| 16955| 10814| 15008| |
Number of shares| 265| 241| 230| |
| | | | |
Dividend Payout Ratio| 37.34%| 12.75%| 36.14%| 56.11%| Dividend yield ratio| 2.09%| 1.11%| 2.02%| 3.30%|
Earnings Per Share in €| 3.59| 3.92| 3.65| 0.76|
P/E| 17.83| 11.44| 17.87| 17.6|
Free Cash Flow Per Share in €| 3.86| | | 1.24|
Share Price Var from 08 to 10| -1.95%| | | -15.07%|
During all the past years, Pernod Ricard had a simple dividends policy, about one third of the EPS, except the 2009 year, impacted by the crisis. The dividend yield ratio, around 2% is lower than Diageo’s of 3.30% but that’s not enough to say that Pernod Ricard shares are not less profitable. Taking account of the share price variation show that although The Group’s stock decreased of 1.95% from June 2008 to June 2010, Diageo’s stock decreased of 15.07%. Moreover, the Dividend Pay-out ratio of Pernod Ricard, approximately 37% is lower than the Diageo’s ratio of 56.11%. It shows that The Company uses fewer resources than Diageo to repay shareholders. On the long term, it should be more profitable, as it allows Pernod Ricard to dedicate more cash to debt repayment and investment, so more growth opportunities than Diageo. This is confirmed by the free cash flow per share of €3.86, far higher than €1.24 of Diageo. And growth opportunity is very important, as shown by the high P/E ratio of 17.83 Pernod Ricard and the whole Wines and Spirits industry will continue to grow (especially in emerging markets). All the results above are also showing that Pernod Ricard has managed to go through the crisis; after a bad year in 2009, The Group returned to pre-crisis results. This fast recover from the crisis shows that the firm has very strong basis and is a good-rewarded and secured investment. Recommendations:
Pernod Ricard should continue its historical dividends policy, of 1third of the EPS dividend every year. This transparent policy is useful for two reasons. Shareholders know how they will earn every year, and it allows a better pricing of the stock. Besides, having the same policy every year is a good sign of strength of company. Second main reason is for Pernod Ricard, it allows to makes better projections, and the amount is a good compromise between dividends payment amount for shareholders’ satisfaction, and keeping a big enough portion of earning for further reinvestments.
j) In what ways could the company take steps to ensure greater
efficiency of the stock market pricing of its shares? Stock price reflects investor expectations of future cash flows that he will earn. In Pernod Ricard’s case, expected Dividends are easy to guess, according to growth prevision of Pernod Ricard. In fact, The Company has affixed dividend policy, equivalent to approximately one third of EPS. This transparency on dividends policy helps to fair pricing of the share. Besides, stock price responds to news of the industry or about the company. In order to help investors to price fairly with greater efficiency, Pernod-Ricard should use more press announcement to relate expected evolutions of The Company or the market. But in order to price fairly, previsions must match with future results, Pernod Ricard should be more attentive on its forecasts. Five previous quarters previsions have been under the results, and Pernod Ricard must ensure greater efficiency in its previsions
Figure 1: Financial performance over the last five years
Figure 2: Financial statements
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | July 3,| | | June 27,| |
| | 2010| | | 2009| |
| | (Thousands, except share amounts)| |
ASSETS| | | | | | | | |
Current assets:| | | | | | | | |
Cash and cash equivalents| | $| 1,092,102| | | $| 943,921| | Receivables, less allowances of $81,197 and $85,477, respectively | | | 3,574,541| | | | 2,618,697| | Inventories| | | 1,812,766| | | | 1,411,755| | Prepaid and other current assets| | | 150,759| | | | 169,879| | | | | | | | |
Total current assets| | | 6,630,168| | | | 5,144,252| |
Property, plant and equipment, net | | | 302,583| | | | 305,682| | Goodwill | | | 566,309| | | | 550,118| | Other assets| | | 283,322| | | | 273,464| | | | | | | | |
Total assets| | $| 7,782,382| | | $| 6,273,516| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY| | | | | | | | | Current liabilities:| | | | | | | | | Borrowings due within one year | | $| 36,549| | | $| 23,294| | Accounts payable| | | 2,862,290| | | | 1,957,993| | Accrued expenses and other | | | 540,776| | | | 474,573| | | | | | | | |
Total current liabilities| | | 3,439,615| | | | 2,455,860| | Long-term debt | | | 1,243,681| | | | 946,573| | Other long-term liabilities | | | 89,969| | | | 110,226| | | | | | | | |
Total liabilities| | | 4,773,265| | | | 3,512,659| | | | | | | | |
Commitments and contingencies | | | | | | | | | Shareholders’ equity | | | | | | | | | Common stock $1.00 par; authorized 300,000,000 shares; issued 151,874,000 shares and 151,099,000 shares, respectively| | | 151,874| | | | 151,099| | Additional paid-in capital| | | 1,206,132| | | | 1,178,524| (1)| Retained earnings| | | 1,624,441| | | | 1,214,071| (1)| Accumulated other comprehensive income | | | 27,362| | | | 218,094| | Treasury stock at cost, 37,769 shares and 32,306 shares, respectively| | | (692| )| | | (931| )| | | | | | | |
Total shareholders’ equity| | | 3,009,117| | | | 2,760,857| | | | | | | | |
Total liabilities and shareholders’ equity| | $| 7,782,382| | | $| 6,273,516| | | | | | | | |
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | Years Ended| |
| | July 3,| | | June 27,| | | June 28,| | | | 2010| | | 2009| | | 2008| |
| | (Thousands, except per share amounts)| |
Sales| | $| 19,160,172| | | $| 16,229,896| | | $| 17,952,707| | Cost of sales| | | 16,879,955| | | | 14,206,903| | | | 15,638,991| | | | | | | | | | | |
Gross profit| | | 2,280,217| | | | 2,022,993| | | | 2,313,716| | Selling, general and administrative expenses| | | 1,619,198| | | | 1,531,522| | | | 1,564,003| | Impairment charges (Note 6)| | | —| | | | 1,411,127| | | | —| | Restructuring, integration and other charges (Note 17)| | | 25,419| | | | 99,342| | | | 38,942| | | | | | | | | | | |
Operating income (loss)| | | 635,600| | | | (1,018,998| )| | | 710,771| | Other income (expense), net| | | 2,480| | | | (11,622| )| | | 20,954| | Interest expense| | | (61,748| )| | | (78,666| )| | | (88,224| )| Gain on sale of assets (Note 2)| | | 8,751| | | | 14,318| | | | 49,903| | | | | | | | | | | |
Income (loss) before income taxes| | | 585,083| | | | (1,094,968| )| | | 693,404| | Income tax provision (Note 9)| | | 174,713| | | | 34,744| | | | 203,826| | | | | | | | | | | |
Net income (loss)| | $| 410,370| | | $| (1,129,712| )| | $| 489,578| | | | | | | | | | | |
| | | | | | | | | | | | | Net earnings (loss) per share (Note 14):| | | | | | | | | | | | | Basic| | $| 2.71| | | $| (7.49| ) (1)| | $| 3.26| (1)| | | | | | | | | | |
Diluted| | $| 2.68| | | $| (7.49| ) (1)| | $| 3.21| (1)| | | | | | | | | | |
| | | | | | | | | | | | | Shares used to compute earnings (loss) per share (Note 14):| | | | | | | | | | | | | Basic| | | 151,629| | | | 150,898| | | | 150,250| | | | | | | | | | | |
Diluted| | | 153,093| | | | 150,898| | | | 152,420| | | | | | | | | | | |
Figure 3: Financial statements