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Financial Analysis of AVX

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Financial Analysis of AVX - February 18th, 2011

AVX Corporation manufactures and distributes passive electronic components that are used in all types of electronic devices ranging from cell phones and computers to automobiles. Passive components operate without electricity, while active components require electricity to run. AVX's passive components, including capacitors, resistors and varistors, are used to store energy, regulate voltage and current, and filter frequencies[1]. Founded in 1972, AVX is majority-owned by Kyocera (KYO), a giant in the Japanese electronics industry, and maintains distribution and resale agreements with Kyocera which provide roughly one-third of AVX's revenues. AVX's relationship with Kycocera gives it an advantage over its competitors, because it is able to sell a wider range of products while spending less on R&D.

AVX's business is dependent on the electronic goods market, with approximately half of its revenue coming from PCs and telecommunications. These markets are highly cyclical and depend on consumer spending[2]. AVX does not sign many long-term contracts with its customers, and those it does sign can generally be canceled at any time by the customer with little or no penalty. As a result, AVX is fully exposed to upturns and downswings in the electronics goods market. The high fixed costs associated with the production of electronic components make AVX particularly vulnerable to changes in demand for its products. During the electronics boom, AVX's gross margins peaked in 2001 at 37.3% for the fiscal year ending March 31, 2001. During the subsequent recession, AVX's gross margins fell to 5.1% in 2004[3].

Contents
1 Business Model
2 Trends and Forces
2.1 Cyclical nature of electronics components market makes AVX's profits variable
2.2 Diversity of component needs within the electronics market makes demand highly competitive
2.3 AVX is unhedged against variable raw material costs, which can affect margins
3 Competition
4 References

Business Model



AVX generates the bulk of its revenue from the sale of passive electronic components, but also earns significant revenue from reselling and distributing the products of Kyocera Corp, AVX's majority owner.[4].
AVX Corp has three business segments: Passive Components, Kyocera Electronic Devices Resale, and Connectors. Passive Components manufactures and sells tantalum and ceramic capacitors, in varying sizes and configurations, as well as a full range of other less commonly used passive components. Tantalum capacitors are a type of capacitor that typically has more capacitance per unit volume than other types of capacitors, making them valuable in low-frequency, high-current circuits. Passive capacitors are used for moderately high-frequency circuits, and are relatively cheap compared to other types of low value capacitors. Within its Passive Components division, AVX also has a subdivision of advanced components, which manufactures specialized products for customers that are designed jointly by AVX's engineers and clients' technical design teams. These customized passive electronics components are called "advanced" because they must be specially developed for each customer's unique projects, and the advanced components division earned about 40% of the Passive Components division's sales revenue in 2007[5]. AVX has invested approximately $122 million over the past three years to develop and expand its passive manufacturing segments.

The Kyocera Resale segment distributes a variety of products manufactured by AVX's parent company, Kyocera Corporation. These products include ceramic capacitors, crystal oscillators, SAW devices, resistors, RF modules, actuators, acoustic devices, and connectors. AVX has a non-exclusive license to resell Kyocera's products outside of Japan, and uses Kyocera's diverse product line to supplement its own components to offer clients a "one-stop shop" for passive electronic components.

AVX's Connectors segment produces and sells Elco automotive, telecom, and memory connectors. This segment includes both industry-standard connectors and customer-specific designs. AVX has invested approximately $16.6 million over the past three years to expand the Connectors segment.

AVX's revenues have been increasing consistently over the past five fiscal years, with the growth driven by the "advanced components" subdivision of Passive Components and the Connectors division. However, the cyclical nature of the electronics industry, which drives demand for AVX's products, raises concerns about the consistency of the company's future performance.


2003 2004 2005 2006 2007
Total Revenue ($M) 1,134.1 1,136.6 1,283.2 1,333.2 1,498.5
Net Income (Loss) ($M) (12.4) (107.6) 55.7 81.8 153.9
Trends and Forces

Cyclical nature of electronics components market makes AVX's profits variable
The electronics component market is almost entirely based on the electronics market, which is highly cyclical and dependent on the strength of the overall economy. AVX is most exposed to the telecommunications and PC submarkets, which together accounted for almost 50% of the company's revenue as of mid 2007.

Since the passive electronics components markets are so competitive, with products largely undifferentiated, AVX is forced to cut its prices to remain competitive when demand slackens. Furthermore, AVX does not sign long-term contracts with most of its customers, so AVX's profits are extremely volatile. For example, during the electronics boom, AVX's gross margins peaked in 2001 at 37.3% for the fiscal year ending March 31, 2001. During the subsequent recession, AVX's gross margins fell to 5.1% in 2004[6].

Diversity of component needs within the electronics market makes demand highly competitive
Instead of spending money on its own R&D, AVX broadens its product offerings through the company's resale agreement with parent company Kyocera Corporation. Since Kyocera manufactures different products, AVX is able to sell a wider range of products without incurring the direct costs of research and development. AVX spends less than both competitors Vishay Intertechnology (VSH) and Kemet (KEM) on R&D as a percentage of revenue. Kemet spends the most, about 5%[7] of its revenue, on R&D, even though Kemet sells the smallest range of products of the three companies. Vishay spends about 2.2%[8] of its revenue on R&D, while AVX spends just under 2%[9]. However, Vishay has significantly larger revenues, since it manufactures both active and passive components, while AVX only produces passive components. Interestingly, although both VSH and KEM have been increasing their spending on research and development over the past several years, AVX's spending on R&D has declined every year since 2003.

AVX is unhedged against variable raw material costs, which can affect margins
AVX's margins are largely determined by the costs of its raw material inputs, primarily tantalum but also including other metals such as platinum, palladium, silver, nickel, and copper. Many of AVX's competitors hedge against material costs risk by purchasing forward contracts (Kemet) or entering into long-term supply contracts Vishay Intertechnology (VSH) . However, AVX does not protect against variations in its input costs, and remains vulnerable to increases in tantalum and other metal prices.

Competition

Kemet (KEM): Kemet manufactures tantalum and ceramic capacitors for use in the computer, communications, automotive, and industrial industries.
Vishay Intertechnology (VSH): Vishay manufactures both active and passive electronic components. The passive components segment, which competes directly with AVX, makes up about 50% of Vishay's revenue, and includes products such as resistors and capacitors.
Murata Manufacturing Co., Ltd. (MRAAF.PK -- traded OTC in the United States and on the Tokyo and Osaka Stock Exchanges): Murata manufactures ceramic passive electronic components, including capacitors, filters, and sensors.
2007 Revenue ($M) 2007 Gross Profit ($M) 2007 Net Income ($M)
AVX (AVX)[10] 1,498.5 297.2 153.9
Kemet (KEM)[11] 658.7 141.3 6.9
Vishay (VSH)[12] 2,833.3 694.8 130.8
AVX is a large player in terms of revenues for the passive components manufacturing segment. For the 2007 fiscal year, net revenues for AVX and its competitors broke down by product category as shown below (figures in millions USD). Although not noted in the table, AVX also distributes products manufactured by Kyocera as part of a resale agreement; these products include some passive electronics components and broaden the range of AVX's product offerings.

AVX (AVX)[13] Kemet (KEM)[14] Vishay (VSH)[15]
Ceramic Components 228.14 234.5 --
Tantalum Components 286.9 424.2 --
Advanced Components 376.4 -- --
Total Passive Components 891.4 658.7 1,343.7
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