Avnet, Inc. — Form 10-Q Summary
Business context and period: Avnet is a global distributor of electronic components. This unaudited report covers the first quarter of fiscal 2018, ended September 30, 2017, and compares with the first quarter ended October 1, 2016. Premier Farnell (PF), acquired in October 2016, is included in current-period results; Technology Solutions (TS), sold in February 2017, is reported as discontinued operations.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Sales | $4.661 billion | $4.118 billion |
| Gross profit / margin | $612.6 million / 13.1% | $522.7 million / 12.7% |
| Operating income / margin | $70.0 million / 1.5% | $129.5 million / 3.1% |
| Adjusted operating income / margin (non-GAAP) | $141.9 million / 3.0% | $161.4 million / 3.9% |
| Net income | $58.3 million | $68.8 million |
| Diluted EPS | $0.47 | $0.53 |
| Operating cash flow | $(128.0) million | $(0.1) million |
- Sales rose 13.2% year over year, or 11.8% in constant currency. Organic sales increased 4.8% (3.5% constant currency). PF contributed $353.7 million of sales.
- Regional organic sales in constant currency increased 14.3% in EMEA and 9.6% in Asia, but fell 14.5% in the Americas. Management cited supplier-channel changes and prior-year ERP implementation impacts in the Americas.
- Gross margin improved 45 basis points, primarily reflecting PF; EC gross margins declined in the Americas and EMEA. Adjusted operating income fell 12.0%, with western EC weakness partly offset by PF.
- SG&A was $496.2 million, or 10.6% of sales, versus $363.7 million, or 8.8%. The increase primarily reflected PF and its acquired intangible amortization.
- Cash used in continuing-operations working capital was $240.0 million, chiefly from a $267.0 million inventory increase as Avnet built inventory amid strong book-to-bill and longer purchasing lead times.
Financial position and capital
- At September 30, 2017, cash and cash equivalents were $539.7 million, down from $836.4 million at July 1; marketable securities were $197.9 million. Of cash, $513.0 million was held outside the United States.
- Total debt was approximately $1.69 billion carrying value ($1.76 billion fair value), compared with $1.78 billion carrying value at July 1. Short-term debt was $195.5 million and long-term debt $1.50 billion.
- Available borrowing capacity under the credit facility and receivables program was approximately $1.42 billion. Avnet reported compliance with applicable covenants. The receivables program, with $170 million outstanding, expires in August 2018.
- Financing uses included $68.1 million of share repurchases and $22.0 million of dividends. The quarterly dividend was $0.18 per share; approximately $327.0 million remained authorized for repurchases at quarter-end.
Outlook, commentary, and notable items
- No specific revenue or earnings guidance was provided. Management said liquidity, including cash, available borrowing capacity, remaining TS-sale proceeds and expected future operating cash flow, should meet future needs.
- For restructuring actions initiated in Q1, Avnet expected up to $10.0 million of additional costs during the rest of fiscal 2018 and approximately $41.7 million in annualized operating-cost savings once completed. Q1 restructuring, integration and other expenses totaled $46.4 million; this included $16.4 million of accelerated depreciation and $8.2 million of integration costs.
- Avnet continued PF integration and its transition toward an electronic-components-focused business, and expected capital spending that includes implementation of a global ERP system over the next two fiscal years.
- The TS-sale closing working-capital adjustment and related tax allocation were unresolved; the estimated adjustment was a principal component of $261.6 million in prepaid and other current assets. Final amounts could differ materially; management expected resolution by fiscal year-end 2018.
- Management expected pension settlement charges of up to approximately $15 million in fiscal 2018 if former TS employees’ withdrawals crossed a specified threshold. The company also recorded $14.2 million of estimated liabilities for reasonably estimable compliance-related matters; some legal and regulatory matters could affect results in an individual period.
- The effective tax rate was 5.4%, versus 23.6%, helped by income mix in lower-tax jurisdictions and a release of unrecognized tax-benefit reserves following a favorable foreign-jurisdiction outcome. Foreign-exchange gains also contributed to other income.
- Principal stated risks include economic and industry conditions, supplier relationships and product allocations, competition, acquisitions and divestitures, foreign currency and cash repatriation, supply-chain disruptions, cybersecurity and information systems, and regulatory changes. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Track whether the severe Americas organic-sales decline and EC margin pressure improve, and whether PF integration supports profitability.
- Assess inventory growth, working-capital cash demands, and the conversion of earnings into operating cash flow.
- Verify the final TS-sale working-capital adjustment and tax allocation against the $261.6 million estimate in current assets.
- Monitor restructuring spending and delivery of the projected $41.7 million annualized savings, as well as potential pension settlement charges.
- Review debt, covenant compliance, and refinancing or renewal of the receivables securitization program before its August 2018 expiration.