Avnet, Inc. — Q1 FY2021 Form 10-Q
Reporting period: First quarter ended October 3, 2020. Avnet is a global technology solutions and electronic-components distributor, reporting Electronic Components (EC) and Farnell segments. This quarter contained 14 weeks versus 13 weeks in the prior-year quarter, affecting year-over-year comparisons. Amounts below are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Sales | $4,723.1 | $4,630.0 |
| Gross profit / margin | $516.1 / 10.9% | $543.8 / 11.7% |
| Operating income / margin | $18.5 / 0.4% | $62.7 / 1.4% |
| Adjusted operating income (non-GAAP) | $65.1 | $107.4 |
| Net income (loss) | $(18.9) | $41.8 |
| Diluted EPS | $(0.19) | $0.40 |
| Operating cash flow | $122.4 | $195.6 |
Reported sales grew 2.0%, but organic sales declined 4.6% year over year, or 6.0% in constant currency, after adjusting for the extra week and the TI distribution agreement termination. EC sales were $4,382.1 million and Farnell sales were $340.9 million. Segment operating income was $84.4 million for EC and $12.0 million for Farnell, versus $112.3 million and $21.8 million, respectively, in the prior-year quarter.
Gross margin fell 82 basis points. SG&A was $471.2 million, 10.0% of sales, versus $456.5 million and 9.9%. Interest and financing expense declined to $22.3 million from $33.6 million, while other expense was $19.5 million, compared with other income of $4.9 million. The quarter included a $15.2 million equity-investment impairment. Income tax benefit was $4.4 million; the effective tax benefit rate was 18.9%.
Cash, debt, and liquidity
- Cash and equivalents were $483.1 million at October 3, 2020, versus $477.0 million at June 27, 2020; $412.1 million was held outside the United States.
- Operating cash flow of $122.4 million was down from $195.6 million. Working capital generated $47.7 million, including a $228.7 million increase in payables, partly offset by a $136.4 million inventory build and a $37.5 million decrease in accrued expenses and other.
- Capital expenditures were $20.0 million; investing cash outflow also included $18.7 million for an asset acquisition. Financing cash outflow was $88.3 million, including a $234.2 million net repayment under the revolving credit facility, partly offset by $166.9 million of securitization borrowings, and $20.8 million of dividends.
- Total debt was approximately $1.36 billion, comprising $167.0 million short-term and $1,195.2 million long-term debt. The company reported approximately $1.48 billion of availability under its credit facility and receivables securitization program. It was in compliance with applicable covenants.
- Current assets were $6.60 billion and current liabilities $2.77 billion. The securitization program is recorded as debt, has a $450 million maximum, and availability depends on eligible receivables.
Material changes and unusual items
- Reported sales growth reflected the additional fiscal week; on an organic basis, sales weakened across both segments and all regions. Management attributed the decline to COVID-19-related demand effects and lower TI product sales.
- TI products contributed $241.0 million of Q1 sales, versus $443.0 million in the prior-year quarter. The filing said the distribution agreement withdrawal was expected to be completed by December 2020.
- Restructuring, integration and other expenses were $26.4 million, including $26.9 million of restructuring costs, $7.3 million of integration costs, and an $8.2 million legal-settlement gain, among other items. Restructuring actions covered reductions or planned reductions of more than 150 employees. Management estimated approximately $21 million in annual savings from these actions.
- Management separately described plans to reduce annual operating costs by $75 million by the second quarter of FY2021. Share repurchases were suspended and considered unlikely in the near term; $469 million remained authorized. The quarterly dividend was $0.21 per share.
- Adoption of the expected-credit-loss standard increased the opening allowance for credit losses by $17.2 million, or $14.5 million net of tax, through opening retained earnings.
Outlook, risks, and contingencies
The filing provides no quantitative revenue or earnings guidance. Management said the COVID-19 pandemic’s duration and economic effects remained uncertain, and current results might not indicate future performance. The company expected to limit near-term material strategic acquisitions, continue cost-saving actions, and use cash for restructuring and related expenses. Management believed operating cash generation and available borrowing capacity would meet future liquidity needs.
Risks highlighted include COVID-19 effects on demand, customers, suppliers, employees, logistics and financial markets; TI’s supplier withdrawal; semiconductor industry cyclicality and competitive pressure; supply-chain and distribution-center disruptions; foreign exchange and international regulatory risks; cyber and systems risks; and general economic, geopolitical and financing conditions. The company reported $18.8 million of estimated liabilities for certain compliance-related matters; outcomes and potential exposure for some proceedings could not be estimated, and such matters could affect results in an individual period. Management did not expect ordinary litigation to materially affect financial condition, liquidity or results.
Investor verification points
- Assess underlying sales trends using the 14-week adjustment, constant-currency figures, and TI-related sales changes; compare organic performance by segment and region.
- Verify whether gross-margin pressure and lower adjusted operating income persist, and whether the planned cost savings are achieved.
- Monitor inventory, payables, operating cash flow, and securitization borrowings for changes in working-capital needs and liquidity.
- Review compliance with amended debt covenants and the availability of eligible receivables supporting the securitization facility.
- Track the financial effects of the TI transition, COVID-19-related risks, the equity-investment impairment, restructuring actions, and pending compliance matters.