Avnet, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended April 2, 2016. Although the request labels this “2015 Q3,” the filing is for fiscal 2016 Q3. Fiscal 2016’s first nine months had 40 weeks versus 39 weeks in the comparable fiscal 2015 period.
Business context
Avnet is a global value-added distributor of electronic components and enterprise computing products, software, IT solutions and services. Its reportable segments are Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | First 9 months FY2016 | First 9 months FY2015 |
|---|---|---|---|---|
| Sales | $6.175 billion | $6.737 billion | $19.992 billion | $21.128 billion |
| Gross profit | $736.8 million | $774.4 million | $2.306 billion | $2.407 billion |
| Operating income | $181.6 million | $203.7 million | $614.7 million | $647.2 million |
| Adjusted operating income | $205.2 million | $230.4 million | $700.9 million | $728.7 million |
| Net income | $123.5 million | $121.5 million | $409.7 million | $413.2 million |
| Diluted EPS | $0.94 | $0.88 | $3.05 | $2.97 |
| Operating cash flow | $212.9 million | $60.1 million | $297.1 million | $284.6 million |
Q3 gross margin was 11.9%, up 44 basis points year over year; operating margin was 2.9% versus 3.0%, and adjusted operating margin was 3.3% versus 3.4%. For the first nine months, gross margin was 11.5% versus 11.4%; operating margin was 3.1% in both periods and adjusted operating margin was 3.5% versus 3.4%.
Q3 reported sales fell 8.3%; the filing reports a 6.9% decline in constant currency. EM sales declined 4.2% reported (3.3% in constant currency), while TS sales declined 15.3% reported (12.9% in constant currency). TS weakness reflected lower demand for certain legacy datacenter products and product-mix changes. EM EMEA sales increased 9.4% in constant currency, while EM Asia sales declined 12.3%.
Cash, debt and liquidity
- At April 2, 2016, cash and equivalents were $1.036 billion, versus $932.6 million at June 27, 2015; $966.8 million was held outside the United States and was expected to remain permanently reinvested abroad.
- Total debt was approximately $2.317 billion: $706.7 million short-term and $1.611 billion long-term, compared with approximately $1.978 billion at June 27, 2015. The company issued $550 million of 4.625% notes due 2026, repaid $250 million of 6.00% notes at maturity, and had $300 million of 6.63% notes due September 2016.
- Combined capacity under the revolving credit facility and receivables program was $2.15 billion. After borrowings and letters of credit, approximately $1.47 billion was available. The company was in compliance with facility covenants.
- Nine-month financing included $334.2 million of share repurchases and $66.9 million of dividends. Capital expenditures were $111.1 million; acquisition spending, net of acquired cash, was $19.7 million.
- Working capital used $300.2 million of cash in the first nine months, principally reflecting a $319.9 million inventory increase.
Outlook, commentary and notable items
- No specific sales or earnings forecast was provided. Management expected approximately $40 million of incremental annualized cost savings from restructuring actions taken in the first nine months, split approximately $17 million for EM and $23 million for TS.
- Management expected to use cash and borrowing capacity to repay the $300 million notes due September 2016 and to renew or replace the receivables securitization program, which matured in August 2016, on similar terms subject to market conditions.
- Restructuring, integration and other expenses were $63.4 million for the first nine months, including $39.4 million of restructuring charges. Actions included reductions of approximately 560 employees. Q3 charges were $16.2 million.
- Other costs included $4.3 million for estimated environmental remediation and $5.2 million in legal expenses associated with lawsuits concerning an acquired business. Estimated liabilities for compliance-related matters were $21.3 million, including $10.0 million for potential import duties, interest and penalties tied to a Customs and Border Protection audit.
- Management said ordinary-course litigation was not expected to materially affect financial condition, liquidity or results, but some compliance matters could be material to results in an individual period. The filing identifies risks including economic and industry downturns, competition, supplier relationships, foreign exchange and international compliance, acquisitions, cyber attacks, and access to financing. No material change to the prior annual report’s risk factors was reported.
- Tax expense benefited from a lower effective tax rate: 23.1% in Q3 versus 28.9%, and 23.5% for the first nine months versus 26.1%. Favorable factors included income mix, reserve releases and, for the nine-month period, releases of valuation allowances.
Important facts for investors to verify
- Whether weak demand in TS, particularly for legacy datacenter products, continues and whether expected cost savings are realized.
- Inventory levels and working-capital cash use, given the $319.9 million year-to-date inventory increase.
- Repayment or refinancing of the September 2016 notes and renewal or replacement of the receivables program before its August 2016 maturity.
- Progress and outcomes of the import-duty audit, environmental remediation matters and acquired-business litigation.
- Whether foreign-held cash can remain available for operating needs, and the effect of currency movements, interest rates and international restrictions.