Business context and reporting period
Avnet, Inc. distributes electronic components and enterprise computing products and provides related technology, logistics and engineering services through Electronics Marketing (EM) and Technology Solutions (TS). This Form 10-Q covers the quarter ended March 29, 2014, the third quarter of Avnet’s fiscal 2014, and the nine months then ended. The request metadata says “2013 Q3,” but the filing period is fiscal Q3 2014.
Financial performance
| Metric | Quarter ended Mar. 29, 2014 | Prior-year quarter | Nine months ended Mar. 29, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $6.684 billion | $6.299 billion | $20.451 billion | $18.868 billion |
| Gross profit / margin | $804.9 million / 12.0% | $756.0 million / 12.0% | $2.389 billion / 11.7% | $2.209 billion / 11.7% |
| Operating income / margin | $184.8 million / 2.8% | $167.6 million / 2.7% | $585.4 million / 2.9% | $463.2 million / 2.5% |
| Adjusted operating income / margin | $223.8 million / 3.3% | $203.7 million / 3.2% | $686.5 million | $576.7 million |
| Net income | $113.9 million | $86.2 million | $359.3 million | $324.0 million |
| Diluted EPS | $0.81 | $0.62 | $2.57 | $2.31 |
Adjusted operating income excludes restructuring, integration and other expenses and acquired-intangible amortization and other. Quarterly sales increased 6.1% reported; organic sales in constant currency rose 3.5%. EM’s organic sales grew 7.2% in constant currency, while TS declined 1.9%. Nine-month organic sales in constant currency increased 4.6%.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $203.9 million, down from $429.4 million. Working capital and other items used $365.5 million, including inventory growth of $114.3 million, receivables growth of $55.9 million, and decreases in accounts payable of $148.8 million.
- Cash and cash equivalents were $960.1 million at March 29, 2014, versus $1.009 billion at June 29, 2013. Capital expenditures were $81.2 million; acquisitions used $116.9 million net of cash acquired.
- Total debt was $2.070 billion, compared with $2.045 billion at fiscal year-end. Current and long-term debt were $848.4 million and $1.222 billion, respectively. Debt was 30.4% of total capitalization, down from 32.3%.
- Working capital was $3.889 billion; the current ratio was 1.8:1 and quick ratio 1.2:1. Avnet reported approximately $1.2 billion of availability under its revolving credit facility and receivables program and stated it was compliant with their covenants.
- The receivables securitization program had $590 million outstanding and expires in August 2014. The company redeemed $300 million of 5.875% notes at maturity in March 2014. Management said cash, borrowing capacity and expected operating cash flows should meet future liquidity needs.
Material changes, outlook and risks
- Quarterly operating performance improved overall, led by EM, particularly EMEA and Asia. EM adjusted operating margin rose 33 basis points to 4.7%; TS adjusted operating margin fell 35 basis points to 2.4%, reflecting weaker gross margin and higher operating expenses. TS organic sales were weaker in EMEA and Asia, partly offset by Americas growth.
- Avnet recognized a $22.1 million gain over the nine-month period from a LCD class-action settlement, including a final $3.0 million award in the quarter. The prior-year nine-month comparison included a $31.4 million net gain from the Internix bargain purchase and a divestiture; these items affect period comparisons.
- The effective tax rate was 31.0% for the quarter versus 40.3% a year earlier; the nine-month rate was 31.6% versus 23.2%. Quarterly tax benefited from income mix in lower-tax jurisdictions and smaller increases in valuation allowances and reserves. The prior-year nine-month rate benefited from IRS audit settlements and a non-taxable bargain-purchase gain.
- Fiscal 2014 restructuring, integration and other costs were $26.1 million for the quarter and $66.6 million for nine months. Management expected up to $10–15 million of additional restructuring costs through fiscal Q1 2015 and projected $35–40 million in annualized operating cost benefits when actions are substantially complete, expected by that quarter.
- Avnet completed three acquisitions during the first nine months, with approximately $490 million of historical annualized sales. Aggregate consideration was $219.7 million, including up to approximately $50 million of contingent consideration. Purchase-price valuations remained preliminary.
- Risks identified include global economic conditions, technology-industry cyclicality, competition, supplier relationships and product allocation, international operations and currency exposure, acquisitions, supply-chain disruptions, information systems, and access to financing. The company noted potential import-duty exposure related to Bell of up to $73 million, while stating its recorded $10 million liability was considered a reasonable estimate. Management did not expect ongoing legal matters to have a material adverse effect.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing is for fiscal Q3 2014, despite the request’s “2013 Q3” metadata.
- Track whether EM growth and margins persist and whether TS can reverse its organic sales and margin declines.
- Assess operating cash conversion and working-capital needs, given the sharp year-over-year decline in nine-month operating cash flow.
- Monitor renewal or refinancing of the receivables securitization program expiring in August 2014, debt levels and covenant compliance.
- Check realization of the stated $35–40 million annualized savings, remaining restructuring costs, and final acquisition valuations and contingent consideration.
- Consider the effect of the LCD settlement gain and tax-rate differences when evaluating recurring earnings, and monitor the Bell import-duty contingency.