Avnet, Inc. — Form 10-Q Summary
Business context and reporting period
Avnet is a global value-added distributor of electronic components and enterprise computing products and solutions. Its reportable segments are Electronics Marketing (EM) and Technology Solutions (TS). This fiscal 2016 first quarter ended October 3, 2015; it contained 14 weeks versus 13 weeks in the comparable fiscal 2015 quarter, limiting direct year-over-year comparisons.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 / comparison |
|---|---|---|
| Sales | $6.970 billion | $6.840 billion; up 1.9% reported |
| Gross profit / margin | $791.5 million / 11.4% | $795.5 million / approximately 11.6% |
| Operating income / margin | $207.0 million / 3.0% | $193.2 million / 2.8% |
| Adjusted operating income / margin | $240.4 million / 3.5% | $223.7 million / 3.3% |
| Net income | $130.3 million | $127.9 million |
| Diluted EPS | $0.96 | $0.91 |
| Operating cash flow | -$33.7 million | -$40.7 million |
Reported sales growth was substantially affected by the extra week: management estimated $525 million of additional sales from it. Sales grew 8.4% in constant currency, but organic sales in constant currency grew approximately 1.0%. EM organic sales rose 1.8%; TS organic sales fell 1.4%. Gross margin declined 27 basis points, while lower SG&A and restructuring-related savings helped lift operating margins. The effective tax rate was 26.6%, versus 24.0%.
At October 3, cash and cash equivalents were $824.7 million, down from $932.6 million at June 27, 2015; $719.2 million was held outside the U.S. Current assets were $8.715 billion and current liabilities $4.960 billion. Total debt was approximately $2.112 billion, compared with $1.978 billion at June 27. The company had approximately $1.07 billion of availability under its credit facility and receivables program and reported compliance with their covenants. Inventory rose to $2.805 billion from $2.482 billion.
Cash used in operations primarily reflected working-capital needs, including a $324.5 million inventory increase. Investing activities used $32.0 million, principally for capital expenditures. Financing cash flows included repayment of $250 million of notes at maturity, $143.7 million of share repurchases and $22.6 million of dividends; net bank and revolving borrowings were $418.6 million.
Material changes, outlook, and risks
- Management attributed reported sales growth mainly to the additional fiscal week, with foreign currency translation also affecting comparisons. TS Asia sales declined, particularly in computing components.
- Q1 restructuring, integration and other expenses were $26.0 million pretax ($0.12 per diluted share after tax), versus $18.3 million in the prior-year quarter. Actions included reducing more than 250 employees. Management expects approximately $18 million in incremental annualized savings when completed and approximately $15 million of additional restructuring expense through fiscal year-end.
- The company expects to repay $300 million of notes due September 2016 using cash, available borrowing capacity, or a capital markets transaction. It expects to renew or replace its receivables program before its August 2016 maturity, subject to market conditions. No specific earnings or sales guidance is provided in the filing.
- Management said current cash, borrowing capacity and expected operating cash generation should meet future liquidity needs. Foreign cash is expected to remain permanently reinvested abroad; repatriation for U.S. use could incur significant taxes.
- Risks identified include technology-industry cyclicality and demand, competition, supplier relationships and product allocation, foreign exchange and international operations, access to financing, acquisitions, cyber risks, and regulatory or legal matters. Management reported $21.3 million in estimated liabilities for compliance-related matters, including $10 million for potential import duties, interest and penalties tied to a Customs audit. The ultimate exposure for certain investigations cannot currently be estimated; management said resolution was not expected to materially affect financial position or liquidity but could affect results in a reporting period.
Important facts for investors to verify
- Assess underlying sales trends using the 14-week quarter adjustment: reported sales rose, but organic constant-currency growth was approximately 1.0% overall and negative for TS.
- Monitor inventory and working-capital conversion, given the $324.5 million quarterly inventory cash outflow and negative operating cash flow.
- Confirm progress on restructuring costs and realization of the expected $18 million annualized savings.
- Track refinancing or repayment plans for the $300 million September 2016 notes and renewal or replacement of the receivables program.
- Follow the Customs audit, other compliance matters, and environmental obligations; certain potential exposures are not currently estimable.