Avnet, Inc. — Form 10-Q Summary
Business context and reporting period
Avnet is a global value-added distributor of electronic components, enterprise computing products, IT solutions and services. This unaudited report covers the first quarter of fiscal 2015, ended September 27, 2014; comparisons are with the quarter ended September 28, 2013, unless otherwise noted. Its reportable segments are Electronics Marketing (EM) and Technology Solutions (TS).
Financial results and position
- Sales: $6.840 billion, up 7.8% year over year. Organic sales grew 5.6% in constant currency. EM sales rose 11.1%; TS sales rose 2.4%.
- Gross profit and margin: $795.5 million, up 8.2%; gross margin was 11.6%, slightly higher year over year. EM margin increased 12 basis points; TS margin declined 22 basis points.
- Operating income: $193.2 million, up 7.9%; operating margin was 2.8% in both periods. Adjusted operating income, excluding restructuring, integration and other expenses and acquired-intangible amortization, was $223.7 million versus $199.5 million; adjusted margin was 3.3% versus 3.1%.
- Net income and EPS: Net income was $127.9 million versus $120.6 million. Diluted EPS was $0.91 versus $0.86; basic EPS was $0.93 versus $0.88.
- Cash flow: Operating activities used $40.7 million, improved from $126.2 million used a year earlier. Investing activities used $34.4 million, including $36.6 million of capital expenditures. Financing activities used $18.4 million. Cash fell $114.6 million to $814.4 million.
- Liquidity and debt: Current assets were $8.762 billion and current liabilities $4.403 billion; working capital was $4.359 billion. Quick ratio was 1.3:1 and working-capital ratio 2.0:1. Total debt was $2.089 billion, up slightly from $2.079 billion at June 28, 2014; debt to total capital was 30.3%, versus 29.8%. The company reported approximately $1.44 billion of borrowing availability under its credit facility and receivables program, subject to eligible-receivables availability.
- Other metrics: The effective tax rate declined to 24.0% from 29.8%. Comprehensive loss was $76.0 million, primarily reflecting $205.7 million of foreign currency translation and other losses, net of tax.
Material changes versus the prior period
- Sales growth was led by EM, including growth in EMEA and Asia. EM organic sales rose 7.8% in constant currency; TS organic sales rose 2.0% in constant currency. TS EMEA and Asia sales declined 5.8% and 15.2%, respectively, in constant currency.
- EM operating income increased 15.3% and its operating margin rose 17 basis points to 4.6%. TS operating income was broadly flat and its margin fell 7 basis points to 2.5%.
- Fiscal 2014 first-quarter income included a $19.1 million pre-tax legal-settlement gain; there was no comparable gain in the current quarter. The current quarter’s lower tax rate partly supported net income growth.
- Cash used in operations decreased year over year, though the quarter still consumed cash, principally due to working-capital requirements, including inventory growth and lower payables and accrued liabilities.
Outlook, commentary, risks and unusual items
- No specific sales or earnings guidance was provided. Management said liquidity, borrowing capacity and expected operating cash flow were sufficient for its strategy, and expected to continue considering acquisitions that meet its strategic and return thresholds.
- Restructuring, integration and other charges were $18.3 million pre-tax ($0.09 per diluted share after tax). Restructuring included workforce reductions of more than 100 employees. Management expected approximately $8 million of incremental annualized cost savings when related actions are substantially complete; most remaining current and prior-year restructuring liabilities were expected to be paid by the end of fiscal 2015.
- The company repurchased 0.4 million shares during the quarter for a total cost of $17.8 million, with $198.1 million remaining under the repurchase authorization at quarter-end. It paid a $0.16-per-share dividend.
- In July, Avnet entered a five-year $1.25 billion unsecured revolving credit facility; in August, it amended and extended its receivables securitization program, with a maximum capacity of $900 million and a term through August 2016. The company reported compliance with applicable financial covenants at quarter-end.
- Cash held outside the United States was $746.6 million and management expected it to remain permanently reinvested abroad; repatriation for U.S. use could incur significant taxes. Foreign-exchange movements also materially reduced comprehensive income and equity.
- A contingent liability for potential import duties, interest and penalties relating to the Bell acquisition was recorded at $10 million; estimated potential exposure could be up to $73 million. Management considered the recorded amount reasonable based on information available.
- Key disclosed risks include global economic conditions, industry cyclicality and competition, supplier relationships and product allocations, international and foreign-currency exposure, acquisitions, supply-chain disruptions, cybersecurity, and access to financing. The filing reported no material changes to the risk factors in the prior Form 10-K and no expected material adverse effect from other ongoing litigation.
Important facts for investors to verify
- Whether reported sales growth and segment trends persist, particularly the weakness in TS EMEA and Asia and the strength in EM.
- Whether management realizes the projected $8 million annualized restructuring savings and how restructuring and integration costs evolve.
- Working-capital needs, inventory levels and operating cash conversion, given the quarter’s use of operating cash.
- Availability under the receivables program and compliance with debt covenants; the program’s capacity depends on eligible receivables.
- The eventual resolution and financial exposure from the Bell import-duty matter, and any material developments in environmental or other legal proceedings.
- Effects of foreign-currency movements and the tax implications of any future repatriation of foreign cash.