Business context and reporting period
Avnet, Inc. is a global value-added distributor of electronic components, enterprise computing and storage products, IT solutions and services. Its reportable segments are Electronics Marketing (EM) and Technology Solutions (TS). This Form 10-Q covers the quarter and nine months ended March 28, 2015 (fiscal 2015 Q3); this differs from the request metadata’s “2014 Q3.” Comparisons are with the quarter and nine months ended March 29, 2014.
Financial results and liquidity
| Metric | Fiscal 2015 Q3 | Prior-year quarter | Fiscal 2015 nine months | Prior-year nine months |
|---|---|---|---|---|
| Sales | $6.737 billion | $6.684 billion | $21.128 billion | $20.451 billion |
| Gross profit / margin | $774.4 million / 11.5% | $804.9 million / 12.0% | $2.407 billion / 11.4% | $2.389 billion / 11.7% |
| Operating income / margin | $203.7 million / 3.0% | $184.8 million / 2.8% | $647.2 million / 3.1% | $585.4 million / 2.9% |
| Net income | $121.5 million | $113.9 million | $413.2 million | $359.3 million |
| Diluted EPS | $0.88 | $0.81 | $2.97 | $2.57 |
| Operating cash flow | $60.1 million | $358.1 million | $284.6 million | $203.9 million |
Quarterly adjusted operating income, excluding restructuring, integration and other expenses and acquired-intangible amortization and other, was $230.4 million, or 3.4% of sales, versus $223.8 million, or 3.3%. The filing reports no quarterly free-cash-flow measure.
At March 28, 2015, cash and cash equivalents were $803.5 million, total debt was approximately $2.08 billion, and total liabilities were $6.11 billion. Short-term debt was $350.3 million and long-term debt was $1.725 billion. The company reported approximately $1.34 billion of borrowing availability under its credit facility and receivables program and compliance with their financial covenants. Cash held outside the U.S. was $701.8 million and was expected to remain permanently reinvested abroad. For the nine months, capital expenditures were $133.4 million, dividends paid were $65.6 million, and common-stock repurchases were $147.6 million.
Material changes versus the prior comparable period
- Reported quarterly sales rose 0.8%; sales increased 7.0% in constant currency. EM reported sales rose 2.1%, while TS sales fell 1.3%. For the nine months, sales increased 3.3% reported and organic sales in constant currency grew 5.6%.
- Quarterly gross margin declined 55 basis points, while operating margin improved 20 basis points. Management attributed gross-margin pressure to geographic and product mix, including currency translation reducing the contribution from higher-margin EMEA sales and more lower-margin high-volume Asia engagements.
- Quarterly SG&A declined 6.5% to $555.1 million, primarily reflecting currency effects and prior cost savings. Restructuring, integration and other expenses were $15.5 million versus $26.1 million.
- Quarterly operating income increased 10.2% and net income increased 6.7%; diluted EPS rose from $0.81 to $0.88. For the nine months, net income rose from $359.3 million to $413.2 million. The prior-year nine-month period included a $22.1 million legal-settlement gain; fiscal 2015 did not.
- Nine-month operating cash flow improved year over year, but remained affected by working-capital outflows. In fiscal 2015, receivables and inventory used $186.0 million and $90.0 million, respectively, and lower accrued expenses used $210.8 million, partly offset by a $118.4 million increase in accounts payable.
- Other comprehensive income was materially affected by foreign currency translation: nine-month foreign-currency translation and other adjustments were a loss of $634.6 million, compared with income of $122.1 million in the prior-year period. Accumulated other comprehensive loss was $489.7 million at quarter-end.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said available cash, borrowing capacity and expected operating cash generation were sufficient to pursue its strategy.
- The company expected to use $250 million of borrowing capacity or a capital-markets transaction to repay $250 million of notes due September 2015.
- Fiscal 2015 restructuring actions were expected to produce approximately $19 million in incremental annualized operating-cost savings. Most remaining fiscal 2015 severance and facility-exit costs were expected to be paid by fiscal year-end; historical restructuring liabilities were expected to be paid by the end of fiscal 2016.
- Management identified exposure to global economic conditions, technology-industry cyclicality, competition, supplier relationships and product allocations, international operations and currency movements, acquisitions, supply-chain disruptions, cybersecurity, financing and regulatory changes. It reported no material change from the risk factors in its fiscal 2014 Form 10-K.
- Potential unpaid import duties related to acquired Bell Microproducts remain a contingency. Avnet recorded a $10 million liability; estimated exposure could be as high as $73 million, although management considers the recorded amount reasonable based on information available.
- Foreign-exchange movements contributed to other expense, which was $8.9 million in the quarter versus $2.5 million of other income a year earlier. A hypothetical 100-basis-point increase in interest rates was estimated to reduce quarterly pretax income by $2.2 million.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is fiscal 2015 Q3, not 2014 Q3.
- Track sales and margins by segment and region, including constant-currency results and the effect of high-volume, lower-margin business.
- Monitor working-capital movements and quarterly operating cash generation relative to earnings.
- Assess the planned repayment or refinancing of the September 2015 notes, debt availability, and compliance with financing covenants.
- Follow restructuring savings and remaining costs, the Bell import-duty contingency, and the effects of foreign-currency translation and cash held overseas.