Avnet, Inc. — Q1 FY2014 Form 10-Q
Reporting period: First quarter of fiscal 2014, ended September 28, 2013. Comparisons are with the first quarter ended September 29, 2012, unless noted. Avnet distributes electronic components and enterprise computing products and services through its Electronics Marketing (EM) and Technology Solutions (TS) groups.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change / context |
|---|---|---|---|
| Sales | $6.345 billion | $5.870 billion | +8.1% reported; +3.5% organic, constant currency |
| Gross profit / margin | $735.2 million / 11.6% | $684.4 million / approximately 11.7% | Profit +7.4%; margin down 7 basis points |
| Operating income | $179.0 million | $100.0 million | +79.0%; margins 2.8% and 1.7% |
| Adjusted operating income | $199.5 million | $144.5 million | Excludes restructuring, integration and other charges and acquired-intangible amortization; adjusted margin 3.1% versus 2.5% |
| Net income | $120.6 million | $100.3 million | +20.3% |
| Diluted EPS | $0.86 | $0.70 | Prior period included a larger bargain-purchase gain |
| Operating cash flow | $(126.2) million | $81.0 million | Working capital used $328.2 million, mainly from inventory growth and lower payables |
| Cash and cash equivalents | $865.6 million | $1.009 billion at June 29, 2013 | $789.8 million held outside the U.S. |
| Total debt | $2.079 billion | $2.045 billion at June 29, 2013 | Debt to total capitalization 31.6%, down from 32.3% |
| Liquidity | $1.5 billion approximate unused capacity | $1.8 billion combined facility capacity; current ratio 1.8:1 and quick ratio 1.2:1 |
Business performance and changes
- EM sales rose 7.8% reported and 8.0% organic, constant currency. EM organic growth was strongest in Asia and EMEA; Americas organic sales rose 1.2%.
- TS sales rose 8.6% reported, but organic sales declined 3.0% in constant currency, principally due to a 13.1% decline in TS EMEA.
- EM gross margin fell 51 basis points, reflecting lower EMEA margin and a greater share of lower-margin Asia sales. TS gross margin rose 65 basis points, supported by a mix shift toward higher-margin products and services.
- SG&A declined 0.5% to $544.1 million. Management attributed expense leverage to cost actions, partly offset by acquired-business expenses. SG&A as a percentage of sales improved to 8.6% from 9.3%.
- Operating group reporting changed in FY2014: acquired-intangible amortization was excluded from segment operating income, and certain operations were transferred from EM to TS. Prior-period segment information was recast; these changes did not affect consolidated results.
Outlook, liquidity and notable items
- The filing provides no specific numerical revenue or earnings guidance. Management said cash, borrowing availability and expected future operating cash flows should be sufficient for projected financing needs.
- In October 2013, after quarter-end, Avnet acquired a controlling interest in MSC Group, a European electronic-components and embedded-computing distributor. The all-cash purchase price is not stated in this filing; Avnet expected to acquire the remaining interest by the end of fiscal Q3. MSC reported more than $450 million of 2012 sales.
- Q1 restructuring, integration and other charges were $12.1 million pre-tax, including $5.7 million restructuring charges. Actions affecting approximately 80 employees are expected to produce about $7 million in annual savings when realized; management expected most related reserves to be used by FY2014 year-end.
- Q1 earnings included a $19.1 million pre-tax LCD class-action settlement award. The company may receive up to another $4 million from the settlement fund. The prior-year quarter included a $31.3 million pre-tax Internix bargain-purchase gain.
- The effective tax rate increased to 29.8% from 7.9%. FY2014 was adversely affected mainly by certain jurisdictional tax-rate changes and increased valuation allowances and reserves; the prior-year rate benefited from an IRS audit settlement and a non-taxable bargain-purchase gain.
- Avnet had $300 million of 5.875% notes due March 15, 2014. Its receivables securitization program, with up to $800 million capacity, expires in August 2014. The $1.0 billion revolving credit facility had no borrowings outstanding at quarter-end; the company reported compliance with applicable covenants.
- Potential Bell Microproducts import-duty exposure was estimated at up to $73 million; Avnet said it had recorded a $10 million contingent liability and considered it a reasonable estimate based on available information.
- Management identified economic conditions, technology-industry cyclicality, competition, supplier relationships, international operations and currency exposure, acquisitions, supply-chain disruptions, information systems, and access to financing as risks. It reported no material changes to the FY2013 Form 10-K risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of sales and adjusted-profit growth is organic and sustainable, particularly given TS’s organic decline and EM’s changing regional mix.
- The cash-conversion outlook: Q1 operating cash use, inventory growth, and whether working capital normalizes as management expects.
- Refinancing plans for the March 2014 notes and renewal or replacement of the securitization program expiring in August 2014.
- The MSC Group purchase price, remaining-interest terms, integration costs, and expected contribution to earnings and cash flow.
- The ultimate amount and timing of Bell import-duty exposure and any further LCD settlement proceeds.
- The effects of the higher tax rate, restructuring savings, and acquisition-related costs on future reported results.