Avnet, Inc. — Form 10-Q Summary
Reporting period: The filing is for the third quarter and nine months ended March 31, 2018 (fiscal 2018), not 2017 Q3 as indicated in the request metadata. Avnet distributes electronic components through its Electronic Components (EC) and Premier Farnell (PF) segments. The results compare with the corresponding periods ended April 1, 2017; the Technology Solutions business had been sold in February 2017 and is reported as discontinued operations.
Financial performance
| Metric | Q3 FY2018 | Prior-year quarter | Nine months FY2018 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $4.80 billion | $4.44 billion | $13.98 billion | $12.83 billion |
| Gross profit | $653.5 million | $630.0 million | $1.87 billion | $1.74 billion |
| Gross margin | 13.6% | 14.2% | 13.4% | 13.5% |
| Operating income (loss) | $(54.4) million | $114.3 million | $102.6 million | $368.0 million |
| Net income (loss) | $(320.1) million | $271.8 million | $(215.0) million | $443.8 million |
| Diluted EPS | $(2.68) | $2.10 | $(1.78) | $3.41 |
Reported Q3 sales rose 8.0%; sales growth excluding foreign-currency translation was 2.4%. Q3 adjusted operating income, a non-GAAP measure excluding restructuring, goodwill impairment and acquired-intangible amortization and other, was $174.9 million, versus $172.3 million. Adjusted operating margin was 3.7%, compared with 3.9%.
For the nine months, operating cash flow from continuing operations was $17.9 million, versus $140.5 million a year earlier. Capital expenditures were $112.2 million. Cash and cash equivalents were $430.1 million at March 31, 2018, down from $836.4 million at July 1, 2017. Total debt was approximately $1.59 billion; cash plus marketable securities was approximately $505.1 million. The company reported about $1.55 billion of borrowing availability under its credit facility and receivables program.
Material changes and notable items
- Q3 included a $181.4 million goodwill impairment charge, eliminating all goodwill assigned to EC Americas. Management cited lower expected cash flows in its planning horizon.
- Income tax expense was $243.5 million in Q3, despite a pretax loss of $72.1 million. It included a provisional $230.0 million U.S. transition-tax liability under the Tax Cuts and Jobs Act; the company expected to pay that liability over eight years. Tax and goodwill-related effects contributed to the reported net loss.
- Q3 gross margin declined 55 basis points year over year. Management attributed the decline to supplier program changes and sales mix, including a greater share of lower-margin Asia sales at EC, as well as PF product/customer mix and currency effects.
- Q3 reported sales increased in EMEA and Asia but declined in the Americas. EC sales were $4.40 billion; PF sales were $391.0 million. The prior-year nine-month comparison is affected by PF’s acquisition in October 2016.
- Inventory rose to $3.26 billion from $2.82 billion at the prior fiscal year-end. Management linked the increase to strong book-to-bill and longer product lead times.
- The company recorded $108.3 million of restructuring, integration and other expenses for the first nine months, including costs associated with restructuring, PF integration and accelerated depreciation of an Americas ERP system being replaced. Fiscal 2018 restructuring actions involved reducing or planning to reduce approximately 700 employees.
- Share repurchases totaled $209.5 million and dividends totaled $66.2 million in the first nine months. Remaining authorization at March 31 was $389.6 million.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said it expected available borrowing capacity, cash, remaining TS-sale proceeds and future operating cash flows to be sufficient for liquidity needs, while anticipating continued spending on acquisitions, capital expenditures, restructuring and integration. It expected most remaining restructuring liabilities to be paid by fiscal year-end.
The TS sale’s closing-date working-capital adjustment and related tax allocation remained subject to finalization and could differ materially from estimates. The company expected the adjustment to be finalized in the first half of fiscal 2019 and taxes on the gain by the end of fiscal 2019. Compliance-related legal matters had $14.2 million of estimated liabilities; outcomes or exposures for some proceedings could not be reasonably estimated. Management did not expect these matters to materially affect financial position or liquidity, though they could materially affect results in a reporting period.
Principal disclosed risks include global economic conditions, competition and semiconductor cycles, supplier relationships and product allocation, international operations and currency/repatriation issues, acquisitions and divestitures, supply-chain disruptions, cyber and information-system risks, and access to financing and covenant compliance. The company reported compliance with debt covenants and effective disclosure controls at period-end.
Investor facts to verify
- Whether operating performance and cash generation improve after excluding the goodwill impairment, transition-tax charge and restructuring-related items.
- How quickly inventory converts to sales and cash, given the substantial inventory build and management’s comments on lead times.
- The final TS sale working-capital adjustment and tax consequences, and any changes to the provisional tax estimates.
- Whether EC Americas sales and expected cash flows recover following the goodwill impairment.
- Liquidity, borrowing availability and covenant compliance as the receivables program approached its August 2018 expiration and the revolving credit facility its July 2019 expiration.
- Execution and cash costs of the restructuring, ERP replacement and PF integration, alongside continued repurchases and dividends.