Avnet, Inc. — Q2 FY2015 Form 10-Q
Business context and period. Avnet is a global distributor of electronic components and enterprise computing products and solutions, operating through Electronics Marketing (EM) and Technology Solutions (TS). This unaudited report covers the quarter and six months ended December 27, 2014; comparisons are with the corresponding periods ended December 28, 2013.
Key financial results
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Sales | $7.552B | $7.422B | $14.391B | $13.767B |
| Gross profit / margin | $837.5M / 11.1% | $848.6M / 11.4% | $1.633B / 11.4% | $1.584B / 11.5% |
| Operating income / margin | $250.3M / 3.3% | $221.6M / 3.0% | $443.5M / 3.1% | $400.6M / 2.9% |
| Net income | $163.7M | $124.9M | $291.7M | $245.5M |
| Diluted EPS | $1.18 | $0.89 | $2.08 | $1.75 |
| Operating cash flow | $265.1M* | $(28.0)M* | $224.4M | $(154.2)M |
*Quarterly operating cash flow as stated in management’s discussion; the cash flow statement presents six-month totals.
Q2 adjusted operating income, a non-GAAP measure excluding restructuring, integration and other expenses and acquired-intangible amortization and other, was $274.6M, or 3.6% of sales, versus $263.2M, also 3.6%, a year earlier. Q2 interest expense was $24.7M; the six-month total was $48.1M. Dividends paid were $0.16 per share in Q2 and $0.32 per share for the six months.
Balance sheet and liquidity
- At December 27, 2014, cash and equivalents were $903.3M, receivables $5.697B, inventory $2.494B, and total assets $11.491B. Cash at June 28, 2014 was $929.0M.
- Short-term debt was $409.2M and long-term debt $1.692B, or $2.101B total, compared with $2.079B total at fiscal year-end. Shareholders’ equity was $4.705B.
- Avnet reported approximately $1.41B of availability under its $1.25B revolving credit facility and receivables securitization program combined, after borrowings and letters of credit. Securitization-program availability depends on eligible receivables. The company stated it was in compliance with applicable financial covenants.
- $812.7M of cash was held outside the U.S. and expected to remain permanently reinvested; repatriation for U.S. use could incur significant taxes.
Changes versus prior period
- Q2 sales rose 1.8% reported and 4.6% in constant currency. EM sales increased 6.8%; TS sales declined 4.6%. Asia/Pacific sales increased 10.6% overall, while Americas and EMEA sales declined 0.4% and 4.2%, respectively.
- Q2 gross profit fell 1.3% as the 34-basis-point margin decline outweighed sales growth. Management attributed margin pressure to both segments, including lower-margin EM supply-chain fulfillment sales in Asia and product mix in TS Americas.
- Q2 GAAP operating income increased 13.0%; diluted EPS rose from $0.89 to $1.18. The effective tax rate fell to 25.6% from 33.8%, favorably affected by the mix of income in lower-tax jurisdictions and release of foreign tax reserves.
- Six-month operating cash flow improved to $224.4M from a $154.2M use, although working capital still used $222.1M, primarily reflecting higher receivables, partly offset by higher payables.
- Foreign currency translation contributed to a $364.0M six-month other comprehensive loss, and accumulated other comprehensive income moved from $139.5M at June 28 to a $221.0M loss at December 27.
Outlook, commentary and risks
- No specific revenue, earnings or full-year forecast is provided in the supplied filing text. Management expected approximately $6.0M of incremental annualized operating-cost savings from restructuring actions when substantially complete ($2.0M EM and $4.0M TS).
- Six-month restructuring, integration and other expenses were $31.6M before tax. Actions included reducing more than 150 employees; most remaining FY2015 restructuring liabilities were expected to be paid by fiscal year-end.
- The board increased the share-repurchase authorization by $250M in November, bringing the program to $1.0B. $109.1M was repurchased during the six months; $357.1M remained available at quarter-end. Management also expected to continue quarterly dividends subject to board approval.
- A Bell-related customs audit could result in duties, interest and penalties of up to an estimated $73M; Avnet had recorded a $10M contingent liability and considered it a reasonable estimate based on information then available.
- Management identified exposure to global economic conditions, technology-industry cyclicality, competition, supplier relationships and product allocation, international operations and currency, acquisitions, supply-chain disruption, cybersecurity, financing and regulatory risks. It reported no material change to the risk factors in its FY2014 Form 10-K.
- Interest-rate sensitivity: 58% of debt was fixed-rate and 42% variable-rate; a hypothetical 1-percentage-point increase in rates would reduce Q2 pretax income by $2.2M. The company said its foreign-currency exposure had not materially changed.
Important facts for investors to verify
- Whether EM growth can offset continued TS weakness, and whether gross-margin pressure—particularly from regional and product mix—persists.
- Receivables, inventory and payables trends and the durability of improved operating cash flow; assess receivables-program availability and covenant headroom.
- Foreign-currency effects, the large overseas cash balance and potential tax consequences of repatriation.
- Resolution and potential exposure in the Bell customs matter relative to the recorded $10M liability.
- Realization and timing of expected restructuring savings, remaining restructuring costs, and execution of share repurchases and dividends.
- Tax-rate sustainability, including releases of reserves and the company’s ongoing assessment of deferred-tax valuation allowances.