Avnet, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 28, 2020, with nine-month results compared with the periods ended March 30, 2019. The request metadata says “2019 Q3,” but the filing covers fiscal 2020 Q3. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Avnet distributes electronic components through its Electronic Components (EC) and Farnell segments. The company attributed weaker results primarily to an industry-wide slowdown, with additional pressure from COVID-19.
| Metric | Fiscal Q3 2020 | Fiscal Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $4,309.8 | $4,698.8 | $13,474.6 | $14,837.7 |
| Gross profit | $518.9 | $624.2 | $1,588.4 | $1,891.0 |
| Operating income (loss) | $(115.8) | $153.1 | $(6.5) | $396.0 |
| Net income (loss) | $(128.7) | $88.0 | $(83.2) | $208.2 |
| Diluted EPS | $(1.29) | $0.81 | $(0.82) | $1.85 |
- Q3 sales fell 8.3% year over year, or 7.3% in constant currency. Both segments and all three regions declined; EMEA had the steepest regional decline in constant currency at 10.4%.
- Q3 gross margin declined to 12.0% from 13.3%. Operating margin was negative 2.7%, versus positive 3.3% a year earlier. Adjusted operating income was $70.4 million, down from $178.1 million; adjusted operating margin was 1.6% versus 3.8%.
- Nine-month sales declined 9.2%; gross margin was 11.8% versus 12.7%. Nine-month adjusted operating income was $260.0 million, down from $539.5 million.
- Q3 SG&A was $469.6 million, or 10.9% of sales, compared with 10.0% a year earlier. Management cited lower sales and gross profit, product/customer and geographic mix, and increased COVID-related logistics costs as pressures.
Cash flow, balance sheet and debt
- Nine-month operating cash flow from continuing operations was $442.6 million, compared with $256.4 million. Working capital generated $180.9 million, including reductions in receivables and inventory, partly offset by lower payables and accrued expenses.
- Nine-month capital expenditures were $61.2 million. Cash and cash equivalents were $402.7 million at March 28, 2020, down from $546.1 million at June 29, 2019.
- Total debt was approximately $1.59 billion: $400.0 million short-term and $1,194.2 million long-term. The company reported approximately $1.63 billion of available capacity under its credit facility and receivables securitization program; it was in compliance with their covenants.
- Current assets were $6,316.6 million and current liabilities $2,607.8 million. Operating lease liabilities totaled $303.0 million after adoption of the new lease standard.
Material changes, outlook and risks
- COVID-19 led to softer demand, pricing constraints, higher logistics costs, lower distribution-center utilization and shipping delays. Avnet expected further negative effects on revenue, earnings and cash flows in Q4 and possibly fiscal 2021; the filing provides no numerical earnings or revenue guidance.
- The company recorded $145.8 million of goodwill and intangible-asset impairment, including $120.5 million of goodwill and $25.3 million of long-lived-asset impairment, largely associated with COVID-related market and outlook deterioration. It also recorded $15.3 million of equity-investment impairment in other expense. Additional impairment may be required if conditions worsen.
- Avnet said Texas Instruments had notified it of termination of their distribution agreement. TI products represented approximately 10% of fiscal 2019 sales; future sales and gross profit may be affected if other growth, margin improvement or cost actions do not offset the loss.
- Restructuring, integration and other expenses were $19.2 million in Q3. Fiscal 2020 restructuring actions included reducing or planning to reduce approximately 400 positions; Q3 actions were expected to yield about $12 million in annual operating-expense savings once completed.
- Avnet temporarily suspended share repurchases because of COVID-related uncertainty and liquidity/leverage priorities. The board approved a Q3 dividend of $0.21 per share. Management said near-term strategic investments through acquisitions were unlikely.
- After quarter-end, Avnet redeemed $300 million of 5.875% notes on April 30, 2020, using cash and its revolving credit facility. The company also expected to renew or replace its receivables securitization program, due August 2020, subject to market conditions.
- Legal and compliance matters included estimated liabilities of $14.7 million. Management did not expect the matters to materially affect financial position or liquidity, but said they could materially affect results in an individual period.
Important facts for investors to verify
- Whether COVID-19 demand, supply-chain and logistics effects materially changed after the March 28 quarter-end, including the expected Q4 and possible fiscal 2021 impact.
- Progress and financial consequences of the TI distribution-agreement termination, given TI’s reported share of fiscal 2019 sales.
- Whether further goodwill, intangible-asset or other impairment charges were recognized as operating conditions and valuation assumptions evolved.
- Renewal or replacement terms for the August 2020 receivables securitization program, and liquidity and covenant headroom following the April 30 note redemption.
- Actual delivery of restructuring savings, and whether the dividend and repurchase pause or other capital-allocation plans changed.