Avnet, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended December 28, 2019 (fiscal 2020), compared with the periods ended December 29, 2018. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions.
Business context
Avnet is a global technology solutions and electronic-components distributor operating through Electronic Components (EC) and Farnell. Management attributed lower sales across both operating groups and all three regions to an industry-wide slowdown that began in the second half of fiscal 2019.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Sales | $4,534.8 | $5,049.0 | $9,164.8 | $10,138.9 |
| Gross profit | $525.6 | $630.0 | $1,069.5 | $1,266.8 |
| Gross margin | 11.6% | 12.5% | 11.7% | 12.5% |
| Operating income | $46.5 | $96.1 | $109.2 | $242.9 |
| Adjusted operating income | $82.2 | $178.8 | $189.6 | $361.4 |
| Net income | $3.7 | $36.4 | $45.4 | $120.1 |
| Diluted EPS | $0.04 | $0.33 | $0.44 | $1.05 |
| Operating cash flow, continuing operations | Not presented quarterly | Not presented quarterly | $344.2 | $(12.8) |
Q2 sales fell 10.2% reported and 9.4% in constant currency; six-month sales declined 9.6% reported and 8.6% in constant currency. Q2 operating margin was 1.0%, versus 1.9%; adjusted operating margin was 1.8%, versus 3.5%. Management said lower sales and gross margin drove the deterioration, partly offset by lower operating expenses. The reported Q2 effective tax rate was 56.8%; for the first six months, the effective rate was a benefit of 1.8%, influenced by releases of unrecognized tax-benefit reserves and other tax items.
Financial position and liquidity
- At December 28, 2019, cash and equivalents were $488.8 million, down from $546.1 million at June 29, 2019; $423.3 million was held outside the U.S.
- Total debt carrying value was approximately $1.69 billion, compared with $1.72 billion at fiscal year-end. Short-term debt was $492.2 million and long-term debt was $1.19 billion. Debt fair value was $1.76 billion.
- Cash provided by continuing operating activities was $344.2 million for the six months, versus $12.8 million used in the prior-year period. Working capital generated $155.2 million, including cash released from receivables and inventory, partly offset by reductions in payables and accrued liabilities.
- Financing used $284.0 million in the six months, including $198.6 million of share repurchases and $42.4 million of dividends. Investing used $108.9 million, including $44.3 million of capital expenditures and $51.5 million for acquisitions.
- Available capacity under the $1.25 billion revolving credit facility and $500 million receivables securitization program was approximately $1.52 billion. No credit-facility borrowings were outstanding; securitization borrowings were $191.9 million. The company reported compliance with applicable covenants.
- The $300 million notes due June 2020 were expected to be redeemed using cash on hand or available borrowing capacity. The securitization program expires in August 2020; Avnet expected to renew or replace it on similar terms, subject to market conditions.
- Lease adoption resulted in recognition of $274.4 million of operating lease assets and $296.7 million of lease liabilities. The company adopted the lease standard on June 30, 2019; it reported no material impact on operations or retained earnings.
Material changes, outlook and risks
- Both EC and Farnell reported lower Q2 sales: 10.2% and 10.1%, respectively. All regions declined; EMEA had the largest constant-currency decline at 12.1%.
- Gross margin fell 89 basis points year over year, attributed primarily to product/customer and geographic mix and market conditions. SG&A declined 1.5%, but increased to 10.3% of sales from 9.3% as sales and gross profit fell.
- Avnet received notice from Texas Instruments in Q2 that TI would terminate its distribution agreement. TI products represented approximately 10% of fiscal 2019 sales; future sales and gross profit could be lower if strategic initiatives do not offset the impact.
- Management gave no specific financial guidance in the provided filing text. It said the downturn was affecting demand, expected the majority of remaining restructuring liabilities to be paid by fiscal year-end, and believed cash generation and borrowing capacity would meet future liquidity needs.
- Fiscal 2020 restructuring actions included workforce reductions affecting or expected to affect more than 300 employees. Six-month restructuring expenses were $27.8 million; Q2 restructuring costs of $9.5 million were expected to yield approximately $15 million in annual operating expense savings once completed.
- The board authorized up to $2.95 billion in cumulative share repurchases; $505.7 million remained authorized at quarter-end. The company repurchased 4.8 million shares for approximately $199.7 million during the six months and paid $0.42 per share in dividends.
- Two Q2 acquisitions were completed, with effects described as not material. The prior sale of Technology Solutions remains classified as discontinued operations; related indemnification matters could result in future costs.
- Management said pending legal and compliance matters were not expected to materially affect financial position or liquidity, but could materially affect results in an individual period. Estimated liabilities for reasonably estimable compliance matters were $14.7 million. Other matters’ maximum exposure could not be reasonably estimated.
- Foreign exchange exposures were primarily economically hedged. At quarter-end, 89% of debt was fixed-rate and 11% variable-rate; a hypothetical 1 percentage-point rate increase was estimated to reduce quarterly pretax income by $0.5 million.
Key facts for investors to verify
- Potential sales, gross-profit and margin effects—and mitigation progress—following termination of the TI distribution agreement.
- Whether the securitization program is renewed or replaced before its August 2020 maturity, and how the June 2020 notes are redeemed.
- Whether demand stabilizes and gross margins recover after the broad-based industry downturn and Q2 declines.
- Delivery and timing of the projected $15 million annual savings from restructuring, alongside remaining restructuring and integration costs.
- Developments in compliance-related investigations, indemnification obligations from the Technology Solutions sale, and the unusual tax-rate effects.
- Cash conversion after the six-month working-capital benefit, and the balance between debt reduction, acquisitions, dividends and continued share repurchases.