Avnet, Inc. — Form 10-Q Summary
Business context and reporting period. Avnet distributes electronic components and provides related technology, design and supply-chain solutions through Electronic Components (EC) and Premier Farnell (PF). This unaudited report covers the second quarter and first six months of fiscal 2019, ended December 29, 2018; comparisons are with the corresponding fiscal 2018 periods.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $5,049.0 | $4,521.6 | $10,138.9 | $9,182.6 |
| Gross profit | $630.0 | $602.5 | $1,266.8 | $1,215.0 |
| Gross margin | 12.5% | 13.3% | 12.5% | 13.2% |
| Operating income | $96.1 | $81.6 | $242.9 | $146.2 |
| Net income | $36.4 | $46.7 | $120.1 | $105.0 |
| Diluted EPS | $0.33 | $0.39 | $1.05 | $0.85 |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $(12.8) | $(59.2) |
- Q2 sales rose 11.7% reported and 13.1% in constant currency. EC sales grew 12.4%; PF sales grew 2.8%. Growth was reported across regions and both operating groups.
- Q2 operating income increased 17.7%, while adjusted operating income (a non-GAAP measure) rose 27.5% to $178.8 million. GAAP operating margin was 1.9%, versus 1.8%; adjusted operating margin was 3.5%, versus 3.1%.
- Q2 net income and diluted EPS declined despite higher operating income, principally reflecting a 43.3% effective tax rate versus 8.6% a year earlier and higher financing expense. For the six months, net income and diluted EPS increased; the effective tax rate was 33.1% versus 7.0%.
- SG&A declined 2.6% year over year in Q2 to $471.7 million; it was 9.3% of sales versus 10.7% a year earlier. Management attributed the reduction mainly to restructuring and lower corporate costs, partly offset by volume-related expense.
Balance sheet, liquidity and capital allocation
- At December 29, 2018, cash and equivalents were $482.2 million, down from $621.1 million at June 30, 2018. Total debt was approximately $1.963 billion, up from $1.655 billion; this included $471 million outstanding under the accounts-receivable securitization program.
- Avnet reported approximately $1.28 billion available under its $1.25 billion revolving credit facility and $500 million securitization program, subject to facility terms and eligible receivables. The company said it was compliant with applicable financial covenants.
- Six-month operating cash flow from continuing operations was a use of $12.8 million. Working capital used $361.8 million, including inventory growth of $209.6 million and decreases in accounts payable and accrued expenses; lower receivables partly offset the outflow. Trailing-four-quarter operating cash flow from continuing operations was $299.9 million.
- Total cash used in operating activities, including discontinued operations, was $69.1 million. Discontinued-operations operating cash use included $56.3 million of taxes paid related to the Technology Solutions business sale.
- Six-month investing cash use was $131.7 million for continuing operations, including $70.2 million of capital expenditures and $62.5 million for acquisitions. Financing activities included $335.4 million of share repurchases and $44.7 million of dividends.
- The board authorized repurchases of up to $2.45 billion; $440.1 million remained authorized at quarter-end. The company paid $0.40 per share in dividends during the six-month period.
Material changes, outlook and risks
- Margins and mix: Gross margin fell 84 basis points in Q2. Management cited a greater share of lower-margin Asia sales, supplier program changes, product mix and foreign exchange effects. Asia represented approximately 43% of EC sales, compared with 42% a year earlier.
- Restructuring and unusual items: Q2 restructuring, integration and other expense was $62.3 million, including a $47.0 million non-cash impairment of software assets and $8.6 million of severance. Six-month restructuring costs included reductions or planned reductions of approximately 160 employees. Management expects about $10 million of operating expense savings once the actions are complete; no timing beyond completion is specified. Most remaining restructuring amounts were expected to be paid or collected by fiscal year-end.
- Taxes: The company finalized its estimate of the U.S. transition tax during the quarter, recording a $10.8 million increase; total transition tax was estimated at $257.5 million. Management noted that tax estimates could change with further guidance or tax-law changes.
- Acquisition and divestiture matters: Avnet acquired Softweb Solutions, an IoT software and AI company, in December 2018; the acquisition’s financial impact was not material. A settlement relating to the 2017 Technology Solutions sale resulted in a final $120 million sale-price adjustment in August 2018. The buyer had terminated all transition services by quarter-end; certain indemnification matters may still result in payments.
- Outlook: The filing provides no specific sales or earnings guidance. Management said it expects to continue investing in acquisitions, facilities and IT, and to incur integration and restructuring costs as it integrates PF. It believes available borrowing capacity and future operating cash flows will meet liquidity needs.
- Risks and contingencies: Disclosed risks include semiconductor-industry downturns, competitive and supplier pressures, international and currency exposure, acquisitions, supply-chain disruption, cyber risks, economic conditions and Brexit-related uncertainty. Management reported no material change to the prior annual report’s risk factors. Compliance-related matters had $14.7 million of estimated accrued liabilities; some potential exposures could not be reasonably estimated and, while management did not expect a material effect on financial position or liquidity, they could be material to results in an individual period.
- Accounting change: Adoption of the new revenue standard had no material effect on reported results; it increased opening retained earnings by $2.0 million. Adoption of the lease standard in fiscal 2020 was expected to materially increase reported assets and liabilities, but not materially affect operating results or cash flows.
Most important facts for investors to verify
- Whether sales growth can be sustained while addressing the decline in gross margin and the lower-margin regional mix.
- Whether restructuring savings materialize and whether additional IT impairments, restructuring charges or integration costs occur.
- How working-capital investment, particularly inventory, affects cash generation and borrowing needs as demand changes.
- Debt levels, securitization usage, facility availability, covenant compliance and the effect of financing costs on earnings.
- Future effective tax rates, transition-tax estimates and any changes in unrecognized tax benefits or related guidance.
- Resolution and potential cash impact of Technology Solutions sale indemnities and legal or compliance matters.