Avnet, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended December 30, 2017 (fiscal 2018); comparisons are to periods ended December 31, 2016. Avnet distributes electronic components through its Electronic Components (EC) and Premier Farnell (PF) businesses. The former Technology Solutions business was sold in February 2017 and is reported as discontinued operations.
Key financial results
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Sales | $4.522bn | $4.274bn | $9.183bn | $8.392bn |
| Gross profit | $602.5m | $586.2m | $1.215bn | $1.109bn |
| Operating income | $87.0m | $124.2m | $157.0m | $253.7m |
| Continuing-operations income | $56.8m | $32.5m | $115.0m | $100.2m |
| Net income | $46.7m | $103.2m | $105.0m | $172.1m |
| Diluted EPS | $0.39 | $0.79 | $0.85 | $1.32 |
| Operating cash flow | Not separately provided | Not separately provided | $(59.2)m | $240.1m |
Q2 sales rose 5.8% year over year; organic sales growth in constant currency was 1.9%. Six-month sales rose 9.4%. Gross margin was described by management as relatively flat in Q2; the six-month gross margin was 13.2% in both years. Q2 operating margin was 1.9%, versus 2.9%; adjusted operating income was $145.7m versus $164.5m, and adjusted operating margin was 3.2% versus 3.8%.
Balance sheet and liquidity
- At December 30, cash and cash equivalents were $589.5m, marketable securities $136.4m, and total debt approximately $1.731bn. Cash plus marketable securities totaled $726.0m.
- Current assets were $7.576bn and current liabilities $2.756bn. Inventory increased to $3.286bn from $2.825bn at July 1, 2017.
- Cash declined by $246.9m from fiscal year-end. Operating cash use reflected a $410.4m inventory build, which management attributed primarily to strong bookings and longer purchasing lead times.
- Available borrowing capacity under the credit facility and receivables program was approximately $1.37bn. Avnet reported compliance with applicable financial covenants. The receivables program had $220m outstanding and expires in August 2018.
- About $568.7m of cash was held outside the United States. Management said available cash, borrowing capacity, and expected operating cash flows should meet liquidity needs.
Material changes and notable items
- Revenue growth reflected the PF acquisition and stronger EC sales in EMEA and Asia, partly offset by weaker Americas sales. Management cited supplier channel and program changes as a factor in the Americas decline.
- EC operating income declined, with management citing supplier program changes and regional mix; PF operating margin improved to 10.0%, supported by growth and post-acquisition synergies.
- SG&A rose 10.9% year over year in Q2 to $478.7m, primarily from PF, foreign exchange, and sales growth. Restructuring, integration, and other expenses were $36.8m in Q2 and $83.2m for the six months; these included accelerated depreciation and integration costs.
- Continuing-operations income increased despite lower operating income, helped by lower other expense and a lower effective tax rate. The Q2 effective tax rate was 8.6%, versus 46.7% a year earlier; the six-month rate was 7.0%, versus 33.0%.
- Reported net income fell partly because prior-year comparisons included earnings from the now-divested Technology Solutions business. Current-period discontinued-operations losses were approximately $10m, primarily from a $14.0m pretax pension settlement charge related to former employees.
- Six-month financing included $135.5m of share repurchases and $43.6m of dividends. The board increased the repurchase authorization by $200m to $1.95bn; $459.6m remained at quarter-end.
Outlook, risks, and contingencies
- The filing provides no formal revenue or earnings guidance. Management expected continued spending on PF integration, restructuring, and a global ERP implementation, including capital expenditures over the next two fiscal years.
- The Tax Cuts and Jobs Act generated a provisional $11.1m deferred-tax remeasurement expense. Avnet had not yet reasonably estimated the transition tax on approximately $3.3bn of unremitted foreign earnings; management expected the amount to be material and anticipated paying it over eight years, subject to final analysis.
- The estimated Technology Solutions sale closing adjustment was included in current assets; the final amount and associated tax effects could differ materially from estimates. Management expected to finalize the adjustment by fiscal year-end 2018 and the tax allocation during fiscal 2019.
- Avnet reported $14.2m in estimated liabilities for reasonably estimable compliance-related matters. Other legal and regulatory matters could not be reliably quantified and could materially affect results in an individual period, though management did not expect a material adverse effect on financial position or liquidity.
- Key stated risks include supplier relationships and product allocations, industry and economic cycles, competition, foreign currency and repatriation restrictions, acquisitions and divestitures, cyber and information-system risks, and supply-chain disruption. Management reported no material change to the risk factors in its latest Form 10-K.
Investor verification points
- Reconcile the MD&A’s stated Q2 diluted EPS of $0.38 with the financial statements, which report $0.39.
- Monitor inventory levels, working-capital conversion, and operating cash flow following the substantial inventory build.
- Check subsequent disclosures for the transition-tax estimate and the final Technology Solutions sale adjustment and related tax effects.
- Assess whether restructuring and integration spending, supplier-program pressures, and PF synergies develop as described.
- Track refinancing or renewal of the receivables program ahead of its August 2018 expiration, and review continued covenant compliance and capital returns.