Avnet, Inc. — Form 10-Q Summary
Period clarification: The filing covers the third quarter and first nine months of fiscal 2019, with the quarter ended March 30, 2019. This differs from the requested “2018 Q3” label. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Avnet distributes electronic components and provides technology, design and supply-chain solutions. Its reportable segments are Electronic Components (EC) and Premier Farnell (Farnell). The unaudited results compare the quarter and nine months ended March 30, 2019 with the corresponding periods ended March 31, 2018. Avnet adopted the new revenue recognition standard in fiscal 2019; the company said adoption had no material financial statement impact.
Financial performance and position
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales | $4,698.8 | $4,795.1 | $14,837.7 | $13,977.7 |
| Gross profit | $624.2 | $653.5 | $1,891.0 | $1,868.6 |
| Gross margin | 13.3% | 13.6% | 12.7% | 13.4% |
| Operating income (loss) | $153.1 | $(58.5) | $396.0 | $87.7 |
| Adjusted operating income | $178.1 | $170.8 | $539.5 | $447.6 |
| Net income (loss) | $88.0 | $(320.1) | $208.2 | $(215.0) |
| Diluted earnings (loss) per share | $0.81 | $(2.68) | $1.85 | $(1.78) |
Adjusted operating income is a non-GAAP measure excluding restructuring, integration and other expenses, goodwill impairment, and acquired-intangible amortization and other items. Q3 adjusted operating margin was 3.8%, versus 3.6% a year earlier.
- Sales and segments: Q3 reported sales fell 2.0%, while constant-currency sales rose 1.2%. EC sales were down 1.7% reported and up 1.5% in constant currency; Farnell sales fell 6.0% reported and 1.5% in constant currency. Nine-month sales rose 6.2% reported and 7.9% in constant currency.
- Profitability: Q3 gross profit fell 4.5%, and gross margin contracted 35 basis points, reflecting regional and product mix. SG&A declined 7.4% year over year to $468.2 million. Nine-month gross margin also declined, attributed primarily to a greater share of lower-margin Asia sales and supplier program changes.
- Cash flow: Nine-month operating cash flow was $200.1 million, including $256.4 million from continuing operations and $56.3 million used by discontinued operations. Continuing-operations cash flow improved from $17.9 million in the prior-year period. Capital expenditures were $101.4 million; cash used for investing activities was $2.3 million, including $123.5 million of discontinued-operations proceeds. Financing activities used $88.4 million.
- Liquidity and debt: At March 30, cash was $725.3 million and total debt was approximately $2.07 billion, compared with $621.1 million and approximately $1.65 billion at June 30, 2018. Cash less total debt was therefore approximately negative $1.35 billion. Current assets were $7,255.4 million and current liabilities $2,333.3 million. Avnet reported about $1.21 billion of borrowing availability under its credit facility and receivables securitization program and compliance with their covenants.
Changes, outlook, risks and unusual items
- Q3 GAAP operating results and net income improved substantially from the prior-year quarter, which included a $181.4 million goodwill impairment and significant tax expense associated with U.S. tax legislation. Nine-month net income likewise turned positive. Adjusted operating income increased 4.3% in Q3 and 20.5% for the first nine months.
- Avnet repurchased 10.2 million shares for approximately $449.2 million during the first nine months and had $322.9 million remaining under its $2.45 billion authorization at quarter-end. It paid $66.2 million in dividends in the nine-month period.
- Fiscal 2019 restructuring actions included $76.5 million of expenses in the first nine months, including a $52.3 million non-cash software impairment. The actions included a planned or completed reduction of more than 300 employees. Management expected approximately $12 million in annual operating expense savings from Q3 restructuring actions and expected most remaining restructuring liabilities to be paid by fiscal year-end.
- Q3 included a $15.1 million gain on real estate sale, which partly offset restructuring and integration costs. Nine-month discontinued-operations loss was $7.1 million, primarily related to additional taxes associated with the divested Technology Solutions business. Avnet also reported a $120 million final sale-price adjustment under its settlement with the buyer; related cash flows were classified in discontinued operations.
- No specific sales or earnings guidance is provided in the supplied filing text. Management said it expected operating cash flow and available borrowing capacity to meet liquidity needs, while noting that working-capital needs can rise during periods of growth. It also expected continuing strategic acquisitions, capital expenditures, restructuring and integration activity, and quarterly dividends subject to board approval.
- Key risks include electronic-components industry downturns, competition, supplier relationships and product allocation, foreign exchange and international operations, Brexit uncertainty, acquisitions and divestitures, cybersecurity and information systems, supply-chain disruptions, and general economic conditions. Management said Brexit contingency planning included potential logistics and shipment-route changes. Pending compliance matters had estimated accrued liabilities of $14.7 million; outcomes or maximum exposures for some matters could not be estimated, and a single-period operating-results impact could be material.
- Avnet expected adoption of lease accounting in fiscal Q1 2020 to materially increase reported assets and liabilities, but did not expect a material effect on operating results or cash flows. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Investor verification priorities
- Confirm the reporting-period designation: this is fiscal Q3 2019, not fiscal Q3 2018.
- Assess whether constant-currency sales growth and margin performance are sustainable, particularly the weaker Q3 Farnell and Asia trends and lower year-to-date gross margin.
- Reconcile GAAP earnings with adjusted operating income and evaluate recurring restructuring, integration, amortization and other excluded costs.
- Review the increase in debt, securitization borrowings and interest expense alongside cash generation, repurchases and remaining borrowing capacity.
- Monitor the execution and realized savings from restructuring, including the software impairment and workforce reductions.
- Track tax uncertainties and potential liabilities tied to the divested Technology Solutions business, as well as compliance and environmental matters.