Avnet, Inc. — Form 10-Q Summary
Business context and reporting period. Avnet distributes electronic components and related products through its Electronic Components (EC) and Premier Farnell (PF) segments. This filing covers the first quarter of fiscal 2019, the three months ended September 29, 2018, compared primarily with the three months ended September 30, 2017. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Sales | $5,089.9 million | $4,660.9 million |
| Gross profit / margin | $636.8 million / 12.5% | $612.6 million / 13.1% |
| Operating income / margin | $146.8 million / 2.9% | $64.6 million / 1.4% |
| Adjusted operating income / margin (non-GAAP) | $182.5 million / 3.6% | $136.5 million / 2.9% |
| Net income | $83.7 million | $58.3 million |
| Diluted EPS | $0.72 | $0.47 |
| Cash from operating activities | $(85.0) million | $(128.0) million |
- Sales increased 9.2% reported and 9.9% in constant currency. EC sales were $4,710.8 million, up 9.4%; PF sales were $379.1 million, up 7.2%.
- Segment operating income was $161.9 million for EC versus $139.6 million, and $40.8 million for PF versus $32.6 million. These segment figures precede corporate costs and other reconciling items.
- Cash and cash equivalents were $365.9 million at September 29, down from $621.1 million at June 30, 2018. Cash used in operating activities included a $269.6 million inventory increase, partly offset by a $95.1 million increase in accounts payable.
- Cash used in financing was $246.2 million, including $149.1 million of cash repurchases, $22.9 million of dividends, and debt repayments. Capital expenditures were $41.0 million. Investing cash flow included $120.0 million received from the discontinued Technology Solutions business sale.
- Total debt carrying value was approximately $1.57 billion, compared with approximately $1.65 billion at June 30. The company reported $1.68 billion of availability under its credit facility and receivables securitization program, subject to facility terms and eligible receivables. It was in compliance with related covenants.
- Trailing-four-quarter operating cash flow from continuing operations was $296.5 million. Management said available borrowing capacity and expected operating cash flows should meet future liquidity needs.
Material changes and notable items
- Gross margin declined 63 basis points. Management attributed the EC decline mainly to a larger share of lower-margin Asia sales; PF margin was affected by customer and product mix and foreign exchange.
- Operating income improved substantially as SG&A fell 5.3% to $475.1 million and restructuring, integration and other expenses declined to $14.8 million from $46.4 million. Adjusted operating income rose 33.7%. Management cited sales growth and cost reductions, partly offset by lower gross margin.
- Interest and other financing expense rose to $30.1 million from $22.0 million, primarily reflecting higher Asia working-capital financing costs and lower interest income. Other income/expense shifted from $18.9 million of income to $1.9 million of expense, including foreign-currency losses in the current quarter.
- The effective tax rate rose to 27.3% from 5.4%. The current-period rate reflected an increase in the provisional U.S. transition-tax estimate and higher unrecognized tax benefits; the prior-year rate benefited from jurisdictional income mix and a release of tax reserves. The transition-tax estimate was increased by $16.7 million in the quarter, and management expected to finalize it in Q2 FY2019; further changes could materially affect tax expense.
- Avnet amended and extended its U.S. receivables securitization program in August, with borrowing capacity up to $500 million and an August 2020 expiration. It also has a $1.25 billion revolving credit facility expiring in June 2023.
- The board increased the share-repurchase authorization by $500 million to $2.45 billion. Avnet repurchased 3.3 million shares for a reported total cost of $156.9 million; $615.2 million remained authorized at quarter-end. The quarter’s cash-flow statement reports $149.1 million of cash repurchases. The quarterly dividend was $0.20 per share.
- In August 2018, Avnet settled a final adjustment related to the 2017 sale of Technology Solutions, receiving $120.0 million. The business remains classified as discontinued operations.
- Fiscal 2019 restructuring actions included $7.5 million of restructuring costs, related to approximately 50 employee reductions, primarily across management and operating functions. The company estimated about $7.2 million in annualized savings after completion; most remaining restructuring liabilities were expected to be paid by fiscal year-end.
- Adoption of revenue-recognition Topic 606 did not materially affect reported results; it increased opening retained earnings by $2.0 million. Adoption of the intra-entity asset-transfer tax standard reduced opening retained earnings and other assets by $5.8 million.
Outlook, risks, and contingencies
The filing provides no specific sales or earnings guidance. Management said it expects to continue investing in acquisitions, facilities and information technology, and to incur further restructuring and integration costs as it integrates Premier Farnell. It expects to use available credit facilities as needed for working capital and general corporate purposes, while seeking to preserve its investment-grade credit rating.
Key disclosed risks include electronic-component competition and industry downturns, supplier relationships and product allocation, international operations and foreign-exchange exposure, repatriation restrictions, acquisitions and divestitures, supply-chain or natural-disaster disruption, cybersecurity and information systems, general economic conditions, and geopolitical or regulatory developments. Avnet was monitoring Brexit and developing logistics and trade-compliance contingency plans. The company reported $14.7 million in estimated liabilities for reasonably estimable compliance-related matters; it could not estimate maximum exposure for certain pending or potential matters, which management said could be material to an individual period’s results. Management did not expect these matters to materially affect financial position or liquidity.
Important facts for investors to verify
- Whether inventory growth and working-capital needs convert into operating cash flow as sales growth develops.
- How sustainable the improved operating income and cost savings are given lower gross margins and ongoing restructuring and integration costs.
- The final transition-tax estimate and any resulting Q2 FY2019 tax-expense adjustment.
- How much of the remaining repurchase authorization Avnet uses, and the effect of repurchases on cash, debt and share count.
- Receivables-securitization availability, debt covenant headroom, and the location and practical accessibility of foreign cash.
- Developments in compliance-related legal matters and other disclosed risks, including Brexit, supplier allocation, cybersecurity and industry demand.