Avnet, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended April 1, 2017; comparisons are with the quarter ended April 2, 2016. The filing is for fiscal 2017 Q3, despite the request metadata’s “2016 Q3” label. Fiscal 2017’s first nine months comprised 39 weeks versus 40 weeks in the prior-year period. Unless noted, amounts below are in millions of dollars.
Business context
Avnet distributes electronic components and related products and solutions. It completed the sale of its Technology Solutions (TS) business on February 27, 2017, and reports TS as discontinued operations. Continuing operations comprise Electronics Marketing (Avnet EM), including Premier Farnell (PF), acquired October 17, 2016. The company reported one remaining segment following the TS sale.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | First 9 months FY2017 | First 9 months FY2016 |
|---|---|---|---|---|
| Sales | $4,441.9 | $4,082.0 | $12,833.6 | $12,771.6 |
| Gross profit | $630.0 | $520.9 | $1,738.8 | $1,582.2 |
| Operating income | $114.3 | $150.0 | $368.0 | $452.7 |
| Continuing-operations net income | $89.9 | $107.8 | $190.1 | $318.9 |
| Net income, including discontinued operations | $271.8 | $123.5 | $443.8 | $409.7 |
| Diluted EPS, continuing operations | $0.69 | $0.82 | $1.46 | $2.37 |
| Diluted EPS, total | $2.10 | $0.94 | $3.41 | $3.05 |
Q3 gross margin was 14.2%, up 142 basis points year over year; operating margin was 2.6%, down from 3.7%. Management’s non-GAAP adjusted operating income was $172.3 million versus $161.3 million, and adjusted operating margin was 3.9% versus 4.0%. Q3 organic sales grew 0.2% year over year, or 1.8% in constant currency. Regional constant-currency organic sales rose 12.3% in EMEA and fell 2.8% in the Americas and 4.1% in Asia.
Q3 total net income included a $217.1 million after-tax estimated gain on the TS sale; continuing-operations net income declined year over year. The reported quarter also included $35.5 million of restructuring, integration and other expenses, and $19.4 million of other income, primarily reflecting an unrealized gain on Tech Data shares received in the sale. Nine-month other expense included PF acquisition-related financing and foreign-exchange hedging costs.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was a use of $184.6 million, versus a source of $297.1 million a year earlier. Continuing operations generated $140.5 million; discontinued operations used $325.1 million. Working-capital movements included a $335.6 million use from receivables.
- Investing cash flow was a source of $1,344.7 million, including $2,235.4 million of TS sale proceeds, net of cash divested, offset in part by $801.2 million for acquisitions and $108.0 million in capital expenditures.
- Financing cash flow used $1,047.2 million. Avnet paid $66.5 million in dividends and repurchased $124.6 million of shares during the nine months.
- At April 1, 2017, cash and cash equivalents were $1,129.2 million and marketable securities were $261.5 million. The cash balance included $1.09 billion held outside the United States. The securities were Tech Data shares received in the TS sale.
- Total debt carrying value was approximately $1.76 billion: $32.6 million short term and $1,724.2 million long term. The company reported approximately $1.3 billion of borrowing availability under its credit facility and receivables program, and compliance with their covenants.
Changes, outlook and risks
- PF contributed $620.2 million of sales from acquisition through the first nine months and approximately $19.0 million of continuing-operations income. Its acquisition added significant goodwill and intangible assets; purchase accounting remained preliminary.
- TS was sold for approximately $2.86 billion in cash and Tech Data shares. The estimated gain may change materially pending agreement on closing net assets and geographic allocation of the sale price. Avnet subsequently hedged the shares during contractual sale restrictions.
- Management expects $60–$80 million of annual cost savings from transformation and cost-saving initiatives, with $30–$50 million of restructuring and integration costs expected during Q4 FY2017 and fiscal 2018. Separately, Q3 restructuring actions were expected to generate about $16 million of incremental annual savings.
- Avnet plans a global ERP implementation, with $75–$125 million of capital expenditures over the next two fiscal years. Shortening the Americas ERP system’s useful life is expected to add approximately $20 million of depreciation expense per quarter for the next eight quarters.
- No specific sales or earnings guidance was provided. Management said available cash, borrowing capacity and expected operating cash generation should meet future liquidity needs, while noting that substantial foreign-held cash may incur significant taxes if repatriated.
- Risks include supplier losses or program changes that could reduce sales and gross profit, demand and industry-cycle exposure, acquisition and integration execution, foreign-exchange and international cash restrictions, and information-system and cyber risks. The filing reports $11.7 million of estimated liabilities for certain compliance matters; some investigations’ potential exposure could not be reasonably estimated.
Investor verification priorities
- Separate recurring continuing-operations performance from the TS sale gain and discontinued-operations results.
- Check final TS sale proceeds and gain, including closing adjustments and the realization of the Tech Data share hedge.
- Monitor PF integration, final purchase-price allocations, and whether announced savings are achieved against expected costs.
- Track operating cash conversion, receivables and working capital, as well as debt and liquidity after the divestiture and acquisition.
- Assess the impact of supplier changes, regional sales trends, and ERP-related spending and accelerated depreciation.