Avnet, Inc. — Form 10-Q Summary
Business context and reporting period. Avnet distributes electronic components and enterprise computing products and provides related technology and supply-chain services through Electronics Marketing (EM) and Technology Solutions (TS). This unaudited report covers the second quarter and six months of fiscal 2014, ended December 28, 2013; comparatives are the periods ended December 29, 2012.
Financial performance
| Metric | Second quarter FY2014 | Prior-year quarter | Six months FY2014 | Prior-year six months |
|---|---|---|---|---|
| Sales | $7.422 billion | $6.699 billion | $13.767 billion | $12.570 billion |
| Gross profit / margin | $848.6 million / 11.4% | $768.5 million / about 11.5% | $1.584 billion / 11.5% | $1.453 billion / 11.6% |
| Operating income | $221.6 million | $195.6 million | $400.6 million | $295.5 million |
| Net income | $124.9 million | $137.5 million | $245.5 million | $237.8 million |
| Diluted EPS | $0.89 | $0.99 | $1.75 | $1.69 |
| Cash from operations | $(28.0) million | $326.4 million | $(154.2) million | $407.4 million |
Quarterly sales rose 10.8% year over year; organic sales in constant currency increased 8.1%. EM sales grew 13.1% as reported, with strength in EMEA and Asia; TS sales grew 8.0%, led by the Americas, while TS EMEA declined. Adjusted operating income, excluding restructuring, integration and other costs and acquired-intangible amortization, was $263.2 million, or 3.6% of sales, versus $228.5 million, or 3.4%.
Quarterly net income and diluted EPS declined despite higher sales and operating income. The effective tax rate rose to 33.8% from 18.6%, principally due to higher valuation allowances and reserves and an investment in a foreign subsidiary; the prior-year rate benefited from tax audit settlements and a tax benefit related to a foreign closure. For the six months, the effective tax rate was 31.9% versus 14.4%.
Cash, debt and liquidity
- Cash and equivalents were $779.3 million at December 28, down from $1.009 billion at June 29, 2013; $677.9 million was held outside the United States.
- Operating cash use of $154.2 million for the half-year reflected working-capital investment, including a $771.7 million increase in receivables and $158.5 million increase in inventory, partly offset by higher payables. Management attributed the receivables increase primarily to strong December TS sales and said receivables days improved slightly from fiscal year-end.
- Total debt was approximately $2.196 billion, up from $2.045 billion; debt was 32.2% of total capitalization. The quick ratio was 1.2:1 and working-capital ratio 1.7:1. Avnet reported approximately $1.4 billion of available capacity under its revolving credit facility and receivables program and was in compliance with their covenants.
- Avnet planned to repay $300 million of 5.875% notes due March 2014 using a combination of facility availability and cash. Approximately 72% of debt carried fixed interest rates.
Material changes, outlook and risks
- Avnet completed three acquisitions in the first half, with approximately $490 million in historical annualized revenue. Aggregate preliminary consideration was $219.7 million, including $38.1 million of contingent consideration. Purchase-price valuations remained subject to adjustment.
- First-half restructuring, integration and other expenses were $40.5 million. Actions were expected to affect approximately 700–800 employees. Management expected $15–$25 million of additional restructuring costs in the remainder of FY2014 and projected $40–$50 million in annualized operating-cost benefits when actions were completed, expected by the first quarter of FY2015. These are management estimates, not guaranteed results.
- First-half results included a $19.1 million pre-tax legal-settlement award; Avnet said it could receive up to an additional $4.0 million. The prior-year first half included a $31.4 million net gain from a bargain purchase and other items, affecting year-over-year comparisons.
- For the Bell import-duty matter, Avnet had recorded a $10 million contingent liability and estimated potential exposure could be as high as $73 million. Management considered the recorded amount reasonable based on information then available. Management did not expect other ongoing legal matters to materially harm results, liquidity or financial condition.
- Management said available cash, borrowing capacity and expected future operating cash flows were sufficient for anticipated needs. The filing provides no quantified sales or earnings guidance. Risks include technology-industry cyclicality, economic conditions, supplier relationships, competition, acquisition integration, foreign exchange, international operations and the ability to repatriate foreign cash. Management stated that foreign cash was expected to remain permanently reinvested abroad and that repatriation could incur significant taxes.
Important facts for investors to verify
- Whether working-capital demands ease and operating cash flow recovers after the substantial receivables and inventory investment.
- Whether the higher tax rate persists and how it affects net income and EPS.
- Whether restructuring spending delivers the projected $40–$50 million annualized savings and whether acquisition synergies are realized.
- How the March 2014 note repayment affects borrowing, liquidity and interest expense.
- Developments in the Bell import-duty exposure, acquisition purchase-price adjustments and the possible remaining legal-settlement distribution.