Avnet, Inc. — Form 10-Q Summary
Business context and period. Avnet distributes electronic components and enterprise technology products and services through its Electronics Marketing (EM) and Technology Solutions (TS) segments. This report covers the second quarter and first six months of fiscal 2016, ended January 2, 2016. The six-month comparison is affected by fiscal 2016 having 27 weeks versus 26 weeks in fiscal 2015; the quarter comparison is against the quarter ended December 27, 2014.
Key financial results
| Metric | Second quarter FY2016 | Comparable quarter | Six months FY2016 | Comparable six months |
|---|---|---|---|---|
| Sales | $6.848 billion | $7.552 billion | $13.818 billion | $14.391 billion |
| Gross profit / margin | $778.2 million / 11.4% | $837.5 million / 11.1% | $1.570 billion / 11.4% | $1.633 billion / 11.4% |
| Operating income / margin | $226.1 million / 3.3% | $250.3 million / 3.3% | $433.1 million / 3.1% | $443.5 million / 3.1% |
| Adjusted operating income / margin | $255.3 million / 3.7% | $274.6 million / 3.6% | $495.7 million | $498.3 million |
| Net income | $156.0 million | $163.7 million | $286.3 million | $291.7 million |
| Diluted EPS | $1.16 | $1.18 | $2.11 | $2.08 |
Second-quarter reported sales fell 9.3%; management attributed the decline to the stronger U.S. dollar, weaker Americas demand, lower TS computing-components sales, and fewer high-volume supply-chain engagements in EM Asia. Sales declined 5.1% in constant currency. EM sales were down 7.2% reported and 3.4% in constant currency; TS sales were down 12.3% reported and 7.6% in constant currency. The TS margin improvement and higher gross margin partly offset lower sales. For the six-month period, reported sales declined 4.0% and operating income declined 2.3%.
Second-quarter SG&A was $530.8 million, down 7.5% year over year; management cited currency translation and prior restructuring savings, partly offset by spending to support organic growth and other costs. The second-quarter effective tax rate was 20.9%, versus 25.6%, aided by income mix, valuation-allowance releases, and tax audit settlements and statute expirations. The six-month rates were 23.6% and 24.9%, respectively.
Cash flow, debt and liquidity
- Six-month operating cash flow was $84.2 million, versus $224.4 million. Working capital used $330.3 million, including increases in receivables ($413.1 million) and inventory ($197.8 million), partly offset by higher payables ($323.4 million). Management reported $118.0 million of operating cash generated in the second quarter and $443.7 million over the trailing four quarters.
- Six-month investing cash outflow was $86.3 million, including $74.8 million of capital expenditures and $19.2 million net cash used for acquisitions. Financing cash flow was positive $3.5 million, including $184.7 million of share repurchases, $45.0 million of dividends, and net borrowings.
- Cash and equivalents were $916.1 million at January 2, 2016, compared with $932.6 million at June 27, 2015. Total debt was approximately $2.21 billion, versus $1.98 billion; short-term debt rose to $1.14 billion from $331.1 million, while long-term debt declined to $1.07 billion from $1.65 billion.
- Combined borrowing capacity under the revolving credit facility and receivables program was $2.15 billion, with approximately $1.03 billion available after borrowings and letters of credit. The company was in compliance with facility covenants. Cash held outside the U.S. was $798.5 million and management expected it to remain permanently reinvested abroad.
Outlook, material items and risks
- No specific sales or earnings guidance was provided. Management expects approximately $28 million of incremental annualized savings from fiscal 2016 restructuring actions once completed, with approximately $5 million of additional restructuring costs expected through fiscal year-end. The majority of remaining restructuring liabilities were expected to be paid by fiscal year-end.
- The company expects to repay $300 million of 6.63% notes due September 2016 using cash, borrowing capacity, or a capital-markets transaction. It also expected to renew or replace its receivables securitization program before its August 2016 expiration, subject to market conditions.
- Fiscal 2016 restructuring, integration and other expenses were $47.2 million for six months, including $31.5 million of restructuring costs. Restructuring actions included reducing approximately 400 employees. The company recorded $4.3 million of estimated environmental remediation expense in the period.
- Two businesses acquired in the quarter had aggregate annualized sales of approximately $120 million; their pro forma impact was deemed immaterial. Avnet repurchased $185.0 million of shares in the first half; $367.4 million remained under the authorization at January 2. From January 3 through January 27, it repurchased a further $64.8 million of shares.
- Estimated liabilities for compliance-related legal matters were $21.3 million, including $10.0 million for potential import duties, interest and penalties related to an ongoing customs audit. The company said outcomes for certain investigations cannot be estimated and could materially affect results in an individual period, though it did not expect a material adverse effect on financial position or liquidity.
- Key risks include global economic conditions, technology-industry cyclicality, competition, supplier relationships and product allocation, international operations and currency exposure, acquisitions, supply-chain disruption, cybersecurity, financing access, and regulatory changes. The filing reported no material changes to the prior annual report’s risk factors. A hypothetical 1% interest-rate increase was estimated to reduce quarterly pretax income by $1.4 million.
Important facts for investors to verify
- Whether sales and demand stabilize, particularly in TS computing components, the Americas, and EM Asia, and how much of reported declines reflects currency translation.
- Whether working-capital investment converts to cash and operating cash flow improves; compare the six-month $84.2 million with the reported $118.0 million generated in the quarter.
- Progress against restructuring savings targets, the remaining costs and liabilities, and the effect of savings on segment margins.
- Availability and renewal terms of the receivables program, repayment or refinancing of the September 2016 notes, and compliance with debt covenants.
- Developments in the customs, environmental, and other compliance matters, including whether recorded reserves remain adequate.
- The effect of tax benefits that lowered the effective tax rate and whether such benefits recur.