Avnet, Inc. — Form 10-Q Summary
Business context and reporting period
Avnet is a global distributor of electronic components and enterprise technology products. This report covers the first quarter of fiscal 2017, ended October 1, 2016. The quarter had 13 weeks, compared with 14 weeks in the prior-year quarter, limiting direct year-over-year comparability.
Technology Solutions (TS) is presented as discontinued operations after Avnet agreed to sell the business to Tech Data for approximately $2.60 billion, comprising $2.40 billion cash and 2.8 million Tech Data shares. Avnet completed the separate acquisition of Premier Farnell in October 2016, after quarter-end.
Financial performance and liquidity
| Metric | Q1 FY2017 | Prior comparable quarter |
|---|---|---|
| Continuing-operations sales | $4.17 billion | $4.60 billion |
| Gross profit / margin | $525.5 million / 12.6% | $563.3 million / approximately 12.2% |
| Operating income / margin | $131.0 million / 3.1% | $170.0 million / 3.7% |
| Adjusted operating income / margin | $162.8 million / 3.9% | $185.4 million / 4.0% |
| Net income | $68.8 million | $130.3 million |
| Diluted EPS | $0.53 | $0.96 |
Reported continuing sales declined 9.3%; organic sales declined 3.0% (3.4% in constant currency). Organic sales grew 1.0% in the Americas, while constant-currency organic sales fell 1.7% in EMEA and 10.1% in Asia/Pacific. The Asia decline primarily reflected Avnet’s decision to exit lower-margin, high-volume supply-chain business. Gross margin improved 35 basis points, partly from that mix change; management cited lower sales as the main pressure on adjusted operating income.
Continuing-operations operating cash flow was $111.3 million; total operating cash flow was slightly negative at $0.1 million, including $111.4 million used by discontinued operations. Capital expenditures were $34.7 million. Cash and equivalents were $1.20 billion, including $1.15 billion held outside the U.S. Total debt was $2.71 billion at carrying value. Available capacity under the revolving credit facility and receivables program was approximately $586 million.
Material changes, outlook, and risks
- Q1 FY2017 continuing-operations sales were down 9.3% reported and 3.0% organically. Prior-year results included an extra week; management’s organic comparison adjusts for that week and certain acquisitions.
- Continuing-operations restructuring, integration, and other expenses were $29.5 million, versus $12.5 million a year earlier. Restructuring actions were expected to produce approximately $8 million of incremental annualized savings when completed. Costs included Premier Farnell and TS transaction expenses and other items.
- TS generated $1.87 billion in sales and $0.3 million in net income, compared with $2.37 billion and $19.3 million, respectively, in the prior-year quarter. Its current-quarter tax expense included a $17 million noncash deferred tax charge related to held-for-sale classification.
- Avnet said the TS sale was expected to close in fiscal 2017 and anticipated a gain because the agreed selling price exceeded carrying value. Closing remained subject to conditions, including regulatory approvals; completion, timing, and expected benefits were not assured.
- Premier Farnell’s approximately £691 million purchase price was expected to be funded with foreign cash and new borrowings. Avnet had arranged bridge and term-loan financing, with no borrowings under those facilities at October 1. The acquisition closed after quarter-end.
- Management said available cash, borrowing capacity, and expected operating cash flows should meet future liquidity needs. It also noted that repatriating substantial foreign cash could incur significant taxes. The company was in compliance with its debt covenants.
- Risks include industry demand and competitive conditions, supplier relationships, international and currency exposures, acquisitions and divestitures, and the possibility that the TS sale may be delayed or not completed. A 1 percentage-point interest-rate increase was estimated to reduce quarterly continuing-operations pretax income by $3.8 million.
Important facts for investors to verify
- Whether and when the TS sale closes, final proceeds after working-capital adjustments, taxes, and any gain on sale.
- Premier Farnell acquisition funding, resulting leverage, and subsequent operating contribution.
- Whether the announced restructuring savings are realized and how recurring results compare after transaction and restructuring costs.
- Cash-flow and working-capital trends, particularly the large discontinued-operations cash use and the company’s available borrowing capacity.
- Comparability of future results given the 13-week versus 14-week periods and TS’s discontinued-operations presentation.