Avnet Reports Third Quarter Fiscal 2018 Results

Avnet, Inc. (NYSE:AVT) today announced results for the third quarter ended March 31, 2018.

CEO Commentary

“This quarter’s performance bolsters our confidence in our plan and execution ability during this important transition year at Avnet,” said Bill Amelio, CEO of Avnet. “We are successfully executing against our key priorities, including building out our unique end-to-end ecosystem, delivering new services and benefits to our evolving customer base, and creating ways to engage with new types of customers at every point in the product lifecycle. As a result, we are seeing both revenue growth and an improvement in our adjusted operating margin.”

Key Financial Metrics

($ in millions, except per share data)

Third Quarter Results (GAAP)

Change
Mar – 18 Mar – 17 Y/Y Dec – 17 Change Q/Q
Sales $ 4,795.1 $ 4,441.9 8.0 % $ 4,521.6 6.1 %
Operating (Loss) Income (54.4) 114.3 (147.6) % 87.0 (162.5) %
Operating (Loss) Income Margin (1.1) % 2.6 % (370) bps 1.9 % (305) bps
Diluted Earnings (Loss) Per Share $ (2.64) $ 0.69 (482.6) % $ 0.47 (661.7) %

Third Quarter Results (Non-GAAP)(1)

Change
Mar – 18 Mar – 17 Y/Y Dec – 17 Change Q/Q
Sales $ 4,795.1 $ 4,441.9 8.0 % $ 4,521.6 6.1 %
Adjusted Operating Income 174.9 172.3 1.5 % 145.7 20.1 %
Adjusted Operating Income Margin 3.7 % 3.9 % (23) bps 3.2 % 43 bps
Adjusted Diluted Earnings Per Share $ 1.02 $ 0.88 15.9 % $ 0.78 30.8 %

Segment and Geographical Mix

Change
Mar – 18 Mar – 17 Y/Y Dec – 17 Change Q/Q
Electronic Components Sales $ 4,404.1 $ 4,090.9 7.7 % $ 4,163.5 5.8 %
EC Operating Income Margin 3.6 % 3.8 % (25) bps 3.1 % 46 bps
Premier Farnell Sales $ 391.0 $ 351.0 11.4 % $ 358.1 9.2 %
PF Operating Income Margin 11.4 % 11.5 % (14) bps 10.0 % 140 bps
Americas Sales $ 1,276.4 $ 1,328.6 (3.9) % $ 1,210.2 5.5 %
EMEA Sales 1,812.3 1,615.9 12.2 % 1,506.0 20.3 %
Asia Sales 1,706.3 1,497.4 14.0 % 1,805.4 (5.5) %

________________________

(1) A reconciliation of non-GAAP financial measures to GAAP financial measures is presented in the “Non-GAAP Financial Information” section of this press release.

CFO Commentary

“In the March quarter, revenue growth and our cost reduction initiatives combined to drive adjusted operating income margin up 43 basis points sequentially to 3.7%, the highest in four quarters,” said Tom Liguori, CFO of Avnet. “While total working capital dollars increased to support our strong growth, net working capital days declined 7 days. As a result, we generated $77 million of cash from operations in the quarter. In addition, we increased our quarterly dividend by 5.5% and repurchased 1.7 million shares returning a total of $93 million of cash to shareholders. As we move into the June quarter our focus on cost management and continued improvement in our net working capital days positions us well for long-term growth in shareholder value.”

Additional Third Quarter Fiscal 2018 Highlights

  • Named a World’s Most Ethical Company for the fifth consecutive year by the Ethisphere Institute
  • Exited the quarter with a strong book-to-bill ratio in all regions, exceeding 1.1 in aggregate
  • Delivered sequential improvement in sales and operating margins in the Americas region
  • Increased digital sales annual run-rate, which now exceeds $850 million
  • Realized 70% of the $120 million annualized cost reduction program in FY18 through Q3
  • Reduced debt by $141 million
  • Accelerated growth with key suppliers, adding 11 new franchises to the Avnet line card
  • Successful implementation of the EMEA upgraded ERP system
  • Recorded $230 million provisional repatriation transition tax liability
  • Recorded $181 million goodwill impairment related to acquisitions prior to fiscal year 2011

Outlook for Fourth Quarter of Fiscal 2018 Ending on June 30, 2018

Guidance Range

Midpoint

Sales $4.65B – $4.95B $4.8B
Non-GAAP Diluted EPS(1) $0.91 – $1.01 $0.96

(1) A reconciliation of non-GAAP guidance to GAAP guidance is presented in the “Non-GAAP Financial Information” section of this press release.

The above guidance excludes any results of discontinued operations, amortization of intangibles, accelerated depreciation, any potential restructuring, integration, and other expenses and certain income tax adjustments. The above guidance assumes 120 million average diluted shares outstanding and an adjusted tax rate of 21% to 25%. In addition, the above guidance assumes that the average U.S. Dollar to Euro currency exchange rate for the fourth quarter of fiscal 2018 is $1.23 to €1.00. This compares with an average exchange rate of $1.10 to the Euro in the fourth quarter of fiscal 2017.

Forward-Looking Statements

This document contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s current expectations and are subject to uncertainty and changes in facts and circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as “will,” “anticipate,” “intend,” “estimate,” “forecast,” “expect,” “feel,” “believe,” “should,” and other words and terms of similar meaning in connection with any discussions of future operating or financial performance, business prospects or market conditions. Actual results may differ materially from the expectations contained in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: Avnet’s ability to retain and grow market share and to generate additional cash flow, risks associated with any acquisition activities and the successful integration of acquired companies, implementing and maintaining ERP systems and transitioning to a global ERP system, supplier losses and changes to supplier programs, an industry down-cycle in semiconductors, declines in sales, changes in business conditions and the economy in general, changes in market demand and pricing pressures, any material changes in the allocation of product or price discounts by suppliers, and other competitive and/or regulatory factors affecting the businesses of Avnet generally.

More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission, including Avnet’s reports on Form 10-K, Form 10-Q and Form 8-K. Except as required by law, Avnet is under no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Teleconference and Upcoming Events

Avnet will host a quarterly teleconference today at 11:00 a.m. Eastern Time. Financial information including financial statement reconciliations of non-GAAP to GAAP financial measures will be available through www.ir.avnet.com. Please log onto the site 15 minutes prior to the start of the event to register or download any necessary software. An archive copy of the teleconference will also be available after the call.

For a listing of Avnet’s upcoming events and other information, please visit Avnet’s Investor Relations website at www.ir.avnet.com.

About Avnet

From idea to design and from prototype to production, Avnet supports customers at each stage of a product’s lifecycle. A comprehensive portfolio of design and supply chain services makes Avnet the go-to guide for innovators who set the pace for technological change. For nearly a century, Avnet has helped its customers and suppliers around the world realize the transformative possibilities of technology. Learn more about Avnet at www.avnet.com.

Visit the Avnet Investor Relations website at www.ir.avnet.com or contact us at investorrelations@avnet.com. (AVT_IR)

AVNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Third Quarters Ended Nine Months Ended
March 31, April 1, March 31, April 1,
2018 2017 2018 2017
(Thousands, except per share data)
Sales $ 4,795,093 $ 4,441,896 $ 13,977,672 $ 12,833,559
Cost of sales 4,141,556 3,811,910 12,109,120 11,094,733
Gross profit 653,537 629,986 1,868,552 1,738,826
Selling, general and administrative expenses 501,378 480,190 1,476,263 1,275,417
Goodwill Impairment expense 181,440 181,440
Restructuring, integration and other expenses 25,120 35,513 108,277 95,382
Operating (loss) income (54,401) 114,283 102,572 368,027
Other income (expense), net 8,384 19,439 24,725 (30,809)
Interest expense (26,046) (27,534) (75,746) (81,518)
Income (loss) from continuing operations before taxes (72,063) 106,188 51,551 255,700
Income tax expense 243,541 16,268 252,179 65,627
Income (loss) from continuing operations, net of tax (315,604) 89,920 (200,628) 190,073
Income (loss) from discontinued operations, net of tax (4,462) 181,851 (14,411) 253,759
Net (loss) income $ (320,066) $ 271,771 $ (215,039) $ 443,832
Earnings (loss) per share – basic:
Continuing operations $ (2.64) $ 0.70 $ (1.66) $ 1.48
Discontinued operations (0.04) 1.42 (0.12) 1.98
Net (loss) income per share basic $ (2.68) $ 2.12 $ (1.78) $ 3.46
Earnings (loss) per share – diluted:
Continuing operations $ (2.64) $ 0.69 $ (1.66) $ 1.46
Discontinued operations (0.04) 1.41 (0.12) 1.95
Net (loss) income per share diluted $ (2.68) $ 2.10 $ (1.78) $ 3.41
Shares used to compute earnings per share:
Basic 119,601 128,487 120,895 127,973
Diluted 119,601 129,432 120,895 129,847
Cash dividends paid per common share $ 0.19 $ 0.18 $ 0.55 $ 0.52

AVNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

March 31, July 1,
2018 2017
(Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 430,065 $ 836,384
Marketable securities 75,051 281,326
Receivables, net 3,552,531 3,337,624
Inventories 3,261,897 2,824,709
Prepaid and other current assets 305,067 253,765
Total current assets 7,624,611 7,533,808
Property, plant and equipment, net 520,922 519,575
Goodwill 1,026,542 1,148,347
Intangible assets, net 258,267 277,291
Other assets 281,588 220,568
Total assets $ 9,711,930 $ 9,699,589
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt $ 101,979 $ 50,113
Accounts payable 2,091,082 1,861,635
Accrued expenses and other 576,385 542,023
Total current liabilities 2,769,446 2,453,771
Long-term debt 1,488,706 1,729,212
Other liabilities 498,957 334,538
Total liabilities 4,757,109 4,517,521
Shareholders’ equity 4,954,821 5,182,068
Total liabilities and shareholders’ equity $ 9,711,930 $ 9,699,589
AVNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31, 2018 April 1, 2017
(Thousands)
Cash flows from operating activities:
Net (loss) income $ (215,039) $ 443,832
Less: Income (loss) from discontinued operations, net of tax (14,411) 253,759
Income (loss) from continuing operations (200,628) 190,073
Non-cash and other reconciling items:
Depreciation 114,111 63,800
Amortization 69,860 34,185
Deferred income taxes (74,126) (15,562)
Stock-based compensation 18,427 41,778
Goodwill impairment expense 181,440
Other, net 30,305 10,563
Changes in (net of effects from businesses acquired and divested):
Receivables (98,147) (335,617)
Inventories (337,939) 86,103
Accounts payable 180,732 86,120
Accrued expenses and other, net 133,837 (20,977)
Net cash flows provided by operating activities – continuing operations 17,872 140,466
Net cash flows used by operating activities – discontinued operations (325,096)
Net cash flows provided (used) by operating activities 17,872 (184,630)
Cash flows from financing activities:
Issuance of notes, net of issuance costs 296,374
Repayment of notes (530,800)
Repayments under accounts receivable securitization, net (47,000) (492,000)
Repayments under senior unsecured credit facility, net (99,971) (150,000)
Repayments under bank credit facilities and other debt, net (44,293) (18,386)
Borrowings of term loans 530,756
Repayments of term loans (511,358)
Repurchases of common stock (209,466) (124,598)
Dividends paid on common stock (66,198) (66,477)
Other, net (2,738) 15,838
Net cash flows used for financing activities – continuing operations (469,666) (1,050,651)
Net cash flows provided by financing activities – discontinued operations 3,447
Net cash flows used for financing activities (469,666) (1,047,204)
Cash flows from investing activities:
Purchases of property, plant and equipment (112,217) (107,960)
Acquisitions of businesses, net of cash acquired (18,621) (801,164)
Other, net 7,020 18,404
Net cash flows used for investing activities – continuing operations (123,818) (890,720)
Net cash flows provided by investing activities – discontinued operations 153,933 2,235,384
Net cash flows provided by investing activities 30,115 1,344,664
Effect of currency exchange rate changes on cash and cash equivalents 15,360 (15,075)
Cash and cash equivalents:
— (decrease) increase (406,319) 97,755
— at beginning of period 836,384 1,031,478
— at end of period $ 430,065 $ 1,129,233

Non-GAAP Financial Information

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company also discloses certain non-GAAP financial information including (i) adjusted operating income, (ii) adjusted other income (expense), (iii) adjusted income tax expense, (iv) adjusted income from continuing operations, (v) adjusted diluted earnings per share, and (vi) sales adjusted for the impact of acquisitions and other items (as defined in the Organic Sales section of this document).

There are also references to the impact of foreign currency in the discussion of the Company’s results of operations. When the U.S. Dollar strengthens and the stronger exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens and the weaker exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is an increase in U.S. Dollars of reported results. In the discussion of the Company’s results of operations, results excluding this impact are referred to as “excluding the impact of changes in foreign currency exchange rates” or “constant currency.” Management believes organic sales and sales in constant currency are useful measures for evaluating current period performance as compared with prior periods and for understanding underlying trends. In order to determine the translation impact of changes in foreign currency exchange rates on sales, income or expense items for subsidiaries reporting in currencies other than the U.S. Dollar, the Company adjusts the average exchange rates used in current periods to be consistent with the average exchange rates in effect during the comparative period.

Management believes that operating income adjusted for restructuring, integration and other expenses, goodwill impairment expense and amortization of acquired intangible assets and other, are useful measures to help investors better assess and understand the Company’s operating performance. This is especially the case when comparing results with previous periods or forecasting performance for future periods, primarily because management views the excluded items to be outside of Avnet’s normal operating results or non-cash in nature. Management analyzes operating income without the impact of these items as well as other income (expense) excluding certain amounts as an indicator of ongoing margin performance and underlying trends in the business. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes.

Additional non-GAAP metrics management uses is adjusted operating income margin, which is defined as adjusted operating income (as defined above) divided by sales.

Management also believes income tax expense, income from continuing operations and diluted earnings per share from continuing operations adjusted for the impact of the items described above and certain items impacting income tax expense are useful to investors because they provide a measure of the Company’s net profitability on a more comparable basis to historical periods and provide a more meaningful basis for forecasting future performance. Additionally, because of management’s focus on generating shareholder value, of which net profitability is a primary driver, management believes income from continuing operations and diluted earnings per share from continuing operations excluding the impact of these items provides an important measure of the Company’s net profitability for the investing public.

Any analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.