Leeds,
30
April
2019
|
10:01
Europe/Amsterdam

Avnet Reports Third Quarter Fiscal 2019 Financial Results

Avnet's ecosystem continues to drive transformation as higher margin businesses improve GAAP operating income margin to 3.3%; Adjusted operating income margin increased from 3.6% to 3.8% YoY GAAP diluted EPS of $0.87; Adjusted diluted EPS of $1.09, up 6.9

As the Avnet ecosystem continues to gain momentum and drive deeper customer engagement across the business, we are very pleased that Farnell contributed significantly to third quarter results. We focus on delivering on the basics by ensuring that our customers can rely on us to deliver what they need, when they need it. During the quarter, this is exactly what we accomplished. We have increased our profitability whilst making significant progress on our new warehouse in Leeds, continuing to improve our online proposition, adding three new suppliers to our linecard, and further broadening and deepening our stocking position.
Chris Breslin, President of Farnell, globally
Avnet+logo_thumbnail

Third Quarter Key Financial Highlights

  • Delivered sales of $4.70 billion, in line with guidance
    • In constant currency, sales rose 1.2% compared to the year ago period
  • GAAP diluted EPS from continuing operations totaled $0.87
    • Adjusted diluted EPS was $1.09, up 4.8% sequentially and 6.9% from a year ago
  • GAAP operating income margin of 3.3%, was up 136 basis points sequentially
    • Adjusted operating income margin was 3.8%, up from 3.6% a year ago
  • Cash flow from operations totaled $269 million
  • Premier Farnell (Farnell) adjusted operating margin rose to 12.4% from 10.8% in the prior year
  • IoT pipeline now exceeds $600 million, and has expanded to new markets including industrial equipment and manufacturing
  • Returned $139 million to shareholders with $117 million of share repurchases and dividends totaling $22 million

CEO Commentary

“I am pleased with the strong execution we demonstrated this quarter,” said Avnet CEO Bill Amelio. “We saw continued strength in our Americas and EMEA regions and solid performance in the higher margin interconnect and passives segment. Overall, we improved operating income and earnings per share and expanded our operating margins compared to a year ago. These results demonstrate the progress of our transformation and the value our unique ecosystem is delivering to our customers. With continued increases in our solutions pipeline and strong execution momentum, we are well positioned to achieve our long-term growth targets and deliver sustained shareholder returns.”

                                     

Key Financial Metrics

($ in millions, except per share data)

                                     
Third Quarter Results (GAAP) (2)
    Mar – 19   Mar – 18   Change Y/Y   Dec – 18   Change Q/Q
Sales   $ 4,698.8     $ 4,795.1     (2.0) %   $ 5,049.0     (6.9) %
Operating Income (Loss)     153.1       (58.5)     361.7 %     96.1     59.4 %
Operating Income (Loss) Margin     3.3 %     (1.2) %   448 bps     1.9 %   136 bps
Diluted Earnings (Loss) Per Share   $ 0.87     $ (2.64)     133.0 %   $ 0.33     163.6 %
Third Quarter Results (Non-GAAP) (1)(2)
    Mar – 19   Mar – 18   Change Y/Y   Dec – 18   Change Q/Q
Sales   $ 4,698.8     $ 4,795.1     (2.0) %   $ 5,049.0     (6.9) %
Adjusted Operating Income     178.1       170.8     4.3 %     178.8     (0.4) %
Adjusted Operating Income Margin     3.8 %     3.6 %   23 bps     3.5 %   25 bps
Adjusted Diluted Earnings Per Share   $ 1.09     $ 1.02     6.9 %   $ 1.04     4.8 %
Segment and Geographical Mix (2)
    Mar – 19   Mar – 18   Change Y/Y   Dec – 18   Change Q/Q
Electronic Components (EC) Sales   $ 4,331.3     $ 4,404.1     (1.7) %   $ 4,680.7     (7.5) %
EC Operating Income Margin     3.5 %     3.6 %   (4) bps     3.4 %   15 bps
Farnell Sales   $ 367.5     $ 391.0     (6.0) %   $ 368.3     (0.2) %
Farnell Operating Income Margin     12.4 %     10.8 %   164 bps     10.8 %   166 bps
Americas Sales   $ 1,297.2     $ 1,276.4     1.6 %   $ 1,300.4     (0.3) %
EMEA Sales     1,740.9       1,812.3     (3.9) %     1,668.6     4.3 %
Asia Sales     1,660.7       1,706.3     (2.7) %     2,080.0     (20.2) %
                                     

____________________

(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.
(2)   Certain prior year amounts in the Company’s measurement of operating income have been recasted to reflect the adoption of new accounting standards during the first quarter of fiscal 2019.
     

CFO Commentary

“We executed well this quarter reducing costs, expanding operating margin and growing EPS, all while facing macro-economic headwinds in Asia as well as the Brexit uncertainties which impacted Farnell growth,” stated Tom Liguori, Avnet Chief Financial Officer. “Farnell still delivered a strong improvement in operating margin, which rose to 12.4% from 10.8% a year ago, supporting the transformational potential of this business longer term. We generated significant operating cash flow this quarter and returned $139 million to shareholders through stock buybacks and dividend.”

Additional Third Quarter Fiscal 2019 Highlights and Key Developments

  • Aligned with BitPay, the largest global blockchain payment provider, to accept cryptocurrency for products and services further breaking down the barriers facing customers who are striving to bring their ideas to market.
  • Announced Avnet Direct Connect, a new service that delivers powerful financial efficiencies where Avnet handles all the hardware integration, configuration, QA testing and system delivery allowing customers to focus on their software-based innovation.
  • Teamed up with Octonion and Orange to launch a customized, modular ‘plug and play’ Avnet SmartEdge Agile IoT device using Octonion’s Brainium meta-sensing (AI) software designed for the LTE-M network.
  • Released a new development board based upon Xilinx technology, which offers engineers and makers a price-competitive development platform for rapidly prototyping breakthrough ideas in AI, IoT and robotics for smart home, automotive and industrial control applications.
  • Completed the sale of real estate in Europe, which generated $41 million of cash flow and a gain on sale of $15 million.

Awards and Notable Recognition Received During the Quarter

  • Named among the “World’s Most Admired Companies” for 2019, marking the 14th time that the company has been recognized by FORTUNE for its strongly positive reputation
  • Named one of the World’s Most Ethical Companies in 2019 by the Ethisphere® Institute, a global leader in defining and advancing the standards of ethical business practices
  • Won Preferred Partner Award from Kitron (EBV Elektronik, which operates in Europe, Israel and South Africa)
  • Awarded Global Supplier of the Year and Supplier of the Year in EMEA (Avnet Silica) by ON Semiconductor
  • Garnered the UK and Ireland Distributor of the Year award (Avnet Silica) from STMicroelectronics
  • Won the 2018 TDK Senten Manten award (Farnell Europe); which translates as “Perfect Result”
  • Received 2018 Business Award (Avnet Taiwan) from Askey Computer Corporation
  • Won Fulfillment Excellence 2018 Supplier Award (Avnet China) from ABB

Outlook for the Fourth Quarter of Fiscal 2019 Ending on June 29, 2019

         
    Guidance Range   Midpoint
Sales   $4.5B - $4.9B   $4.7B
Non-GAAP Diluted EPS(1)   $1.00 - $1.08   $1.04
Estimated Annual Tax Rate   19% - 23%   21%

___________________

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

Avnet’s fourth quarter fiscal 2019 guidance reflects sales similar to the third quarter with a change in mix that includes a slight sequential uptick in Asia sales offset by macro headwinds in the Western regions. This change in sales mix is expected to result in a sequential decline to gross profit with a corresponding reduction in EPS. At the midpoint of guidance, this would represent a 6.6% decline in sales YoY and 5.1% adjusted diluted EPS growth YoY.

The above guidance is also based upon market conditions existing at the end of the third quarter of fiscal 2019 and excludes any acquisitions, results of discontinued operations, amortization of intangibles, accelerated depreciation, any potential restructuring, integration, and other expenses and certain income tax adjustments including certain impacts of the recent tax law changes in the U.S. The above guidance assumes 107 million average diluted shares outstanding and average U.S. Dollar to Euro and GBP currency exchange rates are as shown below:

             
    Q4 Fiscal        
    2019   Q3 Fiscal   Q4 Fiscal
    Guidance   2019   2018
USD to Euro   $1.13   $1.13   $1.19
USD to GBP   $1.30   $1.30   $1.36
             

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 IT systems, 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.

                                 
AVNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                 
      Third Quarters Ended     Nine Months Ended
      March 30,     March 31,     March 30,     March 31,
      2019     2018     2019     2018
      (Thousands, except per share data)
Sales     $ 4,698,824     $ 4,795,093     $ 14,837,683     $ 13,977,672
Cost of sales       4,074,629       4,141,556       12,946,706       12,109,120
Gross profit       624,195       653,537       1,890,977       1,868,552
Selling, general and administrative expenses       468,171       505,471       1,415,040       1,491,144
Goodwill Impairment expense             181,440             181,440
Restructuring, integration and other expenses       2,939       25,120       79,986       108,277
Operating income (loss)       153,085       (58,494)       395,951       87,691
Other income, net       8,731       9,862       9,424       32,132
Interest and other financing expenses, net       (36,253)       (23,431)       (100,064)       (68,272)
Income (loss) from continuing operations before taxes       125,563       (72,063)       305,311       51,551
Income tax expense       30,628       243,541       90,072       252,179
Income (loss) from continuing operations, net of tax       94,935       (315,604)       215,239       (200,628)
Loss from discontinued operations, net of tax       (6,887)       (4,462)       (7,066)       (14,411)
Net income (loss)     $ 88,048     $ (320,066)     $ 208,173     $ (215,039)
                                 
Earnings (loss) per share - basic:                                
Continuing operations     $ 0.87     $ (2.64)     $ 1.93     $ (1.66)
Discontinued operations       (0.06)       (0.04)       (0.06)       (0.12)
Net income (loss) per share basic     $ 0.81     $ (2.68)     $ 1.87     $ (1.78)
                                 
Earnings (loss) per share - diluted:                                
Continuing operations     $ 0.87     $ (2.64)     $ 1.91     $ (1.66)
Discontinued operations       (0.06)       (0.04)       (0.06)       (0.12)
Net income (loss) per share diluted     $ 0.81     $ (2.68)     $ 1.85     $ (1.78)
                                 
Shares used to compute earnings per share:                                
Basic       108,074       119,601       111,222       120,895
Diluted       108,822       119,601       112,252       120,895
Cash dividends paid per common share     $ 0.20     $ 0.19     $ 0.60     $ 0.55
                                 
             
AVNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
             
    March 30,   June 30,
    2019   2018
    (Thousands)
ASSETS            
Current assets:            
Cash and cash equivalents   $ 725,252   $ 621,125
Receivables, net     3,188,863     3,641,139
Inventories     3,211,979     3,141,822
Prepaid and other current assets     129,316     206,513
Total current assets     7,255,410     7,610,599
Property, plant and equipment, net     455,484     522,909
Goodwill     1,027,432     980,872
Intangible assets, net     168,375     219,913
Other assets     192,979     262,552
Total assets   $ 9,099,680   $ 9,596,845
             
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Current liabilities:            
Short-term debt   $ 50,401   $ 165,380
Accounts payable     1,836,543     2,269,478
Accrued expenses and other     446,320     534,603
Total current liabilities     2,333,264     2,969,461
Long-term debt     2,023,628     1,489,219
Other liabilities     380,316     453,084
Total liabilities     4,737,208     4,911,764
Shareholders’ equity     4,362,472     4,685,081
Total liabilities and shareholders’ equity   $ 9,099,680   $ 9,596,845
             
             
AVNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
             
    Nine Months Ended
    March 30, 2019   March 31, 2018
    (Thousands)
Cash flows from operating activities:            
Net income (loss)   $ 208,173   $ (215,039)
Less: Loss from discontinued operations, net of tax     (7,066)     (14,411)
Income (loss) from continuing operations     215,239     (200,628)
             
Non-cash and other reconciling items:            
Depreciation     72,692     114,111
Amortization     63,123     69,860
Deferred income taxes     45,286     (74,126)
Stock-based compensation     24,204     18,427
Goodwill impairment expense         181,440
Other, net     42,786     30,305
Changes in (net of effects from businesses acquired and divested):            
Receivables     436,382     (98,147)
Inventories     (125,410)     (337,939)
Accounts payable     (399,526)     180,732
Accrued expenses and other, net     (118,347)     133,837
Net cash flows provided by operating activities - continuing operations     256,429     17,872
Net cash flows used for operating activities - discontinued operations     (56,284)    
Net cash flows provided by operating activities     200,145     17,872
             
Cash flows from financing activities:            
Borrowings (repayments) under accounts receivable securitization, net     342,000     (47,000)
Repayments under senior unsecured credit facility, net     (11,386)     (99,971)
Borrowings (repayments) under bank credit facilities and other debt, net     85,005     (44,293)
Repurchases of common stock     (447,901)     (209,466)
Dividends paid on common stock     (66,188)     (66,198)
Other, net     10,042     (2,738)
Net cash flows used for financing activities - continuing operations     (88,428)     (469,666)
Net cash flows used for financing activities     (88,428)     (469,666)
             
Cash flows from investing activities:            
Purchases of property, plant and equipment     (101,383)     (112,217)
Acquisitions of businesses, net of cash acquired     (66,458)     (18,621)
Other, net     42,069     7,020
Net cash flows used for investing activities - continuing operations     (125,772)     (123,818)
Net cash flows provided by investing activities - discontinued operations     123,473     153,933
Net cash flows (used) provided by investing activities     (2,299)     30,115
Effect of currency exchange rate changes on cash and cash equivalents     (5,291)     15,360
Cash and cash equivalents:            
— increase (decrease)     104,127     (406,319)
— at beginning of period     621,125     836,384
— at end of period   $ 725,252   $ 430,065
             

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 operating expenses, (iii) adjusted other income (expense), (iv) adjusted income tax expense, (v) adjusted income from continuing operations, (vi) adjusted diluted earnings per share, and (vii) 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 “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 and operating expenses 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 and operating expenses 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. Management measures operating income for our reportable segments excluding restructuring, integration and other expenses, goodwill impairment expense and amortization of acquired intangible assets and other.

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 other expense and 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. Adjustments to income tax expense and the effective income tax rate include the effect of changes in tax laws including recent tax law changes in the U.S., changes in valuation allowances and unrecognized tax benefits, income tax audit settlements and adjustments to the adjusted interim effective tax rate based upon the expected annual adjusted effective tax rate. 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. All amounts below relate to Avnet’s continuing operations.

                           
      Fiscal   Quarters Ended
      Year to Date   March 30,   December 29,   September 29,
      2019*   2019*   2018*   2018
      ($ in thousands, except per share amounts)
GAAP selling, general and administrative expenses - continuing operations     $ 1,415,040   $ 468,171   $ 471,723   $ 475,146
Amortization of intangible assets and other - continuing operations       (63,520)     (22,080)     (20,513)     (20,927)
Adjusted operating expenses - continuing operations       1,351,521     446,092     451,210     454,219
                           
GAAP operating income - continuing operations     $ 395,951   $ 153,085   $ 96,050   $ 146,816
Restructuring, integration and other expenses - continuing operations       79,986     2,939     62,260     14,788
Amortization of intangible assets and other - continuing operations       63,520     22,080     20,513     20,927
Adjusted operating income - continuing operations       539,456     178,103     178,823     182,531
                           
GAAP income before income taxes- continuing operations     $ 305,311   $ 125,563   $ 64,916   $ 114,831
Restructuring, integration and other expenses - continuing operations       79,986     2,939     62,260     14,788
Amortization of intangible assets and other - continuing operations       63,520     22,080     20,513     20,927
Adjusted income before income taxes - continuing operations       448,816     150,581     147,689     150,546
                           
GAAP income tax expense - continuing operations     $ 90,072   $ 30,628   $ 28,141   $ 31,302
Restructuring, integration and other expenses - continuing operations       19,291     306     15,665     3,320
Amortization of intangible assets and other - continuing operations       13,604     4,747     4,379     4,478
Income tax expense items, net - continuing operations       (29,039)     (4,059)     (16,742)     (8,238)
Adjusted income tax expense - continuing operations       93,928     31,622     31,443     30,862
                           
GAAP income - continuing operations     $ 215,239   $ 94,935   $ 36,775   $ 83,529
Restructuring, integration and other expenses (net of tax) - continuing operations       60,695     2,633     46,595     11,468
Amortization of intangible assets and other (net of tax) - continuing operations       49,916     17,333     16,134     16,449
Income tax expense items, net - continuing operations       29,039     4,059     16,742     8,238
Adjusted income - continuing operations       354,889     118,960     116,246     119,684
                           
GAAP diluted earnings per share - continuing operations     $ 1.91   $ 0.87   $ 0.33   $ 0.72
Restructuring, integration and other expenses (net of tax) - continuing operations       0.54     0.02     0.42     0.10
Amortization of intangible assets and other (net of tax) - continuing operations       0.45     0.16     0.14     0.14
Income tax expense items, net - continuing operations       0.26     0.04     0.15     0.07
Adjusted diluted EPS - continuing operations       3.16     1.09     1.04     1.03

____________________________* May not foot/crossfoot due to rounding

                                 
      Fiscal   Quarters Ended
      Year to Date   June 30,   March 31,   December 30,   September 30,
      2018*   2018*   2018*   2017*   2017*
      ($ in thousands, except per share amounts)
GAAP selling, general and administrative expenses - continuing operations(1)     $ 1,991,401   $ 500,257   $ 505,471   $ 484,082   $ 501,593
Amortization of intangible assets and other - continuing operations       (91,923)     (21,736)     (22,725)     (21,877)     (25,585)
Adjusted operating expenses - continuing operations(1)       1,899,478     478,521     482,746     462,204     476,007
                                 
GAAP operating income (loss) - continuing operations(1)     $ 209,218   $ 121,527   $ (58,494)   $ 81,617   $ 64,568
Restructuring, integration and other expenses - continuing operations       145,125     36,848     25,120     36,762     46,394
Goodwill impairment expense - continuing operations       181,440     -     181,440     -     -
Amortization of intangible assets and other - continuing operations       91,923     21,736     22,725     21,877     25,585
Adjusted operating income - continuing operations(1)       627,706     180,111     170,791     140,256     136,547
                                 
GAAP other income (expense), net - continuing operations(1)     $ 28,606   $ (3,526)   $ 9,862   $ 3,349   $ 18,921
Foreign currency (gain) loss and other expenses- continuing operations       (9,762)     (559)     137     546     (9,886)
Adjusted other income (expense), net - continuing operations(1)       18,844     (4,085)     9,999     3,895     9,035
                                 
GAAP income (loss) before income taxes- continuing operations     $ 145,077   $ 93,526   $ (72,063)   $ 62,140   $ 61,474
Restructuring, integration and other expenses - continuing operations       145,125     36,848     25,120     36,762     46,394
Goodwill impairment expense - continuing operations       181,440     -     181,440     -     -
Amortization of intangible assets and other - continuing operations       91,923     21,736     22,725     21,877     25,585
Foreign currency (gain) loss and other expenses- continuing operations       (9,762)     (559)     137     546     (9,886)
Adjusted income before income taxes - continuing operations       553,803     151,551     157,359     121,325     123,567
                                 
GAAP income tax expense - continuing operations