Avnet: Fiscal 3Q16 Financial Results

Highlights:

• Sales for the third quarter ended April 2, 2016, decreased 8.3% year over year and 6.9% in constant currency to $6.17 billion, organic sales (as defined later in this release) declined 8.6% year over year and 7.2% in constant currency
• Adjusted operating income of $205.2 million decreased 10.9% year over year and adjusted operating income margin of 3.3% decreased 10 basis points year over year
• Adjusted net income of $132.6 million decreased 7.6% and adjusted diluted earnings per share of $1.01 decreased 2.9% year over year
• Cash generated from operations was $212.9 million in the March quarter and $596.5 million for the trailing twelve months
• The company repurchased approximately 3.7 million shares during the third quarter representing an investment of $145.7 million, bringing its fiscal year to date purchases to $331 million, or 8.1 million shares

Rick Hamada, CEO, commented: “Our sequential revenue decline was slightly below our normal seasonality given an expected drop in high volume supply chain engagements in our Asia region of Electronics Marketing (EM) coupled with weaker than expected demand in certain legacy technologies at Technology Solutions (TS). These combined impacts led to an overall sequential revenue decline of approximately 10%.

“Despite these elements of softness, we did experience stronger than typical sequential gains in our western regions at EM and notable growth within areas of our TS portfolio. Enterprise gross profit margin increased 44 basis points year over year to 11.9% with contributions from both operating groups.

“This improvement in gross profit margin was offset by the decline in revenue as adjusted operating income dollars declined 10.9% year over year and adjusted operating income margin decreased 10 basis points. Given the overall trends through our March quarter, we have initiated incremental, focused expense management where we have gaps to our expectations while continuing to invest in clearly identified areas of current and future growth. With our strong competitive position at the center of the technology supply chain, we will continue to leverage our broad range of resources and financial strength in expanding new markets, including the Internet of Things, embedded solutions, and third platform technologies.”

• Sales decreased 3.3% in constant currency and reported sales decreased 4.2% year over year to $4.04 billion
• Operating income decreased 7.1% year over year to $183.3 million and operating income margin decreased 15 basis points primarily due to declines in the western regions
• Working capital (defined as receivables plus inventories less accounts payables) increased 2% sequentially driven by a planned increase in inventory

Hamada added: “In our March quarter, seasonal growth in EM’s core business was offset by the expected decline in our select high volume supply chain engagements in Asia as EM global revenue declined 2% from the December quarter. Revenue grew 17% and 6% sequentially in our EMEA and Americas regions, respectively, while our Asia region declined 18%. In addition to strong sequential growth, our EM EMEA team grew revenue 9.4% year over year in constant currency, which represents their 12th consecutive quarter of organic growth. As a result of the typical seasonal Q3 growth in our western regions, EM’s operating income dollars grew 5.3% sequentially and operating income margin increased 30 basis points. We were encouraged to see our book to bill ratio return to at or above parity for the quarter in all three regions. Our sequential increase in inventory was driven by investments in specific profitable growth opportunities and preparation for an ERP implementation in our Americas region. These investments coupled with the ongoing commitment to enhancing our digital platform, tools, and design resources will position us to grow faster than the markets we serve, leading to continued progress toward our financial targets.”

• Reported sales decreased 12.9% in constant currency and reported sales decreased 15.3% year over year to $2.13 billion, organic sales declined 16.0% and 13.6% in constant currency
• Operating income decreased 18.5% to $55.5 million and operating income margin decreased 11 basis points year over year to 2.6%
• At a product level, year-over-year growth in networking and services was offset by a decline in storage, servers, and software

Hamada further added: “TS’s revenue came in at the low end of expectations as all three regions experienced weaker than expected demand in select areas of legacy data center products. As a result, organic revenue decreased 14% year over year in constant currency with all three regions experiencing double digit declines. Operating income declined 18.5% year over year and operating income margin was down 11 basis points as an increase in gross profit margin and a reduction in operating expenses offset some of the negative impact of the revenue decline. Given the increasing rate of decline in certain legacy technologies, we will be reducing annualized operating expenses by approximately $25 million, while continuing to redirect our investment into higher growth technologies. We are already seeing the benefits of existing investments as our all flash array storage business grew over 40% year over year and our converged infrastructure product offerings increased nearly 20%. Our recently introduced Avnet Cloud Marketplace, which offers a growing portfolio of solutions from cloud service providers, flexible payment options, and a powerful cloud management toolset, is gaining traction with our partners as they and their customers embrace new consumption models to drive business results. With our accelerated investments in next generation technologies, we are confident we can optimize our portfolio to capitalize on second platform growth segments, as well as provide seamless support to our expanding community of partners for the transition to third platform technologies.“

Cash Flow and Return to Shareholders

• Cash generated from operations was $212.9 million in the March quarter and for the trailing twelve months cash generated from operations was $596.5 million
• Cash and cash equivalents at the end of the quarter was $1.04 billion; net debt (total debt less cash and cash equivalents) was $1.28 billion
• During the March quarter, the company repurchased 3.7 million shares, representing an aggregate investment of $145.7 million
• Entering the fourth fiscal quarter, the company had $221.7 million remaining under the current repurchase authorization
• The company paid a dividend of $0.17 per share or $21.9 million during the quarter

Kevin Moriarty, CFO, stated: “We generated $213 million in cash flow from operations during our March quarter, bringing our trailing twelve months total to $596 million. During the quarter, we repurchased $146 million of our shares and still have approximately $222 million remaining in our share repurchase program. We have returned approximately $400 million to shareholders through the first nine months of our fiscal year via our disciplined share repurchase and dividend programs. In addition, in the March quarter, we improved our capital structure with a well-received offering of $550 million of 4.625% ten-year notes. We ended the quarter with over $1 billion in cash, which when combined with our strong cash flow generation and credit facilities, provides us with ample liquidity to invest in profitable growth going forward.”

Outlook for Fourth Quarter of Fiscal 2016 Ending on July 2, 2016

• EM sales are expected to be in the range of $3.90 billion to $4.20 billion and TS sales are expected to be in the range of $2.05 billion to $2.35 billion
• Avnet sales are expected to be in the range of $5.95 billion to $6.55 billion
• Adjusted diluted earnings per share is expected to be in the range of $0.95 to $1.05 per share
• The guidance assumes 131 million average diluted shares outstanding and a tax rate of 27% to 31%

The above guidance excludes the amortization of intangibles and any potential restructuring, integration, and other expenses. In addition, the above guidance assumes that the average U.S. $ to € currency exchange rate is $1.13 to €1.00. This compares with an average exchange rate of $1.11 to €1.00 in the fourth quarter of fiscal 2015.