Avnet(AVT) - 2019 Q3 - Quarterly Report

FORM 10-Q Filing Information Filing Details Avnet, Inc.'s Form 10-Q filing details for the period ended March 30, 2019, confirm SEC compliance and registrant classification - Avnet, Inc. filed its Quarterly Report on Form 10-Q for the period ended March 30, 2019[1] - The registrant confirmed compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934 filing requirements for the preceding 12 months and the past 90 days[1] - Avnet, Inc. is classified as a Large Accelerated Filer[1] Common Stock Outstanding | Metric | Value | | :----- | :---- | | Common Stock Outstanding (as of April 18, 2019) | 106,296,252 shares | PART I. FINANCIAL INFORMATION Item 1. Financial Statements Avnet, Inc.'s unaudited interim consolidated financial statements include balance sheets, statements of operations, comprehensive income, cash flows, and detailed explanatory notes Consolidated Balance Sheets The Consolidated Balance Sheets present Avnet, Inc.'s financial position at March 30, 2019, compared to June 30, 2018, detailing assets, liabilities, and equity changes Consolidated Balance Sheets (Thousands) | Metric | March 30, 2019 (Thousands) | June 30, 2018 (Thousands) | | :----------------------------------- | :------------------------- | :------------------------ | | ASSETS | | | | Cash and cash equivalents | $725,252 | $621,125 | | Receivables, net | $3,188,863 | $3,641,139 | | Inventories | $3,211,979 | $3,141,822 | | Total current assets | $7,255,410 | $7,610,599 | | Total assets | $9,099,680 | $9,596,845 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Short-term debt | $50,401 | $165,380 | | Accounts payable | $1,836,543 | $2,269,478 | | Total current liabilities | $2,333,264 | $2,969,461 | | Long-term debt | $2,023,628 | $1,489,219 | | Total liabilities | $4,737,208 | $4,911,764 | | Total shareholders' equity | $4,362,472 | $4,685,081 | | Total liabilities and shareholders' equity | $9,099,680 | $9,596,845 | - Total assets decreased by approximately $497 million from June 30, 2018, to March 30, 2019[5] - Total liabilities decreased by approximately $174 million, while long-term debt increased by over $534 million[5] Consolidated Statements of Operations The Consolidated Statements of Operations detail Avnet, Inc.'s financial performance for the third quarters and nine months ended March 30, 2019, and March 31, 2018 Consolidated Statements of Operations (Thousands) | Metric | Q3 2019 (Thousands) | Q3 2018 (Thousands) | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------------ | :------------------------ | | Sales | $4,698,824 | $4,795,093 | $14,837,683 | $13,977,672 | | Gross profit | $624,195 | $653,537 | $1,890,977 | $1,868,552 | | Operating income (loss) | $153,085 | $(58,494) | $395,951 | $87,691 | | Income (loss) from continuing operations, net of tax | $94,935 | $(315,604) | $215,239 | $(200,628) | | Net income (loss) | $88,048 | $(320,066) | $208,173 | $(215,039) | | Basic EPS - Net income (loss) | $0.81 | $(2.68) | $1.87 | $(1.78) | | Diluted EPS - Net income (loss) | $0.81 | $(2.68) | $1.85 | $(1.78) | | Cash dividends paid per common share | $0.20 | $0.19 | $0.60 | $0.55 | - Sales for the third quarter of fiscal year 2019 decreased by 2.0% year-over-year, while sales for the first nine months of fiscal year 2019 increased by 6.2% year-over-year[7] - The company reported a net income of $88.0 million in the third quarter of fiscal year 2019, a significant improvement from a net loss of $320.1 million in the third quarter of fiscal year 2018, primarily due to the absence of goodwill impairment expense in the current quarter[7] Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income detail net income (loss) and other comprehensive income (loss) for the third quarters and nine months ended March 30, 2019, and March 31, 2018 Consolidated Statements of Comprehensive Income (Thousands) | Metric | Q3 2019 (Thousands) | Q3 2018 (Thousands) | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------------ | :------------------------ | | Net income (loss) | $88,048 | $(320,066) | $208,173 | $(215,039) | | Foreign currency translation and other | $1,193 | $114,073 | $(55,203) | $230,857 | | Pension adjustments, net | $1,249 | $5,121 | $6,212 | $15,310 | | Total comprehensive income (loss) | $90,490 | $(200,872) | $159,182 | $31,128 | - Total comprehensive income significantly improved from a loss of $200.9 million in the third quarter of fiscal year 2018 to an income of $90.5 million in the third quarter of fiscal year 2019[9] - Foreign currency translation had a substantial positive impact in the third quarter of fiscal year 2018 ($114.1 million) but a negative impact over the nine months ended March 30, 2019 ($55.2 million loss)[9] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows summarize cash generated or used in operating, investing, and financing activities for the nine months ended March 30, 2019, and March 31, 2018 Consolidated Statements of Cash Flows (Thousands) | Metric | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :-------------------------------------------------- | :------------------------ | :------------------------ | | Net cash flows provided by operating activities | $200,145 | $17,872 | | Net cash flows used for financing activities | $(88,428) | $(469,666) | | Net cash flows (used) provided by investing activities | $(2,299) | $30,115 | | Cash and cash equivalents at end of period | $725,252 | $430,065 | - Net cash flows from operating activities significantly increased to $200.1 million in the first nine months of fiscal year 2019 from $17.9 million in the prior year[12] - Cash used for financing activities decreased substantially from $(469.7) million in fiscal year 2018 to $(88.4) million in fiscal year 2019, partly due to net proceeds from accounts receivable securitization[12] - Cash and cash equivalents at the end of the period increased to $725.3 million from $430.1 million year-over-year[12] Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, pronouncements, segment information, and specific financial line items 1. Basis of presentation and new accounting pronouncements This note outlines the basis for interim financial statements and discusses the impact of new accounting pronouncements like Topic 606 and Topic 842 - The Company adopted Topic 606, Revenue from Contracts with Customers, on July 1, 2018, using the modified retrospective transition method, resulting in a $2.0 million increase to retained earnings with no material impact on consolidated financial statements[16][17] - ASU No. 2017-07, Compensation - Retirement Benefits, adopted in fiscal year 2019, reclassified service costs to 'Selling, general and administrative expenses' and other pension costs to 'Other income, net', with no impact on income from continuing operations before taxes[19][20] - The Company will adopt Topic 842, Leases, in the first quarter of fiscal year 2020, expecting a material increase in total assets and liabilities due to the recognition of operating lease liabilities and right-of-use assets, but no material impact on statements of operations or cash flows[26] 2. Revenue recognition This note details Avnet's revenue recognition policies, including Topic 606 adoption, for electronic components and integrated solutions, with revenue generally recognized upon transfer of control - Avnet generates revenue from the distribution and sale of electronic components (semiconductors, IP&E devices) and integrated solutions, serving a diverse customer base across various markets[28] - Revenue is recognized when control of the products transfers to the customer, typically upon shipment, or at delivery/consumption for consigned products[29] - For specialized manufacturing products with no alternative use and an enforceable right to payment, revenue is recognized over time as control transfers through the manufacturing process, though these contracts represent less than 2% of total sales[30] 3. Acquisitions and Discontinued operations This note discusses the Softweb Solutions acquisition and the financial impacts of the divested Technology Solutions (TS) business as discontinued operations - Avnet acquired Softweb Solutions, a software and AI company for IoT applications, at the end of December 2018, with an immaterial impact on consolidated financial statements[34] - The Technology Solutions (TS) business, sold in February 2017, is classified as discontinued operations in all presented periods, with a final adjustment of $120.0 million executed in August 2018[35] - The Company has indemnified the Buyer for certain liabilities, including tax-related matters, from the TS business sale, which may result in future indemnification expenses[36] 4. Goodwill and long-lived assets This note details changes in goodwill by segment, carrying values of acquired intangible assets, and their amortization expenses Goodwill Carrying Value by Segment (Thousands) | Segment | Carrying value at June 30, 2018 (Thousands) | Additions from acquisitions (Thousands) | Foreign currency translation (Thousands) | Carrying value at March 30, 2019 (Thousands) | | :---------------- | :---------------------------------------- | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Electronic Components | $479,699 | $49,405 | $(2,309) | $526,795 | | Premier Farnell | $501,173 | — | $(536) | $500,637 | | Total | $980,872 | $49,405 | $(2,845) | $1,027,432 | - Goodwill increased by $46.6 million to $1,027.4 million at March 30, 2019, primarily due to additions from acquisitions in the Electronic Components segment[38] - During the third quarter of fiscal year 2018, the Company recorded $181.4 million of goodwill impairment expense for the Americas reporting unit; no interim impairment test was required in the third quarter of fiscal year 2019[39] Intangible Assets Net Book Value (Thousands) | Intangible Asset Type | Net Book Value (March 30, 2019, Thousands) | Net Book Value (June 30, 2018, Thousands) | | :-------------------- | :----------------------------------------- | :---------------------------------------- | | Customer related | $102,604 | $151,710 | | Trade name | $31,055 | $37,680 | | Technology and other | $34,716 | $30,523 | | Total | $168,375 | $219,913 | - Intangible assets, net, decreased by $51.5 million from June 30, 2018, to March 30, 2019, with amortization expense of $63.1 million for the first nine months of fiscal year 2019[41][43] 5. Debt This note details Avnet's short-term and long-term debt, including credit facilities and securitization programs, along with covenant compliance and fair value disclosures Debt Summary (Thousands) | Debt Type | March 30, 2019 (Thousands) | June 30, 2018 (Thousands) | | :----------------------------------- | :------------------------- | :------------------------ | | Short-term debt | $50,401 | $165,380 | | Long-term debt | $2,023,628 | $1,489,219 | | Total debt (carrying value) | $2,074,029 | $1,654,599 | | Total debt (fair value) | $2,120,000 | $1,670,000 | - Short-term debt decreased significantly from $165.4 million to $50.4 million, while long-term debt increased by over $534 million, primarily due to the accounts receivable securitization program being classified as long-term debt[45][46][48] - The Company has a $1.25 billion senior unsecured revolving credit facility expiring in June 2023 and an accounts receivable securitization program with a maximum of $500 million, expiring in August 2020[48][49] - Avnet was in compliance with all covenants under its Credit Facility and Securitization Program as of March 30, 2019, and June 30, 2018[48][49] 6. Derivative financial instruments This note describes Avnet's use of derivative financial instruments, primarily forward foreign exchange contracts, to mitigate foreign currency risks, detailing their fair values and impact on net other income - Avnet uses derivative financial instruments, mainly forward foreign exchange contracts (typically less than 60 days maturity), to reduce foreign currency exchange rate risks, primarily for international transactions where currencies collected differ from those used for purchases[51][53] Fair Value of Derivative Financial Instruments (Thousands) | Metric | March 30, 2019 (Thousands) | June 30, 2018 (Thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------------- | :------------------------ | | Forward foreign currency exchange contracts (assets) | $2,636 | $2,259 | | Forward foreign currency exchange contracts (liabilities) | $3,262 | $7,083 | Net Derivative Financial Instrument (Loss) Gain (Thousands) | Metric | Q3 2019 (Thousands) | Q3 2018 (Thousands) | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :---------------------------------------- | :------------------ | :------------------ | :------------------------ | :------------------------ | | Net derivative financial instrument (loss) gain | $(398) | $3,354 | $(17) | $5,070 | 7. Commitments and contingencies This note addresses Avnet's involvement in various legal proceedings, claims, and investigations, including compliance matters, and estimated liabilities - Avnet is subject to various legal proceedings and investigations, including environmental and import/export matters, arising in the ordinary course of business[56][57] - Management believes that the resolution of current legal matters will not have a material adverse effect on the Company's financial position or liquidity, but could be material to results of operations in any one reporting period[57] Aggregate Estimated Liabilities for Compliance-Related Matters (Thousands) | Metric | March 30, 2019 (Thousands) | June 30, 2018 (Thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------------- | :------------------------ | | Aggregate estimated liabilities for compliance-related matters | $14,700 | $14,200 | 8. Income taxes This note details Avnet's effective tax rates for the third quarters and nine months of fiscal years 2019 and 2018, explaining impacts from U.S. tax regulations and the transition tax Effective Tax Rate on Income from Continuing Operations Before Taxes | Metric | Q3 2019 Effective Tax Rate | Q3 2018 Effective Tax Rate | 9 Months 2019 Effective Tax Rate | 9 Months 2018 Effective Tax Rate | | :----------------------------------- | :------------------------- | :------------------------- | :------------------------------- | :------------------------------- | | Effective tax rate on income from continuing operations before taxes | 24.4% | 338.0% | 29.5% | 489.2% | - The third quarter of fiscal year 2019 effective tax rate was unfavorably impacted by new U.S. income tax regulations, partially offset by decreases in unrecognized tax benefits[59] - The third quarter and nine-month fiscal year 2018 effective tax rates were significantly impacted by the one-time mandatory deemed repatriation tax liability (transition tax) and non-deductible goodwill impairment expense[60][62] - The total transition tax recorded as a result of the Act is estimated to be $257.5 million, finalized during the second quarter of fiscal year 2019[64] 9. Pension plan This note outlines Avnet's net periodic pension cost components for its defined benefit plan, reflecting ASU 2017-07 adoption and discontinued operations' pension settlement expenses Net Periodic Pension (Benefit) Cost (Thousands) | Metric | Q3 2019 (Thousands) | Q3 2018 (Thousands) | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------ | :------------------ | :------------------------ | :------------------------ | | Total net periodic pension cost within selling, general and administrative expenses | $3,582 | $4,305 | $11,050 | $12,040 | | Total net periodic pension benefit within other income, net | $(6,294) | $(3,270) | $(15,384) | $(12,512) | | Net periodic pension (benefit) cost | $(2,712) | $1,035 | $(4,334) | $(472) | - The Company contributed $8.0 million to the Plan during the first nine months of fiscal year 2019 and expects an additional $8.0 million contribution in the remainder of fiscal year 2019[67] - A pension settlement expense of $4.9 million (third quarter of fiscal year 2018) and $18.9 million (nine months of fiscal year 2018) was recorded due to former TS business employees' withdrawals, classified as loss from discontinued operations[69] 10. Shareholders' equity This note details Avnet's share repurchase program and common stock dividend payments, including authorized and executed amounts - The Board of Directors amended the share repurchase program in August 2018, authorizing up to $2.45 billion of common stock repurchases[71] Share Repurchase Program (Q3 2019) | Metric | Q3 2019 | | :----------------------------------- | :------ | | Shares repurchased | 2.8 million | | Total cost of repurchases | $117.2 million | | Remaining authorization (as of March 30, 2019) | $322.9 million | - The Company approved a dividend of $0.20 per common share in February 2019, resulting in $21.5 million in payments during March 2019; total dividends paid for the nine months ended March 30, 2019, were $0.60 per share, totaling $66.2 million[72] 11. Earnings per share This note provides basic and diluted earnings per share calculations for continuing and discontinued operations for the third quarters and nine months ended March 30, 2019, and March 31, 2018 Earnings Per Share | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :----------------------------------- | :------ | :------ | :------------ | :------------ | | Basic EPS - Continuing operations | $0.87 | $(2.64) | $1.93 | $(1.66) | | Basic EPS - Discontinued operations | $(0.06) | $(0.04) | $(0.06) | $(0.12) | | Basic EPS - Net income (loss) | $0.81 | $(2.68) | $1.87 | $(1.78) | | Diluted EPS - Continuing operations | $0.87 | $(2.64) | $1.91 | $(1.66) | | Diluted EPS - Discontinued operations | $(0.06) | $(0.04) | $(0.06) | $(0.12) | | Diluted EPS - Net income (loss) | $0.81 | $(2.68) | $1.85 | $(1.78) | | Weighted average common shares for basic EPS | 108,074 | 119,601 | 111,222 | 120,895 | | Weighted average common shares for diluted EPS | 108,822 | 119,601 | 112,252 | 120,895 | - Diluted EPS for the third quarter of fiscal year 2019 was $0.81, a significant improvement from a loss of $(2.68) in the third quarter of fiscal year 2018; for the nine months, diluted EPS was $1.85, up from a loss of $(1.78) in the prior year[73] - For periods with net losses (third quarter and nine months of fiscal year 2018), diluted net loss per share was the same as basic net loss per share because potential common shares were anti-dilutive[74] 12. Additional cash flow information This note provides supplemental cash flow information, including non-cash investing and financing activities, and details on interest and income taxes paid Additional Cash Flow Information (Thousands) | Metric | 9 Months 2019 (Thousands) | 9 Months 2018 (Thousands) | | :----------------------------------- | :------------------------ | :------------------------ | | Capital expenditures incurred but not paid | $10,310 | $21,282 | | Unsettled share repurchases | $4,740 | — | | Interest paid | $87,845 | $55,924 | | Income taxes paid (continuing and discontinued operations) | $150,765 | $94,773 | - Interest paid increased by $31.9 million, and income taxes paid increased by $56.0 million for the first nine months of fiscal year 2019 compared to the prior year[75] - Cash and cash equivalents included $6.5 million (March 30, 2019) and $6.1 million (June 30, 2018) of investment grade money market funds and overnight time deposits[75] 13. Segment information This note presents financial information by Avnet's Electronic Components (EC) and Premier Farnell (Farnell) segments, and by geographic area, detailing sales and operating income - Avnet operates through two primary segments: Electronic Components (EC), which distributes semiconductors and IP&E devices, and Premier Farnell (Farnell), which distributes electronic components and related products through multi-channel sales[76] Sales and Operating Income by Segment/Region (Thousands) | Segment/Region | Q3 2019 Sales (Thousands) | Q3 2018 Sales (Thousands) | 9 Months 2019 Sales (Thousands) | 9 Months 2018 Sales (Thousands) | | :--------------- | :------------------------ | :------------------------ | :------------------------------ | :------------------------------ | | Sales | | | | | | Electronic Components | $4,331,351 | $4,404,115 | $13,722,890 | $12,874,885 | | Farnell | $367,473 | $390,978 | $1,114,793 | $1,102,787 | | Americas | $1,297,220 | $1,276,426 | $3,869,435 | $3,672,160 | | EMEA | $1,740,916 | $1,812,334 | $5,124,409 | $5,011,336 | | Asia/Pacific | $1,660,688 | $1,706,333 | $5,843,839 | $5,294,176 | | Operating Income | | | | | | Electronic Components | $153,319 | $157,713 | $473,783 | $427,162 | | Farnell | $45,651 | $42,162 | $126,088 | $108,245 | - EC sales decreased by 1.7% in the third quarter of fiscal year 2019 year-over-year but increased by 6.6% for the first nine months of fiscal year 2019; Farnell sales decreased by 6.0% in the third quarter of fiscal year 2019 year-over-year[78] 14. Restructuring expenses This note details fiscal year 2019 restructuring actions, including severance, facility exit costs, and asset impairments, aimed at improving operating efficiencies and integrating acquired businesses - Avnet incurred $76.5 million in restructuring expenses during the first nine months of fiscal year 2019, primarily for severance ($23.6 million), facility and contract exit costs ($0.6 million), and asset impairments ($52.3 million)[88] - These actions aimed to improve operating efficiencies and integrate the Farnell acquisition, leading to a reduction of over 300 employees and re-prioritization of IT initiatives[87][88] Restructuring Expenses (Thousands) | Restructuring Type | Fiscal 2019 Expenses (Thousands) | Cash Payments (Thousands) | Non-cash Amounts (Thousands) | Balance at March 30, 2019 (Thousands) | | :----------------- | :------------------------------- | :------------------------ | :--------------------------- | :------------------------------------ | | Severance | $23,640 | $(12,782) | — | $10,740 | | Facility and Contract Exit Costs | $553 | $(200) | — | $348 | | Asset Impairments | $52,344 | — | $(52,344) | — | | Total | $76,537 | $(12,982) | $(52,344) | $11,088 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Avnet's financial condition and results of operations for the third quarter and first nine months of fiscal year 2019, covering key metrics, segment performance, and liquidity OVERVIEW This overview introduces Avnet as a global technology solutions company, detailing its operating groups and summarizing sales and operating income performance for the third quarter and first nine months of fiscal year 2019 - Avnet, Inc. is a global technology solutions company founded in 1921, working with over 1,400 technology suppliers and serving 2.1 million customers in more than 140 countries[96] - The Company operates through two primary operating groups: Electronic Components (EC) and Premier Farnell (Farnell), both with operations across the Americas, EMEA, and Asia[97] Sales and Operating Income Margin (Billions) | Metric | Q3 2019 (Billions) | Q3 2018 (Billions) | YoY Change (%) | | :----- | :----------------- | :----------------- | :------------- | | Sales | $4.70 | $4.80 | (2.0)% | | Sales (Constant Currency) | N/A | N/A | 1.2% | | Operating Income Margin | 3.3% | (1.2)% | +4.5 pp | | Adjusted Operating Income Margin | 3.8% | 3.6% | +0.2 pp | - Sales for the first nine months of fiscal year 2019 increased by 6.2% to $14.84 billion (7.9% in constant currency), with all regions experiencing organic sales growth[99] Sales This section details sales performance by segment (EC, Farnell) and geographic region (Americas, EMEA, Asia) for the third quarter and first nine months of fiscal year 2019, including constant currency adjustments Sales by Segment/Region (Thousands) | Segment/Region | Q3 2019 Sales (Thousands) | Q3 2018 Sales (Thousands) | YoY % Change (Reported) | YoY % Change (Constant Currency) | | :--------------- | :------------------------ | :------------------------ | :---------------------- | :------------------------------- | | Avnet Total | $4,698,824 | $4,795,093 | (2.0)% | 1.2% | | Americas | $1,297,220 | $1,276,426 | 1.6% | 1.6% | | EMEA | $1,740,916 | $1,812,334 | (3.9)% | 3.8% | | Asia | $1,660,688 | $1,706,333 | (2.7)% | (2.0)% | | EC | $4,331,351 | $4,404,115 | (1.7)% | 1.5% | | Farnell | $367,473 | $390,978 | (6.0)% | (1.5)% | Sales by Segment/Region (Thousands) | Segment/Region | 9 Months 2019 Sales (Thousands) | 9 Months 2018 Sales (Thousands) | YoY % Change (Reported) | YoY % Change (Constant Currency) | | :--------------- | :------------------------------ | :------------------------------ | :---------------------- | :------------------------------- | | Avnet Total | $14,837,683 | $13,977,672 | 6.2% | 7.9% | | Americas | $3,869,435 | $3,672,160 | 5.4% | 5.4% | | EMEA | $5,124,409 | $5,011,336 | 2.3% | 6.5% | | Asia | $5,843,839 | $5,294,176 | 10.4% | 10.8% | | EC | $13,722,890 | $12,874,885 | 6.6% | 8.3% | | Farnell | $1,114,793 | $1,102,787 | 1.1% | 3.8% | - Farnell sales declined 1.5% year-over-year in constant currency for the third quarter of fiscal year 2019, primarily due to uncertainties related to Brexit impacting market demand[108] Gross Profit and Gross Profit Margins This section analyzes changes in gross profit and margins for the third quarter and first nine months of fiscal year 2019, attributing shifts to sales volume, product mix, and supplier program changes Gross Profit and Gross Profit Margin (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | YoY Change (%) | | :----- | :----------------- | :----------------- | :------------- | | Gross profit | $624.2 | $653.5 | (4.5)% | | Gross profit margin | 13.3% | 13.6% | (35 bps) | | EC gross profit margin | N/A | N/A | (30 bps) | | Farnell gross profit margin | N/A | N/A | +35 bps | - The decrease in gross profit margin in the third quarter of fiscal year 2019 was driven by year-over-year decreases in the EMEA and Asia regions, partially offset by an increase in the Americas[111] - For the first nine months of fiscal year 2019, gross profit margin decreased to 12.7% from 13.4% in the prior year, primarily due to an increased mix of sales from lower-margin Asia and supplier program changes[113] Selling, General and Administrative Expenses This section discusses changes in Selling, General and Administrative (SG&A) expenses, highlighting reductions from restructuring and foreign currency translation, and their impact on SG&A as a percentage of sales and gross profit Selling, General and Administrative Expenses (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | YoY Change (%) | | :----- | :----------------- | :----------------- | :------------- | | SG&A expenses | $468.2 | $505.5 | (7.4)% | | SG&A as % of sales | 10.0% | 10.5% | (0.5 pp) | | SG&A as % of gross profit | 75.0% | 77.3% | (2.3 pp) | - The decrease in SG&A expenses was primarily due to reductions from management's restructuring programs, favorable foreign currency translation rates, and lower Corporate costs, partially offset by sales volume growth[114][116] - For the first nine months of fiscal year 2019, SG&A expenses decreased to $1.42 billion (9.5% of sales) from $1.49 billion (10.7% of sales) in the prior year[116] Goodwill Impairment Expense This section explains the goodwill impairment expense recorded in fiscal year 2018 and the Company's quarterly evaluation process for goodwill impairment - During the third quarter of fiscal year 2018, Avnet recorded $181.4 million of goodwill impairment expense related to the Americas reporting unit[117] - No interim goodwill impairment test was required in the third quarter of fiscal year 2019, as facts and circumstances did not indicate that the fair value of reporting units was less than their carrying value[118] - The Company performs an annual goodwill impairment test during the fiscal fourth quarter, considering long-term planning and market conditions[119] Restructuring, Integration and Other Expenses This section details Avnet's restructuring, integration, and other expenses, including severance, asset impairments, accelerated depreciation, and real estate sale gains, and their financial impact - Avnet incurred $2.9 million in restructuring, integration, and other expenses in the third quarter of fiscal year 2019, down from $25.1 million in the third quarter of fiscal year 2018[121][123] - Third quarter of fiscal year 2019 expenses included $13.4 million in restructuring costs (severance, IT software impairment), $2.4 million in integration costs, and $2.7 million in accelerated depreciation, partially offset by a $15.1 million gain on real estate sale[121] - For the first nine months of fiscal year 2019, total restructuring, integration, and other expenses were $79.9 million, with an after-tax impact of $60.7 million ($0.54 diluted EPS)[122] Operating Income (Loss) This section analyzes Avnet's significant operating income improvement for the third quarter and first nine months of fiscal year 2019, driven by reduced SG&A and no goodwill impairment Operating Income (Loss) (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | YoY Change (%) | | :----- | :----------------- | :----------------- | :------------- | | Operating income (loss) | $153.1 | $(58.5) | +361.7% | | Adjusted operating income | $178.1 | $170.8 | +4.3% | | EC operating income margin | 3.5% | 3.54% | (4 bps) | | Farnell operating income margin | 12.4% | 10.76% | +164 bps | - The substantial increase in operating income was primarily due to reduced selling, general and administrative expenses and the absence of goodwill impairment expense compared to the third quarter of fiscal year 2018[125] - For the first nine months of fiscal year 2019, operating income was $396.0 million (2.7% of sales), and adjusted operating income was $539.5 million (3.6% of sales), both significantly higher than the prior year[127] Interest and Other Financing Expenses, Net and Other Income, Net This section reviews changes in net interest and other financing expenses, and net other income, for the third quarter and first nine months of fiscal year 2019, attributing shifts to financing costs and pension-related income/losses Interest and Other Financing Expenses, Net and Other Income, Net (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | YoY Change (%) | | :----- | :----------------- | :----------------- | :------------- | | Interest and other financing expenses, net | $36.3 | $23.4 | +54.7% | | Other income, net | $8.7 | $9.9 | (12.1)% | - The increase in interest and other financing expenses was primarily due to increased expenses in foreign regions to finance working capital needs, including higher average debt outstanding and lower interest income[128] - Other income in the third quarter and the first nine months of fiscal year 2019 was related to the Company's pension plans, partially offset by foreign currency losses[129] Income Tax Expense This section analyzes Avnet's effective tax rates and influencing factors for the third quarter and first nine months of fiscal years 2019 and 2018, including U.S. tax regulations and the transition tax Effective Tax Rate on Income from Continuing Operations Before Taxes | Metric | Q3 2019 Effective Tax Rate | Q3 2018 Effective Tax Rate | 9 Months 2019 Effective Tax Rate | 9 Months 2018 Effective Tax Rate | | :----------------------------------- | :------------------------- | :------------------------- | :------------------------------- | :------------------------------- | | Effective tax rate on income from continuing operations before taxes | 24.4% | 338.0% | 29.5% | 489.2% | - The third quarter of fiscal year 2019 effective tax rate was unfavorably impacted by new U.S. income tax regulations, partially offset by decreases in unrecognized tax benefits[130] - The third quarter and nine-month fiscal year 2018 effective tax rates were significantly impacted by the one-time mandatory deemed repatriation tax liability (transition tax) and non-deductible goodwill impairment[131][134] Loss from Discontinued Operations This section reports the loss from discontinued operations for the third quarter and first nine months of fiscal years 2019 and 2018, primarily due to tax expenses and pension settlement losses from the divested TS business Loss from Discontinued Operations (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | 9 Months 2019 (Millions) | 9 Months 2018 (Millions) | | :----- | :----------------- | :----------------- | :----------------------- | :----------------------- | | Loss from discontinued operations | $6.9 | $4.5 | $7.1 | $14.4 | - Loss from discontinued operations in fiscal year 2019 was primarily due to additional income tax expenses associated with the TS business[136] - Losses in fiscal year 2018 were mainly due to pension settlement losses from former TS business employees requesting distributions from the pension plan[137] Net Income (Loss) This section summarizes Avnet's net income (loss) and diluted earnings per share for the third quarter and first nine months of fiscal years 2019 and 2018, reflecting all discussed financial factors Net Income (Loss) (Millions) | Metric | Q3 2019 (Millions) | Q3 2018 (Millions) | 9 Months 2019 (Millions) | 9 Months 2018 (Millions) | | :----- | :----------------- | :----------------- | :----------------------- | :----------------------- | | Net income (loss) | $88.0 | $(320.1) | $208.2 | $(215.0) | | Diluted EPS | $0.81 | $(2.68) | $1.85 | $(1.78) | - Avnet reported a net income of $88.0 million ($0.81 diluted EPS) in the third quarter of fiscal year 2019, a significant turnaround from a net loss of $320.1 million ($(2.68) diluted EPS) in the third quarter of fiscal year 2018[138] - For the first nine months of fiscal year 2019, net income was $208.2 million ($1.85 diluted EPS), compared to a net loss of $215.0 million ($(1.78) diluted EPS) in the prior year[139] LIQUIDITY AND CAPITAL RESOURCES This section discusses Avnet's liquidity and capital resources, including cash flow from operating, financing, and investing activities, contractual obligations, financing transactions, and overall liquidity Cash Flow This sub-section details Avnet's cash flows from operating, financing, and investing activities for the first nine months of fiscal years 2019 and 2018, highlighting significant changes and drivers - Cash generated from operating activities from continuing operations increased significantly to $256.4 million in the first nine months of fiscal year 2019, compared to $17.9 million in the prior year[140] - Working capital used cash of $206.9 million in fiscal year 2019, driven by increases in inventories and decreases in accounts payable and accrued expenses, partially offset by a decrease in accounts receivable[140] - Financing activities in fiscal year 2019 included $342.0 million net proceeds from accounts receivable securitization and $85.0 million from bank credit facilities, alongside $447.9 million in common stock repurchases and $66.2 million in dividends[142] - Investing activities in fiscal year 2019 included $101.4 million for capital expenditures and $66.5 million for acquisitions, partially offset by $41.0 million from real estate sales and $123.5 million from discontinued operations[144][145] Contractual Obligations This sub-section refers to the Annual Report for detailed contractual obligations, noting no material changes beyond normal debt and lease activities - No material changes to long-term debt and lease commitments were reported outside of normal borrowings and repayments, as detailed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018[146] - The Company does not currently have any material non-cancellable commitments for capital expenditures or inventory purchases[146] Financing Transactions This sub-section provides additional information on Avnet's financing arrangements, including debt covenant compliance and the use of factoring agreements for trade accounts receivable - Avnet was in compliance with all covenants under its Credit Facility and Securitization Program as of March 30, 2019, and June 30, 2018[147] - The Company sells certain trade accounts receivable on a non-recourse basis to third-party financial institutions as an alternative financing method outside the U.S., with cash proceeds classified as operating activities[149] Liquidity This sub-section assesses Avnet's overall liquidity position, including cash and cash equivalents, available borrowing capacity, and strategies for managing foreign cash balances and future capital needs Liquidity Metrics (Millions) | Metric | March 30, 2019 (Millions) | June 30, 2018 (Millions) | | :----------------------------------- | :------------------------ | :------------------------ | | Cash and cash equivalents | $725.3 | $621.1 | | Cash held outside the United States | $660.7 | $545.3 | | Total borrowing capacity (Credit Facility + Securitization Program) | $1,750.0 | N/A | | Total availability (as of March 30, 2019) | $1,210.0 | N/A | - Avnet generated $492.0 million in cash flows from operating activities from continuing operations over the trailing four fiscal quarters ended March 30, 2019[152] - Management believes available borrowing capacity and expected operating cash flows will be sufficient to meet future liquidity needs, with foreign cash balances generally used for working capital, capital expenditures, and acquisitions, and expected to be permanently reinvested outside the U.S.[153][154] - The Company expects to continue strategic investments through acquisitions, make capital expenditures, and use cash for restructuring and integration expenses[154] Item 3. Quantitative and Qualitative Disclosures About Market Risk Avnet discusses its exposure to foreign currency and interest rate risks, outlining mitigation strategies with no material changes since the prior fiscal year-end Market Risk Disclosures This section discusses Avnet's exposure to market risks, primarily foreign currency and interest rates, and mitigation strategies, noting no material changes since the prior fiscal year-end - Avnet aims to reduce earnings and cash flow volatility from foreign currency exchange rate changes through natural hedging and derivative financial instruments (economic hedges)[158] - The Company's exposure to market risks has not materially changed since June 30, 2018, with the majority of foreign currency exchange exposures economically hedged[159] - For interest rate risk, Avnet maintains a combination of fixed and variable rate debt; as of March 30, 2019, 72% of debt was fixed-rate and 28% was variable-rate[160] - A hypothetical 1.0% increase in interest rates would result in a $1.5 million decrease in income from continuing operations before income taxes for the third quarter of fiscal year 2019[160] Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Avnet's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 30, 2019 - Avnet's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 30, 2019[161] - No changes to the Company's internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the third quarter of fiscal year 2019[162] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section discloses Avnet's involvement in various legal proceedings, including environmental and compliance matters, and management's assessment of their potential financial impact - Avnet may incur future liability under environmental laws and regulations due to former manufacturing operations, including cleanup costs for contamination[163] - Management believes that the resolution of current legal matters will not have a material adverse effect on the Company's financial position or liquidity, but could be material to its results of operations in any one reporting period[165] - The Company has appropriately accrued for its share of estimable costs related to environmental and other compliance matters in its consolidated financial statements[164] Item 1A. Risk Factors This section outlines key risk factors that could materially affect Avnet's future operations, including competitive pressures, industry cycles, supplier relationships, international risks, and geopolitical events - Key risk factors include competitive pressures, industry down-cycles in semiconductors, relationships with key suppliers, and risks associated with international sales and operations (e.g., foreign currency fluctuations, repatriation of cash)[166] - Risks also encompass acquisitions, divestitures, adverse effects on the supply chain, cyber-attacks, general economic conditions, and geopolitical events such as Brexit, which may impact operations and financial condition[166][167] - As of March 30, 2019, there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018[169] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details Avnet's common stock repurchase activities under its publicly announced share repurchase program during the third quarter of fiscal year 2019 - Avnet's Board of Directors approved a share repurchase program of up to $2.45 billion of common stock[170] Common Stock Repurchase Activities (Q3 Fiscal 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares That May Yet Be Purchased | | :-------------------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------- | | December 31 – January 25 | 1,266,377 | $39.50 | $390,116,000 | | January 28 – February 22 | 277,154 | $44.19 | $377,869,000 | | February 25 – March 29 | 1,272,749 | $43.19 | $322,905,000 | - During the third quarter of fiscal year 2019, the Company repurchased a total of 2,816,280 shares under the program[171] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL documents - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[173] - XBRL Instance Document and Taxonomy Extension Documents (Schema, Definition, Calculation, Label, Presentation) are also filed as exhibits[173] Signature Page Report Signature This page formally concludes the Form 10-Q filing, signed by Avnet, Inc.'s Chief Financial Officer - The report was signed on April 26, 2019, by Thomas Liguori, Chief Financial Officer of Avnet, Inc.[177]