AVNET, INC. For a description of the Company's critical accounting policies and an understanding of the significant factors that influenced the Company's performance during the quarter endedDecember 28, 2019 , this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Quarterly Report on Form 10-Q, as well as the Company's Annual Report on Form 10-K for the fiscal year endedJune 29, 2019 .
There are references to the impact of foreign currency translation in the
discussion of the Company's results of operations. When the
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in theU.S. ("GAAP"), the Company also discloses certain non-GAAP financial information, including:
Sales adjusted for certain items that impact the year-over-year analysis, which
includes the impact of certain acquisitions by adjusting Avnet's prior periods
? to include the sales of acquired businesses, as if the acquisitions had
occurred at the beginning of the earliest period presented. Sales taking into
account these adjustments are referred to as "organic sales."
Operating income excluding (i) restructuring, integration and other expenses
? (see Restructuring, Integration and Other Expenses in this MD&A) and (ii)
amortization of acquired intangible assets and other. Operating income
excluding such amounts is referred to as "adjusted operating income."
The reconciliation of operating income to adjusted operating income is presented
in the following table:
Second Quarters Ended Six Months Ended
December 28, December 29, December 28, December 29,
2019 2018 2019 2018
(Thousands)
Operating income $ 46,475 $ 96,050 $ 109,212 $ 242,866
Restructuring, integration and
other expenses 14,265 62,260 38,863 77,048
Amortization of acquired
intangible assets and other 21,454 20,513 41,532 41,440
Adjusted operating income $ 82,194 $ 178,823 $ 189,607 $ 361,354
Management believes that providing this additional information is useful to
readers to better assess and understand operating performance, especially when
comparing results with prior periods or forecasting performance for future
periods, primarily because management typically monitors the business both
including and excluding these adjustments to GAAP results. Management also uses
these non-GAAP measures to establish operational goals and, in many cases, for
measuring performance for compensation purposes. However, any analysis of
results on a non-GAAP basis should be used as a complement to, and in
conjunction with, results presented in accordance with GAAP.
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OVERVIEW
Organization
Avnet, Inc. and its consolidated subsidiaries' (collectively, the "Company" or "Avnet"), is a global technology solutions company with an extensive ecosystem delivering design, product, marketing and supply chain expertise for customers at every stage of the product lifecycle. Avnet transforms ideas into intelligent solutions, reducing the time, cost and complexities of bringing products to market around the world. Founded in 1921 and incorporated inNew York in 1955, the Company works with over 1,400 technology suppliers to serve 2.1 million customers in more than 140 countries. Avnet has two primary operating groups - Electronic Components ("EC") andFarnell ("Farnell"). Both operating groups have operations in each of the three major economic regions of the world: (i) theAmericas , (ii) EMEA and (iii)Asia . A summary of each operating group is provided in Note 13, "Segment information" to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q. Results of Operations Executive Summary
Sales of$4.53 billion were down 10.2% year over year and 9.4% in constant currency as compared to prior fiscal year second quarter sales of$5.05 billion . Both operating groups in all three regions contributed to the year-over-year decline in sales as the global industry-wide slowdown resulted in weaker year over year demand.
Gross profit margin of 11.6% decreased 89 basis points compared to 12.5% in the second quarter of fiscal 2019 primarily due to gross profit margin declines
in both operating groups. Operating income of$46.5 million decreased$49.6 million or 51.6% as compared to the second quarter of fiscal 2019. Operating income margin was 1.0% in the second quarter of fiscal 2020 as compared with a 1.9% in the second quarter of fiscal 2019. Both periods included amortization and restructuring, integration and other expenses. Excluding these expenses from both periods, adjusted operating income margin was 1.8% in the second quarter of fiscal 2020 as compared to 3.5% in the second quarter of fiscal 2019, a decline of 173 basis points. The decrease in adjusted operating income and adjusted operating income margin is primarily due to the decrease in sales and gross profit margin, partially offset by reductions in operating expenses from the Company's restructuring and integration efforts. 22 Table of Contents Sales The following tables present reported and organic sales growth rates for the second quarter and first six months of fiscal 2020 as compared to fiscal 2019. Second Quarters Ended As Reported Sales Sales As Reported and Organic as Reported as Reported and Year-Year % and Organic and Organic Organic Change in Fiscal Fiscal Year-Year Constant 2020 (1) 2019 (2) % Change Currency (Dollars in thousands) Avnet$ 4,534,806 $ 5,048,980 (10.2) % (9.4) % Avnet by region Americas$ 1,186,582 $ 1,300,423 (8.8) % (8.8) % EMEA 1,425,859 1,668,575 (14.6) (12.1) Asia 1,922,365 2,079,982 (7.6) (7.7) Avnet by operating group EC$ 4,203,629 $ 4,680,714 (10.2) % (9.5) % Farnell 331,177 368,266 (10.1) (9.1) ___________
(1) Sales from acquisitions in the second quarter of fiscal 2020 were not
material.
(2) Sales from the acquisition in the second quarter of fiscal 2019 was not
material.
Six Months Ended
As Reported
Sales Sales As Reported and Organic
as Reported as Reported and Year-Year %
and Organic and Organic Organic Change in
Fiscal Fiscal Year-Year Constant
2020 (1) 2019 (2) % Change Currency
(Dollars in thousands)
Avnet $ 9,164,814 $ 10,138,859 (9.6) % (8.6) %
Avnet by region
Americas $ 2,402,339 $ 2,572,216 (6.6) % (6.6) %
EMEA 2,896,782 3,383,492 (14.4) (11.3)
Asia 3,865,693 4,183,151 (7.6) (7.7)
Avnet by operating group
EC $ 8,497,815 $ 9,391,540 (9.5) % (8.6) %
Farnell 666,999 747,319 (10.8) (9.0)
___________
(1) Sales from acquisitions in the second quarter of fiscal 2020 were not
material.
(2) Sales from the acquisition in the second quarter of fiscal 2019 was not
material.
Sales of $4.53 billion for the second quarter of fiscal 2020 were down $514.2
million , or 10.2%, from the prior year second quarter sales of $5.05 billion .
Sales in constant currency decreased 9.4% over the prior year second quarter
with all three regions of both operating groups contributing to the decline.
These decreases are primarily due to the current industry-wide economic
downturn, which began in the second half of fiscal 2019.
EC sales of $4.20 billion in the second quarter of fiscal 2020 decreased $477.1
million or 10.2% from the prior year second quarter sales of $4.68 billion . EC
sales in constant currency declined 9.5% year over year. Farnell sales for the
second quarter of fiscal 2020 were $331.2 million , a decrease of $37.1 million
or 10.1% from the prior year second quarter sales of $368.3 million . Farnell
sales in constant currency declined 9.1% year over year.
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On a regional basis, sales declined 8.8% in the
Sales for the first six months of fiscal 2020 were$9.16 billion , a decline$974.0 million as compared to sales of$10.14 billion for the first six months of fiscal 2019. These decreases are primarily due to the current industry-wide economic downturn, which began in the second half of fiscal 2019. As a result of the notification the Company received from Texas Instruments ("TI") in the second quarter of fiscal 2020 related to the termination of the Company's distribution agreement, the Company may experience lower sales and gross profit in the future if the impact of the termination is not offset by sales growth, gross margin improvements or operating cost reductions from strategic initiatives designed to mitigate such impacts. Sales from TI products represented approximately 10% of total sales in fiscal 2019.
Gross Profit and Gross Profit Margins
Gross profit for the second quarter of fiscal 2020 was$525.6 million , a decrease of$104.4 million , or 16.6%, from the second quarter of fiscal 2019 gross profit of$630.0 million driven primarily by the decline in sales. Gross profit margin decreased to 11.6% or 89 basis points from the second quarter of fiscal 2019 gross profit margin of 12.5% driven by declines in gross profit margin in both operating groups. The declines in gross profit margin in both operating groups are primarily due to a combination of product and customer mix, geographical market mix and overall declines in gross profit margin due to current market conditions. Gross profit and gross margins were$1.07 billion and 11.7%, respectively, for the first six months of fiscal 2020 as compared with$1.27 billion and 12.5%, respectively, for the first six months of fiscal 2019.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A expenses") were $464.9
million in the second quarter of fiscal 2020, a decrease of $6.9 million , or
1.5%, from the second quarter of fiscal 2019. The year-over-year decrease in
SG&A expenses was primarily due to a reduction of expenses resulting from
management's restructuring programs, the impact of changes in foreign currency
translation rates year over year and from the decline in sales, partially offset
by increases in SG&A expenses to fund strategic investments and initiatives.
Metrics that management monitors with respect to its operating expenses are SG&A
expenses as a percentage of sales and as a percentage of gross profit. In the
second quarter of fiscal 2020, SG&A expenses as a percentage of sales were 10.3%
and as a percentage of gross profit were 88.4%, as compared with 9.3% and 74.9%,
respectively, in the second quarter of fiscal 2019. The increase in SG&A
expenses as a percentage of both sales and gross profit is primarily the result
of the decrease in sales and gross profit margin, partially offset by the
decline in SG&A expenses.
SG&A expenses for the first six months of fiscal 2020 were $921.4 million , or
10.1% of sales, as compared with $946.9 million , or 9.3% of sales, in the first
six months of fiscal 2019. SG&A expenses were 86.2% of gross profit in the first
six months of 2020 as compared with 74.7% in the first six months of fiscal
2019.
Restructuring, Integration and Other Expenses
As a result of management's focus on improving operating efficiencies and further integrating the acquisition ofFarnell , the Company has incurred certain restructuring costs. These costs also related to the continued transformation of the Company's information technology, distribution center footprint and business operations. In addition, the Company incurred integration, accelerated depreciation and other costs. Integration costs are primarily related to the integration of acquired businesses includingFarnell , the integration of certain regional and global businesses, and incremental costs incurred as part of the consolidation, relocation, sale and closure of distribution centers and office facilities. Accelerated depreciation relates to the incremental depreciation expense incurred related to the shortening of the estimated useful life 24
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for certain information technology assets. Other costs consist primarily of any other miscellaneous costs that relate to restructuring, integration and other expenses including acquisition related costs. The Company recorded restructuring, integration and other expenses of$14.3 million during the second quarter of fiscal 2020. The Company recorded$9.5 million of restructuring costs in the second quarter of fiscal 2020, which are expected to provide approximately$15.0 million in annual operating expense savings once such restructuring actions are completed. During the second quarter of fiscal 2020, the Company also incurred integration costs of$2.8 million , accelerated depreciation expense of$2.7 million , other costs of$0.5 million and a reversal of$1.2 million for changes in estimates for costs associated with prior year restructuring actions. The after-tax impact of restructuring, integration and other expenses were$10.9 million and$0.11 per share on a diluted basis. During the first six months of fiscal 2020, the Company incurred restructuring costs of$27.8 million , integration costs of$4.5 million , accelerated depreciation of$5.4 million , other costs of$2.6 million and reversals of$1.4 million for changes in estimates for costs associated with prior year restructuring actions. The after tax impact of restructuring, integration and other expenses for the first six months of fiscal 2020 was$29.2 million and$0.29 per share on a diluted basis. Comparatively, in the second quarter of fiscal 2019, restructuring, integration and other expenses were$62.3 million . The after-tax impact of restructuring, integration, and other expenses was$46.6 million and$0.42 per share on a diluted basis. In the first six months of fiscal 2019, restructuring, integration and other expenses were$77.0 million . The after tax impact of restructuring, integration and other expenses for the first six months of fiscal 2019 was$58.1 million and$0.51 per share on a diluted basis.
See Note 14 "Restructuring expenses" to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q.
Operating Income
Operating income for the second quarter of fiscal 2020 was$46.5 million , a decrease of$49.6 million , or 51.6%, from the second quarter of fiscal 2019 operating income of$96.1 million . The year over year decrease in operating income was primarily driven by the decline in sales and gross profit margin partially offset by the reduction in SG&A expenses as compared to the second quarter of fiscal 2019. Adjusted operating income for the second quarter of fiscal 2020 was$82.2 million , a decrease of$96.6 million , or 54.0%, from the second quarter of fiscal 2019. The year over year decrease in adjusted operating income was primarily driven by the decline in sales and gross profit margin, partially offset by the reduction in SG&A expenses. EC operating income margin decreased 117 basis points year over year to 2.2% andFarnell operating income margin decreased 473 basis points year over year to 6.0%. These declines were primarily driven by the decline in sales and gross profit margin, partially offset by the reduction in SG&A expenses. Operating income for the first six months of fiscal 2020 was$109.2 million , or 1.2% of consolidated sales, as compared with operating income of$242.9 million , or 2.4% of consolidated sales in the first six months of fiscal 2019. Adjusted operating income for the first six months of fiscal 2020 was$189.6 million , a decrease of$171.7 million , or 47.5%, from the first six months of fiscal 2019. The year over year decrease in adjusted operating income was primarily driven by the decline in sales and gross profit margin, partially offset by the reduction in SG&A expenses.
Interest and Other Financing Expenses, Net and Other (Expense) Income, Net Interest and other financing expenses in the second quarter of fiscal 2020 was$33.9 million , an increase of$0.2 million or 0.6%, as compared with interest and other financing expenses of$33.7 million in the second quarter of fiscal 2019. Interest and other financing expenses in the first six months of fiscal 2020 was$67.5 million , an increase of$3.7 million or 5.8%, as compared with interest and other financing expenses of$63.8 million in the first six months of fiscal 25 Table of Contents 2019. The increase in interest and other financing expenses in the first six months of fiscal 2020 compared to the first six months of fiscal 2019 was primarily related to increased expenses in foreign regions to finance working capital needs. During the second quarter of fiscal 2020, the Company had$0.5 million of other expense as compared with$2.6 million of other income in the second quarter of fiscal 2019. During the first six months of fiscal 2020, the Company had$4.4 million of other income as compared with$0.7 million of other income in the first six months of fiscal 2019. The year over year differences in other income was primarily due to differences in foreign currency exchange rates between
fiscal 2020 and fiscal 2019. Income Tax Expense The Company's effective tax rate on its income from continuing operations before taxes was 56.8% in the second quarter of fiscal 2020. During the second quarter of fiscal 2020, the Company's effective tax rate was unfavorably impacted primarily by (i) a valuation allowance against interest deduction deferred tax assets, partially offset by (ii) the mix of income in lower tax jurisdictions. During the second quarter of fiscal 2019, the Company's effective tax rate on its income before income taxes from continuing operations of 43.3% was unfavorably impacted primarily by (i) an adjustment to the one-time mandatory deemed repatriation tax liability recorded under the requirements of recent tax law and regulation changes inthe United States (the "Act") and (ii) increases in unrecognized tax benefits, partially offset by (iii) the mix of income in lower tax jurisdictions, and (iv) the release of valuation allowances against deferred tax assets that were deemed to be realizable. For the first six months of fiscal 2020, the Company's effective tax rate on its income before income taxes from continuing operations was a benefit of 1.8%. The effective tax rate for the first six months of fiscal 2020 was favorably impacted primarily by (i) the release of unrecognized tax benefit reserves net of settlements and (ii) the mix of income in lower tax jurisdictions, partially offset by (iii) a valuation allowance against interest deduction deferred tax assets. For the first six months of fiscal 2019, the Company's effective tax rate on its income before income taxes from continuing operations of 33.1% was unfavorably impacted primarily by (i) an adjustment to the one-time mandatory deemed repatriation tax liability recorded under the requirements of the Act and (ii) increases in unrecognized tax benefits, partially offset by (iii) an adjustment to the provisional deferred tax impacts of the Act, (iv) the mix of income in lower tax jurisdictions, and (v) the release of valuation allowances against deferred tax assets that were deemed to be realizable.
See Note 8 "Income taxes" to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q.
Loss from Discontinued Operations
Loss from discontinued operations was
Loss from discontinued operations was
Net Income As a result of the factors described in the preceding sections of this MD&A, the Company's net income for the second quarter of fiscal 2020 was$3.7 million , or$0.04 per share on a diluted basis, as compared with$36.4 million , or$0.33 per share on a diluted basis, in the second quarter of fiscal 2019. As a result of the factors described in the preceding sections of this MD&A, the Company's net income for the first six months of fiscal 2020 was$45.4 million , or$0.44 per share on a diluted basis, as compared with$120.1 million , or$1.05 per share on a diluted basis, in the first six months of fiscal 2019. 26 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash Flow
Cash Flow from Operating Activities
During the first six months of fiscal 2020, the Company generated$344.2 million of cash flow from operations for continuing operations compared to$12.8 million of cash used in the first six months of fiscal 2019. These operating cash flows were comprised of: (i) cash flow generated from net income from continuing operations, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expenses, deferred income taxes, stock-based compensation expense, amortization of operating lease assets and other non-cash items (including provisions for doubtful accounts and net periodic pension costs) and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents. Cash generated from working capital and other was$155.2 million during the first six months of fiscal 2020, including decreases in accounts receivable of$185.6 million and inventories of$94.2 million , offset by decreases in accounts payable of$52.7 million and accrued expenses and other of$71.9 million . Comparatively, cash used for working capital and other was$361.8 million during the first six months of fiscal 2019, including an increase in inventories of$209.6 million and decreases in accounts payable of$205.3 million and accrued expenses and other of$140.5 million , partially offset by a decrease in accounts receivable of$193.5 million .
Cash Flow from Financing Activities
During the first six months of fiscal 2020, the Company made net repayments of$35.4 million under the Securitization Program. During the first six months of fiscal 2020, the Company paid dividends on common stock of$42.4 million and repurchased$198.6 million of common stock. During the first six months of fiscal 2019, the Company received net proceeds of$366.0 million under the Securitization Program and repaid$59.4 million from borrowings of various bank credit facilities. During the first six months of fiscal 2019, the Company paid dividends on common stock of$44.7 million and repurchased$335.4 million of common stock. Additionally, included in other, net is approximately$18.2 million of cash received from the exercises of stock options.
Cash Flow from Investing Activities
During the first six months of fiscal 2020, the Company used$44.3 million for capital expenditures primarily related to warehouse and facilities, and information technology hardware and software costs compared to$70.2 million for capital expenditures in the first six months of fiscal 2019. During the first six months of fiscal 2020, the Company used$51.5 million of cash for acquisitions, which is net of the cash acquired, compared to$62.5 million of cash for acquisitions, which is net of cash acquired in the first six months of fiscal 2019. In addition, the Company paid$13.1 million for other investing activities. During the first six months of fiscal 2019, the Company received$123.5 million of cash from investing activities - discontinued operations from the sale of the TS business. Contractual Obligations For a detailed description of the Company's long-term debt and lease commitments for the next five years and thereafter, see Long-Term Contractual Obligations appearing in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedJune 29, 2019 . With the exception of the Company's debt transactions discussed herein, there are no material changes to this information outside of normal borrowings and repayments of long-term debt and operating lease payments. The Company does not currently have any material non-cancellable commitments for capital expenditures or inventory purchases. 27 Table of Contents Financing Transactions See Note 4, "Debt" to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on financing transactions including the Credit Facility, the Securitization Program, and other outstanding debt as ofDecember 28, 2019 . The Company was in compliance with all covenants under the Credit Facility and the Securitization Program as ofDecember 28, 2019 andJune 29, 2019 . The Company has various lines of credit, financing arrangements and other forms of bank debt in theU.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of second quarter of fiscal 2020 was$2.2 million . As an alternative form of financing outside ofthe United States , the Company sells certain of its trade accounts receivable on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivable are recorded within "Interest and other financing expenses, net" and were not material. Liquidity
The Company held cash and cash equivalents of$488.8 million as ofDecember 28, 2019 , of which$423.3 million was held outsidethe United States . As ofJune 29, 2019 , the Company held cash and cash equivalents of$546.1 million , of which$476.6 million was held outside ofthe United States . As of the end of the second quarter of fiscal 2020, the Company had a combined total borrowing capacity of$1.75 billion under the Credit Facility and the Securitization Program. There were no borrowings outstanding and$3.9 million in letters of credit issued under the Credit Facility and$191.9 million in borrowings outstanding under the Securitization Program, resulting in approximately$1.52 billion of total availability as ofDecember 28, 2019 . Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in theAmericas to support desired borrowings. The Company expects to renew or replace the Securitization Program on similar terms, subject to market conditions, before its maturity inAugust 2020 . The Company expects to redeem the$300.0 million of Notes dueJune 2020 either through cash on hand or from available borrowing capacity under the Credit Facility and Securitization Program. During the second quarter and first six months of fiscal 2020, the Company had an average daily balance outstanding of approximately$41.2 million and$45.9 million , respectively, under the Credit Facility and approximately$408.6 million and$448.5 million , respectively, under the Securitization Program. During the second quarter and first six months of fiscal 2019, the Company had an average daily balance outstanding of approximately$184.0 million and$91.5 million , respectively, under the Credit Facility and approximately$256.0 million and$161.0 million , respectively, under the Securitization Program. During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company generated$948.1 million in cash flows from operating activities over the trailing four fiscal quarters endedDecember 28, 2019 from continuing operations. 28 Table of Contents
Liquidity is subject to many factors, such as normal business operations as well as general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company's control. To the extent the cash balances held in foreign locations cannot be remitted back to theU.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, capital expenditure needs and to support acquisitions. In addition, local government regulations may restrict the Company's ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company's ability to pursue its intended business strategy. Management believes that Avnet's available borrowing capacity including capacity for the non-recourse sale of trade accounts receivable and the Company's expected ability to generate operating cash flows in the future will be sufficient to meet its future liquidity needs. The Company may also issue debt or equity securities in the future and management believes the Company will have adequate access to the capital markets, if needed. Historically the Company has made, and expects to continue to make, strategic investments through acquisition activity to the extent the investments strengthen Avnet's competitive position, further its business strategies and meet management's financial return thresholds. As the Company implements operating cost savings restructuring plans, responds to current business environment challenges and pursues ways to become more efficient and cost effective, the Company also expects to use cash for restructuring, integration and other expenses. As ofDecember 28, 2019 , the Company may repurchase up to an aggregate of$505.7 million of shares of the Company's common stock through a$2.95 billion share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. The timing and actual number of shares repurchased will depend on a variety of factors such as share price, corporate and regulatory requirements, and prevailing market conditions. Additionally, the Company currently expects to pay quarterly cash dividends on shares of its common stock, subject to approval of the Board of Directors. During the second quarter of fiscal 2020, the Board of Directors approved a dividend of$0.21 per share, which resulted in$21.0 million of dividend payments during the quarter.
Recently Issued Accounting Pronouncements
See Note 1, "Basis of presentation and new accounting pronouncements" to the Company's consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements.
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