Avnet, Inc. Reports Second Quarter Fiscal Year 2016 Results

Q2 Fiscal 2016 Results
		SECOND QUARTERS ENDED
		January 2, 2016			December 27, 2014			Change
		$ in millions, except per share data
Sales		$	6,848.1		$	7,551.9		(9.3)	%
Constant Currency (1)								(5.1)	%
GAAP Operating Income			226.1			250.3		(9.7)	%
Adjusted Operating Income (2)			255.3			274.6		(7.0)	%
GAAP Net Income			156.0			163.7		(4.7)	%
Adjusted Net Income (2)			164.3			176.0		(6.6)	%
GAAP Diluted EPS		$	1.16		$	1.18		(1.7)	%
Adjusted Diluted EPS (2)		$	1.22		$	1.27		(3.9)	%

1. Year-over-year sales growth rate excluding the impact of changes in foreign currency exchange rates.
2. A reconciliation of non-GAAP financial measures to GAAP financial measures is presented in the Non-GAAP Financial Information section in this press release.

• Sales for the quarter ended January 2, 2016, decreased 9.3% year over year and 5.1% in constant currency to $6.85 billion, organic sales (as defined later in this release) declined 9.7% year over year and 5.5% in constant currency
• Adjusted operating income of $255.3 million decreased 7.0% year over year and adjusted operating income margin of 3.7% increased 9 basis points year over year 
• Adjusted net income of $164.3 million decreased 6.6% and adjusted diluted earnings per share of $1.22 decreased 3.9% year over year
• Adjusted diluted earnings per share was negatively impacted by approximately $0.07, or 5.5%, from the impact of changes in foreign currency exchange rates from the year ago quarter
• The Company repurchased approximately 900,000 shares during the second quarter representing an aggregate investment of $39.9 million and has invested an additional $65 million thus far in the third quarter

Rick Hamada, Chief Executive Officer, commented, “Our team stayed focused on profitability as both gross profit and adjusted operating income margins expanded year over year even as revenue came in near the low end of expectations due to weaker demand in the Americas region. This softness resulted in below seasonal sequential growth and revenue declined 5.1% year over year in constant currency. Our EMEA region continued their multi-quarter growth trend as revenue increased 3.5% year over year in constant currency led by continued strength in our Electronics Marketing (EM) business. The focus on profitable growth and continued portfolio management at Technology Solutions (TS) helped drive enterprise gross profit margin up 27 basis points year over year. This improvement in gross profit margin and continued expense reductions were offset by the translation impact of the stronger U.S. Dollar as operating income declined 7% year over year in reported dollars and 0.8% in constant currency.  While economic indicators suggest a slower growth environment as we enter calendar 2016, we continue to invest in our organic growth initiatives including Internet of Things, embedded solutions, and third platform technologies. Finally, given our strong cash flow and disciplined share repurchase program, we are taking advantage of the current market pullback to increase the investment in our equity."

Avnet Electronics Marketing Results

1. Year-over-year sales growth rate excluding the impact of changes in foreign currency exchange rates.

• Sales decreased 3.4% in constant currency and reported sales decreased 7.2% year over year to $4.11 billion
• Operating income decreased 9.1% year over year to $174.0 million and operating income margin decreased 9 basis points as strength in the EMEA region was offset by weakness in Americas and Asia
• Working capital (defined as receivables plus inventories less accounts payables) was essentially flat sequentially and inventory declined 5.6% from the September quarter

Mr. Hamada added, “In our December quarter, EM’s revenue was at the low end of expectations due to slower than expected sequential growth in our high volume supply chain engagements in Asia and weaker demand in industrial markets in our Americas region. As a result, revenue declined 7.6% sequentially in constant currency (1% excluding the extra week in our September quarter) and 3.4% year over year.  Year-over-year declines in our Asia and Americas regions were partially offset by another strong quarter in our EMEA region where revenue grew 7.5% in constant currency. Our EMEA team leveraged their multi-quarter trend of organic growth into improved profitability as operating income grew nearly twice as fast as revenue in constant currency and operating income margin expanded year over year for the seventh consecutive quarter. Despite this performance in EMEA, EM’s operating income declined 9.1% from the year ago quarter driven by the declines in the other regions and the translation impact of the stronger U.S. Dollar. Our book to bill ratio of 0.98 to 1.0 finished below parity for the third consecutive quarter. In this environment of slower growth and mixed economic signals, we will continue to focus on aligning our resources with current market conditions.”

1. Year-over-year sales growth rate excluding the impact of changes in foreign currency exchange rates.

• Reported sales decreased 7.6% in constant currency and reported sales decreased 12.3% year over year to $2.73 billion, organic sales declined 13.2% year over year and 8.5% in constant currency
• Operating income decreased 0.4% to $117.1 million and operating income margin increased 51 basis points year over year to 4.3%
• ROWC increased 318 basis points year over year primarily due to continued progress in EMEA and the realized benefits from portfolio actions taken in prior quarters
• At a product level, year-over-year growth in networking, software, and services was offset by a decline in storage and computing components

Mr. Hamada further added, "TS experienced a weaker than expected close in our Americas region, which led to below seasonal growth in the typically strong December quarter.  Revenue declined 12.2% year over year in our Americas region driven by declines in storage and computing components, coupled with softer demand in Latin America. This resulted in TS sequential growth of 19.6% (after adjusting for currency and the extra week in the September quarter) as compared with our typical seasonal growth of 26% to 30%. TS EMEA’s organic revenue declined 2% year over year in constant currency as 5% growth in our core business was offset by a decline in our computing components business. TS Asia’s revenue declined 23% year over year with a third of this decline related to the translation impact of the stronger U.S. Dollar. Despite this revenue decline, our ongoing portfolio and expense management had a positive impact on profitability as both gross profit and operating income margins improved year over year in all three regions.  For calendar 2015, TS’ operating income margin improved 40 basis points over calendar 2014 to 3.3%, representing meaningful progress toward our target range of 3.4% to 3.9%.  With continued momentum at TS EMEA and our investments in higher growth third platform technologies gaining traction, we expect to drive further improvements in margins and returns over time.”

Cash Flow/Dividend

• Cash generated from operations was $118.0 million in the December quarter and for the trailing twelve months cash generated from operations was $443.7 million
• Cash and cash equivalents at the end of the quarter was $916.1 million; net debt (total debt less cash and cash equivalents) was $1.29 billion
• During the past twelve months, the Company repurchased 5.7 million shares, or 4.1% of diluted shares outstanding, representing an aggregate investment of $239.6 million
• Entering the third fiscal quarter, the Company had $367.4 million remaining under the current repurchase authorization
• The Company paid a dividend of $0.17 per share or $22.4 million during the quarter

Kevin Moriarty, Chief Financial Officer, stated, “Cash flow from operations for the December quarter was approximately $118 million and $444 million for the trailing twelve months. During the quarter, we repurchased $40 million of our shares and following the recent decline in equity markets, we have invested an additional $65 million in our share repurchase program quarter to date. We still have approximately $303 million remaining in our share repurchase program and are prepared to continue to invest in our stock when it presents a compelling value. Our focus on operating efficiencies, including our Avnet Advantage initiative, contributed toward operating leverage in the first half of fiscal 2016 as adjusted operating expense as a percentage of gross profit declined 106 basis points to 68.4%, compared to the first half of fiscal 2015. We ended the quarter with approximately $916 million in cash, which when combined with our strong cash flow generation, provides ample liquidity to invest in profitable growth going forward.”

Outlook for Third Quarter of Fiscal 2016 Ending on April 2, 2016

• EM sales are expected to be in the range of $3.85 billion to $4.15 billion and TS sales are expected to be in the range of $2.15 billion to $2.45 billion
• Avnet sales are expected to be in the range of $6.0 billion to $6.6 billion.
• Adjusted diluted earnings per share is expected to be in the range of $0.93 to $1.03 per share
• The guidance assumes 134 million average diluted shares outstanding and a tax rate of 26% to 30%

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. Dollar to Euro currency exchange rate is $1.09 to €1.00. This compares with an average exchange rate of $1.13 to €1.00 in the third quarter of fiscal 2015.