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Avnet (AVT) Q1 Earnings Beat, Revenues Miss; Provides View

Avnet Inc.AVT reported mixed first-quarter fiscal 2017 results wherein its earnings surpassed the Zacks Consensus Estimate but revenues missed the same. However, the company witnessed a year-over-year decline on both fronts.

Avnet reported first-quarter adjusted earnings of 91 cents per share, beating the Zacks Consensus Estimate of 90 cents. However, reported earnings were lower than $1.12 per share earned in the year-ago quarter, representing a decline of approximately 18.8%. On a GAAP basis too, earnings plunged from 96 cents to 53 cents.

Before delving into the financial results, it should be noted that in the past few months, Avnet has been taking major restructuring steps to streamline its business. It intends to focus on high growth businesses only and divest low profit or loss making businesses.

In doing so, the company has already entered into an agreement to sell its troubled Technology Solution (TS) business to Tech Data Corporation TECD . The cash-stock deal is valued at $2.6 billion.

Owing to the pending sale of the TS business, Avnet has decided to report it as discontinued operation beginning with the first quarter of fiscal 2017.

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Quarter Details

The company's quarterly adjusted revenues came in at $6.040 billion while the Zacks Consensus Estimate was pegged at $6.121 billion. The figure also declined 13.3% on a year-over-year basis. Moreover, reported revenues were near the low end of management's guidance of $5.80 billion to $6.40 billion (mid-point $6.10 billion).

The year-over-year decline was mainly due to an unfavorable comparison period in the year-ago quarter. The company revealed that the first quarter of fiscal 2016 had an extra week of sales, which resulted in an estimated $525 million impact on adjusted sales. Excluding the said impact, Avnet's organic revenue declined 6.9% in constant currency.

Segment-wise, revenues from its continued operation Electronics Marketing (EM) dropped 9.3% year over year to $4.173 billion mainly due to the impact of an extra week in the year-ago quarter and unfavorable foreign currency exchange rate. In constant currency, sales at the segment were down 3.4%. However, revenues were toward the high end of the company's guidance range of $3.9 billion to $4.2 billion.

Revenues from TS on a reported basis were down 21.2% year over year to $1.867 billion mainly due to the impact of an extra week in the year-ago quarter and unfavorable foreign currency exchange rate. In constant currency, sales at the segment fell 14.8%. Moreover, revenues were below the company's guidance range of $1.90-$2.20 billion.

Adjusted operating income tanked 19.7% from the year-ago quarter to $193.1 million owing to lower sales and unfavorable foreign exchange fluctuations. Adjusted operating margin was 3.2% compared with 3.45% in the year-ago quarter.

Adjusted net income amounted to $118.4 million, or 91 cents per share, compared with $152.9 million, or $1.12 per share, in the year-ago quarter. Adjusted net income excludes restructuring, integration and other charges, and amortization of intangible assets.

Avnet exited the quarter with cash and cash equivalents of $1.197 billion compared with $1.031 billion in the previous quarter. Long-term debt was $2.610 billion. During the first quarter, the company used $136 million of cash for operational activities.

Avnet paid a dividend of $21.7 million (17 cents per share) during the quarter. However, the company did not made any share repurchases during the quarter. At first quarter end, Avnet has $174.9 million remaining under the current share repurchase authorization program.

Guidance

The company provided its outlook for the second quarter of fiscal 2017, which only includes EM and the newly acquired Premier Farnell businesses. The company projects sales in the range of $4.20 billion to $4.5 billion.

Adjusted earnings per share are expected in the range of 69 cents to 79 cents. The tax rate is likely to be in the 23-27% band.

Our Take

Avnet posted mixed results for the first quarter of fiscal 2017, wherein the bottom line beat the Zacks Consensus Estimate while the top line missed the same. Moreover, both earnings and revenues declined on a year-over-year basis, primarily due to the impact of an extra week sales in the year-ago quarter.

AVNET Price, Consensus and EPS Surprise

AVNET Price, Consensus and EPS Surprise | AVNET Quote

Note that Avnet has been taking major restructuring steps to mainly focus on the EM business. The divestment of the Technology Solution division will allow Avnet to focus on high growth areas such as marketing electronic components and related products in the supply chain. The company intends to use its resources to make investments in embedded solutions, IoT and critical digital platforms as well as expand its footprint in newer markets.

In October, Avnet completed the much awaited acquisition of Premier Farnell plc in a total cash deal worth approximately £691 million. U.K.-based Premier Farnell is engaged in the distribution of technology products and solutions, particularly engineering solutions to the electronic system design, maintenance and repair communities.

With its business spread across Europe, North America and Asia Pacific regions, the company operates in about 36 countries. The company believes that the acquisition will strengthen its worldwide digital footprint.

In our opinion, the acquisition will strategically fit with Avnet's policy of focusing on high growth electronic component business.

Nonetheless, although Avnet has acquired over 100 small companies, it will be a challenging task for it to integrate Premier Farnell, its largest ever buyout.

Furthermore, a significant portion of Avnet's revenues comes from the sale of semiconductors, which is a cyclical industry, characterized by changes in technology and manufacturing capacity and subject to significant market upturns and downturns. Intensifying competition from Arrow Electronics Inc. ARW and Ingram Micro IM also remains a headwind.

Currently, Avnet has a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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