Avnet Reports Fourth Quarter and Fiscal 2019 Financial Results

Quarterly sales of $4.7 billion within guidance despite macroeconomic headwinds and tariffs

Fiscal year sales rose 3%, SG&A expenses were reduced by $117 million, or 6%, and cash flow from continuing operations totaled $591 million

Avnet, Inc. AVT today announced results for the fourth quarter and fiscal year ended June 29, 2019.

Fiscal Fourth Quarter Key Financial Metrics

• Sales of $4.7 billion, which were in line with guidance, declined 7.5% from a year ago and 0.4% from the prior quarter. Sales guidance for the fiscal fourth quarter anticipated lower-than-historical seasonality and emerging macroeconomic headwinds across all geographies.
• GAAP diluted loss per share from continuing operations, which includes $137 million of goodwill impairment expense, totaled $0.33; on an adjusted basis, diluted earnings per share was $0.95.
• GAAP operating margin of (0.6)%, adjusted operating margin of 3.3%.
• Selling, general and administrative (SG&A) expenses declined $40.6 million, or 8.1%, over the prior year quarter and benefited from the acceleration of planned cost optimization actions and a disciplined approach to spending while prioritizing investments to drive growth.
• Cash flow from operations totaled $335 million, up sequentially from $269 million in the fiscal third quarter.
• Returned $138 million to shareholders with $117 million in stock buybacks and dividends totaling $21 million.
• Reduced revolving debt by $354 million with net debt of $1.2 billion at the end of the quarter.
• Recorded a goodwill impairment totaling $137 million related to the Electronic Components operating group as a result of the declining macroeconomic environment and business outlook.
• For the fiscal year ended June 29, 2019, Avnet generated cash flow from continuing operations totaling $591 million, repurchased nearly 13 million shares (more than 10%) of Avnet stock and reduced SG&A expenses by $117 million, or 6%, compared to a year ago.

CEO Commentary

"Avnet continued to execute well in our fiscal fourth quarter despite rapidly changing market conditions," said Avnet CEO Bill Amelio. "We are pleased to have delivered revenues within our target range. We did see margin pressure that was greater than anticipated due to mix and the softening of customer demand, which were exacerbated by global trade tensions and associated tariffs. We remain committed to the multi-pronged strategy we laid out at our 2018 Investor Day, which regardless of market fluctuations, promises to deliver superior service, innovation and support to our customers, suppliers and partners, as well as enhance value for our shareholders long term."

Key Financial Metrics

($ in millions, except per share data)

CFO Commentary

"During the fourth fiscal quarter, we generated strong operating cash flow of $335 million and put the cash to work repurchasing stock and paying a dividend, in accordance with our capital allocation strategy," stated Tom Liguori, Avnet Chief Financial Officer. "As we continue to monitor the prevailing market conditions, including current inventory corrections, we have pulled forward our three year $245 million cost reduction plan by accelerating $50 million of annual savings and efficiency improvements to be completed by the end of the first quarter of fiscal 2020, while still making investments in key growth areas including IoT and Farnell."

Additional Fourth Quarter Fiscal 2019 Highlights and Key Developments

• IoT pipeline rose 5% quarter over quarter to $630 million, and continues to expand to new markets including retail and healthcare.
• Avnet's distribution center and warehouse in Chandler, Arizona became an authorized Foreign Trade Zone (FTZ) increasing global logistics efficiency, improving cash flow, reducing customs related fees, and mitigating potential exposure from punitive tariffs that may be imposed on imports.
• Farnell announced the launch of the new Raspberry Pi 4 Model B Computer, the most powerful Raspberry Pi model ever made.
• Avnet's community, Hackster.io reached 1 million members, bringing Avnet's total community members, when combined with element14, to 1.6 million.
• At Mobile World Congress Shanghai, Avnet showcased key parts of its end-to-end IoT solution including the highly scalable IoTConnect cloud-based software platform. We also highlighted our IoT connectivity solutions, all of which provide greater security while affording flexible cellular connectivity.
• Farnell added more than 159,000 SKUs to its e-commerce site, providing customers access to a wider breadth of technology and products.

Awards and Notable Recognition Received During the Quarter

• Avnet Silica received the Global Partner of the Year award from Xilinx, and was named 2018 EMEA Distributor of the Year from ON Semi.
• Avnet Integrated was recognized as Supplier of the Year by GIRA and received the Supplier Appreciation and Dedicated Support award from Avaya.
• Avnet Japan was named Microsoft's FY19 Distributor MVP.
• Avnet Abacus was named EMEA Distributor of the Year by both TE Connectivity and Molex.
• NXP recognized Avnet Asia for delivering the Best Performance in Demand Creation.
• Recognizing Avnet's supply chain expertise and pioneering implementation of advanced digital technologies and processes, Supply & Demand Chain Executive magazine selected Avnet as a 2019 SDCE 100 Award recipient.
• Farnell received the Gold award for Best Global Performance from TDK Epcos, and the Outstanding Performance award from Neutrik.

Outlook for the First Quarter of Fiscal 2020 Ending on September 28, 2019

Avnet's first quarter fiscal 2020 guidance reflects a sequential decline in sales in the Americas and EMEA regions and stable business trends in Asia, and continued pricing pressure in all businesses. It also reflects a full quarter of industry slowing, compared with a partial quarter of slowing in the immediately preceding quarter (4QFY19).

The above guidance is based upon market conditions existing as of today, and excludes any acquisitions, results of discontinued operations, amortization of intangibles, accelerated depreciation, any potential restructuring, integration, and other expenses and certain income tax adjustments including certain impacts of the recent tax law changes in the U.S. The above guidance also excludes any potential impact from recently announced U.S. tariffs on certain goods imported from China. The above guidance assumes 104 million average diluted shares outstanding and average U.S. Dollar to Euro and GBP currency exchange rates are as shown below:

Today's Conference Call and Webcast Details

Avnet will host a quarterly teleconference and webcast today at 1:30 p.m. PDT/4:30 p.m. EDT to discuss the financial results and provide a corporate update. To participate in the live call, dial 877-407-8112 or 201-689-8840. To access the slides, visit Avnet's Investor Relations web page at: https://ir.avnet.com/. A replay of the conference call will be available for 30 days, through September 9 at 5:00 p.m. EDT, and can be accessed by dialing: 877-660-6853 or 201-612-7415 and using Conference ID: 13692882. The live webcast will be available for 90 days.

Forward-Looking Statements

This document contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management's current expectations and are subject to uncertainty and changes in facts and circumstances. The forward-looking statements herein include statements addressing future financial and operating results of Avnet and may include words such as "will," "anticipate," "intend," "estimate," "forecast," "expect," "feel," "believe," "should," and other words and terms of similar meaning in connection with any discussions of future operating or financial performance, business prospects or market conditions. Actual results may differ materially from the expectations contained in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: Avnet's ability to retain and grow market share and to generate additional cash flow, risks associated with any acquisition activities and the successful integration of acquired companies, implementing and maintaining IT systems, supplier losses and changes to supplier programs, an industry down-cycle in electronic components including semiconductors, declines in sales, changes in business conditions and the economy in general, changes in market demand and pricing pressures, any material changes in the allocation of product or price discounts by suppliers, and other competitive and/or regulatory factors affecting the businesses of Avnet generally.

More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission, including Avnet's reports on Form 10-K, Form 10-Q and Form 8-K. Except as required by law, Avnet is under no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

About Avnet

Avnet is a global technology solutions provider with an extensive ecosystem delivering design, product, marketing and supply chain expertise for customers at every stage of the product lifecycle. We transform ideas into intelligent solutions, reducing the time, cost and complexities of bringing products to market. For nearly a century, Avnet has helped its customers and suppliers around the world realize the transformative possibilities of technology. Learn more about Avnet at www.avnet.com. (AVT_IR)

Non-GAAP Financial Information

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the United States ("GAAP"), the Company also discloses certain non-GAAP financial information including (i) adjusted operating income, (ii) adjusted operating expenses, (iii) adjusted other income (expense), (iv) adjusted income tax expense, (v) adjusted income from continuing operations, (vi) adjusted diluted earnings per share from continuing operations, and (vii) sales adjusted for the impact of acquisitions and other items (as defined in the Organic Sales section of this document).

There are also references to the impact of foreign currency in the discussion of the Company's results of operations. When the U.S. Dollar strengthens and the stronger exchange rates of the current year are used to translate the results of operations of Avnet's subsidiaries denominated in foreign currencies, the resulting impact is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens and the weaker exchange rates of the current year are used to translate the results of operations of Avnet's subsidiaries denominated in foreign currencies, the resulting impact is an increase in U.S. Dollars of reported results. In the discussion of the Company's results of operations, results excluding this impact are referred to as "constant currency." Management believes organic sales and sales in constant currency are useful measures for evaluating current period performance as compared with prior periods and for understanding underlying trends. In order to determine the translation impact of changes in foreign currency exchange rates on sales, income or expense items for subsidiaries reporting in currencies other than the U.S. Dollar, the Company adjusts the average exchange rates used in current periods to be consistent with the average exchange rates in effect during the comparative period.

Management believes that operating income and operating expenses adjusted for restructuring, integration and other expenses, goodwill impairment expense and amortization of acquired intangible assets and other, are useful measures to help investors better assess and understand the Company's operating performance. This is especially the case when comparing results with previous periods or forecasting performance for future periods, primarily because management views the excluded items to be outside of Avnet's normal operating results or non-cash in nature. Management analyzes operating income and operating expenses without the impact of these items as well as other income (expense) excluding certain amounts as an indicator of ongoing margin performance and underlying trends in the business. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. Management measures operating income for our reportable segments excluding restructuring, integration and other expenses, goodwill impairment expense and amortization of acquired intangible assets and other.

Additional non-GAAP metrics management uses is adjusted operating income margin, which is defined as adjusted operating income (as defined above) divided by sales.

Management also believes income tax expense, income from continuing operations and diluted earnings per share from continuing operations adjusted for the impact of the items described above and certain items impacting other income (expense) and income tax expense are useful to investors because they provide a measure of the Company's net profitability on a more comparable basis to historical periods and provide a more meaningful basis for forecasting future performance. Adjustments to income tax expense and the effective income tax rate include the effect of changes in tax laws including recent tax law changes in the U.S., changes in valuation allowances and unrecognized tax benefits, income tax audit settlements and adjustments to the adjusted interim effective tax rate based upon the expected annual adjusted effective tax rate. Additionally, because of management's focus on generating shareholder value, of which net profitability is a primary driver, management believes income from continuing operations and diluted earnings per share from continuing operations excluding the impact of these items provides an important measure of the Company's net profitability for the investing public.

Any analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP. All amounts below relate to Avnet's continuing operations.

Organic Sales

Organic sales is defined as sales adjusted for the impact of significant acquisitions, divestitures and other items by adjusting Avnet's prior and current (if necessary) periods to include the sales of acquired businesses and exclude the sales of divested businesses as if the acquisitions and divestitures had occurred at the beginning of the earliest period presented. Organic sales is measured on a sales from continuing operations basis. Organic sales in constant currency is defined as organic sales (as defined above) excluding the impact of changes in foreign currency exchange rates.

The following tables present reported and organic sales growth rates for the fourth quarter and full year of fiscal 2019 compared to fiscal 2018.

Sales from suppliers lost as a result of supplier channel changes were $2.3 million, $0.5 million and $3.3 million in the fourth quarter of fiscal 2018 for the Americas, EMEA and Asia regions, respectively.

Sales from suppliers lost as a result of supplier channel changes were $36.8 million, $45.1 million and $45.8 million in fiscal 2018 for the Americas, EMEA and Asia regions, respectively.

Historical Segment Financial Information