Avnet Inc. marked the first quarter of its transition to a components-only distributor by exceeding the midpoint of its expectations for the period ended October 1, 2016. Adjusted sales (including Avnet Technology Solutions) declined by 13.3 percent year-over-year to $6.04 billion. Excluding Avnet TS, sales declined by 9.3 percent to $4.17 billion.
"We took a significant step in our strategic transition as we completed the acquisition of Premier Farnell on October 17th and announced the sale of our Technology Solutions operating group to Tech Data Corporation on September 19th,” said Bill Amelio, CEO of Avnet, in a statement. “With the sale of TS, we will be singularly focused on leveraging EM's design and supply chain services with Premier Farnell's digital platform to offer the broadest suite of products and services to support customers at every stage of the product lifecycle."
By all accounts, the distributor's ERP glitches are now in the rearview mirror and its business has returned to pre-disruption levels. In September, Avnet's rollout of SAP in the Americas halted its online business for six days. Gerry Fay, Avnet Electronics Marketing President, Global, told analysts Avnet did not lose market share or any major customers in the Americas and the company intends to invest in additional improvements to its ERP systems. With the acquisition of Premier Farnell now closed, the company expects to dive into the integration of the largely catalog business with an eye toward operational efficiency. Going forward, Avnet expects to realize $70 million to $80 million of synergies with the Premier Farnell acquisition.
Avnet also expects Premier Farnell’s higher-margin components business to bolster FY 2017. The small-volume high-mix sales that Premier Farnell specializes in typically command higher per-unit prices and gross profit margins than volume sales. Although Avnet management declined to be specific, gross margins at Premier Farnell are expected to improve through the December quarter and executives expect the company will further benefit from a stable management structure. Premier Farnell’s Americas business, Newark element14, has averaged a new president every two years for the past decade.
Newark element 14, however, has developed a robust digital platform that will complement Avnet's supply-chain efforts. "Just as technology has impacted many areas of commerce, it is changing how our customer's want to interact from design through production,” Amelio said. “As engineers do more of their research online, we are confident that the combination of EM and Premier Farnell will allow us to reach a broader base of customers earlier in the design cycle with a much lower cost to serve." Premier Farnell will bring 240 million registered users to Avnet through its element14 engineering community. Although Avnet has yet to estimate how many of these users represent customers who purchase components, Avnet is poised to service them immediately when they choose to buy, said Fay.
However, Avnet and other distributors may be losing out on some design-related sales as suppliers take these efforts in-house. Component makers reward distributors for getting their parts designed in to an end-product – a program known as design-wins. Distributors generally retain customers generated through a design-win. Suppliers such as Texas Instruments have now opted to reach out to designers directly, impacting distribution significantly. “Whenever we see one supplier change their program in a negative way, other suppliers step in to take advantage of that gap,” Fay told analysts. Additionally, he said, with Avnet’s exclusive focus on components, the company is well-positioned to benefit from supplier consolidation. (See: Qualcomm to pay $47B for NXP; lists Rationale for Semi's Largest Deal)
For the December quarter, Avnet expects its sales to be in the range of $4.2 billion to $4.5 billion.
"At the end of October we will use approximately $180 million of our offshore cash and approximately $660 million of new debt to pay for the acquisition of Premier Farnell,” said Kevin Moriarty, CFO of Avnet. “While our borrowing levels will be temporarily elevated, once completed, we expect to use a meaningful portion of the proceeds from the sale of TS to reduce debt and return to historical credit statistics consistent with our investment grade rating. Even after paying for Premier Farnell, the proceeds from the sale of TS will allow us to maintain a strong balance sheet, fund future growth and provide excess cash that we can return to shareholders."
The TS transaction is subject to customary closing conditions and regulatory approval and is expected to close in the first half of calendar 2017. "Avnet has a long history of adapting to changes in the technology marketplace and we believe the strategic direction we are setting today will expand our growth opportunities, increase our margins and returns and generate increased shareholder value in the future,” Amelio concluded.