Avnet Inc (AVT) Q3 2020 Earnings Call Transcript

Welcome to the Avnet Third Quarter Fiscal Year 2020 Earnings Call. I would now like to turn the floor over to Joe Burke, VP, Treasury and Investor Relations for Avnet.

Thank you, operator. Earlier this afternoon, Avnet released financial results for the third fiscal quarter of 2020. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website. Lastly, some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict, in particular, the scope and duration of the COVID-19 outbreak and its impact on global economic systems and our operations, employees, customers, and supply chain. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Bill Amelio, Avnet's CEO, and Tom Liguori, Avnet's CFO. Also, Phil Gallagher, Global President, Electronic Components joins us to participate in the Q&A session. With that, let me turn the call over to Bill Amelio.

Thank you, Joe, and thanks to everyone for joining us on our third quarter fiscal year 2020 earnings call. As we're all well aware, the whole world is dealing with the challenges brought on to us by COVID-19, and Avnet is no different. Today we'll walk you through the impact it has on our business. Our third quarter revenues and EPS were down sequentially and year-over-year. Softer demand, particularly in Asia, impacted our quarterly results, as well as softer pricing and increased costs related to the impact of COVID-19 on our logistics operations. That said, revenues in our Americas and EMEA regions increased sequentially in the third quarter, which reflects normal seasonality, as well as our focus on keeping the business running as effectively as possible over the past few months. We met the low-end of our original guidance for the quarter, which Tom will talk about a bit later in the call. Last quarter on our second quarter earnings call, we told you that despite the ongoing initial correction, we're starting to see some good signs of stabilization across key geographies. At that time, COVID-19 was still in the early days and confined to Asia. During the third quarter, as COVID-19's reach widened, we acted quickly to conserve cash and manage our debt prudently. As a result, our focus on working capital management enabled us to generate positive operating cash flow. Looking at our electronic component business, revenues and operating margins were down both sequentially and year-over-year in the March quarter. The most notable region impacting was Asia, with sales orders declining early in the quarter due to the seasonal effect of the Chinese New Year and were further affected by COVID-19. That said, we did not experience any material disruption to our upstream supply chain or incoming goods from suppliers. For the most part, our distribution centers remain operational as we implemented our business continuity plans to ensure workers' safety first and foremost and then to mitigate any business impacts. In certain areas, we had some minor disruptions due to travel restrictions and other related issues. Shipments to our customers continued, but we experienced longer lead times from new orders in certain regions and some delays due to the challenges that freight porters had with volumes and border crossing checks. There was no meaningful impact on bookings. Our book-to-bill ratio at the end of the third quarter was well above parity. We kept a close eye on the rate of bookings and backlogs to ensure the integrity and transparency of our supply chain. We continue to work diligently to confirm the orders our customers had were firm, so we could provide the best possible visibility to our supplier partners allowing them to allocate their resources appropriately. In terms of vertical market segments, as most of you know, we saw weakness in auto as plants in the United States and Europe shut down due to COVID-19. Our transportation was strong in the beginning of the quarter, but we saw a downturn at the end of the quarter. Throughout the quarter, and even today, we see continued strength in our defense and aerospace businesses, as well as medical and various parts of industrial, particularly where they are seen as essential. Although not a vertical segment necessarily, we did see strength and steadiness in our EMS segment. Overall, some operations in our electronic component business appear to be operating as business as usual during the quarter. However, it is clear that COVID-19 created a high level of uncertainty, with some recent reports referring to the possibility of advanced buying and pull-ins leading to panic buying. With that in mind, we're preparing for all scenarios including potential challenges in the next couple of quarters. Tom will provide more detail on that later. Turning to Farnell, both sales and operating income margins in the third quarter were up slightly sequentially. Farnell started shipping from its new distribution center in Europe, but progress to ramp up the new facility will be slower than initially planned due to COVID-19. During the quarter, we continued to execute our five-pronged plan that we put in place to improve Farnell’s competitiveness in the high-service model and promote long-term success. The five parts of our plans are listed here on Slide 6. We saw signs of progress from our plan in the beginning of the quarter. However, once the lockdown started into European countries like Italy and the UK, Farnell slowed down as well. Turning to IoT, investors expressed interest in our ability to scale our IoT offerings. Our new IoT partner program will allow us to do just that. Although the operating environment has changed, we signed up a number of IoT partners in the quarter, and we will update you on additional IoT developments in the months ahead. Despite the current operating environment, we continue to work on our five strategic priorities as outlined on this slide, amplifying our core distribution business, scaling our high-margin businesses, extending our digital capabilities, leveraging our ecosystem for growth, and driving continuous operational improvement. To be clear, while we are still executing on the long-term goals that we laid out previously, we've adapted our near-term priorities to respond to the COVID-19 pandemic. Overall, considering the challenge of COVID-19 and its impact on global commerce, we believe our third quarter results demonstrate the following. First, our commitment to ensuring our employees' health and safety while keeping our business running as efficiently as possible; the resilience of our business model and the strength of our counter-cyclical balance sheet; our flexibility to adapt quickly to changing market conditions, allowing us to maintain quality service levels for our customers and ongoing value for our supplier partners; our success in activating our business continuity plans. And lastly, our company's strength overall in our ability to withstand challenges and navigate market turmoil. The last point reminds us of Avnet's longevity and why our company has been able to bring technology to market for 99 years. I'm so proud of our employees across the entire company and what they've been able to do working together to collaborate with our customers and partners in the fight against COVID-19. In our press release, you will see specific examples of ways we are leveraging Avnet's end-to-end ecosystem to accelerate our customer's abilities to provide lifesaving medical solutions and increase the overall supply of medical equipment. Of course, at the forefront of it all, we are doing everything we can to ensure the safety and health of all of our employees. As we look to the macro forces at play and consider the range of economic forecasts, there is unanimous agreement that the global GDP will contract substantially in 2020. The IMF forecast that the global economy will contract 3% in 2020 and contract in the mid to high-single digits in most of the developed countries we serve. Some estimates predict that the annualized U.S. GDP will fall as much as 40% in the current quarter from a year ago. As we know, unemployment has increased at an alarming rate with 26 million people currently unemployed in the United States. This reflects a level of job loss. It is the worst our country has seen since the Great Depression. With these factors in mind, and as we look ahead, we acknowledge that the macroeconomic environment will likely have a meaningful impact on our fiscal fourth quarter financial results, across geographies and across our business units. While no one knows exactly what the extent of the global recession will be or how long the health crisis will last, we are all taking numerous steps to prepare for a significant downturn. Tom will explain in detail the actions we are taking to ensure financial stability for Avnet during the current uncertain times that we face. In closing, we're encouraged by our performance in the third quarter. Despite recent uncertainty, one key point to remember is that Avnet plays a critical part in the supply chain for our customers and our suppliers. They depend on us. And many electronic products won't get made without us. While we continue to respond to the COVID-19 pandemic and adapt our business for the challenges ahead and the opportunities, we remain confident in our long-term strategy. With that, I'll turn the call over to Tom to report on our financials for the quarter.

Thank you, Bill, and good afternoon, everyone. I hope everyone and their families are healthy and safe. Let me start by building on what Bill said about how we play a critical role in the supply chain. We supply electronic components globally, operating in 100-plus countries. We stock inventory and ship components to customers as they are needed. We're a one-stop shop for our customers' procurement staff. And by using our strong balance sheet, we provide inventory and receivables financing to our customers. All of these continue today, and they will for years to come. Therefore, as we manage through the COVID-19 crisis, our financial priorities are centered on retaining the critical internal resources and capabilities required to be an integral player in the electronics supply chain; maintaining a strong and healthy balance sheet, so that we can continue to provide financing to our customers; and ensuring the necessary liquidity and financial flexibility to run our operations, no matter the economic environment. As we review our third quarter financial performance, I will discuss these priorities and our actions to support each. Turning to Slide 11, our revenues for the third quarter were $4.3 billion and adjusted EPS was $0.38. Both our revenues and adjusted EPS were within the original guidance ranges provided during our last earnings call. While we preannounced that we would most likely fall short of guidance, our teams were able to keep our global distribution centers operating throughout the quarter and continue to support our customer needs. A lower tax rate and interest expense contributed to the EPS performance. The lower tax rate was part of our longer-term effort to work with operations and improve the geographic income mix of our business from a tax perspective as well as cost perspective. Gross margin of 12% was higher than last quarter, primarily due to a lower mix of revenues from Asia. We expected our Asia revenues to decline in the third quarter as a result of the Chinese New Year, though COVID-19 played a part as well. Adjusted operating expenses of $449 million were higher, both sequentially and over the prior year quarter, as we incurred additional costs to manage through COVID-19. This included costs and inefficiencies for new health and safety work procedures in our distribution centers, new shift patterns, as well as higher freight costs. These cost increases overshadowed lower costs in areas like travel and conferences. While it is difficult to put a precise number on the net additional costs related to COVID-19, we estimate the impact to be roughly $10 million. Our adjusted tax rate was 12.8% and benefited from a favorable mix of income. Interest expense was lower due to our improved debt position. Regarding the Texas Instruments transition, our revenues from TI in the third quarter were $401 million, flat sequentially, and a $50 million decline from a year ago. We expect to see a decline in TI revenues as we continue through the calendar year. As a result of macroeconomic impacts of COVID-19, we performed an interim test of goodwill and recorded a charge of $160 million, which includes goodwill and intangible asset impairment related to electronic components acquisitions in equity investments. The $160 million charge includes a $15 million impairment of equity investments, which is included in other expense. There were no impairments to our Farnell segment. On Slide 12, we show revenues by segment and region. Electronic components revenues of $4 billion declined 5.5% sequentially, primarily due to lower revenues in Asia as a result of the Chinese New Year and COVID-19. Sequentially, Americas and EMEA revenues increased, which reflects typical seasonality. Electronic components' operating margins were 2.1%, down slightly from 2.2% sequentially due to lower sales volume. Farnell revenues for the quarter totaled $335 million, up 1.2% sequentially. The Farnell team achieved a 7% operating margin, showing progress in operating margin improvement. Farnell began the March quarter with fairly strong demand. The demand trailed off in March and appears to be weakening in April due to COVID-19 impacts. Turning to cash flows and balance sheet on Slide 13, we continue to have a healthy balance sheet, with sufficient liquidity to support our global business operations and the working capital needs of our customers. We ended the quarter with a cash balance of $403 million and debt of $1.6 billion. Our gross debt leverage ratio was 2.8 and our net debt leverage ratio was 2.1. Our net book value per share was $37, a $2 decrease sequentially due to the impairment charge we previously discussed. Tangible book value per share remained relatively constant at $29. Recently, investors have asked us about our inventory and the quality of receivables, both key parts of our tangible book value. As of the March quarter end, we had $4 billion of working capital, including $3 billion of accounts receivable and $2.7 billion of inventory. We regularly review these valuations. As of quarter end, our receivable aging remains healthy and similar to Q2. In EMEA and Asia, we have credit assurance programs that provide some risk mitigation for receivables in those markets. Historically during a downturn, we may experience some slowdown in the timeliness of customer payments. We've not incurred significant reserves or write-downs in receivables; I attribute that to the quality of our experienced credit team. The same goes for the inventory. Our global teams focus daily on managing inventory, and we have various contractual arrangements with suppliers should our inventories become aged, obsolete or affected by changes in market prices. We ensure a healthy Avnet balance sheet by maintaining our disciplined working capital processes and performing quarterly reviews. Turning to liquidity on Slide 14. Our liquidity position remains strong. All of our businesses are focused on managing working capital and generating cash. During the calendar year 2019, we put in place improved processes, reporting, accountability, automated tools, and metrics to focus on cash generation. These actions reaped benefits in 2019 with the generation of $948 million of cash flow from operations. The processes and systems we put in place during the last year are serving us well today, as we managed our liquidity throughout the pandemic and downturn. In the third quarter, we generated $98 million of cash flow from operations. This is the sixth straight quarter of positive cash flow from operations. We used the cash to pay down $92 million of debt and returned $58 million to shareholders. Going forward, we want to remind you that we have a counter-cyclical balance sheet, meaning that when revenues decline, we collect receivables and reduce inventory purchases, both of which contribute to positive cash flow. We expect that to continue. And when revenues improve in the future, we would expect to use some of that cash to accommodate the additional working capital. Turning to Slide 15, as a management team, along with our board, we evaluated several possible economic scenarios for the future to identify and implement any actions required to ensure liquidity. As a result, we have taken the following actions. We continue to focus our businesses on managing inventories, receivables, and generating cash. We suspended our share buyback program in early March as a result of the economic uncertainties. We also paused our M&A activities and curtailed non-essential outside services and hires. We are implementing actions to manage our debt. For background, our debt maturity is spread out as shown on Slide 14. We have a $300 million note due in June, which we will redeem at the end of April. The next note does not mature until December 2021, which means we do not have another debt maturity due for the next 21 months. In addition, we have open lines of credit of $1.6 billion. Our receivable securitization line matures at the end of this summer, and we intend to renew it and it is supported by our U.S. receivables. Overall, our liquidity includes $2 billion of cash and credit facilities to fund near to medium-term operations, and our debt maturity dates are spread out over time. Turning to business outlook on Slide 16, despite COVID-19, we continue to serve the needs of our employees, suppliers, customers and business partners. We are confident in our liquidity position. Like many companies, we are unable to predict to what extent the global COVID-19 pandemic may adversely impact our businesses for the next quarter. Therefore, we are not providing guidance for the fourth quarter. The color we can provide for the fourth quarter is Greater China is operational and the region appears to be recovering from the COVID-19 outbreak. Some uncertainty remains in parts of Southeast Asia, India, and Japan. We expect to drop off in EMEA revenues. Farnell has experienced a fairly sizable downturn in revenues. The Americas region is cautious, given the continued COVID-19 cases along with government restrictions. However, we see strength in aerospace, defense and medical markets. We expect to continue to incur higher operating expenses as we managed through the government-imposed travel and commerce restrictions. These are uncertain times, but Avnet took proactive steps in the third quarter to stabilize our near-term performance and secure our liquidity. We look to continue to do so in the months ahead as we navigate the COVID-19 crisis. As Bill said, Avnet has served customers and suppliers for 99 years, and next year is our centennial anniversary, which is a huge milestone. As a management team, we're focused on keeping Avnet healthy and strong for years to come. With that, let's open the line for Q&A.

Our first question comes from Adam Tindle of Raymond James. Please proceed with your questions.

Okay, thanks. Good afternoon and I appreciate all the color by region. I want to ask about forward trends into June. I was a little bit confused by the commentary that book-to-bill was above parity at the end of Q3, but the next by the region, it sounds like a lot of negative data points. So first, maybe you could touch on where book-to-bill is now at the end of April? And as we think about the June quarter, I'm not asking for guidance here, but maybe you could just touch on what you're currently seeing in terms of a sequential decline? Just for perspective, your largest semiconductor customer was alluding to a low double-digit sequential decline into June. I'm wondering if that's kind of the level that you're at least currently seeing? Thanks.

Okay. I'll do the book-to-bill question, and I'll have Tom and Phil give a little color on the sequential moves with respect to the revenue. On book-to-bill, we're definitely over parity in every region. And we've also normalized that by given the fact that billings are down. We looked backwards at previous quarters and previous years' billings and said, where do we stand against the bookings, and where do we stand against that if we normalize the higher position that we're still above one. So there's no question that we see some level of robustness with respect to book-to-bill. And with that, I'll have Tom and Phil chime in on the revenues.

Hi, Adam. How are you today? We're not giving guidance, and a lot of it really depends on COVID-19 related events, timing of return to work, changes and restrictions. And it is still April, so a lot can change between now and then. The ranges you threw out are reasonable, but however, we're not sure exactly what will transpire in May and June. I have looked at the models that are out there. I would bring to everybody's attention that our breakeven from an EPS perspective is in the $3.7 billion to $3.8 billion range. So, if we were at that range, that’s about a $500 million reduction from the March quarter. At 12% gross margin, that's about $60 million that we'd be making up, and that's the commentary on the breakeven. That said, we will be at the end of June. It is difficult to say, what we really like is what we're seeing with the operating performance of Farnell. The operating performance and potential that we see, that we still have our projects in place for OpEx. Our cash generation seems to be working well. All I would reiterate before turning over to Phil is that, Asia remains to be stable, but we all have seen recent changes in restrictions in Singapore, India, Japan and elsewhere. The one data point that in the near-term that is concerning to us is that Farnell is the one that's seeing a fairly sizable downturn in revenues, which is part of our breakeven commentary. With that, Phil?

Thank you, Tom, and thank you, Adam. I will add a little more, but I believe Bill and Tom covered the topic well. Regarding the backlog, as Bill mentioned about the book-to-bill, we have a strict process for managing that backlog. Currently, our book-to-bills are above parity. We are also very cautious to ensure that all incoming inventory will be reintegrated into our operations. We are actively collaborating with our customers and suppliers on a daily basis and are at the center of it. As for the outlook, we are not providing specific forecasts, but Asia appears to be stable, as Bill noted. We are fully operational across Asia-Pacific and have returned to our offices in Taiwan on a limited schedule. Demand seems to be rebounding, with decent First Nation performance holding up at least through April, which is encouraging. In the Americas, as Bill and Tom described, we are cautiously optimistic. It is not where we would like it to be, but the situation is not as dire as we anticipated. Europe, on the other hand, has been more significantly affected, having faced prolonged shutdowns, especially since automotive is a major sector there. As countries begin to reopen, we are managing the situation closely, particularly in Italy and Austria, and Germany is starting to recover. The key will be how quickly they can resume manufacturing. With May and June still ahead, we hope to reactivate operations as swiftly as possible. As Tom pointed out, defense remains strong, medical is doing well, and certain parts of industrial are still performing adequately, though we are aware of some gaps, particularly in automotive transportation.

I understand. That was very informative. As a follow-up, I have a question for Tom. Given that the stock is essentially trading at tangible book value, the market seems to have a negative perception of the intangibles associated with Avnet. You mentioned that Farnell constitutes a significant part of the goodwill and there were no impairments related to Farnell during the last quarter. Moving forward, I know you indicated an anticipated significant decrease in revenue for Farnell. Can you discuss the factors influencing the impairment test in that area and your perspective on those, especially since the market appears to be bracing for another impairment? Thank you.

Yes. Thanks, Adam, for that. We're not expecting another impairment. That said, we don't know where COVID-19 will go, the testing that we did. Farnell actually has a fair amount of headroom still available, even with our current projections. I would think about it in terms of, if our operating margins were 9% or 10% or lower long-term, then Farnell would come up for possible impairment. We saw good progress since last quarter. It was only four quarters ago we were at 12% operating margins, so that's very encouraging to us. So right now, we see a fair amount of headroom for Farnell and impairment. And yes, you're right, Avnet has always traded at 1.1 times net book value and that book value today is $37. We did the test. We tried to be conservative. There were a number of smallest things that were impaired, but I think we ended up in a good position given all of the uncertainty out there. And as you can imagine, these are fully vetted with auditors, and I know many companies are going through the same type of exercise. Does that help, Adam?

It does. And one last clarification, I know you mentioned some capital allocation priority changes. I think you're maintaining the dividend, correct me if I'm wrong. And tell me what that says about your feelings about cash flow in the next quarter and beyond? Thanks.

Yes. We're going to make a decision on the dividend in May. The dividend is not a huge cash outlay; it's around $21 million a quarter. That said, let's see where the macro environment is in a few quarters down the road. I'm sorry, now a few weeks down the road to get to mid-May, but we'll make a decision on that. Again, it's not a large outlay.

I would like to add to that, Adam. We have paused the buyback, which represents a much larger expense. We believe that maintaining the dividends still communicates our confidence in the company. As Tom mentioned, if the situation with COVID worsens, all options remain available, but at this point, we do not perceive that as a threat.

Thank you, Adam.

Our next questions come from the line of Ruplu Bhattacharya of Bank of America. Please proceed with your questions.

Hi, thanks for taking my questions. I think Tom you said that the additional cost associated with COVID-19 was about $10 million in the quarter. How should we think about those additional costs trending in the fourth quarter? And in general, how should we think about OpEx as a percent of sales? Are there any incremental cost actions you can take to lower OpEx? Thanks.

Sure. Thanks, Ruplu. First of all, that $10 million is related to things like freight, which is a near-term issue for us, personal protective gear. All of our distribution centers, they've done a great job of operating, continue to operate, but they're working within social distancing work rules, cleaning, disinfecting. So this June quarter, we would expect most of those to continue, probably start to subside through the quarter. Meaning things like, freight costs we fully anticipate to start returning to normal. And I think as our distribution centers get familiar with working with the new rules, their productivity will go up. For the June quarter, I would plan on it being at the same level or slightly below our March quarter. Seeing OpEx as a percent of revenue, you have to forecast revenues. So let's leave that to the side. We historically talked about OpEx in the mid $430 million. I'm assuming that revenue stays within a reasonable range. I think that's what's a good number to go with going forward. On our OpEx, we continue to work with the $245 million cost reduction plan; that's going well. We've talked about the defined projects in that to fully achieve that. Right now, we're about $190 million of the $245 million achieved. We believe we'll end up at $245 million of savings or probably more. The one thing I would say is that those are going to take a little longer, meaning in the three to six months longer timeframe. The reason is that some of those savings are based on moving various functions either to a lower cost country or an outsourced type mode. And with our new work restrictions and people working at home, the knowledge transfer takes a little longer. So, near-term, June is going to be very similar to March; once we get the additional costs associated with COVID-19 normalized, we'll be in the $430 million, $435 million per quarter. And over the next 18 to 24 months, you'll see the rest of that $245 million plan come to fruition.

Okay. Thanks for the details on that, Tom. Just for my follow-up, you talked about the counter-cyclical balance sheet. If I look back to fiscal 2009, I think you guys generated about $1 billion in free cash flow. Any idea if that level of free cash flow makes sense for the fiscal year? And in terms of your uses of cash, you paid down some debt, you delivered this quarter. Should we expect that delevering to continue as we go forward in the next couple of quarters? Thanks.

Sure. So as far as cash flow and comparing it to 2008, 2009, the model is just similar. So, I think in 2008, 2009 our revenues declined 20% to 30%, and it's quite substantial. At that level of decline, yes, we would generate hundreds of millions if not $1 billion of cash flow. I'm sorry, what was the second part of the question?

And in terms of delevering the balance sheet.

Delevering. Yes. So, right now, our focus is on the balance sheet and really liquidity. So, I would anticipate in June our debt to be the same or lower. And one thing to keep in mind, to the extent we generated a lot of cash because of a slowdown in macro, a good part of it will go back into the business once the recovery comes. Thank you, Ruplu.

Thank you. Thanks for the details.

Our next questions come from the line of Will Stein of SunTrust. Please proceed with your questions.

Great. Thanks for taking my question. Many companies and Avnet is falling in this category of posting reasonable results for Q1, and highlighting a reasonably strong bookings, but sort of withdrawing an outlook or not providing an outlook for Q2. As it stands now when you look at that backlog and you think about revenue for Q2, is the concern more that you think perhaps some of the orders could get canceled or pushed? Or is the concern instead that you feel comfortable with the backlog, but the pace of turns business would be slower than typically? And then as a follow-up that's related to this, I think typical revenue is up a couple percentage points sequentially. Is there any chance you think revenue could be flat in the quarter?

Yes, there's a lot to unpack. I'll give it a try, and then my teammates will contribute too. First, let's talk about the strength of the backlog, which Phil mentioned earlier. We have implemented a thorough management system that allows us to analyze individual customer booking and billing patterns. This enables us to identify discrepancies between bookings and billings for any given quarter and to look back at previous quarters and years to spot any anomalies. We can identify outliers and follow up with customers to clarify whether they have legitimate bookings or if they're making additional bookings that would prompt us to implement stricter terms. This process is helping us refine the backlog to ensure it is in good health. It's important for our suppliers, who are operating at only 40% capacity, to receive solid orders they can rely on. These orders may be tied to actual customer demand or critical devices for customers, which is crucial for everyone in the supply chain. Regarding the outlook for orders, we do have concerns that worsening COVID conditions could lead to scenarios like we saw in the automotive sector, where production ceased and end-user demand dropped rapidly. This decline happened almost overnight in automotive and could potentially occur in our other sectors such as industrial, communication, and consumer. This uncertainty regarding future demand is what we are currently focused on. At the moment, our book-to-bill ratio appears to be healthy. I’ll pass it to Tom.

Thanks, Bill. I would just add, Will, that today is April 27. There is a big difference between today and March 27. And maybe in a different situation, May 27, it could be much better or it could be much worse. And so that's really what we're saying by not giving guidance. Phil, anything to add? Go ahead.

Yes, Tom. I would just say, I think, again, you guys said it well. And it's the question, and we're using, frankly, we talked about accountability in the backlog, accountability of the customer, just really we're getting by being responsible. And, we need to be good responsible partners with our suppliers as they some of them have some limited capacity as you guys all know. And to be sure that the products that they were asking for, based on our customer backlog they really need. And so we're working upstream with our suppliers and downstream every day with our customers. And so we just say, everybody needs to be responsible right now. This is something like none of us have seen before.

I would add to that Will, what Phil said. We're having weekly calls with each of the businesses, Phil is leading them up. It's very impressive and comforting to look at what the sales and supply chain people are doing in each one of our businesses of staying in contact with the customers, checking what you brought up, is that order real or could that go away in May in June, and adjusting our services to ensure our cash flow. So, it's one of them joked that this message will transpire in five seconds, back to the Mission Possible show, which I feel is very humorous, but that's really what it is. It's every day, we're getting new orders, new changes are made, new demand signals, and just an uncertain time. But everybody's on top of it managing. And regardless, we believe we'll have a good cash story and keep the company liquid and keep our balance sheet strong. Thanks, Will.

Thanks.

Thank you.

Our next questions come from the line of Matt Sheerin of Stifel. Please proceed with your question.

Yes, thank you. I wanted to ask about the Texas Instruments revenue run-rate. It sounds like that $400 million was higher than you had expected. I think you expected it to be down from last quarter. So, could you give us an update on how you see that transitioning over the next two to three quarters? And I know also, Phil, you've talked about backfilling that lost revenue with other suppliers and other share gains. Can you update us on that? And is this current environment making it more difficult to win incremental business now?

Yes. So, I’ll start with that one, Matt. With respect to TI, there is of course a lot of questions about the timing of the transition. So here is what you can expect is still we’re on track for seeing it completed by December 31. Although, as we pointed out, we would expect it to see a little bit more of a decline, most likely some impact with COVID-19. So, we’re especially flat sequentially. But we continue with our plan on how we’re going to take or replace that revenue with, in fact, richer margin other suppliers' products. We're doing pin-to-pin replacements wherever possible. We've got some share shifts going on between supplier lines and where customers want to make sure they stay balanced with our distributors. And of course, demand creation which takes a little bit longer to get a design win that leads into revenue. But those three are active in place, and we have a really tight management system across the world to make sure we can maximize on the results associated with that.

Yes. Great job, Bill, thanks. And Matt, good to hear from you, thanks for the question. Yes, this is another one of those rigorous processes we have in place. We're meeting regularly with the regions down to the country level. We know every single customer, every single part, and the DP dollar generation by customer by part. So, that's the detail what we're doing. And Bill just pointed out as pin for pin, new generation designs and share shift, okay, internally customer. We've a tracking process. And I'd say right now we're satisfied, and we're pleased, right, but we're satisfied with where we are in the process against the timeline to replace that business. Yes, I think we're probably pleasantly surprised that the decline really hasn't come sequentially. We're planning on it, by the end of the calendar year, but I think it's attributed to, frankly, if I could put a plug in for our sales and marketing team and our customer engagement, customers obviously aren't really looking to move that business too fast. And I have to complement the team, but we will be planning on it by the end of December.

Are you expecting that to be down in line with the overall business or a little bit more because that might happen or just no visibility?

Well, we're planning that. That definitely shows go ahead though.

I'll just say this at this juncture, I would plan it linearly to the end of the year, but you can never tell if it's going to extend or not. I mean, because this, it's not as we're seeing. It's not an easy thing to move it quickly, but our plan is that every quarter we reassess it, but we're essentially putting the line in place and said it's going to be gone by the end of the year.

Okay. Thank you.

We're modeling. So financially, that's how we're modeling it, yes.

Okay. Thanks very much.

Thanks, Matt.

Our next questions come from the line of Steven Fox of Fox Advisors. Please proceed with your questions.

Thanks for taking my question. Good afternoon. I guess first question, I was just curious if you guys could provide a little bit more insight or color into the receivables, collectable question that you brought up earlier. I know there's differences between collecting from a small business versus collecting from a large EMS provider. Can you talk about how you're supporting some of the smaller customers in terms of credit terms, et cetera? And then I had a follow-up question.

Sure, I'll start and then Tom can provide additional details. The good news is we've experienced cycles like this before, and we did not see a significant increase in bad debt from our customers, which is a positive indicator. We believe this trend may continue in the current situation as well. While we have some insurance coverage globally, it may not be sufficient if conditions worsen. However, we feel comfortable with the current level of receivables and conduct regular audits to ensure they meet our accounting standards. Tom?

Thanks, Bill. No change in our receivables aging quarter-to-quarter, so that's a very good sign.

Okay. I appreciate that color. And then just, I'm getting back to one of your original comments, in terms of potential panic buying reports. I mean, like, is there a certain area that maybe you are more suspect of in terms of orders you're seeing or certain region? I mean, what is it that you're most on the lookout for in terms of maybe over buying right now?

I would say the following on it. You got to think about that maybe on commodities, the hot commodities that you're considering whether they're SSDs, NANDs, DRAMs. So memory is one where you could have some level of concern. But by focusing on individual customers and individual customer behavior, we're able to fare it out pretty quickly where we think there could be some double ordering or "panic buying" that's occurring. And then we go discuss with the customer and we put tougher terms in place when we believe that's the case. And that helps essentially normalize the demand profile we have assure ourselves that we're not going to be caught with orders that aren't going to be fulfilled.

Right. But your general viewpoint right now is broadly speaking, you're not seeing that.

Yes. If you look at cancellation rates, they're not abnormal at this juncture either. So that's another good indicator. It tells you that we've got a pretty solid backlog.

Our next questions come from the line of Sean Harrison of Loop Capital. Please proceed with your questions.

Hi, afternoon everybody. I guess Bill or Phil, could you remind us kind of what percentage of your sales are automotive versus aerospace defense kind of medical given kind of divergent trends you're seeing?

Sure. In terms of our key revenue segments, EMS consistently makes up about 30% to 35% of our business. Industrial and transportation account for nearly 30%, and the remainder is from other sectors, which includes aerospace and defense. This gives you a sense of the major revenue streams we have.

Okay. There's a follow-up. I just want to address the weakness at Farnell. Is that mainly due to its stronger position in Europe? Are you noticing any changes in design activity within the business, or is there another factor contributing to the current weakness at Farnell?

Well, a couple of things. Farnell at the beginning of the quarter was off to a good, really solid start. And we finished really strong from the operating income point of view, demonstrating the fact that our SKU expansion that we're doing, the work that we're doing on our user experience, the web speed, the marketing dollars that we're spending is all effectively starting to work. And then we went into the latter part of the quarter when the UK, Italy and others in the EMEA market went dark, that created an enormous problem for us, as far as things slowing down. And that's essentially where we saw it. As far as the design activity goes, no, we're not seeing anything different with respect to that. And I think as people come start going back to work again and country start up opening back up again, we'll hopeful that that turns back around again. But it's still a wild card.

I would just say, we've got a lot of confidence in our Farnell position right now. And to Bill's point, right around March 17, frankly, we started to see that decline, which is where you started to see the acceleration to your point in Europe, okay and UK and whatnot where. Yes, that's their strongest region by a good shot.

Thank you, Sean.

Our next questions come from the line of Tim Yang of Citi. Please proceed with your questions.

Hi. Thanks for taking the question. You mentioned weakness Asia in March quarter, I think it was down roughly 4% year-over-year. But one of your largest competitor WPG reported double-digit year-over-year growth for the March quarter. Can you provide some color on a disconnect between your performance versus WPG?

Phil, do you want to take a shot at that one?

Yes, I'll take a shot at that one. And of course, we don't know exactly all the details about WPG. They do play in a different market than we play particularly in processors, memory. They have a very substantial size business in that space and tends to be much lower margin business and we just don't play there. So as far as the share goes in our lines that we manage as far as the basket, in Asia we're holding our own plus some. So, I'm going to estimate that it's a commodity situation.

Got it. So it's not a share shift, it's more like just a change in the marketing mix.

Yes. I think it could be related to the end market mix concerning where the processors and memory products are used, which is not a significant area for us.

Can you discuss the demand linking average during the quarter? You mentioned in early March that you would not meet the March quarter guidance, but you still achieved the midpoint of the original guidance on the revenue side. Did you see strong demand in March that contributed to that?

I'm sorry. Can you repeat the last part of that question?

So is that just the performance of the month of March that drives the upside so that you can actually achieve the midpoint or the guidance range? But in the beginning of the March, you actually mentioned that you cannot meet the guidance.

Well, when we tell we could not meet the guidance, it looked like things are going to fall off faster than they did. And we were able to end up doing better than we expected. And as you notice, when you look at some of this operationally, we also had some advantages on tax. So that helped us along as well. But we were really close to that bottom end, and that's one of the reasons why we did the preannouncement.

Got you. Okay. Thank you.

Our next questions come from the line of Nik Todorov of Longbow Research. Please proceed with your questions.

Thanks. Good afternoon, gentlemen. Given the some of the indications of extended lead times, can you talk about the pricing outlook? I know that matters mostly for Farnell and that thing is going to get hit from the top line perspective. But is that a potential area of near-term benefit here over the next couple of quarters? Can talk about the pricing please?

Of course, when lead times start to extend, that's always an opportunity to see some ASPs expand as well. We haven't seen that occurring yet, but of course, as time goes on and the situation gets tighter and tighter you will start to see that occur.

Okay. And as a follow-up, you mentioned the strength in aerospace multiple times. Typically, you think about the production cuts from the major aerospace companies. Is there anything different in your exposure that allows you to see strength in that business? And do you expect to see strength going forward?

Yes. I think we made that comment. We're talking more about defense than we are actually aerospace, because clearly with planes not flying, that has an impact on aerospace. But we're not seeing that in defense. And also, as you'd imagine, medical is up for us too, and it's all on the same sector.

Okay. And if I can sneak one more. Can you talk a little bit about that expanding relationship with Micron? What does that entail for which products or end market that is?

Yes. Absolutely. Phil, do you want to give any details, especially at Micron, please?

Yes. Well, we've got Micron around the world on the Avnet core and the simple response, Nick is really just sort of expanding that with Farnell. So it's a real big one that will be across the portfolio of Micron. So it's a nice win for us there.

Okay, got it. Thanks.

Our next questions come from the line of Joe Quatrochi of Wells Fargo. Please proceed with your question.

Yes. Thanks for taking the question. Just kind of building on the last one. Are there any products or categories where we should think about being the most likely to see shortages or extended lead times at this point?

Well, I think that's specific by supplier. And I think you could talk to every one of the suppliers and know which ones have facilities in some of the countries that have had lockdowns, like in the Philippines and Malaysia to name a couple.

Okay. Fair enough. And then just one kind of housekeeping question. How do you think about the tax rate, just given the quite significant decline in the March quarter relative to your long-term target rate?

A total year estimate is about 19% and our long-term target has been to get it under 20%. So, we feel really good about the progress within our tax rate, Joe. Did I answer it?

Yes. That's perfect. Thank you.

Thank you.

Gentlemen, there are no further questions at this time. I'll now turn the call back to Bill Amelio for closing remarks.

Thank you, operator. And in closing, I'd like to say that our thoughts are with all those that are impacted by the COVID-19 across our global community. We are incredibly grateful for the dedication of the first responders and healthcare professionals who are out there each day working tirelessly to fight this virus. And we're proud of our employees who have risen to the challenge and have come together to make a positive difference in our industry, in our communities and other people's lives. We will continue to monitor the COVID-19 developments closely as things continue to evolve and we'll update you on our fiscal fourth quarter results in just a few months. Thank you, operator.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great night.