Avnet Earnings Call Transcript (AVT) Q3 2020

Avnet (NASDAQ: AVT)
2020 third quarter earnings call
Apr 27, 2020, 4:30 pm. ET

Content:

• Prepared observations
• Questions and answers
• Call participants

Prepared observations:

Operator

Welcome to Avnet’s third quarter fiscal year 2020 earnings call. Now I would like to turn the floor over to Joe Burke, Avnet Vice President of Treasury and Investor Relations.

Joe Burke – Vice President of Treasury and Investor Relations

Thanks operator. Earlier this afternoon, Avnet released financial results for the fiscal third quarter of 2020. The statement is available in the investor relations section of the company’s website. You can find a copy of the slide show that will accompany today’s comments via the link in the results post as well as in the IR section of the Avnet website.

Finally, some of the information contained in the press release and in 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. in global economic systems and our operations, employees, customers and supply chain. Such forward-looking statements are not guarantees of performance, and actual company results may 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 only refer to the date of this presentation, and the company assumes no obligation to publicly update any forward-looking statements or provide new information about circumstances subsequent to the date of this presentation.

Today’s call will be led by Bill Amelio, CEO of Avnet, and Tom Liguori, CFO of Avnet. Additionally, Phil Gallagher, Global President for Electronic Components, joins us to participate in the question and answer session. With that, let me pass the call on to Bill Amelio. Bill?

Bill Amelio – Executive Director

Thanks Joe. And thank you all for joining us on our third quarter earnings call for fiscal year 2020. As we all know, the entire world is grappling with the challenges presented by COVID-19, and Avnet is no different. Today, we will guide you through the impact it has on our business.

Our EPS and third quarter revenues decreased sequentially and year over year. Softer demand, particularly in Asia, impacted our quarterly results, as well as softer prices and higher 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, reflecting normal seasonality, as well as our focus on keeping the business running as effectively as possible in recent months. We met the lower limit of our original guide for the quarter, which Tom will talk about a little later in the call.

Last quarter, in our second-quarter earnings call, we told you that despite the ongoing correction in the industry, we are beginning to see some good signs of stabilization in key geographies. At that time, COVID-19 was still in the early days and limited to Asia. During the third quarter, as the scope of COVID-19 expanded, we acted quickly to save cash and manage our debt wisely. As a result, our focus on working capital management allowed us to generate positive operating cash flow.

Looking at our electronic components business. Revenue and operating margins decreased both sequentially and year-over-year in the March quarter. The most notable impact in the region was Asia, which saw orders decline at the beginning of the quarter due to the seasonal effect of the Chinese New Year and was further affected by COVID-19. That said, we do not experience any material disruption to our upstream supply chain or inbound products from suppliers.

For the most part, our distribution centers remained operational as we implemented our business continuity plans to ensure worker safety first and then to mitigate any business impact. In certain areas, we had some minor disruptions due to travel restrictions and other related issues. Shipments to our customers continued, but we experience longer lead times for new orders in certain regions and some delays due to challenges that freight forwarders had with volumes and border crossing controls. There was no significant impact on reserves.

Our book-to-invoice ratio at the end of the third quarter was well above parity. We kept an eye on the reservation rate and the backlog of orders to ensure the integrity and transparency of our supply chain. We continue to work diligently to confirm that the orders our customers had were firm. Therefore, we will 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 the automotive sector as plants in the United States and Europe closed due to COVID-19. While transportation was strong at the beginning of the quarter, we did see a downward trend 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 in the medical and diverse sectors of the industry, particularly where they are deemed essential.

Although it is not necessarily a vertical segment, we did see strength and stability in our EMS segment. Overall, some operations in our electronic components business appeared to be operating 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 purchases and pull-ins leading to panic purchases. With that in mind, we are preparing for all scenarios, including potential challenges in the coming quarters.

Tom will provide more details on that later. Returning to Farnell. Both sales and operating income margins in the third quarter increased slightly sequentially. Farnell began shipping from its new distribution center in Europe, but progress in increasing the new facilities will be slower than initially planned due to COVID-19.

During the quarter, we continued to execute on our five-pronged plan that we implemented to enhance Farnell’s competitiveness in the high-service model and promote long-term success. The five parts of our plan are listed here on Slide 6. We saw signs of progress in our plan at the beginning of the quarter. However, once the blockade began in European countries like Italy and the United Kingdom, Farnell also slowed down.

As for 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 to a number of IoT partners in the quarter and will update it in additional IoT developments in the coming months.

Despite the current operating environment, we continue to work on our five strategic priorities as described on this slide. Amplifying our core distribution business, expanding our high-margin businesses, expanding 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 we set earlier, we have adapted our short-term priorities to respond to the COVID-19 pandemic. Overall, considering the challenges of COVID-19 and its impact on global trade, we believe that our third-quarter results demonstrate the following: First, our commitment to ensuring the health and safety of our employees while keeping our business running smoothly. most efficient way possible; the resistance of our business model and the strength of our countercyclical balance; our flexibility to quickly adapt to changing market conditions, allowing us to maintain quality service levels for our customers and continued value for our supplier partners; our success in activating our business continuity plans; and finally, the strength of our company in general and our ability to withstand challenges and navigate the turmoil of the market.

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 am very proud of our employees across the company and what they have been able to do by 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 how we are leveraging Avnet’s end-to-end ecosystem to accelerate our customers’ capabilities to provide life-saving medical solutions and increase the overall supply of medical equipment. Of course, at the forefront of everything, we are doing everything we can to ensure the safety and health of all our employees.

When we look at the macro forces at play and consider the range of the economic forecast, there is unanimous agreement that global GDP will contract substantially in 2020. The IMF forecasts that the global economy will contract 3% in 2020 and contract in mid to high digits in most of the developed countries we serve. Some estimate that the annualized GDP of the US USA It will drop as much as 40% in the current quarter 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 that is the worst our country has seen since the Great Depression. With these factors in mind and looking ahead, we recognize that the macroeconomic environment is likely to have a significant impact on our fiscal fourth quarter financial results across geographies and 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 recession.

Tom will explain in detail the actions we are taking to ensure Avnet’s financial stability during the current uncertain times we face. In closing, we are encouraged by our performance in the third quarter. Despite recent uncertainty, a key point to remember is that Avnet plays a critical role in the supply chain for our customers and suppliers. They depend on us, and many electronic products will not be manufactured without us.

While we continue to respond to the COVID-19 pandemic and tailor our business to the coming challenges and opportunities, we remain confident in our long-term strategy. With that, I will pass the call to Tom to report on our finances for the quarter. Tom?

Tom Liguori – CFO

Thanks Bill. And good afternoon everyone. I hope that everyone and their families are healthy and safe. Let me start by adding what Bill said about how we play a critical role in the supply chain.

We supply electronic components worldwide, operating in more than 100 countries. We stock inventory and ship components to customers when needed. We are a one stop shop for our customers’ purchasing staff. And by using our strong balance sheet, we provide accounts receivable inventory financing to our clients.

All of these continue today and will continue for years to come. Therefore, as we manage during the COVID-19 crisis, our financial priorities focus on retaining critical internal resources and the capabilities required to be an integral player in the electronic supply chain, maintaining a strong balance sheet and healthy so that we can continue Provide financing to our clients and guarantee the necessary liquidity and financial flexibility to execute our operations regardless of the economic environment. As we review our financial performance in the third quarter, I will review these priorities and our actions to support them. Going to slide 11.

Our third quarter revenue was 4.3 billion, and adjusted EPS was $ 0.38. Both our income and adjusted EPS were within the original guidance ranges provided during our last earnings call. While we previously announced that we would likely not receive guidance, our teams were able to keep our global distribution centers operational throughout the quarter and continue to support our customers’ needs. A lower tax rate and interest expense contributed to EPS performance.

The lower tax rate was part of our longer-term effort to work with operations and improve our business’s geographic revenue mix from a tax as well as from a cost perspective. The 12% gross margin was higher than the previous quarter mainly due to a lower revenue mix from Asia. We expect our Asian revenue to decline in the third quarter as a result of the Chinese New Year, although COVID-19 also played a role. Asia became the first region affected by the pandemic.

Adjusted operating expenses of $ 449 million were higher both sequentially and during 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 at our distribution centers, new shift patterns, as well as higher freight costs. These cost increases overshadowed the lower costs in areas like travel and conferences. Although it is difficult to establish a precise number in the net additional costs related to COVID-19, we estimate that the impact will be approximately 10 million.

Our adjusted tax rate was 12.8% and benefited from a favorable income mix. Interest expense was lower due to our better debt position. Regarding the transition of Texas Instruments. Our IT revenue in the third quarter was $ 401 million, sequentially and a decrease of 50 million from the prior year.

We expect to see a decrease in IT revenue as we continue throughout the calendar year. As a result of the macroeconomic impacts of COVID-19, we performed a provisional goodwill test and recorded a charge of 160 million, which includes goodwill and impairment of intangible assets related to acquisitions of electronic components and capital investments. The charge of 160 million includes an impairment of capital investments of 15 million, which is included in other expenses. There were no impediments in our Farnell segment.

On Slide 12, we show revenue by segment and region. Electronic component revenue of $ 4 billion decreased 5.5% sequentially, mainly due to lower revenue in Asia as a result of Chinese New Year and COVID-19. Sequentially, American and EMEA incomes increased, reflecting typical seasonality. Electronic components operating margins were 2.1%, slightly below 2.2% sequentially due to lower sales volume.

Farnell’s revenue for the quarter totaled 335 million, a sequential increase of 1.2%. The Farnell team achieved a 7% operating margin, showing progress in improving the operating margin. Farnell started the March quarter with quite strong demand. Although demand died down in March, it appears to be weakening in April due to COVID-19 impacts.

Regarding cash flows and balance sheet on Slide 13. We continue to have a healthy balance sheet, with enough liquidity to support our global business operations and the working capital needs of our clients. We ended the quarter with a cash balance of 403 million and a debt of 1,600 million. Our gross debt ratio was 2.8%, and our net debt ratio was 2.1%.

Our net book value per share was $ 37, a decrease of $ 2 sequentially due to the impairment charge discussed above. Tangible book value per share remained relatively constant at $ 29. Recently, investors have asked us about our inventory and the quality of accounts receivable, both key parts of our tangible book value. At the end of the March quarter, we had 4 billion working capital, including 3 billion accounts receivable and 2.7 billion inventory.

We regularly review these ratings. At the end of the quarter, our aging accounts receivable continues to be healthy and similar to that of the second quarter. In EMEA and Asia, we have credit insurance programs that provide some risk mitigation for accounts receivable in those markets. Historically, during a recession, we may experience some slowdown in the timeliness of customer payments.

We have not incurred significant reserves or amortizations in accounts receivable. I attribute this to the quality of our experienced credit team. The same goes for inventory. Our global teams focus on inventory management on a daily basis, and we have various contractual agreements with suppliers in the event that our inventories become outdated, obsolete, or affected by changes in market prices.

We ensure a healthy Avnet balance by maintaining our disciplined working capital processes and conducting 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 2019 calendar year, we implemented improved processes, reporting, accountability, automated tools, and metrics to focus on cash generations. These actions obtained benefits in 2019 with a generation of 948 million of cash flow from operations. The processes and systems we have implemented over the past year are serving us well today as we manage our liquidity during the pandemic and recession. In the third quarter, we generated 98 million cash flow from operations.

This is the sixth consecutive quarter of positive cash flow from operations. We used the cash to pay 92 million of debt and returned 58 million to the shareholders. Going forward, we want to remind you that we have a countercyclical balance, which means that when revenues decrease, we collect accounts receivable and reduce inventory purchases, which contribute to positive cash flow. We hope that will continue.

And when incomes improve in the future, we would expect to use some of that cash to accommodate the additional working capital. Moving on to Slide 15. As the management team, together with our board, we evaluated various possible economic scenarios for the future in order to identify and implement any actions required to restore liquidity. As a result, we have taken the following steps: We continue to focus our businesses on inventory management, accounts receivable and cash generation.

We discontinued our share buyback program in early March as a result of economic uncertainties. We also halted our M&A activities and reduced non-core outsourcing and services. We are implementing actions to manage our debt. For the fund, our debt maturities are extended, as shown on Slide 14.

We have a $ 300 million note due June, which we will redeem in late April. The following note does not expire until December 2021, which means that we have no other debt maturity for the next 21 months. In addition, we have open credit lines of 1.6 billion. Our accounts receivable securitization line expires at the end of this summer, and we intend to renew it, and this is supported by our EE. USA

accounts receivable In general, our liquidity includes $ 2 billion in cash and credit facilities to finance short and medium-term operations, and our debt maturity dates extend over time. Regarding the business perspective 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 cannot predict to what extent the global pandemic of COVID-19 may adversely affect our business for the coming quarter. Therefore, we are not providing guidance for the fourth quarter. The color we can provide for the fourth quarter is that 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 a drop in EMEA revenue. Farnell has experienced a fairly sizable downturn in earnings. The Americas region is cautious due to continued COVID-19 cases along with government restrictions.

However, we see strength in the aerospace, defense and medical markets. We hope to continue incurring higher operating expenses as we manage through government-imposed travel and trade restrictions. These are uncertain times, but Avnet took proactive measures in the third quarter to stabilize our short-term performance and secure our liquidity. We will continue to do so in the coming months as we navigate the COVID-19 crisis.

As Bill said, Avnet has served customers and suppliers for 99 years, and next year is our centenary, which is a great milestone. As a management team, we are focused on keeping Avnet healthy and strong for years to come. With that, let’s open the line for questions and answers. Operator?

Questions and answers:

Operator

[Operator instructions] The first question comes from Raymond James’ Adam Tindle line. Please proceed with your questions.

Adam Tindle – Raymond James – Analyst

OK. Thank you. Good afternoon and I appreciate all the color by region, and I want to ask about future trends in June. I was a little confused by the comment that the book-to-invoice was above parity at the end of the third quarter, but the region mix sounds like a lot of negative data points.

So first, maybe I could mention where the book is now to the invoice in late April. And as we think about the June quarter, I’m not asking for a forward orientation here, but perhaps I could mention what you’re currently seeing in terms of a sequential decline. Just for perspective, its biggest semiconductor client was hinting at a sequential double-digit decline in June. And I wonder if that’s the level that you’re at least currently seeing.

Bill Amelio – Executive Director

OK. Adam, I’m going to ask the book question to the invoice, and then I’m going to have Tom and Phil color the sequential moves regarding income a little bit. In the book to invoice, we are definitely above parity in all regions. And we’ve normalized that as well: Given the fact that bills are down, we look back at billings from the previous quarter and from previous years and said, where do we oppose reservations? Where do we oppose if we normalize our increase? position? And we are still above one, so there is no doubt that we see a certain level of strength regarding the book to the invoice.

And with that, I’ll have Tom and Phil step in on the revenue.

Tom Liguori – CFO

We are not giving guidance. And a lot really depends on the events related to COVID-19, the time of return to work, the changes in restrictions. And it’s still April, so many things can change from time to time. The ranges he gave are reasonable.

However, we are not sure exactly what will happen in May and June. I’ve looked at the models out there. I would like to point out to everyone that our balance from an EPS perspective is in the range of 3.7 to $ 3.8 billion. So if we were in that range, that represents a $ 500 million reduction from the March quarter.

And with a 12% gross margin, that’s about $ 60 million that we’d be making up, and that’s the break-even comment. That said, where we will be at the end of June, it is difficult to say. What we really like is what we are seeing with Farnell’s operational performance, operational performance and EC potential where we still have our projects up and running for opex. Cash generation seems to be working well.

All I would like to reiterate before turning myself in to Phil is that Asia remains stable, but we have all seen recent changes in restrictions in Singapore, India, Japan and elsewhere. The only data point that, in the short term that concerns us, is that Farnell is one that is experiencing a sizable drop in revenue, which is part of our equilibrium comment. With that, Phil?

Phil Gallagher – Global President, Electronic Components

Yes. Thanks tom. Thanks Adam. I’ll just add a little more, but I think Bill and Tom covered it very well.

In the order book, to the point of Bill and Bill: your reservation question, we have a rigorous management process that manages that order book, OK, like the book to the invoices, as Bill pointed out, we are above parity . We are also very cautious to make sure that all the inventory you enter is going to come out again. So we are working with: it is, as I said, rigorous and day to day with our customers and suppliers, and we are sitting right in the middle. Looking at the prospects, we are not giving a perspective, but Asia seems to be, as Tom and Bill pointed out, we are 100% operational in Asia Pac.

We are back in Taiwan offices with limited hours. Demand seems to be coming back. Decent for us in Asia, then delayed until at least April, which is really positive. The Americas, as Bill pointed out and Tom did in the script, we are cautiously optimistic in the Americas.

We are not, it is not where we want it to be, but it is not as far as we thought. And then Europe is the one that probably had the biggest impact, having been closed for so long, and the car is such an important part of the European market. But as the country begins to open up, that is what we are managing, between Italy and Austria. Germany has begun to return.

The question will be, how fast do they recover our manufacturing? And when the full months of May and June remain, we hope to reactivate it as soon as possible. But that’s really so, Phil. As Tom pointed out, the defense is strong. Medicine is strong.

Some parts of the industry are still doing well, and we know where we got some gaps from automotive transportation.

Adam Tindle – Raymond James – Analyst

It is understood. Very useful. And just as a follow-up, maybe one for Tom. And only because the stock is basically listed on a tangible book.

So the market obviously has a negative view on intangibles on Avnet. I think he mentioned that Farnell is a big part of goodwill, and there were no Farnell-related impediments in the quarter. So going forward, I know you mentioned that you expected a fairly sizable slowdown in earnings at Farnell. Can you talk about the triggering factors for the impairment test in that segment and your view on those as the market seems to expect another deterioration?

Tom Liguori – CFO

Yes. Thanks Adam for that. We do not expect another impediment. That said, true, we don’t know where COVID-19 will go.

The tests we did: Farnell actually still has a fair amount of free space available, even with our current projections. I would think about it in terms of whether our operating margins were 9 or 10% or less in the long term, then Farnell would face possible deterioration. We saw good progress since the last quarter. It was only four quarters ago when we had an operating margin of 12%, which is very encouraging for us.

So right now, we see a lot of room for Farnell in disability. And yes, you are right. Avnet siempre ha negociado una vez, 1.1 veces el valor contable neto, y el valor contable neto actual es de $ 37. Hicimos la prueba.

Intentamos ser conservadores. Había una serie de cosas más pequeñas que estaban deterioradas. Pero creo que terminamos en una buena posición, dada toda la incertidumbre que existe. Y como se puede imaginar, estos son examinados completamente por los auditores, y sé que muchas compañías están pasando por el mismo tipo de ejercicio.

¿Eso ayuda, Adam?

Adam Tindle – Raymond James – Analista

OK. Lo hace. Y una última aclaración. Sé que ha mencionado algunos cambios de prioridad de asignación de capital.

Creo que está manteniendo el dividendo, corríjame si me equivoco y cuénteme qué dice eso sobre sus sentimientos sobre el flujo de caja en el próximo trimestre y más allá.

Tom Liguori – Director financiero

Yes. Vamos a tomar una decisión sobre el dividendo en mayo. El dividendo no es un gran desembolso de efectivo. Son alrededor de 21 millones por trimestre.

Dicho esto, veamos dónde está el entorno macro en unos pocos trimestres más adelante. Lo siento, ahora faltan algunas semanas para llegar a mediados de mayo. Pero tomaremos una decisión al respecto. De nuevo, no es un gran desembolso.

Bill Amelio – Director Ejecutivo

Yes. Añadiría a eso, Adam. Mire, detuvimos la recompra, que es un desembolso mucho mayor. Y creemos que el dividendo aún envía un mensaje sólido de que nosotros, lo que sentimos acerca de las compensaciones de la empresa.

Y como señala Tom, sin embargo, si COVID va más al sur, eso: todas las opciones aún están sobre la mesa. Pero en este momento, no vemos que sea una amenaza.

Adam Tindle – Raymond James – Analista

Eso es útil Gracias Bill.

Bill Amelio – Director Ejecutivo

Gracias Adam.

Operator

Nuestras siguientes preguntas provienen de la línea de Ruplu Bhattacharya del Bank of America. Por favor proceda con su pregunta.

Ruplu Bhattacharya – Bank of America Merrill Lynch – Analista

Hi. Gracias por tomar mis preguntas. Creo, Tom, que dijiste que el costo: el costo adicional asociado con COVID-19 fue de aproximadamente 10 millones en el trimestre. ¿Cómo deberíamos pensar en esos costos adicionales en tendencia en el cuarto trimestre? Y en general, ¿cómo debemos pensar en opex como porcentaje de las ventas? ¿Hay alguna acción de costo incremental que pueda tomar para reducir opex?

Tom Liguori – Director financiero

Of course. Gracias Ruplu. En primer lugar, esos 10 millones están relacionados con cosas como el flete, que es un problema a corto plazo para nosotros, equipo de protección personal. Todos nuestros centros de distribución, han hecho un gran trabajo de operación: continúan operando, pero están trabajando dentro de las reglas de trabajo de distanciamiento social, limpieza y desinfección.

Entonces, este trimestre de junio, esperaríamos que la mayoría de ellos continúen, probablemente comiencen a disminuir durante el trimestre, lo que significa cosas como los costos de flete. Anticipamos completamente comenzar a volver a la normalidad. Y creo que a medida que nuestros centros de distribución se familiaricen con el trabajo con las nuevas reglas, su productividad aumentará. Para el trimestre de junio, planearía que esté al mismo nivel o ligeramente por debajo de nuestro trimestre de marzo.

Al ver opex como un porcentaje de los ingresos, debe pronosticar los ingresos. Entonces, dejemos eso a un lado. Históricamente hablamos de un opex a mediados de 430 millones. Suponiendo que los ingresos se mantengan dentro de un rango razonable, creo que ese es un buen número para seguir adelante.

En nuestro opex, continuamos trabajando con el plan de reducción de costos de 245 millones. Eso va bien Hemos hablado sobre los proyectos definidos en eso para lograrlo completamente. En este momento, somos aproximadamente 190 millones de los 245 logrados.

Creemos que terminaremos con 245 millones de ahorros o probablemente más. Lo único que diría es que tomarán un poco más de tiempo, es decir, en el plazo de tres a seis meses más. La razón es que algunos de esos ahorros se basan en trasladar varias funciones a un país de menor costo o a un modo de tipo subcontratado. Y con nuestras nuevas restricciones laborales y las personas que trabajan en casa, la transferencia de conocimiento lleva un poco más de tiempo.

Pero, a corto plazo, junio será muy similar a marzo. Una vez que normalicemos los costos adicionales asociados con COVID-19, estaremos a mediados de 430, 435 millones por trimestre. Y durante los próximos 18 a 24 meses, verá que el resto de ese plan de $ 245 millones se concretará.

Ruplu Bhattacharya – Bank of America Merrill Lynch – Analista

OK. Solo para mi seguimiento. Usted habló sobre el balance anticíclico. Si recuerdo el año fiscal 2009, creo que ustedes generaron alrededor de $ 1 mil millones en flujo de caja libre.

¿Alguna idea de si ese tipo de … ese nivel de flujo de caja libre tiene sentido para el año fiscal? Y en términos de sus usos del efectivo, sé que pagó parte de la deuda que desmovilizó este trimestre. Should we expect that de-levering to continue as we go forward in the next couple of quarters?

Tom Liguori – Chief Financial Officer

Of course. So, as far as cash flow and comparing it to 2008, 2009, the model is similar. So, I think in 2008, 2009, our revenues declined 20 to 30%. It is quite substantial.

At that level of decline, yes, we would generate hundreds of millions, just not $1 billion of cash flow. I’m sorry, what was the second part of the question?

Ruplu Bhattacharya – Bank of America Merrill Lynch — Analyst

And in terms of de-levering the balance sheet —

Tom Liguori – Chief Financial Officer

De-levering. 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 generate 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.

Ruplu Bhattacharya – Bank of America Merrill Lynch — Analyst

Thank you. Thank you. Thanks for the details.

Operator

[Operator instructions] Our next question come from the line of Will Stein of SunTrust. Please proceed with your question.

Will Stein – SunTrust Robinson Humphrey — Analyst

Excellent. Gracias por responder mi pregunta. Many companies — and Avnet’s falling in this category of posting reasonable results for Q1 and highlighting 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 the follow-up that’s related to this, I think typical revenue was up a couple of percentage points sequentially.

Is there any chance you think revenue could be flat in the quarter?

Bill Amelio – Chief Executive Officer

Yes. There’s a lot packed in there. Well, let me give it a shot, and then I’ll have my teammates take a shot at it as well. Let’s first start with the idea that how good is the backlog? Phil mentioned that in a previous question.

We put a rigorous management system in place. We’re actually able to look at any individual customer and know what their booking patterns are and be able to determine — and their billing patterns and be able to determine the discrepancy between bookings and billings in a given quarter, as well as going back previous quarters and previous years to see if all of a sudden, there’s an anomaly there that we can see where the outliers are and question customers on whether or not they are true bookings or in fact, they are in fact doing some additional bookings that we then would say put a stricter terms in place. So, I think that’s helping us clean up the backlog and make sure it’s really in a good position. Because as you can imagine, some of our suppliers who are concerned with filling their factories when they’re only running at 40%, they want to make sure the orders they get are really good orders, and they’re going to go to actual demand to customers or, in some cases, life-saving devices for customers, so that’s critically important to all of us in the supply chain.

With respect to what we think about how the orders look, then there is a concern that if the COVID gets worse, we could see things happening like what happened in automotive where the production actually stops. So, then, all of a sudden, we’ll see end-user demand kind of get curtailed pretty quickly. And that happened almost overnight, if you recall it’s what happened with the automotive sector. And that could happen in the industrial and some of the other sectors that we’re in, communication, consumer, etc.

So, that’s really what the concern is with respect to what’s going to happen in the uncertainty with respect to demand in the future. At this given juncture, our book-to-bill looks solid. I’ll pass it to Tom.

Tom Liguori – Chief Financial Officer

Thanks, Bill. I would just add, Will, that today is April 27. There’s a big difference between today and March 27. And maybe in a different situation May 27, it could be much better.

It could be much worse. And so, that’s really what we’re saying by not giving guidance. Phil, anything to add? Adelante.

Phil Gallagher – Global President, Electronic Components

Yeah, Tom. I would just say, I think, again, you guys said it well. And it’s the question. And we’re using, frankly, we talk about accountability in the backlog, accountability of the customers.

It’s really — we’re getting — talking to all our constituents about being responsible, OK? 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 we’re asking for, based on our customers’ backlog, they really need. ¿De acuerdo? And so we’re working upstream with our suppliers and downstream every day, OK, 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.

Tom Liguori – Chief Financial Officer

I would add to that, Will, to what Phil said, we’re having weekly calls with each of the businesses. Phil’s 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 their customers, checking what you brought up. Is that order real? Or could that go away in May and June? And adjusting our purposes 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 know this, that everybody is on top of it managing, and we believe we’ll have a good cash story and keep the company liquid and keep our balance sheet strong.

Operator

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

Matt Sheerin – Stifel Financial Corp. — Analyst

Yes. Thank you. I wanted to ask about the Texas Instruments revenue run rate. It sounded 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?

Bill Amelio – Chief Executive Officer

Yes. So, I’ll start with that one, Matt. With respect to TI, there’s, of course, a lot of questions about the timing of the transition. So, here’s what you can expect is still we’re on track for a C&E completed by December 31.

Although as you pointed out, we would expect it to see a little bit more of a decline, most likely due to some impact with COVID-19, so it was essentially flat, sequentially. But we continue with our plan on how we’re going to replace that revenue with, in fact, richer margin — other suppliers’ products. We’re doing pin-to-pin replacement wherever possible. We’ve got some share shifts going on between supplier lines and where customers want to make sure they stay balanced with their 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. So, Phil, you want to add something else to that?

Phil Gallagher – Global President, Electronic Components

Yes. Great job, Bill, thanks. And Matt, good to hear from you. Thanks for the question.

Yes. This is another of those rigorous processes we have in place. We meet regularly with the regions down to the country level. We know every single customer, every single part in the BP dollar generation by customer by part.

So, that’s the detail of what we’re doing. And Bill just pointed is, pin-for-pin, new generation designs and share shift, OK? Internal to the customer. We have a tracking process. And I’d say right now, we’re satisfied.

We’re pleased, right, but we’re satisfied with where we are in the process against the time line to replace that business. I’ll be candid with you. I think we’re probably pleasantly surprised that the decline really hasn’t come sequentially. We are — comment that we’re point planning on it by the end of the calendar year.

But I think it’s a tribute 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 the compliment to the team. But we will be planning on it by the end of December.

Matt Sheerin – Stifel Financial Corp. — Analyst

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?

Phil Gallagher – Global President, Electronic Components

Well, we’re going to plan that separately. So, — oh, go ahead, Bill.

Bill Amelio – Chief Executive Officer

I’ll just say, 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 we’re — 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.

Phil Gallagher – Global President, Electronic Components

Your comment is right, Bill. So, financially it’s how we’re modeling it, yes.

Matt Sheerin – Stifel Financial Corp. — Analyst

OK. And just on my follow-up regarding gross margin, which was up nicely to 12%. And, obviously, mix helped you a lot there, particularly with Premier Farnell flat in Asia down. It looks like that’s going to work against you pretty significantly this quarter.

And also — so could you comment on that, whether you think gross margin is going to be weaker? And then the demand-creation business, so jobs, as you can see, drive gross margin. Is that weaker just because of customer engagements are down because of COVID? Or are there no changes there?

Bill Amelio – Chief Executive Officer

OK. I’ll take the demand creation question, and then Tom can talk about the regional mix. On demand creation, we are, in fact, holding solid. In fact, it’s even a little bit more robust than we expected it to be.

So, it’s still, roughly, in the core business, 30% of our revenues, and it continues to be that way. Tom?

Tom Liguori – Chief Financial Officer

Of course. Matt, gross margin was up because of mix. When you looked at each individual business, their gross margin was pretty much flat to slightly down. And mix will play a part going forward and what you’re bringing up is Farnell, we said, would be down the most.

And Asia seemed to be flattish, so you are correct.

Matt Sheerin – Stifel Financial Corp. — Analyst

OK. Thank you.

Bill Amelio – Chief Executive Officer

Thanks, Matt.

Operator

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

Steven Fox – Fox Advisors — Analyst

Gracias por responder mi pregunta. Good afternoon. I guess, first question, I was just curious if you guys can provide a little bit more insight or color into the receivables collectible 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, etc.? And then I had a follow-up question.

Bill Amelio – Chief Executive Officer

Of course. I’ll start on that, then Tom can give some more color on it. The good news is we’ve launched recycles before. And when we launched recycles, we had — we didn’t see a significant amount of bad debt come out from our customers, which is a great thing.

And we’re — we believe that may occur this time as well. We do have some level of insurance coverage across the world, but that’s not enough to cover if this gets into a worse position. But we’re pretty comfortable with the level of the receivables. And we do an audit check on them on a regular basis to make sure that they are, in fact, good receivables and they fit our accounting standards.

Tom?

Tom Liguori – Chief Financial Officer

Thanks, Bill. Steve, no change in our receivables aging quarter to quarter, so that’s a very good sign.

Steven Fox – Fox Advisors — Analyst

OK. I appreciate that color. And then just 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?

Bill Amelio – Chief Executive Officer

I would say the following on it, it’s — you got to think about, 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, where 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.

Steven Fox – Fox Advisors — Analyst

Excellent. But your general viewpoint right now is, broadly speaking, you’re not seeing an impact to the economy?

Bill Amelio – Chief Executive Officer

I mean 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.

Steven Fox – Fox Advisors — Analyst

That’s very helpful.

Bill Amelio – Chief Executive Officer

Thank you, Steve.

Operator

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

Shawn Harrison – Loop Capital Markets — Analyst

Good afternoon. I guess, either Bill or Phil, could you remind us kind of what percentage of your sales are automotive versus aerospace, defense and kind of medical, given kind of the diverging trends you’re seeing?

Bill Amelio – Chief Executive Officer

Of course. If you look at the split of the key verticals in revenue, EMS represents, and it’s been steady, about 30, 35% of our business. Industrial and transportation represents another almost 30%, and the rest of it is what we’ll call it, diversified, which includes aerospace and defense. That kind of gives you the balance of the major revenue streams we have.

Shawn Harrison – Loop Capital Markets — Analyst

OK. And then as a follow-up, I just wanted to — the Farnell weakness. Is that solely a function of that it’s more, I guess, it’s stronger position within Europe? Are you seeing any changes in design activity within the business? Or is there something else going on in Farnell where you’re seeing kind of the most — the greatest weakness currently?

Bill Amelio – Chief Executive Officer

Well, a couple of things. I mean, Farnell, at the beginning of the quarter, was off to a good — really solid start, and we finished really strong from an 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 as we went into the latter part of the quarter when the U.K., 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 what we saw.

As far as the design activity goes, no, we’re not seeing anything different with respect to that. And I think it’s as people come — start going back to work again, and the country start opening back up again, we’re hopeful that that turns back around again. But it’s still a wildcard.

Phil Gallagher – Global President, Electronic Components

Shawn, 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, OK, in the U.K. and whatnot, where, yes, that’s their strongest region by a good shot.

Shawn Harrison – Loop Capital Markets — Analyst

OK. That’s helpful. And Tom, if I may slip in one last question. Just inventory velocity.

Do you think you’ll be able to keep it at this level into the June quarter? Or do you somehow think with Asia coming back, you’ll actually improve inventory velocity into the June quarter?

Tom Liguori – Chief Financial Officer

Well, we think Asia will improve inventory velocity. I think the bottom line, what we want to be able to achieve in June, Shawn, is positive cash flow. And that implies that working capital will continue to get better.

Shawn Harrison – Loop Capital Markets — Analyst

Thank you.

Operator

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

Tim Yang – Citi — Analyst

Hi. Thanks for taking the question. You mentioned weakness in Asia in March quarter. I think it was down roughly 4% year over year.

But one of your largest competitors, WPG, reported double-digit year-over-year growth for the March quarter. Can you provide some color on the disconnect between your performance versus WPG?

Bill Amelio – Chief Executive Officer

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

Phil Gallagher – Global President, Electronic Components

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-sized business in that space. And it tends to be much lower-margin business than — 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.

Tim Yang – Citi — Analyst

Entendido. So, it’s not a share shift. It’s more like just end-marketing mix that —

Phil Gallagher – Global President, Electronic Components

Yes. I would say, it could be end-market mix as where the processors, memory, those types of products go that we don’t play in as much. Correcto.

Tim Yang – Citi — Analyst

Got you. The second question is, can you maybe talk about the demand, the linking average during the quarter? I think you mentioned that in early March that you would not give the March quarter guidance, but you still achieved the — on the revenue side, you still achieved the midpoint of the original guidance. Do you see a strong demand in the month of March, which drove the cost side?

Bill Amelio – Chief Executive Officer

I’m sorry, can you repeat the last part of the question?

Tim Yang – Citi — Analyst

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

Bill Amelio – Chief Executive Officer

Well, when we said we could not meet the guidance, it looked like things were going to fall off faster than they did. And we were able to end up doing better than we expected. And as you noted, when you look at it, 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 pre-announcement.

Tim Yang – Citi — Analyst

Thank you.

Operator

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

Nick Todorov – Longbow Research — Analyst

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

Bill Amelio – Chief Executive Officer

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.

Nick Todorov – Longbow Research — Analyst

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

Bill Amelio – Chief Executive Officer

Yes. I think when we made that comment, we’re talking more about defense than we were 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 imagine, medical is up for us, too, and that’s all in the same sector.

Nick Todorov – Longbow Research — Analyst

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

Bill Amelio – Chief Executive Officer

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

Phil Gallagher – Global President, Electronic Components

Yes. Well, we’ve got Micron around the world in the Avnet core. And the simple response makers really just we’re expanding that with Farnell, so it’s a real big win. It will be across the portfolio of Micron, so it’s a nice win for us there.

Nick Todorov – Longbow Research — Analyst

OK. Entendido. Thank you.

Operator

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

Joe Quatrochi – Wells Fargo Securities — Analyst

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?

Bill Amelio – Chief Executive Officer

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 the Philippines and Malaysia to name a couple.

Joe Quatrochi – Wells Fargo Securities — Analyst

OK. Lo suficientemente justo. 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?

Tom Liguori – Chief Financial Officer

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 with our tax ratio. Did I answer it?

Joe Quatrochi – Wells Fargo Securities — Analyst

Yes. Eso es perfecto. Thank you.

Operator

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

Bill Amelio – Chief Executive Officer

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 how our employees 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 will update you on our fiscal fourth quarter results in just a few months. Thank you, operator.

Operator

[Operator signoff]

Duration: 62 minutes

Call the participants:

Joe Burke – Vice President, Treasury, and Investor Relations

Bill Amelio – Chief Executive Officer

Tom Liguori – Chief Financial Officer

Adam Tindle – Raymond James — Analyst

Phil Gallagher – Global President, Electronic Components

Ruplu Bhattacharya – Bank of America Merrill Lynch — Analyst

Will Stein – SunTrust Robinson Humphrey — Analyst

Matt Sheerin – Stifel Financial Corp. — Analyst

Steven Fox – Fox Advisors — Analyst

Shawn Harrison – Loop Capital Markets — Analyst

Tim Yang – Citi — Analyst

Nick Todorov – Longbow Research — Analyst

Joe Quatrochi – Wells Fargo Securities — Analyst

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