Avnet (AVT) Q3 2020 Earnings Call Transcript

Avnet (AVT -0.11%)
Q3 2020 Earnings Call
Apr 27, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Joe Burke -- Vice President, Treasury, and Investor Relations

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 contain 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 the 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. Bill?

Bill Amelio -- Chief Executive Officer

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 industry 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 impact was Asia, which saw orders decline early in the quarter due to the seasonal effect of the Chinese New Year and was further affected by COVID-19. That said, we did not experience any material disruptions to our upstream supply chain or incoming goods from suppliers.

For the most part, our distribution centers remained 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 for new orders in certain regions and some delays due to the challenges that freight forwarders 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 backlog 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 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 auto as plants in the United States and Europe shut down due to COVID-19. While transportation was strong in the beginning of the quarter, we saw it trend down 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 appeared 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 are 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 plan 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 the European countries like Italy and the U.K., 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 have adapted our near-term priorities to respond to the COVID-19 pandemic. Overall, considering the challenges 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 countercyclical 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 and 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 customers' abilities to provide life-saving 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 forecast, there is unanimous agreement that the global GDP will contract substantially in 2020. The IMF forecasts 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 estimate 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 that 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 are 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. Tom?

Tom Liguori -- Chief Financial Officer

Thank you, Bill. And good afternoon, everyone. I hope everyone and their families are healthy and safe. Let me start by adding on to 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 are a one-stop shop for our customers' procurement staff. And by using our strong balance sheet, we provide inventory 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 electronic 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, 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 Chinese New Year, though COVID-19 played a part as well. Asia became the first region impacted by the pandemic.

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 cost and inefficiencies for new health and safety work procedures in our distribution centers, new shift patterns, as well as higher freight cost. 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 continued 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 and 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 the 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. Though demand trailed off in March, it 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 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 insurance 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 have not incurred significant reserves or writedowns in receivables. I attribute that to the quality of our experienced credit team. The same goes with 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 calendar year 2019, we put in place improved processes, reporting, accountability, automated tools and metrics to focus on cash generations. These actions reaped benefits in 2019 with a 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 manage 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 countercyclical 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 in order to identify and implement any actions required to restore 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 nonessential outside services and hires. We are implementing actions to manage our debt. For background, our debt maturities are 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 this is supported by our U.S.

receivables. Overall, our liquidity includes $2 billion of cash and credit facilities to fund near- to medium-term operation, 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 a drop-off in EMEA revenues. Farnell has experienced 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 manage 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 will 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 are focused on keeping Avnet healthy and strong for years to come. With that, let's open the line for Q&A. Operator?

Questions & Answers:

Operator

[Operator instructions] The first question come from the line of Adam Tindle of Raymond James. Please proceed with your questions.

Adam Tindle -- Raymond James -- Analyst

OK. Thanks. Good afternoon and appreciate all the color by region, and 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 mix by region 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 June quarter, I'm not asking for a forward 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. And I'm wondering if that's kind of the level that you're at least currently seeing.

Bill Amelio -- Chief Executive Officer

OK. Adam, I'll do the book-to-bill question, and then 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 quarter and previous years billings and said, where do we stand against bookings -- where do we stand against that if we normalized our higher position? And 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.

Tom Liguori -- Chief Financial Officer

We're not giving guidance. And a lot really depends on COVID-19-related events, timing of return to work, changes in 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 to $3.8 billion range. So, if we were at that range, that's about a $500 million reduction from March quarter.

And at a 12% gross margin, that's about $60 million that we'd be making up, and that's the commentary on the breakeven. That said, where we'll 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 of EC that we still have our projects in place for opex. 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 one that's seeing a fairly sizable downturn of revenues, which is part of our breakeven commentary. With that, Phil?

Phil Gallagher -- Global President, Electronic Components

Yeah. Thanks, Tom. Thanks, Adam. I'll just add a little bit more, but I think Bill and Tom covered it really well.

On the backlog, to Bill's point and to Bill's -- your booking question, we have a rigorous management process managing that backlog, OK, as the book-to-bills, as Bill pointed out, we're above parity. We're also very cautious to be sure that all the inventory coming in is going to go back out. So, we're working with -- it's, like I said, rigorous and day to day with our customers and our suppliers, and we're sitting right in the middle of it. As far as the outlook, we're not giving an outlook, but Asia seems to be, as Tom and Bill both pointed out, we're 100% operational across Asia Pac.

We're back in the offices in Taiwan on a limited schedule. The demand seems to be coming back. Decent for us in Asia, then held up at least through April, which is really positive. The Americas, as Bill pointed out and Tom did in the script, we're cautiously optimistic in Americas.

We're not -- it's not where we want it to be, but it's not as far down as we thought. And then Europe is the one that's probably got a bigger impact as it's been shut down for so long, and the automotive is such a big part of the European marketplace. But as the country start to open up, that's what we're managing, between Italy and Austria. Germany's started coming back.

The question will be, how fast do they bring back our manufacturing, OK? And with the full month of May and June left, we're hopeful that we'll turn that back on as quickly as possible. But that's really that is, Phil. As Tom pointed out, defense is strong. Medical is strong.

Parts of industrial are still doing well, and we know where we got some of the gaps with the automotive transportation.

Adam Tindle -- Raymond James -- Analyst

Got it. Very helpful. And just as a follow-up, maybe one for Tom. And just because the stock is basically trading at tangible book.

So, market, obviously, has a negative view on the intangibles in Avnet. I think you did mention Farnell is a large portion of the goodwill, and there was no impairments related to Farnell in the quarter. So, moving forward, I know you mentioned expecting a fairly sizable downturn in revenue in Farnell. Can you just talk about the gating factors to the impairment test in that segment and your view on those as the market seems to be expecting another impairment?

Tom Liguori -- Chief Financial Officer

Yeah. Thanks, Adam, for that. We're not expecting another impairment. That said, right, 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 when we were at 12% operating margin, so that's very encouraging to us.

So, right now, we see a fair amount of headroom for Farnell in impairment. And yes, you're right. Avnet has always traded at one times, 1.1 times net book value, and net book value today is $37. We did the test.

We tried to be conservative. There were a number of smaller 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?

Adam Tindle -- Raymond James -- Analyst

OK. It does. And one last clarification. I know you've 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.

Tom Liguori -- Chief Financial Officer

Yeah. We're going to make a decision on the dividend in May. The dividend is not a huge, large 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.

Bill Amelio -- Chief Executive Officer

Yeah. I'd add to that, Adam. Look, we paused the buyback, which is a much bigger outlay. And we think the dividend sends a solid message still that we -- what we feel about the comps of the company.

And as Tom points out, though, if COVID goes further south, that -- all options are still on the table. But at this juncture, we don't see that to be a threat.

Adam Tindle -- Raymond James -- Analyst

That's helpful. Thanks, Bill.

Bill Amelio -- Chief Executive Officer

Thank you, Adam.

Operator

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

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks for taking my questions. I think, Tom, you said that the cost -- 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?

Tom Liguori -- Chief Financial Officer

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 revenue. So, let's leave that to the side. We historically talked about an opex in the mid-430 million. Assuming that revenues stay 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 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-month longer time frame. 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.

But -- 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 mid-430, 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.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

OK. Just for my follow-up. You talked about the countercyclical 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 kind of -- that level of free cash flow makes sense for the fiscal year? And in terms of your uses of cash, I know you paid down some debt you de-levered this quarter. Should we expect that de-levering to continue as we go forward in the next couple of quarters?

Tom Liguori -- Chief Financial Officer

Sure. 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. Yeah. 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

Great. Thanks for taking my question. 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

Yeah. 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? Go ahead.

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. OK? 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

Yeah. 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

Yeah. 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

Yeah. 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

Sure. 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. Thanks very much.

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

Thanks for taking my question. 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

Sure. 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

Great. 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

Sure. 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

Yeah. 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

Got it. So, it's not a share shift. It's more like just end-marketing mix that --

Phil Gallagher -- Global President, Electronic Components

Yeah. 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. Correct.

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

Thanks. 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

Yeah. 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

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

Phil Gallagher -- Global President, Electronic Components

Yeah. 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. Got it. Thanks.

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. 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?

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

Yeah. That's perfect. 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 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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