Avnet, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended July 1, 2017 (52 weeks). The filing is an annual report, not a standalone FY2016 fourth-quarter filing; it also reports FY2017 fourth-quarter results. Fiscal 2016 had 53 weeks, affecting year-over-year comparisons.
Business context
Avnet distributes electronic components and provides related design, engineering, integration and supply-chain services. Following the February 2017 sale of its Technology Solutions business, continuing operations comprise Electronic Components (EC) and Premier Farnell (PF). Avnet acquired PF in October 2016.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Continuing-operations sales | $17.44 billion | $16.74 billion |
| Gross profit / gross margin | $2.37 billion / 13.6% | $2.08 billion / 12.4% |
| Operating income / operating margin | $461.4 million / 2.6% | $572.9 million / 3.4% |
| Adjusted operating income / margin (non-GAAP) | $653.3 million / 3.7% | $627.5 million / 3.7% |
| Income from continuing operations | $263.4 million | $390.9 million |
| Net income / diluted EPS | $525.3 million / $4.08 | $506.5 million / $3.80 |
| Cash from operating activities — continuing operations | $221.0 million | Cash used: $48.9 million |
| Cash and cash equivalents at year-end | $836.4 million | $1.03 billion |
| Total debt at year-end | $1.78 billion | $2.49 billion |
| Working capital / current ratio | $5.08 billion / 3.1:1 | $4.06 billion / 1.8:1 |
Net income includes a $222.4 million after-tax gain on the TS business sale. FY2017 diluted EPS from continuing operations was $2.05, versus $2.93 in FY2016. Total operating cash flow, including discontinued operations, was negative $368.7 million; discontinued operations used $589.7 million, principally reflecting the timing of the sale and cash-conversion cycle.
FY2017 fourth-quarter sales were $4.61 billion, net income was $81.4 million and diluted EPS was $0.65. Continuing-operations quarterly profit is not stated separately in the provided quarterly summary.
Changes versus prior period
- Reported sales increased 4.2%, primarily because of PF; organic sales were flat, or up 1.0% in constant currency. EC sales declined 1.6% as reported, while EC organic sales grew about 1.0% in constant currency.
- Gross margin expanded 117 basis points, mainly from PF’s higher-margin business and changes in EC Asia engagements; the benefit was partly offset by weaker EC western-region performance, supplier-program changes, lower-margin fulfillment mix and ERP-related inefficiencies.
- Reported operating income fell 19.5%, but adjusted operating income rose to $653.3 million from $627.5 million, with adjusted margin unchanged at 3.7%. FY2017 restructuring, integration and other costs were $137.4 million, versus $44.8 million.
- Net income rose modestly, but continuing-operations income declined; the TS-sale gain more than accounted for the difference. PF contributed $965.9 million of sales after acquisition.
- Avnet received approximately $2.86 billion in consideration for TS, including cash and buyer shares, and recorded an after-tax sale gain of $222.4 million. It paid approximately $841 million cash for PF and assumed $242.8 million of debt.
- Cash from continuing operating activities improved from use of $48.9 million to generation of $221.0 million. FY2017 investing cash flow included $2.24 billion of TS-sale proceeds and $802.7 million of acquisition spending.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expected available borrowing capacity, cash and future operating cash flow to be sufficient for liquidity needs, and planned to continue selective acquisitions, repurchases and quarterly dividends, subject to conditions and board approval.
- Management expected $75–$125 million of capital expenditures over the next two fiscal years for global ERP implementation. FY2017 restructuring actions are expected to yield approximately $45 million in incremental annualized operating-cost savings; further integration and restructuring cash costs were anticipated.
- Supplier losses and program changes may pressure future sales and gross profit. Texas Instruments represented about 11% of FY2017 consolidated sales and billings; management expected a similar share of billings in FY2018. Semiconductor sales were approximately 78% of FY2017 sales.
- Key risks include economic and geopolitical weakness, intense competition and margin pressure, inventory obsolescence or order cancellations, customer credit and collections, currency movements, international regulatory and tax exposure, cyber and logistics disruptions, and ERP implementation/integration risks. About 72% of FY2017 sales came from outside the U.S.
- The ERP system in the Americas had $16.0 million of accelerated depreciation after its estimated useful life was shortened. Management cited prior ERP-related customer service disruption and FY2017 inefficiencies; a new global ERP implementation was planned.
- The TS-sale gain and proceeds remain subject to final working-capital and tax allocation determinations, expected by the end of FY2018; changes could adjust the gain. The Company held $281.3 million of marketable securities received in the transaction and hedged their value during contractual sale restrictions.
- Management reported no goodwill impairment, but EC Americas’ estimated fair value exceeded carrying value by only about 8%; that reporting unit held approximately 22% of total goodwill. PF was excluded from the internal-control assessment, representing about 15% of assets and 5% of FY2017 sales; management and the auditor otherwise reported effective controls and an unqualified financial-statement audit opinion.
- Environmental, import/export and other compliance matters are pending or possible. The filing says resolution is not currently expected to materially affect financial position or liquidity, though a single period’s results could be affected. Estimated accrued compliance-related liabilities were $14.2 million; unrecognized tax benefits totaled $106.8 million.
Important facts for investors to verify
- Final TS-sale working-capital adjustment and tax allocation, and any resulting change to the recorded gain.
- PF integration performance, realized synergies and the effect of acquired amortization and restructuring costs on recurring profitability.
- EC supplier retention and program economics, particularly TI exposure, and whether organic sales and margins improve.
- ERP implementation progress, customer-service effects, total spending and expected savings.
- Cash conversion, receivables and inventory trends, debt maturities, and renewal or replacement of the receivables program before its August 2018 maturity.
- Potential changes in tax reserves, compliance contingencies and the EC Americas goodwill impairment cushion.