Business context and reporting period
Avnet, Inc. is a global distributor of electronic components and enterprise IT products, with value-added engineering, logistics and other services. Its two operating groups are Electronics Marketing (EM) and Technology Solutions (TS). This Form 10-K covers the 52-week fiscal year ended June 27, 2015; it also reports the fourth quarter ended that date.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $27.92 billion | $27.50 billion |
| Gross profit | $3.19 billion | $3.23 billion |
| Operating income | $827.7 million | $789.9 million |
| Net income | $571.9 million | $545.6 million |
| Diluted EPS | $4.12 | $3.89 |
| Operating cash flow | $583.9 million | $237.4 million |
| Cash and cash equivalents | $932.6 million | $929.0 million |
| Total debt | $1.98 billion | $2.07 billion |
| Working capital | $4.37 billion | $3.98 billion |
| Current ratio / quick ratio | 2.0 / 1.4 | 1.8 / 1.2 |
Gross margin was 11.4%, down from 11.7%; operating margin was 3.0%, up from 2.9%. Adjusted operating margin, excluding restructuring and integration expenses and acquired-intangible amortization, was 3.5% versus 3.4%. Net margin was approximately 2.0% in both years. Capital expenditures were $174.4 million, compared with $123.2 million. The company paid $87.3 million in dividends and used $160.0 million of cash for share repurchases.
For Q4 FY2015, sales were $6.80 billion, net income was $158.7 million and diluted EPS was $1.15; Q4 FY2014 figures were $7.05 billion, $186.3 million and $1.33, respectively.
Material changes versus the prior comparable period
- Annual sales increased 1.5% as reported. The filing also reports organic sales growth of 5.0% in constant currency in its detailed comparison; growth was led by EM, while TS sales declined 3.4% as reported and were flat in constant currency.
- EM sales rose 4.8% as reported, with growth across regions in constant currency. TS weakness included a 13.6% decline in Asia, primarily from lower computing-component sales.
- Gross profit fell 1.0%, and gross margin declined 30 basis points. Management cited geographic mix shifting toward lower-margin Asia, currency effects and high-volume supply-chain engagements.
- Operating income increased 4.8%; lower SG&A and restructuring costs helped offset lower gross profit. Net income rose 4.8%, while diluted EPS increased 5.9%.
- Operating cash flow increased to $583.9 million from $237.4 million, as working-capital cash use fell to $303.4 million from $564.3 million.
- Other comprehensive income included a $561.0 million foreign-currency translation loss, contributing to shareholders’ equity declining to $4.69 billion from $4.89 billion.
Outlook, management commentary, risks and unusual items
- No specific sales or earnings guidance is provided. Fiscal 2015 restructuring actions are expected to yield approximately $50 million in annualized cost savings—about $20 million in EM and $30 million in TS—with up to $10 million of additional related restructuring expense expected through Q2 FY2016.
- Management expected to repay or refinance $250 million of 6.00% notes due September 2015 using cash and/or available borrowing capacity. It said cash, borrowing availability and expected operating cash flow should meet anticipated liquidity needs.
- Fiscal 2015 restructuring, integration and other expenses totaled $90.8 million before tax ($65.9 million after tax). Restructuring included costs associated with planned reductions of more than 500 employees.
- The 19.8% effective tax rate included a $55.1 million net tax benefit, principally from releasing a valuation allowance on EMEA deferred tax assets and favorable audit settlements. Without the EMEA valuation-allowance release, the filing says the rate would have been 27.0%.
- Key risks include cyclical demand in semiconductors and IT products, competition and margin pressure, supplier concentration (IBM represented 11% of sales), foreign-currency exposure, inventory obsolescence, customer credit and collection risk, international compliance, cybersecurity and logistics disruptions.
- At year-end, $850.6 million of cash was held outside the U.S. and was expected to remain permanently reinvested abroad. Debt agreements and the receivables securitization program have financial covenants; Avnet reported compliance at year-end.
- Management reported estimated liabilities of $17.0 million for certain compliance matters, including $10.0 million related to potential import duties, interest and penalties. It stated that other pending compliance matters could be material to results in an individual reporting period, although it did not expect a material adverse effect on financial position or liquidity.
Most important facts for investors to verify
- Confirm the basis for organic constant-currency growth: the filing gives differing figures in its executive summary and detailed discussion.
- Assess how much of FY2015 earnings growth depended on the tax benefit and restructuring-related adjustments, and the sustainability of the stated cost savings.
- Review the repayment or refinancing of the $250 million notes due in September 2015, covenant headroom and availability under the credit and receivables facilities.
- Evaluate the concentration of cash held abroad, working-capital trends and the effect of currency movements on reported results and equity.
- Monitor the import-duty matter and other compliance contingencies, as well as goodwill sensitivity in TS Asia and TS EMEA, where estimated fair value exceeded carrying value by approximately 7% and 9%, respectively.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of June 27, 2015.