Avnet, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2020. Although the request specifies “2019 Q4,” this filing reports FY2020; it also presents fourth-quarter FY2020 results. Fiscal 2020 contained 52 weeks.
Business context
Avnet is a global distributor and technology-solutions provider serving customers through Electronic Components (EC) and Farnell. It operates in more than 140 countries; semiconductors accounted for approximately 76% of FY2020 sales. The business faced an industry slowdown and COVID-19 disruption during the year.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $17.63 billion | $19.52 billion |
| Gross profit / margin | $2.06 billion / 11.7% | $2.49 billion / 12.7% |
| Operating income (loss) / margin | ($4.6 million) / approximately 0.0% | $365.9 million / 1.9% |
| Adjusted operating income / margin | $302.9 million / 1.7% | $695.7 million / 3.6% |
| Net income (loss) | ($31.1 million) | $176.3 million |
| Diluted EPS | ($0.31) | $1.59 |
| Cash from operating activities | $730.2 million | $591.1 million |
| Cash and cash equivalents at year-end | $477.0 million | $546.1 million |
| Working capital | $4.05 billion | $4.30 billion |
Sales declined 9.7% reported and 8.7% in constant currency. Both operating groups declined: EC sales fell 9.5% and Farnell sales 11.3%. EMEA had the steepest regional decline, down 14.9% reported. Fourth-quarter sales were $4.16 billion and net income was $52.2 million.
Operating cash flow benefited from working-capital reductions, including lower receivables and inventory. Capital expenditures were $73.5 million. Year-end debt carrying value was approximately $1.425 billion; the company had $230 million drawn on its revolving Credit Facility, no securitization borrowings, and $1.44 billion of combined availability under those facilities. The current ratio was 2.8:1 and total debt to capital was 27.7%.
Material changes and unusual items
- Gross margin fell 104 basis points year over year; adjusted operating margin declined 184 basis points.
- FY2020 operating loss included $144.1 million of goodwill and intangible-asset impairment charges and $81.9 million of restructuring, integration and other expenses. The filing also reports a $15.3 million impairment of an equity investment.
- The third-quarter impairment followed COVID-related market and outlook deterioration. Goodwill impairment was $118.7 million; substantially all of the $25.4 million long-lived-asset impairment related to intangible assets.
- FY2020 included a $98.6 million income-tax benefit, with effects from the CARES Act carryback provision and changes in valuation allowances. The resulting effective tax rate was unusually high and should not be treated as a normalized rate.
- Avnet repurchased $237.8 million of shares and paid $84.0 million in dividends during FY2020. Share repurchases were subsequently suspended amid COVID-19 uncertainty.
Outlook, commentary and risks
Management said COVID-19 would likely continue to negatively affect sales, earnings and cash flow into FY2021. Reported impacts included softer demand, price constraints, higher logistics costs, longer lead times and shipping delays. The company was conserving cash and managing debt.
Avnet planned operating-cost reductions of $75 million annually by the second quarter of FY2021. It separately expected approximately $52 million in incremental annualized savings from FY2020 restructuring actions. Management said near-term strategic acquisition investment was unlikely.
Texas Instruments notified Avnet that it planned to terminate their distribution agreement by December 31, 2020. TI products represented approximately 9% of FY2020 sales, versus 10% in FY2019; Avnet warned that future sales and gross profit could fall unless offset by growth, margin improvement or cost reductions. Other key risks include global economic weakness, supplier and customer concentration or credit deterioration, inventory obsolescence, foreign-exchange and trade-policy exposure, logistics and cybersecurity disruptions, and debt covenant or refinancing constraints.
Subsequent to year-end, Avnet amended its securitization program, extending it to July 2021 and eliminating specified financial covenants, and amended its Credit Facility to temporarily ease certain financial covenants. The filing says the company was in compliance with facility covenants at June 27, 2020.
Most important facts for investors to verify
- Whether Avnet offset the loss of TI distribution business and how the termination affected sales, gross profit and customer relationships.
- Whether COVID-related demand, pricing and logistics pressures persisted into FY2021, and whether operating cash flow remained resilient.
- Progress against the $75 million annual cost-reduction target and the separate restructuring savings estimate, including execution costs.
- Whether liquidity, debt covenants and financing access remained adequate after the amendments and during the downturn.
- The assumptions behind the goodwill impairment, tax valuation allowances and any further impairment or tax adjustments.