Avnet, Inc. — Fiscal 2010 Form 10-K
Reporting period: Fiscal year ended July 3, 2010. Fiscal 2010 included 53 weeks; fiscal 2009 included 52. Avnet distributes electronic components and enterprise computing products and provides related engineering, integration, logistics and supply-chain services. Its two operating groups are Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $19.16 billion | $16.23 billion |
| Gross profit / gross margin | $2.28 billion / 11.9% | $2.02 billion / 12.5% |
| Operating income (loss) | $635.6 million | $(1.02) billion |
| Net income (loss) | $410.4 million | $(1.13) billion |
| Diluted EPS | $2.68 | $(7.49) |
| Cash from operating activities | $(30.4) million | $1.12 billion |
| Cash and cash equivalents at year-end | $1.09 billion | $943.9 million |
| Total debt at year-end | $1.28 billion | $969.9 million |
- Revenue rose 18.1% as reported; organic growth was 15.5%. Management estimated the extra fiscal week contributed about $400 million in sales.
- EM revenue was $10.97 billion, up 19.3%; TS revenue was $8.19 billion, up 16.4%. Asia/Pacific represented 25.3% of sales, versus 20.9% in FY2009.
- Gross margin declined 56 basis points, reflecting mix shifts and lower margins across regions. SG&A increased 5.7%, slower than sales growth; it fell to 8.5% of sales from 9.4%.
- Excluding restructuring, integration and other charges, FY2010 operating income was $661.0 million, or 3.5% of sales, versus $491.5 million, or 3.0%, in FY2009. FY2009 also included $1.41 billion of non-cash goodwill and intangible-asset impairment charges, making the GAAP comparison unusually distorted.
- Operating cash outflow reflected higher receivables and inventory associated with growth, partly offset by increased payables. Working-capital velocity reached a reported record 7.8 times.
- Working capital was $3.19 billion; the quick ratio was 1.4:1 and the current ratio was 1.9:1, compared with 1.5:1 and 2.1:1, respectively, in FY2009. Debt to total capital increased to 29.8% from 26.0%.
Changes, outlook and material items
- Management said technology markets recovered faster than expected and FY2010 results exceeded expectations. Revenue grew year over year in each quarter from the second quarter onward; gross margin improved sequentially during the final three quarters.
- Management cautioned that the pace and durability of the global recovery were uncertain. No specific company-wide FY2011 revenue or earnings guidance is provided in the supplied filing text.
- After year-end, Avnet completed its acquisition of Bell Microproducts on July 6, 2010. The transaction had an approximate $575 million total value, including $252 million of equity value and assumption of about $323 million of net debt. Avnet expected the deal to be immediately accretive excluding integration and transaction costs and forecast $50–$60 million of cost synergies after integration, anticipated by the end of FY2011. The filing states about $25 million of Bell equity-award costs would be expensed in FY2011.
- Avnet also completed post-year-end acquisitions of Tallard and Unidux. Together with Bell, management reported using approximately $600 million to fund the three acquisitions, including repayment of certain assumed debt.
- In June 2010, Avnet issued $300 million of 5.875% notes due 2020, receiving $296.5 million net of discount and fees. The $500 million revolving credit facility had $93.7 million drawn; the receivables program had no balance outstanding and was expected to be renewed in August 2010. The company reported covenant compliance at year-end.
- FY2010 included $25.4 million of restructuring, integration and other charges, including a $6.5 million European VAT exposure related to a prior-year audit. FY2010 also included an $8.8 million pre-tax gain on sale of assets, principally earn-out proceeds.
- Key risks include cyclical semiconductor demand, competitive pricing and margin pressure, inventory obsolescence and customer order cancellations, customer credit risk, supplier dependence (IBM represented about 15% of sales), foreign-exchange and international operating risks, acquisition integration, information-system and logistics disruptions, and financing/covenant constraints.
- Environmental matters relate primarily to former manufacturing operations; management said it had appropriately accrued estimated cleanup costs and no particular pending environmental proceeding required specific disclosure. Other ordinary-course litigation was not expected by management to have a material adverse effect. Unrecognized tax benefits were $132.8 million at year-end.
Important facts for investors to verify
- How much of reported growth reflected underlying demand versus acquisitions, the additional fiscal week and regional/product mix.
- Whether margin recovery continued, particularly in EMEA and Asia, and whether working-capital demands reduced operating cash generation as growth persisted.
- Post-acquisition cash, debt and liquidity after Bell, Tallard and Unidux, and whether Bell’s projected accretion and $50–$60 million synergies were achieved on schedule.
- Exposure to IBM and semiconductor cycles, inventory valuation and receivables collection, along with compliance with financing covenants and renewal of the receivables program.
- The resolution and cash consequences of tax contingencies, the European VAT matter, and environmental and other legal obligations.