Avnet, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 29, 2013 (52 weeks), compared with fiscal 2012 ended June 30, 2012. Although the request metadata says “2012 Q4,” this filing reports the full fiscal year ended in 2013.
Business context
Avnet distributes electronic components, enterprise computing and storage products, software, IT services and embedded systems globally. Its two operating groups are Electronics Marketing (EM) and Technology Solutions (TS). Sales were $25.46 billion; approximately 63% came from outside the United States. Semiconductors represented more than half of sales.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $25.46 billion | $25.71 billion |
| Gross profit / margin | $2.98 billion / 11.7% | $3.05 billion / 11.9% |
| Operating income / margin | $626.0 million / 2.5% | $884.2 million / 3.4% |
| Adjusted operating income, excluding restructuring and integration charges | $775.5 million | $957.8 million |
| Net income | $450.1 million | $567.0 million |
| Diluted earnings per share | $3.21 | $3.79 |
| Cash from operating activities | $696.2 million | $528.7 million |
At year-end, cash and cash equivalents were $1.01 billion, total debt was $2.05 billion, and working capital was $3.54 billion. The quick ratio was 1.2:1, the working-capital ratio was 1.7:1, and debt to total capital was 32.3% (35.4% in FY2012). Cash held outside the U.S. was $918.4 million.
Material changes versus FY2012
- Reported revenue fell 1.0%; organic revenue declined 5.3% (4.2% excluding currency translation). Weakness in western markets, especially in TS, was partly offset by growth in Asia.
- EM revenue increased 1.1% to $15.09 billion, while TS revenue declined 3.8% to $10.36 billion. Organic revenue declined in both groups.
- Gross margin fell 17 basis points. Adjusted operating margin declined to 3.0% from 3.7%; acquisitions, lower sales and margin pressure weighed on performance.
- Operating cash flow increased to $696.2 million, helped by working-capital cash generation, including a $225.7 million inventory decrease.
- Avnet completed 12 acquisitions with approximately $1.18 billion of aggregate annualized revenue. Acquisition cash outlays, net of cash acquired, were $262.3 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no quantified revenue or earnings guidance. Management said cash, borrowing capacity and expected operating cash generation should be sufficient for projected financing needs. It expected IBM products and services, which accounted for about 12% of FY2013 sales, to remain a similar share in FY2014.
- Restructuring and integration: FY2013 charges were $149.5 million pre-tax, including $120.0 million of restructuring charges. Cost-reduction actions eliminated more than 1,600 positions and included facility exits. Management expected some acquisition-related cost synergies, particularly in TS EMEA, to take several quarters to achieve.
- Tax items: The 18.1% effective tax rate included a net $50.4 million tax benefit, including favorable audit settlements and valuation-allowance releases. These items benefited reported earnings and may not recur.
- Debt and liquidity: The $800 million accounts-receivable securitization program was due to expire in August 2013; management expected renewal on comparable terms. The company reported compliance with applicable covenants. Its $300 million 5.875% notes were due March 2014.
- Contingencies: A customs matter connected with acquired Bell operations had a recorded liability of $10 million; the company estimated potential exposure could reach $73 million. Management considered the recorded amount reasonable based on information available. It said other ongoing litigation was not expected to have a material adverse effect.
- Key risks: Cyclical semiconductor demand, competitive pricing and margin pressure, inventory obsolescence and order cancellations, customer credit and collections, reliance on suppliers, international and currency exposure, acquisition integration, logistics and IT disruptions, and financing or covenant constraints.
Important facts for investors to verify
- Underlying demand and margins by operating group and region, especially the extent of further weakness in western markets.
- Whether planned acquisition synergies materialize and whether restructuring produces lasting cost savings.
- Renewal terms and availability of the receivables securitization program, and the company’s ability to manage near-term debt maturities.
- The resolution and final cost of the Bell-related customs matter, compared with the recorded $10 million liability and stated potential exposure.
- The sustainability of earnings excluding restructuring charges, bargain-purchase gains and favorable tax items.