Avnet, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 29, 2019 (52 weeks). The filing also reports fourth-quarter fiscal 2019 results; this is an annual filing, not a standalone quarterly report.
Business context
Avnet distributes electronic components and provides design, integration, logistics and supply-chain services worldwide. Its two reportable operating groups are Electronic Components (EC), serving primarily higher-volume customers, and Farnell, serving primarily lower-volume customers. Avnet operates in more than 140 countries; approximately 75% of fiscal 2019 sales came from outside the United States. Semiconductors accounted for approximately 77% of sales. Texas Instruments was the only supplier representing more than 10% of sales, at approximately 10%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $19.52 billion | $19.04 billion |
| Gross profit / margin | $2.49 billion / 12.7% | $2.53 billion / 13.3% |
| Operating income / margin | $365.9 million / 1.9% | $209.2 million / 1.1% |
| Adjusted operating income / margin (non-GAAP) | $695.7 million / 3.6% | $627.7 million / 3.3% |
| Net income (loss) | $176.3 million | $(156.4) million |
| Diluted earnings (loss) per share | $1.59 | $(1.30) |
| Operating cash flow from continuing operations | $591.1 million | $253.5 million |
| Cash and cash equivalents | $546.1 million | $621.1 million |
| Total debt | $1.72 billion | $1.65 billion |
| Working capital | $4.30 billion | $4.64 billion |
Fiscal 2019 sales increased 2.5% as reported and 4.4% in constant currency. EC sales grew 2.9% as reported (4.8% in constant currency); Farnell sales declined 2.3% as reported and were flat in constant currency. SG&A fell 5.9% to $1.87 billion. Interest and other financing expense rose 45.4% to $134.9 million. The effective tax rate was 25.7%, compared with 198.5% in fiscal 2018, which was affected by the Tax Cuts and Jobs Act and nondeductible goodwill impairment.
At year-end, current and quick ratios were 2.7:1 and 1.4:1, respectively. Combined availability under the revolving credit facility and receivables securitization program was $1.52 billion. Cash flow benefited from lower receivables and inventory, partly offset by reductions in accounts payable and accrued expenses. The company repurchased $568.7 million of shares and paid $87.2 million in dividends during fiscal 2019.
Material changes and unusual items
- Gross margin declined 54 basis points, primarily because of industry and macroeconomic conditions and a higher mix of EC sales from Asia.
- Reported operating income improved from fiscal 2018, but both years included substantial charges. Fiscal 2019 included $137.4 million of goodwill impairment and $108.1 million of restructuring, integration and other expenses; fiscal 2018 included $181.4 million and $145.1 million, respectively. Excluding these items and acquired-intangible amortization, adjusted operating income increased by $68.0 million.
- Fiscal 2019 goodwill impairment related to EC reporting businesses in the Americas and Asia and followed lower-than-expected second-half results and reduced future expectations. The impairment was non-cash.
- Fiscal 2019 restructuring expenses included $54.7 million of primarily IT-related asset impairments and $35.8 million of severance costs. The actions were associated with a reduction or planned reduction of approximately 600 employees.
- Fiscal 2019 net income included a fourth-quarter net loss of $31.8 million, or $(0.30) diluted per share; the quarter included $118.8 million of after-tax goodwill impairment and a $20.9 million discrete tax benefit.
- Avnet adopted ASC Topic 606 in fiscal 2019; the filing says adoption did not materially affect the financial statements. It increased opening retained earnings by $2.0 million.
- Fiscal 2019 included a $120.0 million final settlement adjustment related to the 2017 sale of the Technology Solutions business; related cash receipts and tax payments are reflected in discontinued-operations cash flows. Fiscal 2019 also recorded a $3.8 million loss from discontinued operations.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management expects approximately $50 million of incremental annualized operating cost savings from fiscal 2019 restructuring actions and expects to incur up to $35 million of restructuring costs in fiscal 2020, primarily severance and lease-exit costs. Avnet expected to renew or replace its receivables securitization program before its August 2020 maturity and planned to address $300 million of notes due June 2020 through new notes or available credit-facility capacity. Management said operating cash generation and available borrowing capacity should be sufficient for future liquidity needs.
- Principal business risks include semiconductor-cycle and demand fluctuations, pricing and margin competition, inventory obsolescence or customer cancellations, customer and supplier credit risk, and reliance on key suppliers.
- International operations expose Avnet to foreign exchange, tariffs and trade restrictions, Brexit uncertainty, regulatory and tax complexity, and geopolitical disruption. The company said tariffs had not yet had a significant impact but could affect costs, demand and operating results.
- Other risks include acquisition integration, IT implementation, logistics interruption, cybersecurity and data privacy, and the ability to retain skilled employees.
- Debt agreements contain financial tests and restrictions on debt, dividends, repurchases, investments and other actions. Avnet reported compliance with the securitization-program and credit-facility covenants at year-end.
- Pending and potential legal and regulatory matters include import/export and environmental compliance issues. Management did not expect a material adverse effect on financial position or liquidity, but stated that outcomes could be material to results in an individual reporting period. Estimated compliance-related liabilities were $14.7 million.
- Estimated unrecognized tax benefits were $147.2 million; the timing of settlement of the remaining balance was uncertain. The filing also describes potential indemnification obligations related to the former Technology Solutions business.
- Adoption of the new lease standard in fiscal 2020 was expected to materially increase reported assets and liabilities, without a material effect on operating results or cash flows.
Important facts for investors to verify
- Whether the reported sales growth and adjusted operating-income improvement persist despite lower gross margins and weaker second-half conditions.
- Whether the $50 million expected annual cost savings are achieved and the related restructuring costs remain within management’s estimate.
- How Avnet refinances or repays the $300 million notes due June 2020 and renews or replaces the securitization program before August 2020.
- Whether working-capital cash-flow benefits are sustainable and how cash balances held outside the United States affect liquidity.
- Future goodwill impairment risk, particularly in EC businesses affected by lower operating expectations, and the basis for key valuation assumptions.
- Developments in tax contingencies, Technology Solutions indemnities, compliance matters, tariffs and Brexit-related exposure.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of June 29, 2019.