Avnet, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended July 2, 2016. Although the request metadata says “2015 Q4,” this filing covers fiscal 2016; fiscal 2016 included 53 weeks, versus 52 weeks in fiscal 2015. All amounts below are U.S. dollars.
Business context and results
Avnet distributes electronic components and enterprise IT products, software and services globally through Electronics Marketing (EM) and Technology Solutions (TS). Approximately 64% of fiscal 2016 sales came from outside the United States.
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Sales | $26.22 billion | $27.92 billion |
| Gross profit / margin | $3.04 billion / 11.6% | $3.19 billion / 11.4% |
| Operating income / margin | $787.7 million / 3.0% | $827.7 million / 3.0% |
| Adjusted operating income / margin | $895.6 million / 3.4% | $972.5 million / 3.5% |
| Net income | $506.5 million | $571.9 million |
| Diluted EPS | $3.80 | $4.12 |
| Operating cash flow | $224.3 million | $583.9 million |
Fiscal 2016 sales declined 6.1% as reported; organic sales declined 5.3% in constant currency after adjustments for acquisitions and the extra week. Gross margin rose 16 basis points, while adjusted operating margin fell 10 basis points. The effective tax rate increased to 24.5% from 19.8%; fiscal 2016 included a $15.1 million net tax benefit, compared with substantially larger tax benefits in fiscal 2015.
Segment and fourth-quarter trends
- EM: Sales were $16.57 billion, down 4.5%; operating margin was 4.4%, down 22 basis points. Lower demand in industrial markets and an ERP implementation that disrupted Americas customer delivery and service in the fourth quarter weighed on results. EMEA demand was stronger.
- TS: Sales were $9.65 billion, down 8.8%; operating margin was 3.3%, up 21 basis points. Weakness in legacy datacenter products and product mix weighed on sales; networking, services and software grew, partly offsetting declines in servers and storage.
- Fourth quarter: Sales were $6.23 billion versus $6.80 billion a year earlier; net income was $96.8 million versus $158.7 million; diluted EPS was $0.75 versus $1.15.
Cash, debt and liquidity
- Cash and equivalents were $1.03 billion at year-end, including $972.7 million held outside the United States. Working capital was $4.06 billion; the current ratio was 1.8 and quick ratio 1.2.
- Total debt was approximately $2.49 billion, up from approximately $1.98 billion a year earlier. Debt to capital was 34.7%, compared with 29.7%. The company issued $550 million of 4.625% notes due 2026 and repaid $250 million of notes at maturity.
- Operating cash flow fell to $224.3 million, primarily reflecting $636.7 million of cash used for working capital and other items, including a $367.7 million inventory increase. Capital expenditures were $147.5 million.
- Available borrowing capacity under the credit facility and receivables program totaled $2.15 billion. The $900 million receivables program had $730 million drawn and was due to expire in August 2016; management expected to renew or replace it. The company also expected to repay $300 million of 6.63% notes due September 2016 using cash and borrowing capacity. It reported compliance with financing covenants.
Outlook, risks and unusual items
- The filing gives no numerical earnings or sales guidance. Management said available cash, borrowing capacity and expected operating cash flow should meet future liquidity needs.
- Restructuring, integration and other expenses were $79.3 million, including $52.8 million of restructuring costs. Avnet expected approximately $57 million of incremental annualized savings and recorded severance costs associated with reducing or planning to reduce more than 700 positions.
- In July 2016, after fiscal year-end, Avnet announced an offer to acquire Premier Farnell for approximately £691 million and arranged potential bridge financing. Completion and financing terms are subsequent-event items to monitor.
- Key risks include cyclical semiconductor and IT demand, competitive pricing and margin pressure, inventory obsolescence and customer cancellations, foreign-exchange exposure, collection and liquidity risks, reliance on suppliers (IBM represented about 11% of billings), ERP and cybersecurity risks, and acquisition integration. The company noted that cloud-based IT models may reduce hardware demand.
- Estimated liabilities for compliance-related matters were $20.2 million, including an $8.5 million offer-in-compromise to resolve a customs investigation. Fiscal 2016 also included $4.3 million of environmental remediation expense and $8.4 million of legal expense related to an acquired business. Management did not expect pending matters to materially affect financial position or liquidity, but said some could be material to results in a reporting period.
Investor verification points
- Confirm the receivables program was renewed or replaced before its August 2016 expiry and that the September 2016 notes were repaid as planned.
- Assess whether the working-capital cash use and inventory build—particularly inventory supporting the EM Americas ERP conversion—reversed or persisted.
- Verify the status, final consideration and financing of the Premier Farnell offer, and the expected timing and realization of restructuring savings.
- Review subsequent results for recovery in EM Americas after the ERP disruption and stabilization of TS demand and margins.
- Track tax-rate variability, the resolution of customs and other compliance matters, and debt, liquidity and covenant headroom.