Avnet, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018 (52 weeks), with comparisons to fiscal 2017. Although the request metadata refers to 2017 Q4, this filing is the FY2018 annual report; fourth-quarter figures are noted below. Avnet distributes electronic components and provides design, integration, and supply-chain services. Its reportable groups are Electronic Components (EC) and Premier Farnell (PF). The Technology Solutions business was sold in February 2017 and is reported as discontinued operations.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $19.04 billion | $17.44 billion |
| Gross profit / margin | $2.53 billion / 13.3% | $2.37 billion / 13.6% |
| Operating income / margin | $230.5 million / 1.2% | $461.4 million / 2.6% |
| Adjusted operating income / margin (non-GAAP) | $649.0 million / 3.4% | $653.3 million / 3.7% |
| Income (loss) from continuing operations | $(142.9) million | $263.4 million |
| Net income (loss) / diluted EPS | $(156.4) million / $(1.30) | $525.3 million / $4.08 |
| Cash from continuing operating activities | $253.5 million | $221.0 million |
- Sales increased 9.2%; management reported organic sales growth of 3.6% in constant currency. PF contributed a full year of sales, and approximately $575 million of reported sales growth reflected currency translation.
- EC sales were $17.54 billion, up 6.5%; PF sales were $1.49 billion. EC Americas organic sales declined 6.7% in constant currency, while EMEA and Asia growth offset that decline.
- Gross profit rose 6.7%, but gross margin fell 31 basis points, principally from supplier channel/program changes and a higher share of lower-margin EC Asia sales.
- FY2018 operating income included $145.1 million of restructuring, integration and other expenses, $91.9 million of acquired-intangible amortization and a $181.4 million goodwill impairment. Excluding these items, adjusted operating income was nearly flat year over year.
- Fourth-quarter sales were $5.06 billion, gross profit $658.6 million, net income $58.6 million and diluted EPS $0.50.
Cash, debt and liquidity
- Cash and cash equivalents were $621.1 million at year-end, down from $836.4 million. Working capital was $4.64 billion; the current ratio was 2.6 and quick ratio 1.4.
- Total debt was approximately $1.65 billion ($165.4 million short-term and $1.49 billion long-term), versus approximately $1.78 billion a year earlier. Interest expense was $102.5 million, down from $106.7 million.
- Combined availability under the revolving credit facility and receivables program was $1.50 billion. Avnet reported compliance with applicable financial covenants. The receivables program was extended after year-end through August 2020, with its maximum increased to $500 million.
- Operating cash flow from continuing operations was $253.5 million; capital expenditures were $155.9 million. Higher receivables and inventory used cash, partly offset by higher payables. The company repurchased $323.5 million of stock and paid $88.3 million in dividends.
Changes, outlook and notable items
- The FY2018 net loss principally reflects a $230.0 million provisional one-time U.S. deemed-repatriation tax charge and the $181.4 million goodwill impairment; goodwill impairment was not tax-deductible. The effective tax rate was 198.5%, versus 15.2% in FY2017.
- FY2017 net income included a $222.4 million after-tax gain on the TS sale. FY2018 discontinued-operations loss of $13.5 million included pension settlement costs related to former TS employees.
- Management cited about $84.3 million in expected incremental annualized operating-cost savings from FY2018 restructuring actions. It said available cash, borrowing capacity, expected operating cash flow and remaining TS-sale proceeds should meet future liquidity needs. The filing provides no specific sales or earnings guidance.
- In August 2018, Avnet finalized a TS-sale closing adjustment expected to provide $120.0 million of incremental consideration, classified as discontinued-operations investing cash flow in FY2019.
- Key risks include semiconductor-industry cyclicality and intense pricing competition; supplier dependence (Texas Instruments represented about 11% of sales and management expected a similar share of billings in FY2019); inventory obsolescence and working-capital demands; foreign currency, tariffs and international regulation; acquisition integration; cybersecurity and IT execution; and debt covenant, tax and environmental/legal exposures.
- KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether organic growth and margins improve, particularly in EC Americas, and how much reported growth remains attributable to currency and PF.
- Whether the $181.4 million goodwill impairment signals further pressure on EC Americas cash-flow assumptions.
- The final tax consequences of the Tax Cuts and Jobs Act: the transition-tax amount was provisional and subject to refinement.
- Progress realizing restructuring savings, integrating PF, and managing inventory and receivables as product lead times lengthen.
- Debt maturities, covenant headroom and continued access to the receivables program; also confirm receipt and treatment of the $120.0 million TS-sale adjustment.
- Potential impact of tariffs, supplier changes and unresolved tax, environmental or compliance matters on future results.