Avnet, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2014 (52 weeks); comparable period ended June 29, 2013. Avnet is a global distributor of electronic components and enterprise IT products and solutions, operating through Electronics Marketing (EM) and Technology Solutions (TS).
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $27.50 billion | $25.46 billion |
| Gross profit / margin | $3.23 billion / 11.7% | $2.98 billion / 11.7% |
| Operating income / margin | $789.9 million / 2.9% | $626.0 million / 2.5% |
| Adjusted operating income / margin | $931.3 million / 3.4% | $807.9 million / 3.2% |
| Net income | $545.6 million | $450.1 million |
| Diluted EPS | $3.89 | $3.21 |
| Cash from operating activities | $237.4 million | $696.2 million |
| Cash and cash equivalents, year-end | $929.0 million | $1.01 billion |
| Total debt, year-end | $2.08 billion | $2.05 billion |
| Working capital, year-end | $3.98 billion | $3.54 billion |
Sales rose 8.0%; organic sales increased 5.2% (4.8% in constant currency). EM sales increased 9.6%, while TS sales increased 5.7%; TS organic sales were essentially flat in constant currency. EM generated $747.9 million of operating income, and TS generated $317.8 million. Sales by product included $13.16 billion in semiconductors and $10.57 billion in computer products.
Fiscal fourth-quarter sales were $7.05 billion versus $6.59 billion a year earlier; gross profit was $837.0 million versus $770.9 million, net income was $186.3 million versus $126.1 million, and diluted EPS was $1.33 versus $0.91.
Changes versus prior year
- Operating income increased 26.2%, while adjusted operating income rose 15.3%; adjusted operating margin improved 20 basis points.
- EM growth, led by EMEA and Asia, more than offset flat TS organic sales. Higher-volume fulfillment sales supported Asia growth but put pressure on EM gross margin there.
- Operating cash flow fell to $237.4 million from $696.2 million, primarily because working capital used $564.3 million, including increases in receivables and inventory.
- Restructuring, integration and other expenses declined to $94.6 million from $149.5 million. Avnet completed three acquisitions with approximately $492 million of annualized sales, versus 12 acquisitions totaling approximately $1.18 billion of annualized sales in FY2013.
Liquidity, debt and capital allocation
Year-end current assets were $8.95 billion and current liabilities were $4.98 billion; the quick ratio was 1.2:1 and the working-capital ratio was 1.8:1. Debt was 29.8% of total capitalization, down from 32.3%. Cash included $815.4 million held outside the U.S., which Avnet expected to remain permanently reinvested abroad; repatriation could trigger significant taxes.
Avnet repaid $300 million of notes at maturity during FY2014. Its receivables securitization program had $615 million outstanding at year-end and an $800 million maximum capacity; renewal was expected when its August 2014 term expired. In July 2014, Avnet replaced its $1.0 billion revolving credit facility with a five-year $1.25 billion facility, expandable to $1.50 billion subject to conditions. The company reported compliance with applicable covenants at year-end.
Avnet initiated a quarterly dividend of $0.15 per share in August 2013 and paid $0.60 per share for FY2014. The Board had authorized up to $750 million in repurchases, with $215.9 million remaining at year-end. The company stated it expected available borrowing capacity, cash and future operating cash flow to meet liquidity needs.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected restructuring actions to be substantially complete by Q2 FY2015 and to produce $30–$35 million in annualized operating cost savings.
- FY2014 net income included a $22.1 million pretax gain on a legal settlement and a $43.8 million net tax benefit, primarily from releasing deferred-tax valuation allowances. Without the EMEA valuation-allowance release, management said the effective tax rate would have been 27.0%, versus the reported 22.2%.
- Growth and profitability remain exposed to technology and semiconductor cycles, competitive pricing and margin pressure, inventory obsolescence, customer credit and receivable collection, supplier concentration, foreign exchange and international operating risks. IBM products accounted for approximately 13% of sales; management expected a roughly similar share in FY2015.
- Avnet reported $128.2 million of unrecognized tax benefits. A potential customs-duty matter related to acquired Bell operations had a stated exposure range up to $73 million; Avnet had recorded a $10 million liability and considered it a reasonable estimate based on information then available.
- No goodwill impairment was recorded. Two reporting units had estimated fair values only about 10% and 15% above carrying value, respectively. Environmental and ordinary-course legal matters were discussed; management did not expect current matters to materially affect financial position, liquidity or results.
- Cash from operations was substantially below net income, reflecting working-capital investment. This makes cash conversion, inventory, receivables and continued access to the securitization program important monitoring points.
Key facts for investors to verify
- Whether projected $30–$35 million annualized savings were achieved and whether restructuring costs tapered as expected.
- Whether operating cash flow recovered and receivables and inventory remained well controlled after FY2014 working-capital use.
- Renewal terms and availability of the receivables securitization program, covenant headroom, and scheduled debt repayments.
- Whether EMEA taxable earnings support deferred-tax asset realization and whether future tax adjustments affect the effective rate.
- Resolution and ultimate cash exposure of the Bell customs matter, and performance of acquired businesses and contingent consideration.
- Whether semiconductor, regional and product mix changes affected gross margins, particularly in Asia, and whether IBM supplier concentration changed.