Avnet, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, ended September 30, 2023. Comparisons are with the first quarter ended October 1, 2022, unless otherwise noted. Dollar figures below are USD millions, except per-share data.
Business context and financial performance
Avnet distributes electronic components and related products globally through its Electronic Components (EC) and Farnell operating groups.
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $6,335.6 | $6,750.1 | Down 6.1% (down 7.8% in constant currency) |
| Gross profit / margin | $748.1 / 11.8% | $768.2 / 11.4% | Profit down 2.6%; margin up 43 bps |
| Operating income / margin | $253.8 / 4.0% | $290.5 / 4.3% | Down 12.7%; margin down 29 bps |
| Adjusted operating income | $261.7 | $293.3 | Down 10.8% |
| Net income | $209.3 | $184.3 | Up 13.6% |
| Diluted EPS | $2.25 | $1.93 | Up $0.32 |
| Cash flow from operations | $(41.3) | $(645.1) | Cash use decreased substantially |
Drivers and material changes
- Sales declined primarily as electronic-component supply normalized and demand eased versus the prior-year period. EC sales fell 6.5% (8.1% in constant currency); Farnell sales fell 1.1% (3.8% in constant currency).
- Regional sales were down 6.3% in the Americas and 16.6% in Asia, while EMEA increased 8.4% as reported (1.9% in constant currency).
- EC operating income was $272.8 million versus $267.3 million; its margin rose 38 bps to 4.6%. Farnell operating income fell to $17.7 million from $51.6 million, and its margin declined 792 bps to 4.2%. Farnell faced weaker demand, competitive pricing, and the unwinding of component-shortage pricing premiums.
- SG&A rose 2.0% to $487.3 million, mainly due to foreign currency translation. SG&A was 7.7% of sales versus 7.1% a year earlier.
- Interest and other financing expense rose to $70.8 million from $45.1 million, reflecting higher average borrowings and borrowing rates.
- Net income included an $86.5 million pretax gain on legal settlements, equivalent to $0.71 per diluted share after tax. The filing does not provide net income excluding this gain.
Cash, debt, and liquidity
- Cash and cash equivalents were $278.7 million at September 30, 2023, down from $288.2 million at July 1, 2023. Total debt was approximately $3.17 billion, compared with approximately $3.06 billion at July 1.
- Current assets were $10.91 billion and current liabilities $4.29 billion. Inventory was $5.76 billion, up from $5.47 billion at July 1.
- Operating cash use was $41.3 million. Working capital and other items used $280.1 million, including a $371.6 million inventory increase, partly offset by lower receivables and higher payables.
- Investing activities used $75.8 million, including $76.1 million of capital expenditures, primarily for EMEA distribution and warehouse expansions. Financing activities provided $100.2 million, including $243.6 million of net credit-facility borrowings.
- Combined borrowing capacity under the revolving credit facility and receivables securitization program was $2.20 billion; approximately $733.3 million of committed availability remained. Facility and securitization covenants were met at quarter-end.
- Approximately 52% of debt bore fixed rates and 48% variable rates. The company estimated that a hypothetical 1 percentage-point rate increase would reduce quarterly pretax income by $3.8 million.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said it believes operating cash generation, available borrowing capacity, and potential capital-markets access will be sufficient for future liquidity needs.
- Management noted that Avnet typically generates operating cash during industry demand weakness and uses cash for working capital during periods of higher growth. Cash used in operations over the trailing four fiscal quarters was $109.8 million.
- Risks highlighted include semiconductor industry cycles and supply changes, customer and supplier credit exposure, competition and pricing pressure, foreign exchange and interest-rate movements, geopolitical and trade developments, cyber and systems risks, and general economic conditions.
- The company reported $22.7 million of estimated liabilities for reasonably estimable compliance-related legal matters. Outcomes and maximum exposure for certain pending or potential investigations cannot be reasonably estimated; management said these matters could be material to results in a single period, though it does not expect a material adverse effect on financial position or liquidity.
- Q1 restructuring, integration, and other expenses were $7.1 million, including $2.7 million of Farnell severance costs related to a reduction or planned reduction of more than 50 employees. Management did not anticipate material adjustments to these plans.
Important facts for investors to verify
- The amount and sustainability of the $86.5 million legal-settlement gain, and underlying earnings excluding that unusual item.
- Whether inventory growth and demand normalization continue to pressure sales, working capital, and cash generation.
- Whether Farnell can stabilize margins amid pricing pressure and the reversal of shortage-related premiums.
- Borrowing levels, interest costs, remaining committed availability, and continued compliance with debt covenants.
- Developments in compliance-related legal matters and the adequacy of recorded liabilities.