Avnet, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter ended December 31, 2022; six-month results are for the period ended the same date. Comparisons are to the quarter and six months ended January 1, 2022, unless otherwise noted. Avnet distributes electronic components and technology products through its Electronic Components (EC) and Farnell businesses.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales | $6.72 billion | $5.87 billion | $13.47 billion | $11.45 billion |
| Gross profit | $784.1 million | $713.0 million | $1.55 billion | $1.37 billion |
| Gross margin | 11.7% | 12.2% | 11.5% | 12.0% |
| Operating income | $299.0 million | $211.7 million | $589.5 million | $379.9 million |
| Net income | $243.9 million | $150.8 million | $428.1 million | $262.1 million |
| Diluted EPS | $2.63 | $1.50 | $4.55 | $2.60 |
- Q2 reported sales increased 14.5%; growth was 21.1% excluding foreign-currency effects. Operating margin was 4.5%, versus 3.6% a year earlier. Adjusted operating income was $300.5 million, with a 4.5% margin versus 3.7%.
- EC Q2 sales rose 16.3% reported and 22.8% in constant currency; segment operating margin increased to 4.7%. Farnell sales fell 7.5%, primarily due to supply constraints for certain single-board computers and currency translation; operating margin declined to 9.0% from 13.6%.
- SG&A was $485.1 million, down 3.2% year over year. Lower expenses and higher sales supported operating leverage, while product and customer mix reduced gross margin.
- Six-month operating cash flow was negative $966.5 million, compared with negative $263.2 million. Working capital used $1.48 billion, including $469.7 million from receivables, $686.9 million from inventory, and $341.2 million from lower accounts payable.
- Capital expenditures were $111.4 million for the six months, primarily supporting a new EMEA warehouse, versus $22.1 million in the prior-year period. Financing activities provided $1.26 billion, including $1.13 billion of net credit-facility borrowings and $352.2 million under the receivables securitization program.
Balance sheet and liquidity
- At December 31, 2022, cash and equivalents were $324.8 million; receivables were $4.79 billion and inventory was $4.97 billion. Total assets were $11.93 billion.
- Total debt carrying value was approximately $3.19 billion, versus $1.61 billion at July 2, 2022; cash was $324.8 million. The increase chiefly reflects borrowing to fund working capital. Debt includes $1.19 billion under the credit facility and $650 million under the receivables securitization program.
- Combined committed availability under those facilities was approximately $309.3 million at quarter-end. Avnet reported compliance with debt covenants. Management said operating cash generation as working capital is liquidated, available borrowing capacity, and potential capital-markets access should meet future liquidity needs.
- Interest and other financing expense rose to $59.0 million in Q2 and $104.1 million for six months, primarily reflecting higher borrowings and borrowing rates. Approximately 64% of debt bore variable rates; the company estimated a 100-basis-point rate increase would reduce Q2 pretax income by $5.1 million.
Material changes, unusual items, and outlook
- Q2 net income included a $61.7 million pretax gain ($47.2 million after tax, or $0.51 per diluted share) from settlement of claims against capacitor manufacturers. Avnet had received $51.2 million in cash by quarter-end.
- Foreign-currency translation affected reported results; management attributed strong EC sales to demand across regions, including transportation, industrial, and aerospace and defense markets. Farnell faced product supply constraints.
- No numerical earnings or sales guidance is provided in the supplied filing text. Management cautions that interim results may not indicate full-year results.
- Risks include economic and industry-cycle conditions, component supply and supplier relationships, customer credit risk, foreign exchange and international operations, geopolitical events, supply-chain and distribution disruption, cybersecurity and systems risks, and access to financing. The filing reports no material changes to the prior 10-K risk factors.
- Avnet disclosed $14.7 million of estimated liabilities for reasonably estimable compliance-related matters. Outcomes and potential losses for certain legal and regulatory matters cannot be estimated; management did not expect a material effect on financial position or liquidity, but results in an individual period could be materially affected.
Important facts for investors to verify
- Whether inventory and receivables convert to cash as expected, and how working-capital needs and operating cash flow evolve.
- Facility availability, debt levels, borrowing costs, variable-rate exposure, and continued covenant compliance.
- Whether EC demand and margins remain resilient and whether Farnell’s supply constraints and margin decline improve.
- The effect of the one-time legal settlement gain when assessing recurring earnings.
- Developments in compliance-related legal matters, foreign-exchange exposure, and the risks detailed in Avnet’s filings.