Avnet, Inc. — Form 10-Q summary
Period: Third quarter and first nine months of fiscal 2022, ended April 2, 2022. The request metadata says “2021 Q3,” but the filing is for fiscal 2022 Q3. Fiscal 2022’s first nine months comprised 39 weeks versus 40 weeks in the comparable fiscal 2021 period.
Business context and financial performance
Avnet is a global technology distributor and solutions provider. Its reportable segments are Electronic Components (EC) and Farnell.
| Metric | Q3 FY22 | Q3 FY21 | First 9 months FY22 | First 9 months FY21 |
|---|---|---|---|---|
| Sales | $6.49 billion | $4.92 billion | $17.94 billion | $14.31 billion |
| Gross profit | $813.0 million | $568.4 million | $2.19 billion | $1.60 billion |
| Operating income | $274.4 million | $87.7 million | $654.3 million | $163.4 million |
| Net income | $183.4 million | $107.5 million | $445.6 million | $107.8 million |
| Diluted EPS | $1.84 | $1.07 | $4.44 | $1.08 |
- Q3 sales rose 32.0% reported and 35.7% in constant currency. Management attributed growth to strong demand across both segments and all regions, particularly transportation and industrial demand in EC.
- Q3 gross margin increased to 12.5% from 11.6%; operating margin rose to 4.2% from 1.8%. Adjusted operating income, a non-GAAP measure, was $303.7 million versus $110.5 million; adjusted operating margin was 4.7% versus 2.3%.
- For the first nine months, gross margin was 12.2% versus 11.2%. SG&A was 8.4% of sales versus 9.6%, reflecting operating leverage despite higher costs to support volume and inflation.
- Q3 EC sales were $6.02 billion, up 33.2%; Farnell sales were $469.0 million, up 18.4%. Both segments reported operating income growth.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was a use of $19.4 million, compared with $197.5 million provided a year earlier. Working capital used $660.8 million, including increases in receivables of $881.0 million and inventory of $550.0 million, partly offset by a $628.8 million increase in accounts payable.
- Cash and cash equivalents were $199.5 million at April 2, 2022. Total debt was approximately $1.35 billion, versus $1.21 billion at July 3, 2021. Current liabilities were $4.07 billion and current assets $8.22 billion.
- Avnet reported approximately $1.62 billion of borrowing availability under its credit facility and receivables securitization program. It was in compliance with facility covenants. The $350 million notes due December 2022 were classified as short-term debt; management said it believed it could renew or replace maturing debt and had adequate capital-market access if needed.
- The company used $33.7 million for capital expenditures, paid $73.3 million in dividends, and repurchased $89.0 million of shares during the nine months. It also received $84.3 million from liquidation of company-owned life insurance policies.
Material changes, outlook and risks
- Russia’s invasion of Ukraine resulted in $26.3 million of Q3 expense, including $17.2 million of credit-loss provisions on Russian receivables and costs for product write-downs and winding down operations. Avnet said it did not expect to resume business with Russian customers in the foreseeable future; historically, Russian sales and gross profit were each less than 1% of consolidated totals.
- Management cited possible further effects from geopolitical developments, supply-chain disruption, inflation, freight costs, cyberattacks and credit-market disruption. It noted that impacts could be materially adverse, particularly if the conflict expands into other parts of Europe.
- Avnet said the termination of its Maxim distribution agreement could reduce future sales and gross profit if not offset by growth, margin improvements or cost reductions. Maxim products represented about 3% of fiscal 2021 sales. The filing also discusses the prior termination of the Texas Instruments distribution agreement in its organic-sales comparisons.
- Management expected to release its U.S. deferred-tax-asset valuation allowance in Q4 FY22 as U.S. profitability improved; the resulting discrete tax benefit was expected to reduce the fiscal 2022 effective tax rate. No specific sales or earnings guidance is provided in the supplied filing text.
- Other identified risks include semiconductor industry cyclicality, supplier relationships and product allocations, international operations and currency exposure, competition, acquisitions, technology and information-system risks, and general economic conditions. Management did not expect pending ordinary-course litigation to materially affect financial condition, liquidity or results, but certain compliance matters could affect a single period’s results; $14.7 million of estimated liabilities was accrued.
Most important facts for investors to verify
- Whether strong demand and improved gross margins persist, and how sales growth converts into operating cash flow as receivables and inventory expand.
- Progress on refinancing or repaying the $350 million notes due December 2022, and continued compliance with debt covenants.
- The realized effects of the Russia-Ukraine conflict and the Maxim distribution agreement termination on sales, credit losses and margins.
- Whether the anticipated U.S. tax valuation-allowance release occurs in Q4 FY22 and its effect on the effective tax rate.
- How reported growth compares with organic and constant-currency growth, considering the extra week in the prior-year nine-month period.