Avnet, Inc. — Form 10-Q summary
Business context and reporting period. Avnet distributes electronic components and related products through its Electronic Components (EC) and Farnell segments. This is fiscal 2022’s first quarter, ended October 2, 2021. The quarter had 13 weeks, compared with 14 weeks in the prior-year quarter ended October 3, 2020; this difference affects year-over-year comparisons.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $5.585 billion | $4.723 billion |
| Gross profit / margin | $659.7 million / 11.8% | $516.1 million / 10.9% |
| Operating income / margin | $168.2 million / 3.0% | $18.5 million / 0.4% |
| Adjusted operating income | $178.8 million | $65.1 million |
| Net income (loss) | $111.3 million | $(18.9) million |
| Diluted earnings (loss) per share | $1.10 | $(0.19) |
| Operating cash flow | $(31.0) million | $122.4 million |
- Reported sales rose 18.2%; constant-currency sales increased 17.5%. Organic sales growth, adjusted for the prior-year extra week and the Texas Instruments distribution termination, was 32.9% in constant currency.
- EC sales were $5.129 billion, up 17.1% reported; Farnell sales were $455.2 million, up 33.5%. Management cited strong global component demand, particularly in transportation and industrial markets, and growth across both segments.
- Gross margin improved 88 basis points, attributed mainly to strong demand, favorable pricing and product/customer mix, partly offset by a less favorable regional sales mix. SG&A rose 3.2% to $486.2 million, but declined to 8.7% of sales from 10.0%.
- Cash and equivalents were $299.1 million at quarter-end, versus $199.7 million at fiscal year-end. Total debt carrying value was $1.39 billion, up from $1.21 billion; long-term debt was $1.390 billion and short-term debt was zero.
- Avnet reported approximately $1.48 billion of availability under its $1.25 billion revolving credit facility and $450 million receivables securitization program, subject to facility terms and eligible receivables. It was in compliance with financing covenants.
Material changes and cash flows
Operating income increased $149.7 million year over year. The comparison reflects stronger sales and margins, lower restructuring and amortization expenses, and lower prior-year other expense; the prior period also included an equity-investment impairment. Adjusted operating income increased 174.6%, to $178.8 million. Prior-year results included a 14th week, so reported growth rates are not directly comparable without the company’s adjustments.
Operating cash flow turned negative, principally because growth increased receivables by $170.0 million and inventories by $74.0 million; higher payables provided a partial offset. Financing activities provided $142.5 million, including $118.7 million net borrowings under the credit facility and $59.3 million under the securitization program. Investing activities used $11.7 million, including $12.0 million of capital expenditures. Avnet paid $23.9 million in dividends and repurchased $10.5 million of shares.
Outlook, risks and unusual items
- The filing provides no specific numerical sales or earnings guidance. Management said operating cash generation and available borrowing capacity should be sufficient for future liquidity needs; actual results may differ, and interim performance is not necessarily indicative of the full year.
- Avnet warned that termination of its Maxim Integrated distribution agreement could reduce future sales and gross profit if not offset by growth, margin improvements or cost reductions. Maxim products represented approximately 3% of fiscal 2021 sales.
- Identified risks include COVID-19 and economic conditions, component supply and supplier allocations, semiconductor industry cycles, competition, foreign exchange and international operations, cybersecurity and systems risks, and logistics or distribution-center disruptions.
- Compliance-related legal matters carried estimated liabilities of $14.7 million. Management did not expect these matters to materially affect financial position or liquidity, but said they could be material to results in a single reporting period; maximum exposure could not be estimated for some matters.
- Q1 FY2022 restructuring, integration and other expenses were $5.3 million, substantially integration costs. Remaining restructuring liabilities were $26.0 million, with most expected to be paid by fiscal year-end. Management said no material changes had occurred to the Form 10-K risk factors.
Investor facts to verify
- How sustained demand, pricing and product mix affect gross margins, and whether sales growth persists after accounting for the shorter current-year quarter and prior-year adjustments.
- The expected financial impact and timing of the Maxim distribution agreement termination, including whether growth elsewhere can offset it.
- Whether working-capital investment continues to constrain operating cash flow as sales grow, and how Avnet funds receivables and inventory.
- Debt levels, borrowing availability, covenant compliance and the ability to refinance or renew facilities, including the June 2023 credit facility maturity.
- Potential outcomes and costs of compliance-related legal matters, and whether restructuring payments and share repurchases remain consistent with liquidity needs.