Avnet, Inc. — Form 10-Q Summary
Reporting period: Second quarter ended January 2, 2021; six months ended the same date. This is fiscal 2021 Q2, notwithstanding the request metadata’s “2020 Q2.” The six-month period included 27 weeks, compared with 26 weeks in the prior-year period ended December 28, 2019, so comparisons are affected by the extra week.
Business context and results
Avnet distributes electronic components and related products through its Electronic Components (EC) and Farnell segments. It serves customers globally across the Americas, EMEA, and Asia/Pacific.
| Metric | Q2 FY2021 | Prior comparable quarter | Six months FY2021 | Prior comparable six months |
|---|---|---|---|---|
| Sales | $4.668B | $4.535B | $9.391B | $9.165B |
| Gross profit | $511.3M | $525.6M | $1.027B | $1.069B |
| Gross margin | 11.0% | 11.6% | 10.9% | 11.7% |
| Operating income | $57.2M | $46.5M | $75.7M | $109.2M |
| Adjusted operating income | $79.6M | $82.2M | $144.7M | $189.6M |
| Net income | $19.2M | $3.7M | $0.3M | $45.4M |
| Diluted EPS | $0.19 | $0.04 | $0.00 | $0.44 |
Q2 sales increased 2.9% year over year; management reported organic sales growth of 0.7% in constant currency. Asia was the principal growth contributor. EC sales rose 3.3% to $4.342B, while Farnell sales declined 1.6% to $325.8M. In constant currency, regional organic sales declined in the Americas and EMEA and increased 14.6% in Asia.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $207.4M, versus $344.2M in the prior-year period. Investing activities used $47.7M, including $30.0M of capital expenditures and $18.4M for an asset acquisition. Financing activities used $272.9M, including $239.4M of net repayments under the revolving credit facility and $41.5M of dividends.
- Cash and equivalents were $376.3M at January 2, 2021, down from $477.0M at June 27, 2020; $332.7M was held outside the United States. The company reported approximately $1.57B of availability under its credit facility and receivables securitization program.
- Total debt carrying value was approximately $1.21B, compared with $1.42B at fiscal year-end. Debt included $311.8M classified as short-term, including $300.0M of notes due December 2021, and $895.6M of long-term debt. The company reported compliance with applicable debt covenants.
- Cash dividends were $0.21 per share in the quarter. Share repurchases were suspended; $469.0M remained authorized.
Material changes, outlook, and risks
- Gross margin fell 64 basis points in the quarter, reflecting geographic, product, and customer mix and market conditions. Lower SG&A helped lift GAAP quarterly operating income, but adjusted operating income declined 3.2% and adjusted operating margin eased to 1.7% from 1.8%.
- The termination of the Texas Instruments distribution agreement was completed in December 2020. TI product sales were $50M in Q2 FY2021 versus $399M in Q2 FY2020. Management attributed growth chiefly to Asia, partly offset by this lost TI business and COVID-19-related demand impacts.
- Six-month results included a $15.2M equity investment impairment in other expense and an $8.2M legal settlement gain in restructuring, integration and other expenses. The six-month effective tax rate was 97.5%, primarily affected by increases in valuation allowances; net income was only $0.3M.
- Fiscal 2021 restructuring actions included $34.5M of charges in the first six months and reductions or planned reductions of approximately 250 employees. Management expects the majority of remaining severance obligations to be paid by fiscal year-end; Q2 restructuring costs were expected to yield about $12M in annual operating expense savings once completed.
- No specific financial guidance was provided in the supplied filing text. Management said it believes operating cash generation and available borrowing capacity will meet future liquidity needs, but noted continuing uncertainty from COVID-19. It expected near-term material acquisitions to be unlikely and anticipated further cash use for restructuring and integration.
- Key risks cited include COVID-19 effects on demand, employees and supply chains; semiconductor industry cycles and supplier allocations; competition; foreign currency, international and regulatory exposures; cyber and information-system risks; and general economic and geopolitical conditions. Certain compliance-related legal matters have estimated liabilities of $17.9M; the company said some potential exposures cannot be reasonably estimated and could affect results in a single period.
Important facts for investors to verify
- Whether Asia-led demand and reported sales growth persist after accounting for the extra week and the TI agreement termination.
- Whether gross-margin pressure, especially in Farnell, stabilizes and whether restructuring savings offset lower margins.
- How operating cash flow and working-capital movements develop, and whether debt maturities and covenant terms remain manageable.
- Whether the unusually high six-month tax rate, equity investment impairment, and legal matters have further effects on earnings.
- Whether COVID-19, supply-chain conditions, and foreign-currency movements materially change the company’s outlook or liquidity.