Avnet, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Second quarter ended January 1, 2022; comparisons are with the quarter ended January 2, 2021. Six-month comparisons cover 26 weeks in FY2022 versus 27 weeks in FY2021, so the extra prior-year week affects year-over-year comparisons. Avnet distributes electronic components and technology products through Electronic Components (EC) and Farnell.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Sales | $5.865B | $4.668B | $11.450B | $9.391B |
| Gross profit / margin | $713.0M / 12.2% | $511.3M / 11.0% | $1.373B / 12.0% | $1.027B / 10.9% |
| Operating income / margin | $211.7M / 3.6% | $57.2M / 1.2% | $379.9M / 3.3% | $75.7M / 0.8% |
| Adjusted operating income (non-GAAP) | $215.5M | $79.6M | $394.2M | $144.7M |
| Net income | $150.8M | $19.2M | $262.1M | $0.3M |
| Diluted EPS | $1.50 | $0.19 | $2.60 | $0.00 |
Quarterly sales rose 25.6% reported and 27.4% in constant currency; organic constant-currency sales growth excluding the terminated Texas Instruments agreement was 28.8%. EC sales increased 24.9% and Farnell sales 35.3% reported. Management attributed growth to strong global demand, particularly in transportation and industrial markets, and cited favorable pricing and sales mix as contributors to improved gross margin. SG&A increased 13.4% to $501.4M, but fell to 8.6% of sales from 9.5%, reflecting operating leverage. Adjusted operating income is a non-GAAP measure; the filing reconciles it to GAAP operating income.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $263.2M for the first six months, versus positive $207.4M a year earlier. Working-capital use was $631.0M, including receivables growth of $558.7M and inventory growth of $359.8M, partly offset by a $328.6M rise in accounts payable. Trailing-four-quarter operating cash flow was negative $379.7M.
- Cash and equivalents were $167.8M at January 1, 2022, down from $199.7M at July 3, 2021. Current assets were $7.944B and current liabilities $3.689B.
- Balance-sheet debt was approximately $1.495B: $350.0M short-term and $1.145B long-term. The filing reports total debt carrying value of $1.49B and fair value of $1.56B. Debt increased from approximately $1.21B at July 3, 2021.
- Combined borrowing capacity under the revolving credit facility and receivables securitization program was $1.70B; approximately $1.49B was available at quarter-end. The securitization program had $213.3M outstanding; no Credit Facility borrowings were outstanding at that date. Avnet reported compliance with applicable covenants.
- Six-month investing cash flow was positive $46.2M, including proceeds primarily from liquidation of company-owned life insurance policies; capital expenditures were $22.1M. Financing cash flow was positive $199.2M, including net facility and securitization borrowings, $47.6M of dividends and $45.6M of share repurchases.
Material changes, outlook and risks
- Performance improved substantially year over year, with higher sales, gross margin and operating income. Prior-year six-month net income was nearly break-even and included equity-investment impairment expense; the prior-year period also included restructuring expenses. No restructuring, integration or other expense was recorded in Q2 FY2022; $5.3M was recorded for the first half, primarily integration costs.
- Management provided no specific sales or earnings guidance in the supplied filing text. It said operating cash flow and available borrowing capacity should be sufficient to meet future liquidity needs, while noting that growth can require significant working capital.
- Avnet warned that the recent termination of its Maxim distribution agreement could reduce future sales and gross profit unless offset by growth, margin improvement or cost reductions; Maxim products represented about 3% of FY2021 sales. The filing also identifies COVID-19, supply-chain disruption and product allocations, semiconductor industry cycles, competition, foreign exchange, cybersecurity, geopolitical events and economic conditions among key risks.
- New U.S. Treasury foreign-tax-credit regulations were under evaluation and could significantly affect Q3 FY2022 income tax expense. The six-month effective tax rate was 22.2%, compared with 97.5% in the prior-year period.
- Management reported $14.7M of estimated liabilities for reasonably estimable compliance-related matters. It said resolution was not expected to materially affect financial position or liquidity, but could materially affect results in a single period; maximum exposure for some matters could not be estimated. Management did not expect ordinary-course litigation to have a material adverse effect.
- The company repurchased 0.9M shares for $35.3M in Q2 and had $423.1M remaining under its authorization. The quarterly dividend was $0.24 per share. Disclosure controls were assessed as effective, and the filing reported no material change in risk factors from the FY2021 Form 10-K.
Important facts for investors to verify
- Whether receivables and inventory growth converts to cash, given negative operating cash flow and higher borrowing.
- The sustainability of elevated demand, pricing and gross margins, including the effect of the Maxim agreement termination and product availability.
- The Q3 tax impact of the new foreign-tax-credit regulations and the status and potential exposure of compliance-related matters.
- Debt maturity and refinancing needs, covenant headroom, and continued access to receivables-backed borrowing capacity.
- How reported, constant-currency and organic sales comparisons are affected by the extra FY2021 week and the TI agreement adjustment.