Avnet, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Second quarter ended December 30, 2023; six-month results are compared with the periods ended December 31, 2022. Amounts below are in U.S. dollars; financial-statement figures are generally in millions unless stated otherwise.
Business context and results
Avnet distributes electronic components and related products through its Electronic Components (EC) and Farnell segments. Management attributed the quarterly sales decline primarily to softer component demand, as customers had sufficient inventory for near-term production. The company expects these market conditions may continue potentially throughout 2024.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Sales | $6,204.9 | $6,717.5 | $12,540.6 | $13,467.7 |
| Gross profit | $706.2 | $784.1 | $1,454.3 | $1,552.3 |
| Gross margin | 11.4% | 11.7% | 11.6% | 11.5% |
| Operating income | $236.3 | $299.0 | $490.0 | $589.5 |
| Operating margin | 3.8% | 4.5% | 3.9% | 4.4% |
| Net income | $117.9 | $243.9 | $327.2 | $428.1 |
| Diluted EPS | $1.28 | $2.63 | $3.54 | $4.55 |
- Quarterly sales fell 7.6% year over year (8.7% in constant currency). EC sales declined 7.9%; Farnell declined 3.7%. For the six months, sales decreased 6.9%.
- Quarterly gross profit fell 9.9%; lower sales and unfavorable product mix pressured results. Farnell also faced the unwinding of component-shortage pricing premiums and competitive pricing pressure.
- Quarterly operating income declined 21.0%. Lower sales and gross margins were partly offset by lower SG&A. Adjusted operating income, a non-GAAP measure, was $242.2 million, down 19.4%.
- Quarterly interest and other financing expense rose to $74.3 million from $59.0 million; the six-month expense rose to $145.1 million from $104.1 million. Avnet cited higher borrowings and average borrowing rates.
Cash flow, debt and liquidity
- Operating cash flow was a use of $83.6 million in the first six months, versus a use of $966.5 million in the prior-year period. Working capital and other items used $539.4 million, including a $610.0 million inventory increase; lower receivables provided a partial offset.
- Cash and equivalents were $272.9 million at December 30, 2023, including $178.7 million held outside the U.S. Total debt carrying value was $3.45 billion, versus $3.06 billion at July 1, 2023. Current debt was $696.3 million, compared with $70.6 million at fiscal year-end; long-term debt was $2.75 billion.
- Committed borrowing capacity under the credit facility and receivables securitization program totaled $2.20 billion, with approximately $493 million available at quarter-end. The securitization program is recorded as debt, and availability depends on eligible receivables. Avnet reported compliance with applicable covenants.
- Capital expenditures were $158.1 million, up from $111.4 million, primarily due to EMEA distribution-center expansions. Avnet reported $169.2 million of operating cash flow over the trailing four fiscal quarters.
- Approximately 48% of debt bore fixed rates and 52% variable rates. Management estimated a hypothetical 1 percentage-point rate increase would reduce quarterly pretax income by $4.5 million.
Material changes, outlook and other items
- Six-month results included an $86.5 million gain on legal settlements and other, compared with $61.7 million in the prior-year period, related to claims against capacitor manufacturers. The current quarter recorded no such gain; the prior-year quarter included $61.7 million.
- Avnet recorded $5.2 million of restructuring, integration and other expenses in Q2 and $12.3 million for the first six months. It expects $15 million to $25 million of such expenses in the second half of FY2024, primarily related to Farnell, and estimates $50 million to $70 million of annual operating-expense reductions once Farnell actions are complete.
- Legal and compliance matters had $22.7 million of aggregate estimated liabilities accrued. Management does not expect these matters to materially affect financial position or liquidity, but says they could be material to results in an individual reporting period; some exposures cannot be reasonably estimated.
- Other cited risks include industry downturns and changing demand, supplier relationships and product allocations, customer credit, foreign exchange and international operations, geopolitical events, supply-chain and distribution-center disruption, cybersecurity and information-system issues, and economic conditions. Management reported no material changes to the risk factors in its FY2023 Form 10-K.
- Avnet repurchased approximately 1.3 million shares for about $59.9 million in Q2; $232.5 million remained under its authorization at quarter-end. The quarterly dividend was $0.31 per share.
Important facts for investors to verify
- Whether demand, customer inventory levels, and sales trends develop in line with management’s expectation that soft market conditions may persist through 2024.
- Inventory levels and working-capital cash use, along with the company’s ability to convert working capital into cash as demand changes.
- Debt maturities, interest costs, borrowing availability and covenant headroom, particularly given the increase in short-term debt and variable-rate exposure.
- Progress, costs and expected savings from Farnell restructuring, and the effect of pricing and product mix on segment margins.
- The timing and variability of legal-settlement gains, tax reserves, and the potential outcomes of compliance-related matters.