Avnet, Inc. — Q1 FY2023 Form 10-Q
Reporting period: First quarter ended October 1, 2022; comparable period ended October 2, 2021. Avnet is a global technology distributor with Electronic Components (EC) and Farnell reporting segments.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales | $6.750 billion | $5.585 billion |
| Gross profit / margin | $768.2 million / 11.4% | $659.7 million / 11.8% |
| Operating income / margin | $290.5 million / 4.3% | $168.2 million / 3.0% |
| Adjusted operating income / margin | $293.3 million / 4.4% | $178.8 million / 3.2% |
| Net income | $184.3 million | $111.3 million |
| Diluted EPS | $1.93 | $1.10 |
| Operating cash flow | $(645.1) million | $(31.0) million |
- Sales grew 20.9% reported and 28.9% in constant currency. EC sales increased 23.3% reported (31.4% constant currency); Farnell sales declined 6.4% reported but grew 1.6% in constant currency.
- Gross margin fell 43 basis points, primarily due to product and customer mix. Operating income improved with higher sales and operating leverage; SG&A declined 1.8% to $477.6 million, and SG&A was 7.1% of sales versus 8.7% a year earlier.
- Interest and other financing expense rose to $45.1 million from $22.8 million, mainly due to higher borrowings and borrowing rates. The effective tax rate was 25.0%, versus 23.2%.
Balance sheet, debt and liquidity
- At October 1, cash was $80.9 million, receivables $4.591 billion, and inventory $4.655 billion. Cash was down from $153.7 million at July 2, 2022.
- Total debt was approximately $2.34 billion, compared with $1.61 billion at July 2; short-term debt was $513.0 million and long-term debt $1.826 billion. Debt fair value was $2.22 billion.
- Avnet amended and extended its $1.25 billion revolving credit facility to August 2027. Combined capacity under the facility and receivables securitization program was $1.70 billion, with approximately $563.2 million available at quarter-end. The company reported compliance with applicable debt covenants.
- Operating cash flow was heavily affected by working-capital investment: receivables used $419.9 million and inventory used $559.0 million, partly offset by a $120.9 million increase in accounts payable. Investing cash flow was $(20.9) million, including $28.2 million of capital expenditures; financing cash flow was $588.4 million.
- Management said operating cash generation and available borrowing capacity should be sufficient for future liquidity needs. Trailing four-quarter operating cash flow was $(833.5) million.
Material changes and notable items
- Net income rose to $184.3 million from $111.3 million, while diluted EPS increased to $1.93 from $1.10. Average diluted shares declined to 95.6 million from 101.1 million.
- Foreign currency translation and other items reduced other comprehensive income by $201.7 million, resulting in a total comprehensive loss of $7.5 million despite positive net income.
- Avnet repurchased 3.4 million shares for $147.9 million and paid $27.0 million in dividends. $383.4 million remained under its $600 million repurchase authorization.
- No restructuring, integration or other expenses were recorded in the quarter, versus $5.3 million in the prior-year quarter.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cited strong demand and pricing for electronic components, particularly in transportation, industrial, and aerospace and defense markets, as drivers of EC growth.
- Risks identified include geopolitical events and conflict, economic conditions and industry cycles, component supply and supplier allocations, customer credit defaults, foreign exchange and international regulatory exposure, supply-chain and distribution disruptions, cybersecurity and information-system risks, and access to financing.
- Avnet reported $14.7 million of estimated liabilities for reasonably estimable compliance-related matters. Outcomes and potential losses for certain legal matters and investigations cannot be reliably estimated; management did not expect a material adverse effect on financial position or liquidity, though an individual period’s results could be materially affected.
- About 51% of debt bore variable interest rates. The filing estimates that a 1 percentage-point rate increase would reduce quarterly pretax income by $3.0 million.
Important facts for investors to verify
- Whether working-capital investment, particularly inventory and receivables, converts to operating cash as demand and growth evolve.
- Whether gross-margin pressure from product and customer mix persists, and whether reported sales growth remains strong excluding currency effects.
- Debt levels, borrowing costs, covenant compliance, and the continued availability of the receivables-backed borrowing capacity.
- Developments in compliance-related legal matters and any resulting changes to the $14.7 million accrual or potential exposure.
- The pace of share repurchases and dividends relative to cash generation and liquidity needs.