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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _____ to _____ | |
Commission File #
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction |
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| (IRS Employer | |
of incorporation or organization) |
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| Identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code.)
N/A
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which registered: |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated Filer ☐ |
| |
Non-accelerated Filer ☐ | Smaller Reporting Company | ||
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of April 20, 2022, the total number of shares outstanding of the registrant’s Common Stock was
AVNET, INC. AND SUBSIDIARIES
INDEX
1
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements |
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 2, |
| July 3, |
| |||
2022 | 2021 |
| |||||
(Thousands, except share |
| ||||||
amounts) |
| ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Receivables |
| |
| | |||
Inventories |
| |
| | |||
Prepaid and other current assets |
| |
| | |||
Total current assets |
| |
| | |||
Property, plant and equipment, net |
| |
| | |||
Goodwill |
| |
| | |||
Intangible assets, net |
| |
| | |||
Operating lease assets | | | |||||
Other assets |
| |
| | |||
Total assets | $ | | $ | | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Short-term debt | $ | | $ | | |||
Accounts payable |
| |
| | |||
Accrued expenses and other | | | |||||
Short-term operating lease liabilities |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt |
| |
| | |||
Long-term operating lease liabilities | | | |||||
Other liabilities |
| |
| | |||
Total liabilities |
| |
| | |||
Commitments and contingencies (Note 7) | |||||||
Shareholders’ equity: | |||||||
Common stock $ |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Retained earnings |
| |
| | |||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Total shareholders’ equity |
| |
| | |||
Total liabilities and shareholders’ equity | $ | | $ | | |||
See notes to consolidated financial statements.
2
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Third Quarters Ended | Nine Months Ended | |||||||||||
| April 2, |
| April 3, |
| April 2, |
| April 3, | |||||
2022 | 2021 | 2022 | 2021 | |||||||||
(Thousands, except per share amounts) | ||||||||||||
$ | | $ | | $ | | $ | | |||||
| |
| |
| |
| | |||||
Gross profit |
| |
| |
| |
| | ||||
Selling, general and administrative expenses |
| |
| |
| |
| | ||||
Russian-Ukraine conflict related expenses (Note 2) | | — | | — | ||||||||
Restructuring, integration and other expenses |
| — |
| |
| |
| | ||||
Operating income |
| |
| |
| |
| | ||||
Other (expense) income, net |
| ( |
| |
| |
| ( | ||||
Interest and other financing expenses, net |
| ( |
| ( |
| ( |
| ( | ||||
Income before taxes |
| |
| |
| |
| | ||||
Income tax expense (benefit) |
| |
| ( |
| |
| ( | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Shares used to compute earnings per share: | ||||||||||||
Basic |
| |
| |
| |
| | ||||
Diluted |
| |
| |
| |
| | ||||
Cash dividends paid per common share | $ | | $ | | $ | | $ | | ||||
See notes to consolidated financial statements.
3
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Third Quarters Ended | Nine Months Ended | |||||||||||
| April 2, |
| April 3, |
| April 2, |
| April 3, | |||||
2022 | 2021 | 2022 | 2021 | |||||||||
(Thousands) | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income, net of tax: | ||||||||||||
Foreign currency translation and other |
| ( |
| ( |
| ( |
| | ||||
Pension adjustments, net |
| |
| |
| |
| | ||||
Total comprehensive income | $ | | $ | | $ | | $ | | ||||
See notes to consolidated financial statements.
4
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
| Accumulated |
| ||||||||||||
Common | Common | Additional | Other | Total | ||||||||||||||
Stock- | Stock- | Paid-In | Retained | Comprehensive | Shareholders’ | |||||||||||||
Shares | Amount | Capital | Earnings | (Loss) Income | Equity | |||||||||||||
(Thousands) | ||||||||||||||||||
Balance, July 3, 2021 |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Repurchases of common stock |
| ( |
| ( | — |
| ( | — |
| ( | ||||||||
Stock-based compensation |
| | | | — | — | | |||||||||||
Balance, October 2, 2021 |
| | | | | ( | | |||||||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Repurchases of common stock |
| ( |
| ( | — |
| ( | — |
| ( | ||||||||
Stock-based compensation |
| |
| |
| |
| — |
| — |
| | ||||||
Balance, January 1, 2022 | | | | | ( | | ||||||||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Repurchases of common stock |
| ( |
| ( | — |
| ( | — |
| ( | ||||||||
Stock-based compensation |
| |
| |
| |
| — |
| — |
| | ||||||
Balance, April 2, 2022 | | $ | | $ | | $ | | $ | ( | $ | | |||||||
|
|
|
|
| Accumulated |
| ||||||||||||
Common | Common | Additional | Other | Total | ||||||||||||||
Stock- | Stock- | Paid-In | Retained | Comprehensive | Shareholders’ | |||||||||||||
Shares | Amount | Capital | Earnings | (Loss) Income | Equity | |||||||||||||
(Thousands) | ||||||||||||||||||
Balance, June 27, 2020 |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| |
| | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Effects of new accounting principles, net | — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Stock-based compensation |
| | | |
| — |
| — |
| | ||||||||
Balance, October 3, 2020 |
| | | | | ( | | |||||||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| |
| | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Stock-based compensation |
| |
| |
| |
| — |
| — |
| | ||||||
Balance, January 2, 2021 | | | | | ( | | ||||||||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | ||||||
Translation adjustments and other |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Pension liability adjustments, net | — | — | — | — | | | ||||||||||||
Cash dividends |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Stock-based compensation |
| |
| |
| |
| — |
| — |
| | ||||||
Balance, April 3, 2021 | | $ | | $ | | $ | | $ | ( | $ | | |||||||
See notes to consolidated financial statements.
5
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||
| April 2, |
| April 3, | |||
2022 | 2021 | |||||
(Thousands) | ||||||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Non-cash and other reconciling items: | ||||||
Depreciation |
| |
| | ||
Amortization |
| |
| | ||
Amortization of operating lease assets | | | ||||
Deferred income taxes |
| |
| | ||
Stock-based compensation |
| |
| | ||
Impairments |
| — |
| | ||
Other, net |
| |
| | ||
Changes in (net of effects from businesses acquired and divested): | ||||||
Receivables |
| ( |
| ( | ||
Inventories |
| ( |
| | ||
Accounts payable |
| |
| | ||
Accrued expenses and other, net |
| |
| | ||
Net cash flows (used) provided by operating activities |
| ( |
| | ||
Cash flows from financing activities: | ||||||
Borrowings under accounts receivable securitization, net |
| |
| — | ||
Repayments under senior unsecured credit facility, net | — |
| ( | |||
Borrowings (repayments) under bank credit facilities and other debt, net |
| |
| ( | ||
Repurchases of common stock |
| ( |
| — | ||
Dividends paid on common stock |
| ( |
| ( | ||
Other, net |
| ( |
| ( | ||
Net cash flows used for financing activities |
| ( |
| ( | ||
Cash flows from investing activities: | ||||||
Purchases of property, plant and equipment |
| ( |
| ( | ||
Acquisitions of assets and businesses |
| — |
| ( | ||
Proceeds from liquidation of Company owned life insurance policies |
| |
| — | ||
Other, net |
| |
| | ||
Net cash flows provided (used) for investing activities |
| |
| ( | ||
Effect of currency exchange rate changes on cash and cash equivalents |
| ( |
| | ||
Cash and cash equivalents: | ||||||
— decrease | ( | ( | ||||
— at beginning of period | | | ||||
— at end of period | $ | | $ | | ||
See notes to consolidated financial statements.
6
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation and new accounting pronouncements
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly Avnet, Inc. and its consolidated subsidiaries’ (collectively, the “Company” or “Avnet”) financial position, results of operations, comprehensive income and cash flows. All such adjustments are of a normal recurring nature.
Preparing financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results may differ from these estimates and assumptions.
Interim results of operations do not necessarily indicate the results to be expected for the full fiscal year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021.
Fiscal year
The Company operates on a “52/53 week” fiscal year, and fiscal 2022 contains 52 weeks compared to fiscal 2021, which contained 53 weeks. As a result, the first nine months of fiscal 2022, contained 39 weeks compared to the first nine months of fiscal 2021, which contained 40 weeks.
Recently adopted accounting pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU No. 2019-12”), which simplifies income tax accounting, eliminates certain exceptions within ASC Topic 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within ASU No. 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’s adoption of ASU No. 2019-12 beginning the first quarter of fiscal 2022 did not have a material impact on the Company’s consolidated financial statements.
Recently issued accounting pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU No. 2021-01”), to clarify certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting to apply to derivatives that are affected by the discounting transition. Both ASU No. 2020-04 and ASU No. 2021-01 are effective upon issuance through December 31, 2022. The Company plans to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is discontinued and does not currently expect a material impact on the Company’s consolidated financial statements.
7
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Receivables and Russian-Ukraine conflict related expenses
The Company’s receivables and allowance for credit losses were as follows:
April 2, | July 3, | |||||
2022 | 2021 | |||||
(Thousands) | ||||||
Receivables | $ | | $ | | ||
Allowance for Credit Losses | ( | ( | ||||
The Company had the following activity in the allowance for credit losses during the first nine months of fiscal 2022 and 2021:
April 2, | April 3, | |||||
2022 | 2021 | |||||
(Thousands) | ||||||
Balance at beginning of the period | $ | | $ | | ||
Effect of adopting credit loss accounting standard | — | | ||||
Credit Loss Provisions | | | ||||
Russian-Ukraine conflict Credit Loss Provisions | | — | ||||
Credit Loss Recoveries | ( | ( | ||||
Receivables Write offs | ( | ( | ||||
Foreign Currency Effect and Other | ( | | ||||
Balance at end of the period | $ | | $ | | ||
As a direct and incremental impact associated with the Russian invasion of Ukraine, the Company incurred $
3. Goodwill and intangible assets
Goodwill
The following table presents the change in goodwill by reportable segment for the nine months ended April 2, 2022.
| Electronic |
|
| ||||||
Components | Farnell | Total | |||||||
(Thousands) | |||||||||
Carrying value at July 3, 2021 (1) | $ | | $ | | $ | | |||
Foreign currency translation |
| ( |
| ( |
| ( | |||
Carrying value at April 2, 2022 (1) | $ | | $ | | $ | | |||
| (1) | Includes accumulated impairments of $ |
8
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible Assets
The following table presents the Company’s acquired intangible assets at April 2, 2022 and July 3, 2021, respectively.
April 2, 2022 | July 3, 2021 |
| |||||||||||||||||
Acquired | Accumulated | Net Book | Acquired | Accumulated | Net Book |
| |||||||||||||
| Amount |
| Amortization |
| Value |
| Amount(1) |
| Amortization |
| Value |
| |||||||
(Thousands) |
| ||||||||||||||||||
Customer related | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Trade name |
| |
| ( |
| |
| |
| ( |
| | |||||||
Technology and other |
| |
| ( |
| |
| |
| ( |
| | |||||||
$ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
(1)Acquired amount reduced by impairment of $
Intangible asset amortization expense was $
The following table presents the estimated future amortization expense for the remainder of fiscal 2022 and the next five fiscal years (in thousands):
Fiscal Year |
| ||
Remainder of fiscal 2022 | $ | | |
2023 | | ||
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total | $ | | |
4. Debt
Short-term debt consists of the following (carrying balances in thousands):
April 2, | July 3, | April 2, | July 3, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
Interest Rate | Carrying Balance |
| |||||||||||
Other short-term debt and accounts receivable securitization program | | % | | % | $ | | $ | | |||||
Public notes due December 2022 | | % | — |
| |
| — | ||||||
Short-term debt | $ | | $ | | |||||||||
Other short-term debt consists primarily of various committed and uncommitted lines of credit and other forms of bank debt with financial institutions utilized primarily to support the working capital requirements of the Company, including its foreign operations.
9
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt consists of the following (carrying balances in thousands):
April 2, | July 3, | April 2, | July 3, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
Interest Rate | Carrying Balance |
| |||||||||||
Revolving credit facilities: | |||||||||||||
Accounts receivable securitization program | | % | — | $ | | $ | — | ||||||
Credit Facility (due June 2023) | — | — | — | — | |||||||||
Public notes due: | |||||||||||||
December 2022 | — | | % |
| — |
| | ||||||
April 2026 | | % | | % | | | |||||||
May 2031 | | % | | % | | | |||||||
Other long-term debt | | % | | % |
| |
| | |||||
Long-term debt before discount and debt issuance costs |
| |
| | |||||||||
Discount and debt issuance costs – unamortized |
| ( |
| ( | |||||||||
Long-term debt | $ | | $ | | |||||||||
In August 2021, the Company amended and extended for
The Company has a
As of April 2, 2022, and July 3, 2021, there were $
As of April 2, 2022, the carrying value and fair value of the Company’s total debt was $
10
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Leases
Substantially all the Company’s leases are classified as operating leases and are predominately related to real property for distribution centers, office space, and integration facilities with a lease term of up to
The components of lease cost related to the Company’s operating leases were as follows (in thousands):
Third Quarters Ended | Nine Months Ended | |||||||||||
April 2, | April 3, | April 2, | April 3, | |||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Variable lease cost | | | | | ||||||||
Total lease cost | $ | | $ | | $ | | $ | | ||||
Future minimum operating lease payments as of April 2, 2022, are as follows (in thousands):
Fiscal Year | ||||
Remainder of fiscal 2022 | $ | | ||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
2026 |
| | ||
Thereafter |
| | ||
Total future operating lease payments | | |||
Total imputed interest on operating lease liabilities | ( | |||
Total operating lease liabilities | $ | |
Other information pertaining to operating leases consists of the following:
Nine Months Ended | ||||||
April 2, | April 3, | |||||
2022 |
| 2021 | ||||
Operating Lease Term and Discount Rate | ||||||
Weighted-average remaining lease term in years | ||||||
Weighted-average discount rate | | % | | % | ||
Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):
Nine Months Ended | ||||||
April 2, | April 3, | |||||
2022 |
| 2021 | ||||
Supplemental Cash Flow Information: | ||||||
Cash paid for operating lease liabilities | $ | | $ | | ||
Operating lease assets obtained from new operating lease liabilities | | | ||||
11
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Derivative financial instruments
Many of the Company’s subsidiaries purchase and sell products in currencies other than their functional currencies, which subjects the Company to the risks associated with fluctuations in currency exchange rates. The Company uses economic hedges to reduce this risk utilizing natural hedging (i.e., offsetting receivables and payables in the same foreign currency) and creating offsetting positions through the use of derivative financial instruments (primarily forward foreign exchange contracts typically with maturities of less than
The Company generally does not hedge its investments in its foreign operations. The Company does not enter derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase from suppliers. The Company’s foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Japanese Yen, Chinese Yuan, Taiwan Dollar, Canadian Dollar and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other EMEA and Asian foreign currencies.
The fair values of forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in the Company’s consolidated balance sheets are as follows:
April 2, |
| July 3, |
| ||||
2022 | 2021 | ||||||
(Thousands) | |||||||
Prepaid and other current assets | $ | | $ | | |||
Accrued expenses and other | | | |||||
The amounts recorded to other (expense) income, net, related to derivative financial instruments for economic hedges are as follows:
Third Quarters Ended | Nine Months Ended | |||||||||||
April 2, |
| April 3, |
| April 2, |
| April 3, | ||||||
2022 | 2021 | 2022 | 2021 | |||||||||
(Thousands) | ||||||||||||
Net derivative financial instrument loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are classified within the same line item in the consolidated statements of operations as the remeasurement of the underlying assets or liabilities being economically hedged.
12
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Commitments and contingencies
From time to time, the Company may become a party to, or be otherwise involved in, various lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of conducting its business. While litigation is subject to inherent uncertainties, management does not anticipate that any such matters will have a material adverse effect on the Company’s financial condition, liquidity, or results of operations.
The Company is also currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations. For certain of these matters, it is not possible to determine the ultimate outcome, and the Company cannot reasonably estimate the maximum potential exposure or the range of possible loss, particularly regarding to matters in early stages. The Company currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position or liquidity, but could possibly be material to its results of operations in any single reporting period.
As of April 2, 2022, and July 3, 2021, the Company had aggregate estimated liabilities of $
During the first nine months of fiscal 2021, the Company recorded a gain on legal settlement of $
8. Income taxes
The Company’s effective tax rate on its income before taxes was
During the third quarter of fiscal 2021, the Company’s effective tax rate on its income before taxes was a benefit of
For the first nine months of fiscal 2022, the Company’s effective tax rate on its income before taxes was
During the first nine months of fiscal 2021, the Company’s effective tax rate on its income before taxes was a benefit of
In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization. The Company has determined there is no material impact of the regulations to the Company’s financial position.
The Company has established a full valuation allowance against its deferred tax assets in the United States. As a result of improved profitability in the United States, primarily due to the performance of the Company’s Americas business, the Company expects to release the valuation allowance established in the United States in the fourth quarter of fiscal 2022. As a result, the discrete tax benefit from the release of the valuation allowance will reduce the effective tax rate for fiscal 2022.
13
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Pension plan
The Company has a noncontributory defined benefit pension plan that covers substantially all current or former U.S. employees (the “Plan”). Components of net periodic pension cost for the Plan was as follows:
Third Quarters Ended | Nine Months Ended | |||||||||||
| April 2, |
| April 3, |
| April 2, |
| April 3, | |||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(Thousands) | ||||||||||||
Service cost | $ | | $ | | $ | | $ | | ||||
Total net periodic pension cost within selling, general and administrative expenses | | | | | ||||||||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Amortization of prior service cost |
| |
| |
| |
| | ||||
Recognized net actuarial loss |
| |
| |
| |
| | ||||
Total net periodic pension benefit within other expense, net | ( | ( | ( | ( | ||||||||
Net periodic pension (benefit) cost | $ | ( | $ | | $ | ( | $ | | ||||
The Company made $
10. Shareholders’ equity
Share repurchase program
In August 2019, the Company’s Board of Directors amended the Company’s existing share repurchase program, increasing the cumulative total of authorized share repurchases to $
Common stock dividend
In February 2022, the Company’s Board of Directors approved a dividend of $
14
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Earnings per share
Third Quarters Ended | Nine Months Ended | |||||||||||
| April 2, | April 3, | April 2, | April 3, | ||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(Thousands, except per share data) | ||||||||||||
Numerator: |
| |||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Denominator: | ||||||||||||
Weighted average common shares for basic earnings per share |
| |
| |
| |
| | ||||
Net effect of dilutive stock-based compensation awards |
| |
| |
| |
| | ||||
Weighted average common shares for diluted earnings per share |
| |
| |
| |
| | ||||
Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
Stock options excluded from earnings per share calculation due to anti-dilutive effect | | | | | ||||||||
12. Additional cash flow information
Non-cash investing and financing activities and supplemental cash flow information were as follows:
Nine Months Ended | ||||||
| April 2, |
| April 3, | |||
2022 | 2021 | |||||
(Thousands) | ||||||
Non-cash Investing Activities: | ||||||
Capital expenditures incurred but not paid | $ | | $ | | ||
Non-cash Financing Activities: | ||||||
Unsettled share repurchases | $ | | — | |||
Supplemental Cash Flow Information: | ||||||
Interest | $ | | $ | | ||
Income tax net payments | | | ||||
Included in cash and cash equivalents as of April 2, 2022, and July 3, 2021, was $
15
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Segment information
Electronic Components (“EC”) and Farnell (“Farnell”) are the Company’s reportable segments (“operating groups”). EC markets and sells (i) semiconductors, (ii) interconnect, passive and electromechanical devices, and (iii) integrated components, to a diverse customer base serving many end-markets. Farnell distributes electronic components and related products to the electronic system design community utilizing multi-channel sales and marketing resources.
Third Quarters Ended | Nine Months Ended | |||||||||||
April 2, | April 3, | April 2, | April 3, | |||||||||
2022 |
| 2021 | 2022 | 2021 | ||||||||
| (Thousands) | |||||||||||
Sales: |
|
|
|
|
|
|
|
| ||||
Electronic Components | $ | | $ | | $ | | $ | | ||||
Farnell | | | | | ||||||||
| | | | |||||||||
Operating income: | ||||||||||||
Electronic Components | $ | | $ | | $ | | $ | | ||||
Farnell | | | | | ||||||||
| | | | |||||||||
Corporate | ( | ( | ( | ( | ||||||||
Restructuring, integration and other expenses |
| — |
| ( |
| ( | ( | |||||
Russian-Ukraine conflict related expenses | ( | — | ( | — | ||||||||
Amortization of acquired intangible assets and other | ( | ( | ( | ( | ||||||||
Operating income | $ | | $ | | $ | | $ | | ||||
Sales, by geographic area: | ||||||||||||
Americas (1) | $ | | $ | | $ | | $ | | ||||
EMEA (2) |
| |
| |
| |
| | ||||
Asia/Pacific (3) |
| |
| |
| |
| | ||||
Sales | $ | | $ | | $ | | $ | | ||||
(1) | Includes sales from the United States of $ |
(2) | Includes sales from Germany and Belgium of $ |
(3) | Includes sales from China (including Hong Kong), Taiwan and Singapore of $ |
16
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
April 2, | July 3, |
| |||||
2022 | 2021 |
| |||||
| (Thousands) | ||||||
Property, plant, and equipment, net, by geographic area: | |||||||
Americas (1) | $ | | $ | | |||
EMEA (2) |
| |
| | |||
Asia/Pacific |
| |
| | |||
Property, plant, and equipment, net | $ | | $ | | |||
(1) | Includes property, plant and equipment, net, of $ |
(2) | Includes property, plant and equipment, net, of $ |
14. Restructuring expenses
During fiscal 2021 and prior, the Company incurred restructuring expenses related to various restructuring actions intended to achieve planned synergies from acquired businesses and to reduce future operating expenses. The following table presents the activity during the first nine months of fiscal 2022 related to the remaining restructuring liabilities established during fiscal 2021 and prior:
Facility | |||||||||
|
| and Contract |
| ||||||
Severance |
| Exit Costs |
| Total | |||||
(Thousands) | |||||||||
Balance at July 3, 2021 | $ | | $ | | $ | | |||
Cash payments |
| ( | ( | ( | |||||
Changes in estimates, net | ( | | ( | ||||||
Other, principally foreign currency translation |
| ( | ( | ( | |||||
Balance at April 2, 2022 | $ | | $ | | $ | | |||
The Company expects the majority of the remaining amounts to be paid by the first half of fiscal 2023.
17
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with respect to the financial condition, results of operations and business of the Company. You can find many of these statements by looking for words like “believes,” “plans,” “expects,” “anticipates,” “should,” “will,” “may,” “estimates,” or similar expressions in this Quarterly Report or in documents incorporated by reference in this Quarterly Report. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties. The following important factors, in addition to those discussed elsewhere in this Quarterly Report, and the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021, could affect the Company’s future results of operations, and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements: geopolitical events and military conflicts; risks relating to pandemics or other health-related crisis, including COVID-19; competitive pressures among distributors of electronic components; an industry down-cycle in semiconductors; relationships with key suppliers and allocations of products by suppliers; risks relating to the Company’s international sales and operations, including risks relating to the ability to repatriate cash, foreign currency fluctuations, duties and taxes, and compliance with international and U.S. laws; risks relating to acquisitions, divestitures and investments; adverse effects on the Company’s supply chain, operations of its distribution centers, shipping costs, third-party service providers, customers and suppliers, including as a result of issues caused by military conflicts, natural and weather-related disasters, pandemics and health related crisis, or warehouse modernization and relocation efforts; risks related to cyber-attacks, other privacy and security incidents, and information systems failures, including related to current or future implementations, integrations or upgrades; general economic and business conditions (domestic, foreign and global) affecting the Company’s operations and financial performance and, indirectly, the Company’s credit ratings, debt covenant compliance, liquidity, and access to financing; constraints on employee retention and hiring; and legislative or regulatory changes affecting the Company’s businesses.
Any forward-looking statement speaks only as of the date on which that statement is made. Except as required by law, the Company assumes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
For a description of the Company’s critical accounting policies and an understanding of Avnet and the significant factors that influenced the Company’s performance during the quarter ended April 2, 2022, this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021. The Company operates on a “52/53 week” fiscal year and fiscal 2022 contains 52 weeks compared to 53 weeks in fiscal 2021. As a result, the first nine months of fiscal 2022 contained 39 weeks and the first nine months of fiscal 2021 contained 40 weeks. This extra week in the first nine months of fiscal 2021, which occurred in the first quarter of fiscal 2021, impacts the year-over-year analysis in this MD&A.
The discussion of the Company’s results of operations includes references to the impact of foreign currency translation. When the U.S. Dollar strengthens and the stronger exchange rates are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the result is a decrease in U.S. Dollars of reported results. Conversely, weaker exchange rates result in an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in Europe, the Middle East and Africa (“EMEA”) and Asia/Pacific (“Asia”), are referred to as “constant currency.”
18
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:
| ● | Sales adjusted for certain items that impact the year-over-year analysis, which includes the impact of certain acquisitions by adjusting Avnet’s prior periods to include the sales of acquired businesses, as if the acquisitions had occurred at the beginning of the earliest period presented. In addition, fiscal 2021 sales are adjusted for the estimated impact of the extra week of sales in the first quarter of fiscal 2021 due to it being a 14-week quarter, as discussed above. Additionally, the Company has adjusted sales for the impact of the termination of the Texas Instruments (“TI”) distribution agreement between fiscal years. Sales taking into account these adjustments are referred to as “organic sales.” |
| ● | Operating income excluding (i) restructuring, integration and other expenses, (see Restructuring, Integration and Other Expenses in this MD&A), (ii) Russian-Ukraine conflict related expenses (see Russian-Ukraine conflict related expenses in this MD&A) and (iii) amortization of acquired intangible assets is referred to as “adjusted operating income.” |
The reconciliation of operating income to adjusted operating income is presented in the following table:
Third Quarters Ended | Nine Months Ended | |||||||||||
| April 2, |
| April 3, |
| April 2, |
| April 3, | |||||
2022 |
| 2021 | 2022 | 2021 | ||||||||
(Thousands) | ||||||||||||
Operating income | $ | 274,408 | $ | 87,684 | $ | 654,323 | $ | 163,407 | ||||
Restructuring, integration and other expenses |
| — |
| 17,574 |
| 5,272 |
| 55,943 | ||||
Russian-Ukraine conflict related expenses | 26,261 | — | 26,261 | — | ||||||||
Amortization of acquired intangible assets and other |
| 3,074 |
| 5,283 |
| 12,109 |
| 35,875 | ||||
Adjusted operating income | $ | 303,743 | $ | 110,541 | $ | 697,965 | $ | 255,225 | ||||
Management believes that providing this additional information is useful to readers to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.
19
OVERVIEW
Organization
Avnet, Inc. and its consolidated subsidiaries (collectively, the “Company” or “Avnet”), is a leading global technology distributor and solutions provider. Avnet has served customers’ evolving needs for an entire century. Avnet supports customers at each stage of a product’s lifecycle, from idea to design and from prototype to production. Avnet’s position at the center of the technology value chain enables it to accelerate the design and supply stages of product development so customers can realize revenue faster. Decade after decade, Avnet helps its customers and suppliers around the world realize the transformative possibilities of technology. Founded in 1921, the Company works with suppliers in every major technology segment to serve customers in more than 140 countries.
Avnet has two primary operating groups — Electronic Components (“EC”) and Farnell (“Farnell”). Both operating groups have operations in each of the three major economic regions of the world: (i) the Americas, (ii) EMEA, and (iii) Asia. A summary of each operating group is provided in Note 13, “Segment information” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.
Results of Operations
Recent Global Events and Uncertainties
In February 2022, Russian forces invaded Ukraine (the “Russian-Ukraine conflict”), and in response, the member countries of NATO initiated a variety of sanctions and export controls targeting Russia and associated entities. The sanctions currently in place limit the Company’s ability to provide goods to Russian customers and banking sanctions effectively negate our ability to collect outstanding receivables; as such, the Company has recorded a full allowance for credit losses against those receivables that are not covered by customer credit insurance as of April 2, 2022. Historically, the Company’s sales and gross profit generated from sales to Russian customers is less than 1% of consolidated sales and consolidated gross profit. See further discussion of the impacts of the Russian-Ukraine conflict on the Company’s results of operations in the third quarter of fiscal 2022 below.
The Company will continue to monitor the situation with the Russian-Ukraine conflict, but does not believe the Company will be able to resume business with Russian customers into the foreseeable future. The Company will continue to monitor and manage the ancillary impact of the Russian-Ukraine conflict on its business, which is primarily related to increased fuel and freight related costs and other potential associated supply chain and inflationary considerations.
Because the situation is rapidly evolving, other impacts are currently unknown and could potentially subject the Company’s business to materially adverse consequences, particularly if the conflict expands to other parts of Europe where the Company operates. Such other impacts could include global economic disruptions, shortages of materials or electronic components, increased shipping costs, increased trade barriers, increased cyberattacks, credit market disruptions, and adverse effects on the Company’s third-party service providers, customers, and suppliers. For a more complete discussion of the risks and uncertainties to which the Company is or may become subject, please refer to Item 1A Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021.
Executive Summary
Sales of $6.49 billion in the third quarter of fiscal 2022 were 32.0% higher than the prior year third quarter sales of $4.92 billion. Excluding the impact of changes in foreign currency, sales increased 35.7% as compared to sales in the prior year third quarter.
Gross profit margin of 12.5% increased 97 basis points compared to 11.6% in the third quarter of fiscal 2021. This increase is primarily due to strong overall demand for electronic components and improvements in pricing, product and customer mix, and geographic sales mix.
20
Operating income of $274.4 million was $186.7 million higher than the third quarter of fiscal 2021. Operating income margin was 4.2% in the third quarter of fiscal 2022, as compared to 1.8% in the prior year third quarter. The increase in operating income margin is the result of increases in sales and in gross profit margin, partially offset by an increase in selling, general and administrative expenses. Adjusted operating income margin was 4.7% in the third quarter of fiscal 2022 as compared to 2.3% in the third quarter of fiscal 2021, an increase of 243 basis points. This increase in adjusted operating income margin is primarily due to the increases in sales and gross profit margin, partially offset by increases in selling, general and administrative expenses.
Sales
Reported sales were the same as organic sales in the third quarter and first nine months of fiscal 2022. The following table presents the reconciliation of reported sales to organic sales for the third quarter and first nine months of fiscal 2021 by geographic region and by operating group.
Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
Sales | |||||||||||||||||||||||
As Reported | Organic | Estimated | Organic | ||||||||||||||||||||
and | Sales | Sales | Extra | Organic | Sales | ||||||||||||||||||
Organic | TI Sales | Adj for TI | As Reported | Week in | Sales | TI Sales | Adj for TI | ||||||||||||||||
Q3-Fiscal | Q3-Fiscal | Q3-Fiscal | Q3-Fiscal | Fiscal | Q3-Fiscal | Q3-Fiscal | Fiscal | ||||||||||||||||
2021 |
| 2021(1) |
| 2021(1) |
| 2021 |
| 2021(2) |
| 2021 |
| 2021(1) |
| 2021(1) | |||||||||
(Thousands) | |||||||||||||||||||||||
Avnet | $ | 4,916,714 | $ | 1,659 | $ | 4,915,055 | $ | 14,307,945 | $ | 306,000 | $ | 14,001,945 | $ | 292,212 | $ | 13,709,733 | |||||||
Avnet by region | |||||||||||||||||||||||
Americas | $ | 1,160,973 | $ | 416 | $ | 1,160,557 | $ | 3,468,118 | $ | 77,000 | $ | 3,391,118 | $ | 82,885 | $ | 3,308,233 | |||||||
EMEA | 1,585,631 | 483 | 1,585,148 | 4,412,652 | 97,000 | 4,315,652 | 124,232 | 4,191,420 | |||||||||||||||
Asia | 2,170,110 | 760 | 2,169,350 | 6,427,175 | 132,000 | 6,295,175 | 85,095 | 6,210,080 | |||||||||||||||
Avnet by operating group | |||||||||||||||||||||||
EC | $ | 4,520,608 | $ | 1,659 | $ | 4,518,949 | $ | 13,245,143 | $ | 284,000 | $ | 12,961,143 | $ | 292,212 | $ | 12,668,931 | |||||||
Farnell | 396,106 | — | 396,106 | 1,062,802 | 22,000 | 1,040,802 | — | 1,040,802 | |||||||||||||||
___________
| (1) | Sales adjusted for the impact of the termination of the Texas Instruments (“TI”) distribution agreement. |
| (2) | The impact of the additional week of sales in the first quarter of fiscal 2021 is estimated. |
The following table presents reported and organic sales growth rates for the third quarter and first nine months of fiscal 2022 as compared to fiscal 2021 by geographic region and by operating group.
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
Sales | Organic | Organic | ||||||||||||||||||||||
As Reported | Sales | Sales | Organic | Sales | ||||||||||||||||||||
Sales | and Organic | Adj for TI | As Reported | Sales | Adj for TI | |||||||||||||||||||
as Reported | Year-Year % | Year-Year % | Sales | Year-Year % | Organic | Year-Year % | Year-Year % | |||||||||||||||||
and Organic | Change in | Change in | As Reported | Change in | Sales | Change in | Change in | |||||||||||||||||
Year-Year | Constant | Constant | Year-Year | Constant | Year-Year | Constant | Constant | |||||||||||||||||
% Change | Currency |
| Currency(1) |
| % Change | Currency |
| % Change |
| Currency |
| Currency(1) | ||||||||||||
Avnet | 32.0 | % | 35.7 | % | 35.7 | % | 25.4 | % | 26.9 | % | 28.1 | % | 29.6 | % | 32.4 | % | ||||||||
Avnet by region | ||||||||||||||||||||||||
Americas | 40.2 | % | 40.2 | % | 40.2 | % | 23.3 | % | 23.3 | % | 26.1 | % | 26.1 | % | 29.3 | % | ||||||||
EMEA | 37.9 | 47.6 | 47.7 | 30.9 | 35.0 | 33.8 | 38.0 | 42.1 | ||||||||||||||||
Asia | 23.3 | 24.5 | 24.5 | 22.7 | 23.3 | 25.3 | 25.9 | 27.6 | ||||||||||||||||
Avnet by operating group | ||||||||||||||||||||||||
EC | 33.2 | % | 36.9 | % | 36.9 | % | 25.1 | % | 26.7 | % | 27.9 | % | 29.5 | % | 32.5 | % | ||||||||
Farnell | 18.4 | 21.8 | 21.8 | 28.4 | 28.6 | 31.2 | 31.3 | 31.3 | ||||||||||||||||
___________
| (1) | Sales growth rates excluding the impact of the termination of the TI distribution agreement. |
21
Sales of $6.49 billion for the third quarter of fiscal 2022 were up $1.57 billion, or 32.0%, from the prior year third quarter sales of $4.92 billion. Sales in constant currency in the third quarter of fiscal 2022 increased by 35.7% year over year, reflecting sales growth in both operating groups across all regions driven by strong demand globally for electronic components.
EC sales of $6.02 billion in the third quarter of fiscal 2022 increased $1.50 billion or 33.2% from the prior year third quarter sales of $4.52 billion. On an organic basis, EC sales increased 36.9% year over year in constant currency, reflecting sales growth in all three regions. The increase in sales in the Company’s EC operating group is primarily due to improvements in overall stronger market demand, especially in the transportation and industrial sectors.
Farnell sales for the third quarter of fiscal 2022 were $469.0 million, an increase of $72.9 million or 18.4% from the prior year third quarter sales of $396.1 million. Sales in constant currency increased 21.8% year over year. These increases were primarily a result of increased market demand in all three regions.
Sales for the first nine months of fiscal 2022 were $17.94 billion, an increase of $3.63 billion as compared to sales of $14.31 billion for the first nine months of fiscal 2021. The increase in sales is primarily the result of increased sales in both operating groups across all regions driven by strong demand globally for electronic components.
As a result of the recent termination of the Company’s distribution agreement between Maxim Integrated Products, Inc. (“Maxim”) and the Electronic Components operating group, the Company may experience lower sales and gross profit in the future if the impact of the termination is not offset by sales growth, gross margin improvements or operating cost reductions. Sales from Maxim products represented approximately 3% of total sales in fiscal 2021.
Gross Profit
Gross profit for the third quarter of fiscal 2022 was $813.0 million, an increase of $244.7 million, or 43.1%, from the third quarter of fiscal 2021 gross profit of $568.4 million. Gross profit margin increased to 12.5% or 97 basis points from the third quarter of fiscal 2021 gross profit margin of 11.6%, driven by increases in gross profit margin in both operating groups. Sales in the higher gross profit margin western regions represented approximately 59% of sales in the third quarter of fiscal 2022, as compared to 56% during the third quarter of fiscal 2021.
Gross profit and gross profit margin was $2.19 billion and 12.2%, respectively, for the first nine months of fiscal 2022 as compared with $1.60 billion and 11.2%, respectively, for the first nine months of fiscal 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) were $512.4 million in the third quarter of fiscal 2022, an increase of $49.3 million, or 10.6%, from the third quarter of fiscal 2021. The year-over-year increase in SG&A expenses was primarily due to increases in costs to support sales growth and to a lesser extent increased costs related to inflation.
Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In the third quarter of fiscal 2022, SG&A expenses were 7.9% of sales and 63.0% of gross profit, as compared with 9.4% and 81.5%, respectively, in the third quarter of fiscal 2021. The decrease in SG&A expenses as a percentage of sales and gross profit primarily results from operating leverage created from higher sales, increases in gross profit margin, and lower amortization expense, partially offset by increases in SG&A expenses primarily to support sales volumes.
22
SG&A expenses for the first nine months of fiscal 2022 were $1.50 billion, or 8.4% of sales, as compared with $1.38 billion, or 9.6% of sales, in the first nine months of fiscal 2021. SG&A expenses as a percentage of gross profit for the first nine months of fiscal 2022 were 68.6% as compared with 86.3% in the first nine months of fiscal 2021. The decrease in SG&A expenses as a percentage of sales and gross profit primarily results from operating leverage created from higher sales, increase in gross profit margin, and lower amortization expense, partially offset by increases in SG&A expenses primarily to support sales volumes.
Russian-Ukraine Conflict Related Expenses
The Company incurred $26.3 million of costs associated with the Russian-Ukraine conflict in the third quarter of fiscal 2022, primarily comprised of $17.2 million of expense for credit loss reserves for trade accounts receivable from Russian customers that are no longer considered collectible. The remaining expense is primarily related to product write-downs for Russia based customers and other Russian business operation wind-down costs.
Restructuring, Integration, and Other Expenses
The Company did not incur any restructuring, integration and other expenses during the third quarter of fiscal 2022. During the first nine months of fiscal 2022, the Company recorded restructuring, integration and other expenses of $5.3 million, substantially all of which was related to integration costs.
Operating Income
Operating income for the third quarter of fiscal 2022 was $274.4 million, an increase of $186.7 million, from the third quarter of fiscal 2021 operating income of $87.7 million. Adjusted operating income for the third quarter of fiscal 2022 was $303.7 million, an increase of $193.2 million, or 174.8%, from the third quarter of fiscal 2021. The year-over-year increase in adjusted operating income was primarily driven by the increase in sales and in gross profit margin, partially offset by an increase in SG&A expenses.
EC operating income margin increased 178 basis points year over year to 4.4% and Farnell operating income margin increased 886 basis points year over year to 14.9%.
Operating income for the first nine months of fiscal 2022 was $654.3 million, an increase of $490.9 million, from the operating income of $163.4 million during the first nine months of fiscal 2021. Adjusted operating income for the first nine months of fiscal 2022 was $698.0 million, an increase of $442.7 million, or 173.5%, from the first nine months of fiscal 2021. The year-over-year increase in adjusted operating income was primarily driven by the increase in sales and in gross profit margin.
Interest and Other Financing Expenses, Net and Other (Expense) Income, Net
Interest and other financing expenses in the third quarter of fiscal 2022 was $25.9 million, an increase of $3.6 million, or 16.0%, as compared with interest and other financing expenses of $22.3 million in the third quarter of fiscal 2021. Interest and other financing expenses in the first nine months of fiscal 2022 was $70.4 million, an increase of $4.3 million, or 6.4%, as compared with interest and other financing expenses of $66.1 million in the first nine months of fiscal 2021. The increases in interest and other financing expenses in the third quarter and first nine months of fiscal 2022 compared to the third quarter and first nine months of fiscal 2021 is primarily a result of higher outstanding borrowings during fiscal 2022 as compared to fiscal 2021.
23
During the third quarter of fiscal 2022, the Company had $0.5 million of other expense as compared with $4.8 million of other income in the third quarter of fiscal 2021. During the first nine months of fiscal 2022, the Company had $0.9 million of other income as compared with $16.1 million of other expense in the first nine months of fiscal 2021. The year-over-year differences in other expense was primarily due to the equity investment impairment expense included in the other expense in the first nine months of fiscal 2021, and differences in foreign currency exchange rates between the third quarters and first nine months of fiscal 2022 and fiscal 2021.
Income Tax
The Company’s effective tax rate on its income before taxes was 26.0% in the third quarter of fiscal 2022. During the third quarter of fiscal 2022, the Company’s effective tax rate was unfavorably impacted primarily by the mix of income in higher tax jurisdictions.
During the third quarter of fiscal 2021, the Company’s effective tax rate on its income before taxes was a benefit of 53.3%. The Company’s effective tax rate was favorably impacted primarily by (i) the tax benefit arising from the reduction in value of certain businesses for income tax purposes and (ii) decreases to valuation allowances, partially offset by (iii) increases to unrecognized tax benefit reserves.
For the first nine months of fiscal 2022, the Company’s effective tax rate on its income before taxes was 23.8%. The effective tax rate for the first nine months of fiscal 2022 was unfavorably impacted primarily by (i) the mix of income in higher tax jurisdictions and (ii) increases to valuation allowances.
During the first nine months of fiscal 2021, the Company’s effective tax rate on its income before taxes was a benefit of 32.7%. The effective tax rate for the first nine months of fiscal 2021 was favorably impacted primarily by (i) the tax benefit arising from the reduction in value of certain businesses for income tax purposes, (ii) decreases to valuation allowances, and (iii) the mix of income in lower tax jurisdictions, partially offset by (iv) increases to unrecognized tax benefit reserves.
In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization. The Company has determined there is no material impact of the regulations to the Company’s financial position.
The Company has established a full valuation allowance against its deferred tax assets in the United States. As a result of improved profitability in the United States, primarily due to the performance of the Company’s Americas business, the Company expects to release the valuation allowance established in the United States in the fourth quarter of fiscal 2022. As a result, the discrete tax benefit from the release of the valuation allowance will reduce the effective tax rate for fiscal 2022.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the Company’s net income for the third quarter of fiscal 2022 was $183.4 million, or $1.84 per share on a diluted basis, as compared with $107.5 million, or $1.07 per share on a diluted basis, in the third quarter of fiscal 2021.
As a result of the factors described in the preceding sections of this MD&A, the Company’s net income for the first nine months of fiscal 2022 was $445.6 million, or $4.44 per share on a diluted basis, as compared with $107.8 million, or $1.08 per share on a diluted basis, in the first nine months of fiscal 2021.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the first nine months of fiscal 2022, the Company used $19.4 million of cash flow for operations compared to $197.5 million of cash generated from operations in the first nine months of fiscal 2021. These operating cash flows were comprised of: (i) cash flow generated from net income, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expenses, deferred income taxes, stock-based compensation expense, amortization of operating lease assets, and other non-cash items, and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents. Cash used for working capital and other was $660.8 million during the first nine months of fiscal 2022, including increases in accounts receivable of $881.0 million, and in inventories of $550.0 million both to support sales growth in the first nine months of fiscal 2022, partially offset by increases in accounts payable of $628.8 million, and in accrued expenses and other of $141.4 million. Comparatively, cash used for working capital and other was $112.0 million during the first nine months of fiscal 2021, including an increase in accounts receivable of $405.7 million, offset by a decrease in inventories of $63.0 million, increases in accounts payable of $224.2 million, and accrued expenses and other of $6.5 million.
Cash Flow from Financing Activities
During the first nine months of fiscal 2022, the Company received net proceeds of $57.4 million under the Securitization Program, and $118.0 million under the other short-term debt. During the first nine months of fiscal 2022, the Company paid dividends on common stock of $73.3 million and repurchased $89.0 million of common stock.
During the first nine months of fiscal 2021, the Company made a net repayment of $232.3 million under the Credit Facility and paid dividends on common stock of $62.4 million.
Cash Flow from Investing Activities
During the first nine months of fiscal 2022, the Company used $33.7 million for capital expenditures compared to $39.0 million for capital expenditures in the first nine months of fiscal 2021. During the first nine months of fiscal 2022, the Company received $84.3 million from investing activities related to the liquidation of Company owned life insurance policies. During the first nine months of fiscal 2021, the Company paid $18.4 million for an asset acquisition.
Contractual Obligations
For a detailed description of the Company’s long-term debt and lease commitments for the next five years and thereafter, see Long-Term Contractual Obligations appearing in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021. There are no material changes to this information outside of normal borrowings and repayments of long-term debt and operating lease payments. The Company does not currently have any material non-cancellable commitments for capital expenditures or inventory purchases outside of the normal course of business.
Financing Transactions
See Note 4, “Debt” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on financing transactions including the Credit Facility, the Securitization Program, and other outstanding debt as of April 2, 2022. The Company was in compliance with all covenants under the Credit Facility and the Securitization Program as of April 2, 2022, and July 3, 2021.
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The Company has various lines of credit, financing arrangements, and other forms of bank debt in the U.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of third quarter of fiscal 2022 was $74.3 million.
As an alternative form of financing outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivable are recorded within “Interest and other financing expenses, net” and were not material.
Liquidity
The Company held cash and cash equivalents of $199.5 million as of April 2, 2022, of which $114.1 million was held outside the United States. As of July 3, 2021, the Company held cash and cash equivalents of $199.7 million, of which $150.5 million was held outside of the United States.
As of the end of the third quarter of fiscal 2022, the Company had a combined total borrowing capacity of $1.70 billion under the Credit Facility and the Securitization Program. There were no borrowings outstanding and $1.2 million in letters of credit issued under the Credit Facility, and $80.3 million outstanding under the Securitization Program, resulting in approximately $1.62 billion of total availability as of April 2, 2022. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings.
During the third quarter and first nine months of fiscal 2022, the Company had an average daily balance outstanding of approximately $694.6 million and $522.7 million, respectively, under the Credit Facility and approximately $266.9 million and $227.3 million, respectively, under the Securitization Program.
During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company used $126.0 million in cash flows for operating activities over the trailing four fiscal quarters ended April 2, 2022.
Liquidity is subject to many factors, such as normal business operations and general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. To the extent the cash balances held in foreign locations cannot be remitted back to the U.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, capital expenditures and other foreign business needs. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy.
The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows in the future and available borrowing capacity, including capacity for the non-recourse sale of trade accounts receivable, will be sufficient to meet its future liquidity needs. The Company may also renew or replace expiring debt arrangements, including the $350 million of Notes due December 2022, in the future and management believes the Company will have adequate access to capital markets, if needed. The Company has historically generated operating cash flows and believes it will have the ability to do so in the future.
As of April 2, 2022, the Company may repurchase up to an aggregate of $378.0 million of shares of the Company’s common stock through a $2.95 billion share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During the third quarter of fiscal 2022, the Company repurchased $45.1 million of common stock.
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The Company has historically paid quarterly cash dividends on shares of its common stock, and future dividends are subject to approval by the Board of Directors. During the third quarter of fiscal 2022, the Board of Directors approved a dividend of $0.26 per share, which resulted in $25.6 million of dividend payments during the quarter.
Recently Issued Accounting Pronouncements
See Note 1, “Basis of presentation and new accounting pronouncements” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company seeks to reduce earnings and cash flow volatility associated with changes in foreign currency exchange rates by entering into financial arrangements that are intended to provide an economic hedge against all or a portion of the risks associated with such volatility. The Company continues to have exposure to such risks to the extent they are not economically hedged.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021, for further discussion of market risks associated with foreign currency exchange rates and interest rates. Avnet’s exposure to such risks has not changed materially since July 3, 2021, as the Company continues to economically hedge the majority of its foreign currency exchange exposures. Thus, any increase or decrease in fair value of the Company’s forward foreign currency exchange contracts is generally offset by an opposite effect on the related economically hedged position. For interest rate risk, the Company continues to maintain a combination of fixed and variable rate debt to mitigate the exposure to fluctuations in market interest rates.
See Liquidity and Capital Resources — Financing Transactions appearing in Item 2 of this Quarterly Report on Form 10-Q for further discussion of the Company’s financing transactions and capital structure. As of April 2, 2022, approximately 89% of the Company’s debt bears interest at a fixed rate and 11% of the Company’s debt bears interest at variable rates. Therefore, a hypothetical 1.0% (100 basis points) increase in interest rates would result in a $0.4 million decrease in income before income taxes in the Company’s consolidated statement of operations for the third quarter of fiscal 2022.
Item 4. | Controls and Procedures |
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the reporting period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures are effective such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During the third quarter of fiscal 2022, there were no changes to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. | Legal Proceedings |
Pursuant to SEC regulations, including but not limited to Item 103 of Regulation S-K, the Company regularly assesses the status of and developments in pending environmental and other legal proceedings to determine whether any such proceedings should be identified specifically in this discussion of legal proceedings, and has concluded that no particular pending legal proceeding requires public disclosure. Based on the information known to date, management believes that the Company has appropriately accrued in its consolidated financial statements for its share of the estimable costs of environmental and other legal proceedings.
The Company is also currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export and environmental matters. The Company currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position or liquidity, but could possibly be material to its results of operations in any single reporting period.
Item 1A. | Risk Factors |
The discussion of the Company’s business and operations should be read together with the risk factors contained in Item 1A of its Annual Report on Form 10-K for the fiscal year ended July 3, 2021, which describe various risks and uncertainties to which the Company is or may become subject. These risks and uncertainties have the potential to affect the Company’s business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of April 2, 2022, there have been no material changes to the risk factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In August 2019, the Company’s Board of Directors amended the Company’s existing share repurchase program, increasing the cumulative total of authorized share repurchases to $2.95 billion of the Company’s common stock. The following table includes the Company’s monthly purchases of the Company’s common stock during the third quarter of fiscal 2022, under the share repurchase program, which is part of a publicly announced plan.
Total Number of | Approximate Dollar |
| |||||||||
Total | Average | Shares Purchased | Value of Shares That |
| |||||||
Number | Price | as Part of Publicly | May Yet Be |
| |||||||
of Shares | Paid per | Announced Plans | Purchased under the |
| |||||||
Period | Purchased |
| Share |
| or Programs |
| Plans or Programs |
| |||
January 2 – January 29 |
| 233,762 |
| $ | 40.07 |
| 233,762 |
| $ | 413,781,000 | |
January 30 – February 26 |
| 315,842 | $ | 40.64 |
| 315,842 | $ | 400,945,000 | |||
February 27 – April 2 |
| 550,800 | $ | 41.63 |
| 550,800 | $ | 378,015,000 | |||
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Item 6. | Exhibits |
* | Filed herewith. |
** | Furnished herewith. The information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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