Avnet(AVT) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, management's analysis, market risk disclosures, and an evaluation of internal controls Item 1. Financial Statements The unaudited financial statements reflect significant year-over-year growth in sales and net income, alongside a decrease in operating cash flow Consolidated Balance Sheets Total assets grew to $9.78 billion, driven by increases in receivables and inventories Consolidated Balance Sheet Highlights (in thousands) | Account | April 2, 2022 | July 3, 2021 | | :--- | :--- | :--- | | Total Current Assets | $8,217,643 | $7,163,421 | | Receivables | $4,164,573 | $3,576,130 | | Inventories | $3,680,821 | $3,236,837 | | Total Assets | $9,781,673 | $8,925,422 | | Total Current Liabilities | $4,065,788 | $3,055,238 | | Short-term debt | $424,182 | $23,078 | | Accounts payable | $2,968,845 | $2,401,357 | | Long-term debt | $922,041 | $1,191,329 | | Total Liabilities | $5,524,953 | $4,841,238 | | Total Shareholders' Equity | $4,256,720 | $4,084,184 | Consolidated Statements of Operations Quarterly and nine-month results show substantial increases in sales, gross profit, and net income Q3 Fiscal 2022 vs Q3 Fiscal 2021 (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $6,488,143 | $4,916,714 | 32.0% | | Gross Profit | $813,033 | $568,350 | 43.1% | | Operating Income | $274,408 | $87,684 | 212.9% | | Net Income | $183,417 | $107,484 | 70.6% | | Diluted EPS | $1.84 | $1.07 | 72.0% | Nine Months Ended Fiscal 2022 vs 2021 (in thousands, except per share data) | Metric | Nine Months 2022 | Nine Months 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $17,938,055 | $14,307,945 | 25.4% | | Gross Profit | $2,185,760 | $1,595,683 | 37.0% | | Operating Income | $654,323 | $163,407 | 300.4% | | Net Income | $445,556 | $107,759 | 313.5% | | Diluted EPS | $4.44 | $1.08 | 311.1% | - The company incurred $26.3 million in expenses related to the Russian-Ukraine conflict during the third quarter of fiscal 2022, with no comparable expense in the prior year[12] Consolidated Statements of Cash Flows Operating activities used cash due to significant investments in working capital to support sales growth Cash Flow Summary for Nine Months Ended (in thousands) | Cash Flow Activity | April 2, 2022 | April 3, 2021 | | :--- | :--- | :--- | | Net cash flows (used) provided by operating activities | $(19,418) | $197,526 | | Net cash flows provided (used) for investing activities | $51,388 | $(51,171) | | Net cash flows used for financing activities | $(3,676) | $(308,394) | | Cash and cash equivalents - decrease | $(234) | $(154,289) | - The significant decrease in operating cash flow was primarily driven by an increase in receivables ($881.0 million) and inventories ($550.0 million) to support sales growth, which was partially offset by an increase in accounts payable ($628.8 million)[22] Notes to Consolidated Financial Statements Notes detail the financial impact of the Russia-Ukraine conflict, tax considerations, and segment performance - The company incurred $26.3 million in expenses due to the Russian-Ukraine conflict, primarily from $17.2 million in credit loss provisions for Russian receivables and $9.1 million in product write-downs and wind-down costs[32] - The company expects to release the full valuation allowance against its U.S. deferred tax assets in the fourth quarter of fiscal 2022 due to improved profitability, which will result in a discrete tax benefit[62] Sales by Reportable Segment (in thousands) | Segment | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Electronic Components | $6,019,094 | $4,520,608 | $16,572,940 | $13,245,143 | | Farnell | $469,049 | $396,106 | $1,365,115 | $1,062,802 | Operating Income by Reportable Segment (in thousands) | Segment | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Electronic Components | $265,017 | $118,565 | $616,383 | $306,927 | | Farnell | $69,817 | $23,861 | $179,598 | $50,412 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong sales growth driven by global demand, improved margins, and the impact of working capital investments on cash flow Overview The company operates globally as a technology distributor through its Electronic Components and Farnell segments - Avnet is a global technology distributor and solutions provider with two primary operating groups: Electronic Components (EC) and Farnell, both with operations in the Americas, EMEA, and Asia[91][92] - The company's sales and gross profit from Russia are historically less than 1% of consolidated totals and it does not foresee resuming business there due to sanctions[93][94] Q3 Fiscal 2022 Executive Summary | Metric | Q3 2022 | YoY Change | | :--- | :--- | :--- | | Sales | $6.49 billion | +32.0% | | Sales (Constant Currency) | - | +35.7% | | Gross Profit Margin | 12.5% | +97 bps | Results of Operations Strong global demand for electronic components drove significant year-over-year growth in sales and profitability - Q3 2022 sales increased 32.0% (35.7% in constant currency) to $6.49 billion, driven by strong global demand for electronic components across all regions and in both operating groups[104] - EC segment sales grew 33.2% to $6.02 billion, while Farnell sales increased 18.4% to $469.0 million in Q3 2022[104][105] - Gross profit margin increased by 97 basis points to 12.5% in Q3 2022, driven by margin improvements in both operating groups and a favorable geographic sales mix[107] - SG&A expenses as a percentage of sales decreased to 7.9% from 9.4% year-over-year, demonstrating operating leverage from higher sales and gross profit[109] - The company recorded a $26.3 million charge in Q3 2022 related to the Russia-Ukraine conflict, primarily for credit loss reserves on Russian trade receivables[111] Operating Income Reconciliation (in thousands) | Description | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Operating income | $274,408 | $87,684 | | Russian-Ukraine conflict expenses | $26,261 | - | | Restructuring, integration, etc. | - | $17,574 | | Amortization of intangibles | $3,074 | $5,283 | | Adjusted operating income | $303,743 | $110,541 | Liquidity and Capital Resources The company maintains strong liquidity despite using cash for operations to fund working capital investments for sales growth - For the first nine months of fiscal 2022, cash used for operations was $19.4 million, a significant shift from $197.5 million of cash generated in the prior-year period due to a $660.8 million investment in working capital[121] - As of April 2, 2022, the company had $199.5 million in cash and cash equivalents, with $114.1 million held outside the U.S[126] - The company has strong liquidity with approximately $1.62 billion available for borrowing under its Credit Facility and Securitization Program as of April 2, 2022[126] - During Q3 2022, the company repurchased $45.1 million of its common stock and paid dividends of $25.6 million, with $378.0 million remaining under the share repurchase authorization[130][132] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to foreign currency and interest rate risks remains materially unchanged, managed through hedging and fixed-rate debt - The company's exposure to market risks, primarily foreign currency exchange and interest rates, has not materially changed since July 3, 2021[135] - Avnet uses economic hedges, such as forward foreign exchange contracts, to reduce volatility from currency fluctuations[134] - As of April 2, 2022, 89% of the company's debt is fixed-rate, and a hypothetical 100 basis point increase in interest rates would decrease income before taxes by only $0.4 million for the quarter[136] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of April 2, 2022[137] - No changes were made during the third quarter of fiscal 2022 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[138] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, share repurchase activities, and filed exhibits Item 1. Legal Proceedings Current legal matters are not expected to have a material adverse effect on the company's financial position or liquidity - The company has concluded that no particular pending legal proceeding requires specific public disclosure at this time[139] - Management believes that the resolution of current legal matters will not have a material adverse effect on the company's financial position or liquidity[140] Item 1A. Risk Factors No material changes to the company's previously disclosed risk factors have occurred since the last annual report - 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[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $45.1 million of its common stock during the quarter under its authorized share repurchase program Share Repurchases in Q3 Fiscal 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2 – Jan 29 | 233,762 | $40.07 | | Jan 30 – Feb 26 | 315,842 | $40.64 | | Feb 27 – Apr 2 | 550,800 | $41.63 | - As of the end of the quarter, approximately $378.0 million remained authorized for purchase under the company's share repurchase program[143] Item 6. Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - The report includes several exhibits, such as amendments to credit agreements, details of the 2021 Stock Compensation and Incentive Plan, and CEO/CFO certifications pursuant to the Sarbanes-Oxley Act[144]