Avnet(AVT) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Avnet, Inc.'s unaudited consolidated financial statements and detailed notes for the first quarter ended October 1, 2022 Item 1. Financial Statements (Unaudited) This section presents Avnet, Inc.'s unaudited consolidated financial statements for Q1 FY23, covering balance sheets, income, equity, and cash flows, with detailed accounting notes Consolidated Balance Sheets | Metric | October 1, 2022 (Thousands) | July 2, 2022 (Thousands) | | :----------------------- | :-------------------------- | :----------------------- | | Total Assets | $10,968,406 | $10,388,532 | | Total Liabilities | $6,949,071 | $6,195,772 | | Total Shareholders' Equity | $4,019,335 | $4,192,760 | - Total assets increased by $579.87 million, and total liabilities increased by $753.299 million from July 2, 2022, to October 1, 2022, while total shareholders' equity decreased by $173.425 million[8] Consolidated Statements of Operations | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | YoY Change (Thousands) | YoY Change (%) | | :--------------------------------- | :------------------ | :------------------ | :--------------------- | :------------- | | Sales | $6,750,133 | $5,584,695 | $1,165,438 | 20.9% | | Gross Profit | $768,173 | $659,693 | $108,480 | 16.4% | | Operating Income | $290,537 | $168,243 | $122,294 | 72.7% | | Net Income | $184,261 | $111,318 | $72,943 | 65.5% | | Basic EPS | $1.96 | $1.12 | $0.84 | 75.0% | | Diluted EPS | $1.93 | $1.10 | $0.83 | 75.5% | | Cash dividends paid per common share | $0.29 | $0.24 | $0.05 | 20.8% | Consolidated Statements of Comprehensive Income | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net income | $184,261 | $111,318 | | Foreign currency translation and other | $(201,663) | $(29,036) | | Pension adjustments, net | $9,866 | $4,012 | | Total comprehensive (loss) income | $(7,536) | $86,294 | - Total comprehensive income shifted from a gain of $86.294 million in Q1 FY22 to a loss of $(7.536) million in Q1 FY23, primarily due to a significant increase in foreign currency translation losses[13] Consolidated Statements of Shareholders' Equity | Metric | July 2, 2022 (Thousands) | October 1, 2022 (Thousands) | | :-------------------------- | :----------------------- | :-------------------------- | | Total Shareholders' Equity | $4,192,760 | $4,019,335 | | Net income | - | $184,261 | | Cash dividends | - | $(26,998) | | Repurchases of common stock | - | $(147,902) | - Shareholders' equity decreased from $4.19 billion to $4.02 billion, influenced by net income, cash dividends, and significant common stock repurchases totaling $147.9 million[16] Consolidated Statements of Cash Flows | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net cash used for operating activities | $(645,149) | $(30,968) | | Net cash provided by financing activities | $588,385 | $142,486 | | Net cash used for investing activities | $(20,905) | $(11,707) | | Net decrease in cash and cash equivalents | $(72,812) | $99,410 | - The company experienced a significant increase in cash used for operating activities in Q1 FY23 compared to Q1 FY22, primarily driven by higher working capital requirements[20] Notes to Consolidated Financial Statements 1. Basis of presentation and new accounting pronouncements - The early adoption of ASU 2021-08 (Business Combinations) in fiscal year 2023 had no impact on the Company's Consolidated Financial Statements[24] - The Company is currently evaluating the impact of ASU 2022-04 (Supplier Finance Programs), which is effective for the Company in the first quarter of fiscal 2024[25] 2. Receivables | Metric | October 1, 2022 (Thousands) | July 2, 2022 (Thousands) | | :------------------------ | :-------------------------- | :----------------------- | | Receivables | $4,697,643 | $4,414,904 | | Allowance for Credit Losses | $(106,623) | $(113,902) | | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :-------------------------- | :------------------ | :------------------ | | Credit Loss Provisions | $1,442 | $4,174 | | Receivables Write Offs | $(3,378) | $(3,193) | 3. Goodwill and intangible assets | Segment | July 2, 2022 (Thousands) | October 1, 2022 (Thousands) | Foreign Currency Translation (Thousands) | | :-------------------- | :----------------------- | :-------------------------- | :--------------------------------------- | | Electronic Components | $291,526 | $279,746 | $(11,780) | | Farnell | $467,307 | $424,082 | $(43,225) | | Total Goodwill | $758,833 | $703,828 | $(55,005) | - Goodwill decreased by $55.005 million in Q1 FY23, primarily due to foreign currency translation effects[32] - Intangible asset amortization expense decreased to $2.8 million in Q1 FY23 from $5.2 million in Q1 FY22[33] 4. Debt | Debt Type | October 1, 2022 (Thousands) | July 2, 2022 (Thousands) | | :------------------------------------ | :-------------------------- | :----------------------- | | Short-term debt | $513,000 | $174,422 | | Long-term debt | $1,825,514 | $1,437,400 | | Total Debt (Carrying Value) | $2,338,514 | $1,611,822 | - The Company amended and extended its $1.25 billion revolving credit facility, now expiring in August 2027[37] - The carrying value of total debt increased from $1.61 billion to $2.34 billion from July 2, 2022, to October 1, 2022[38] 5. Leases | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :---------------------- | :------------------ | :------------------ | | Operating lease cost | $16,566 | $17,847 | | Variable lease cost | $6,313 | $6,118 | | Total lease cost | $22,879 | $23,965 | | Metric | October 1, 2022 | October 2, 2021 | | :--------------------------------- | :-------------- | :-------------- | | Weighted-average remaining lease term | 8.5 years | 9.0 years | | Weighted-average discount rate | 3.9% | 3.8% | - Cash paid for operating lease liabilities decreased to $14.062 million in Q1 FY23 from $14.826 million in Q1 FY22[44] 6. Derivative financial instruments - The Company uses economic hedges, primarily forward foreign exchange contracts, to reduce foreign currency exchange rate risk, with maturities typically less than 60 days[47] | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :------------------------------- | :------------------ | :------------------ | | Net derivative financial instrument loss | $(359) | $(8,771) | 7. Commitments and contingencies - Management does not anticipate that current legal proceedings will have a material adverse effect on the Company's financial condition or liquidity[52] - Aggregate estimated liabilities for compliance-related matters were $14.7 million as of October 1, 2022, and July 2, 2022[53] 8. Income taxes | Metric | Q1 FY23 | Q1 FY22 | | :---------------- | :------ | :------ | | Effective tax rate | 25.0% | 23.2% | - The effective tax rate in Q1 FY23 was unfavorably impacted by increases to unrecognized tax benefit reserves and the mix of income in higher tax jurisdictions[54] 9. Pension plan | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :------------------------- | :------------------ | :------------------ | | Net periodic pension benefit | $(1,911) | $(498) | - The Company made $4.0 million in contributions to its defined benefit pension plan during Q1 FY23 and expects to make an additional $4.0 million in contributions for the remainder of fiscal 2023[56] 10. Shareholders' equity - The Company repurchased 3.4 million shares for $147.9 million under its share repurchase program during Q1 FY23, with $383.4 million remaining authorization[59] - A cash dividend of $0.29 per common share was approved and paid in Q1 FY23, totaling $27.0 million[59] 11. Earnings per share | Metric | Q1 FY23 | Q1 FY22 | | :---------------- | :------ | :------ | | Basic EPS | $1.96 | $1.12 | | Diluted EPS | $1.93 | $1.10 | - Both basic and diluted EPS significantly increased in Q1 FY23 compared to Q1 FY22[60] 12. Additional cash flow information | Metric | Q1 FY23 (Thousands) | Q1 FY22 (Thousands) | | :--------------------------------- | :------------------ | :------------------ | | Capital expenditures incurred but not paid | $11,916 | $4,508 | | Interest paid | $32,855 | $11,636 | | Income tax net payments | $57,426 | $27,977 | - Capital expenditures incurred but not paid, interest paid, and income tax net payments all increased significantly in Q1 FY23 compared to Q1 FY22[64] 13. Segment information | Segment | Q1 FY23 Sales (Thousands) | Q1 FY22 Sales (Thousands) | YoY Change (%) | YoY Change (Constant Currency %) | | :-------------------- | :------------------------ | :------------------------ | :------------- | :------------------------------- | | Electronic Components | $6,324,223 | $5,129,497 | 23.3% | 31.4% | | Farnell | $425,910 | $455,198 | (6.4)% | 1.6% | | Segment | Q1 FY23 Operating Income (Thousands) | Q1 FY22 Operating Income (Thousands) | | :-------------------- | :----------------------------------- | :----------------------------------- | | Electronic Components | $267,253 | $162,462 | | Farnell | $51,611 | $49,593 | - EC sales growth was driven by strong market demand and pricing for electronic components, particularly in transportation, industrial, and aerospace and defense sectors[86] 14. Restructuring expenses - Remaining restructuring liabilities from fiscal 2022 and prior were not material as of October 1, 2022[72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 FY23 financial performance, liquidity, and capital resources, including foreign currency impacts and non-GAAP measures Overview Organization - Avnet is a global technology distributor and solutions provider, operating through two primary groups: Electronic Components (EC) and Farnell, serving customers in over 140 countries[80][81] Results of Operations (Executive Summary) | Metric | Q1 FY23 | Q1 FY22 | YoY Change (%) | YoY Change (Constant Currency %) | | :-------------------------- | :------ | :------ | :------------- | :------------------------------- | | Sales | $6.75B | $5.58B | 20.9% | 28.9% | | Gross Profit Margin | 11.4% | 11.8% | (43 bps) | - | | Operating Income Margin | 4.3% | 3.0% | 130 bps | - | | Adjusted Operating Income Margin | 4.4% | 3.2% | 115 bps | - | Sales | Segment/Region | Sales YoY % Change | Sales YoY % Change (Constant Currency) | | :--------------- | :----------------- | :------------------------------------- | | Avnet Total | 20.9% | 28.9% | | Americas | 33.4% | 33.4% | | EMEA | 21.9% | 42.4% | | Asia | 14.1% | 17.5% | | EC | 23.3% | 31.4% | | Farnell | (6.4)% | 1.6% | - Overall sales growth was driven by strong demand and pricing for electronic components across all regions, with foreign currency translation negatively impacting reported sales[85] Gross Profit | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | YoY Change (%) | | :----------- | :----------------- | :----------------- | :------------- | | Gross Profit | $768.2 | $659.7 | 16.4% | | Gross Profit Margin | 11.4% | 11.8% | (43 bps) | - The decrease in gross profit margin was primarily due to differences in product and customer mix[87] Selling, General and Administrative Expenses | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | YoY Change (%) | | :-------------------------------- | :----------------- | :----------------- | :------------- | | SG&A Expenses | $477.6 | $486.1 | (1.8)% | | SG&A as % of Sales | 7.1% | 8.7% | (160 bps) | | SG&A as % of Gross Profit | 62.2% | 73.7% | (1150 bps) | - The decrease in SG&A expenses was primarily due to foreign currency translation, partially offset by increased support for higher sales volumes[88] Operating Income | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | YoY Change (%) | | :------------------------ | :----------------- | :----------------- | :------------- | | Operating Income | $290.5 | $168.2 | 72.7% | | Adjusted Operating Income | $293.3 | $178.8 | 64.1% | - Operating income increased significantly year-over-year, driven by higher sales and improved operating leverage from lower SG&A expenses as a percentage of sales[91] - EC operating income margin increased by 106 basis points to 4.2%, and Farnell operating income margin increased by 123 basis points to 12.1%[91] Interest and Other Financing Expenses, Net | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | YoY Change (Millions) | | :-------------------------------- | :----------------- | :----------------- | :-------------------- | | Interest and other financing expenses | $45.1 | $22.8 | $22.3 | - The increase in financing expenses was primarily due to higher outstanding borrowings and increased average borrowing rates[92] Income Tax | Metric | Q1 FY23 | Q1 FY22 | | :---------------- | :------ | :------ | | Effective Tax Rate | 25.0% | 23.2% | - The effective tax rate was unfavorably impacted by increases to unrecognized tax benefit reserves and the mix of income in higher tax jurisdictions[93] Net Income | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | YoY Change (%) | | :----------- | :----------------- | :----------------- | :------------- | | Net Income | $184.3 | $111.3 | 65.6% | | Diluted EPS | $1.93 | $1.10 | 75.5% | Liquidity and Capital Resources Cash Flow from Operating Activities | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | | :--------------------------------- | :----------------- | :----------------- | | Cash used for operations | $(645.1) | $(31.0) | | Cash used for working capital | $(874.8) | $(191.6) | - The significant increase in cash used for operations was primarily due to higher working capital requirements, including increases in accounts receivable ($419.9 million) and inventories ($559.0 million) to support sales growth[97] Cash Flow from Financing Activities | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | | :-------------------------------- | :----------------- | :----------------- | | Net proceeds from Credit Facility | $702.0 | $118.7 | | Net proceeds from Securitization Program | $152.2 | $59.3 | | Common stock repurchases | $(152.4) | $(9.6) | | Dividends paid | $(27.0) | $(23.9) | Cash Flow from Investing Activities | Metric | Q1 FY23 (Millions) | Q1 FY22 (Millions) | | :------------------- | :----------------- | :----------------- | | Capital expenditures | $28.2 | $12.0 | Contractual Obligations - There are no material changes to the Company's long-term debt and lease commitments outside of normal borrowings and repayments[99] Financing Transactions - The Company was in compliance with all covenants under its Credit Facility and Securitization Program as of October 1, 2022[100] - Outstanding borrowings under other short-term debt were $40.1 million at the end of Q1 FY23[100] Liquidity | Metric | October 1, 2022 (Millions) | July 2, 2022 (Millions) | | :------------------------ | :------------------------- | :---------------------- | | Cash and cash equivalents | $80.9 | $153.7 | - As of October 1, 2022, the Company had a total borrowing capacity of $1.70 billion under its Credit Facility and Securitization Program, with approximately $563.2 million of total availability[106] - The Company had $383.4 million remaining under its share repurchase authorization as of October 1, 2022[107] Recently Issued Accounting Pronouncements - Refers to Note 1 for details on recently issued accounting pronouncements[109] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company discusses market risks from foreign currency and interest rates, and mitigation strategies including economic hedges and debt structure - The Company economically hedges the majority of its foreign currency exchange exposures to reduce earnings and cash flow volatility[110][111] - As of October 1, 2022, 49% of the Company's debt bears interest at a fixed rate and 51% at variable rates. A hypothetical 1.0% increase in interest rates would result in a $3.0 million decrease in income before income taxes[112] Item 4. Controls and Procedures Management confirmed effective disclosure controls and procedures as of October 1, 2022, with no material changes to internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective as of the end of the reporting period[113] - There were no material changes to the Company's internal control over financial reporting during the first quarter of fiscal 2023[114] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and a list of exhibits for the reporting period Item 1. Legal Proceedings The Company believes no pending legal proceedings require specific public disclosure and do not materially affect financial position or liquidity - No particular pending legal proceeding requires specific public disclosure[115] - Estimated liabilities for compliance-related matters were $14.7 million as of October 1, 2022, and July 2, 2022[53][116] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Company's Annual Report on Form 10-K for FY2022 - 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 2, 2022, as of October 1, 2022[117] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board approved a $600 million share repurchase plan, with $147.9 million repurchased in Q1 FY23, leaving $383.4 million authorized - A new share repurchase plan for up to $600 million of common stock was approved in May 2022[118] | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------ | :------------------------------- | :--------------------------- | | July 3 – July 30 | 1,177,103 | $43.94 | | July 31 – August 27 | 1,145,699 | $45.56 | | August 28 – October 1 | 1,121,937 | $39.20 | - As of October 1, 2022, approximately $383.4 million remained available under the share repurchase authorization[119] Item 6. Exhibits This section lists all Form 10-Q exhibits, including agreements, Sarbanes-Oxley certifications, and XBRL documents - Exhibits include a Letter Agreement with the CFO, the Second Amended and Restated Credit Agreement, and certifications pursuant to the Sarbanes-Oxley Act[121] - XBRL taxonomy extension documents are also included as exhibits[121] Signature Page The report was signed by Kenneth A. Jacobson, Chief Financial Officer, on October 28, 2022 - The report was signed by Kenneth A. Jacobson, Chief Financial Officer, on October 28, 2022[124]