AVNET, INC. 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 endedJanuary 1, 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 endedJuly 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 six months of fiscal 2022 contained 26 weeks and the first six months of fiscal 2021 contained 27 weeks. This extra week in the first six 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 theU.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 inU.S. Dollars of reported results. Conversely, weaker exchange rates result in an increase inU.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries inEurope , theMiddle East andAfrica ("EMEA") andAsia/Pacific ("Asia"), are referred to as "constant currency." 18 Table of Contents In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in theU.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), and (ii)
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:
Second Quarters Ended Six Months Ended
January 1, January 2, January 1, January 2,
2022 2021 2022 2021
(Thousands)
Operating income $ 211,672 $ 57,221 $ 379,915 $ 75,723
Restructuring, integration and other
expenses - 11,948 5,272 38,369
Amortization of acquired intangible
assets and other 3,796 10,417 9,035 30,592
Adjusted operating income $ 215,468 $ 79,586 $ 394,222 $ 144,684 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
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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) theAmericas , (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 Executive Summary Sales of$5.87 billion in the second quarter of fiscal 2022 were 25.6% higher than the prior year second quarter sales of$4.67 billion . Excluding the impact of changes in foreign currency, sales increased 27.4% as compared to sales in the prior year second quarter. Gross profit margin of 12.2% increased 121 basis points compared to 11.0% in the second quarter of fiscal 2021. This increase is primarily due to strong overall demand for electronic components and improvements in product, customer mix, and geographic regional sales mix. Operating income of$211.7 million was$154.5 million higher than the second quarter of fiscal 2021. Operating income margin was 3.6% in the second quarter of fiscal 2022, as compared to 1.2% in the prior year second quarter. The increase in operating income margin is the result of increases in sales and in gross profit margin, partially offset by an increase in selling, general and administrative expenses. Adjusted operating income margin was 3.7% in the second quarter of fiscal 2022 as compared to 1.7% in the second quarter of fiscal 2021, an increase of 197 basis points. This increase in adjusted operating income margin is primarily due to the increases in sales and gross margin, partially offset by increases in selling, general and administrative expenses. 20 Table of Contents Sales Reported sales were the same as organic sales in the second quarter and first six months of fiscal 2022. The following table presents the reconciliation of reported sales to organic sales for the second quarter and first six months of fiscal 2021 by geographic region and by operating group. Quarter Ended Six Months Ended Sales As Reported Organic Estimated Organic and Sales Sales Extra Organic Sales Organic TI Sales Adj for TI As Reported Week in Sales TI Sales Adj for TI Q2-Fiscal Q2-Fiscal Q2-Fiscal Q2-Fiscal Fiscal Q2-Fiscal Q2-Fiscal Q2-Fiscal 2021 2021(1) 2021(1) 2021 2021(2) 2021 2021(1) 2021(1) (Thousands) Avnet$ 4,668,172 $ 49,568 $ 4,618,604 $ 9,391,232 $ 306,000 $ 9,085,232 $ 290,552 $ 8,794,680 Avnet by region Americas$ 1,101,450 $ 13,969 $ 1,087,481 $ 2,307,145 $ 77,000 $ 2,230,145 $ 82,469 $ 2,147,676 EMEA 1,346,347 20,839 1,325,508 2,827,020 97,000 2,730,020 123,749 2,606,271 Asia 2,220,375 14,760 2,205,615 4,257,067 132,000 4,125,067 84,334 4,040,733 Avnet by operating group EC$ 4,342,386 $ 49,568 $ 4,292,818 $ 8,724,535 $ 284,000 $ 8,440,535 $ 290,552 $ 8,149,983 Farnell 325,786 - 325,786 666,697 22,000 644,697 - 644,697 ___________
(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
second quarter and first six months of fiscal 2022 as compared to fiscal 2021 by
geographic region and by operating group.
Quarter Ended Six 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 25.6 % 27.4 % 28.8 % 21.9 % 22.4 % 26.0 % 26.5 % 30.7 %
Avnet by
region
Americas 26.3 % 26.3 % 28.0 % 14.9 % 14.9 % 18.8 % 18.8 % 23.4 %
EMEA 36.7 41.7 43.9 26.9 28.2 31.4 32.7 39.1
Asia 18.6 19.4 20.2 22.4 22.7 26.3 26.7 29.3
Avnet by
operating
group
EC 24.9 % 26.8 % 28.2 % 21.0 % 21.6 % 25.0 % 25.6 % 30.1 %
Farnell 35.3 35.8 35.8 34.4 32.8 39.0 37.3 37.3
___________
(1) Sales growth rates excluding the impact of the termination of the TI
distribution agreement.
Sales of$5.87 billion for the second quarter of fiscal 2022 were up$1.20 billion , or 25.6%, from the prior year second quarter sales of$4.67 billion . Sales in constant currency in the second quarter of fiscal 2022 increased by 27.4% year over year. Organic sales in constant currency excluding TI sales in the second quarter of fiscal 2022 were 28.8% higher than sales in the second quarter of fiscal 2021, reflecting sales growth in both operating groups across all regions driven by strong demand globally for electronic components. 21 Table of Contents EC sales of$5.42 billion in the second quarter of fiscal 2022 increased$1.08 billion or 24.9% from the prior year second quarter sales of$4.34 billion . On an organic basis, EC sales excluding TI increased 28.2% 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 market demand and stronger demand, especially in the transportation
and industrial sectors.
Farnell sales for the second quarter of fiscal 2022 were$440.9 million , an increase of$115.1 million or 35.3% from the prior year second quarter sales of$325.8 million . Sales in constant currency increased 35.8% year over year. These increases were primarily a result of increased market demand in all three regions. Sales for the first six months of fiscal 2022 were$11.45 billion , an increase of$2.06 billion as compared to sales of$9.39 billion for the first six 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 second quarter of fiscal 2022 was$713.0 million , an increase of$201.8 million , or 39.5%, from the second quarter of fiscal 2021 gross profit of$511.3 million . Gross profit margin increased to 12.2% (or 121 basis points) from the second quarter of fiscal 2021 gross profit margin of 11.0%, driven by increases in gross profit margin in both operating groups primarily due to strong demand for electronic components that resulted in favorable pricing environment and geographic region sales mix. Sales in the higher gross profit margin western regions represented approximately 55% of sales in the second quarter of fiscal 2022, as compared to 52% during the second quarter of fiscal 2021.
Gross profit and gross profit margin was
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A expenses") were $501.4
million in the second quarter of fiscal 2022, an increase of $59.3 million , or
13.4%, from the second quarter of fiscal 2021. The year-over-year increase in
SG&A expenses was primarily due to increases in costs to support sales growth,
increased costs related to inflation including merit pay increases for
employees, and to a lesser extent the impact of foreign currency due to the
weakening of the U.S. Dollar.
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
second quarter of fiscal 2022, SG&A expenses were 8.6% of sales and 70.3% of
gross profit, as compared with 9.5% and 86.5%, respectively, in the second
quarter of fiscal 2021. The decrease in SG&A expenses as a percentage of 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.
SG&A expenses for the first six months of fiscal 2022 were $987.5 million , or
8.6% of sales, as compared with $913.2 million , or 9.7% of sales, in the first
six months of fiscal 2021. SG&A expenses as a percentage of gross profit for the
first six months of fiscal 2022 were 71.9% as compared with 88.9% in the first
six months of fiscal 2021. The decrease in SG&A expenses as a percentage of
gross profit primarily results from operating leverage created from higher
sales, increase in gross profit margin, and lower amortization expense.
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Restructuring, Integration, and Other Expenses
The Company did not incur any restructuring, integration and other expenses during the second quarter of fiscal 2022. During the first six 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 second quarter of fiscal 2022 was$211.7 million , an increase of$154.5 million , from the second quarter of fiscal 2021 operating income of$57.2 million . Adjusted operating income for the second quarter of fiscal 2022 was$215.5 million , an increase of$135.9 million , or 170.7%, from the second 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 109 basis points year over year to 3.5% and Farnell operating income margin increased 917 basis points year over year to 13.7%. Operating income for the first six months of fiscal 2022 was$379.9 million , an increase of$304.2 million , from the operating income of$75.7 million during the first six months of fiscal 2021. Adjusted operating income for the first six months of fiscal 2022 was$394.2 million , an increase of$249.5 million , or 172.5%, from the first six 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 Income (Expense), Net Interest and other financing expenses in the second quarter of fiscal 2022 was$21.6 million , an increase of$0.1 million , or 0.7%, as compared with interest and other financing expenses of$21.5 million in the second quarter of fiscal 2021. Interest and other financing expenses in the first six months of fiscal 2022 was$44.5 million , a decrease of$0.7 million , or 1.6%, as compared with interest and other financing expenses of$43.8 million in the first six months of fiscal 2021. During the second quarter of fiscal 2022, the Company had$1.7 million of other income as compared with$1.3 million of other expense in the second quarter of fiscal 2021. During the first six months of fiscal 2022, the Company had$1.3 million of other income as compared with$20.8 million of other expense in the first six 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 six months of fiscal 2021, and differences in foreign currency exchange rates between the second quarters and first six months of
fiscal 2022 and fiscal 2021. Income Tax The Company's effective tax rate on its income before taxes was 21.4% in the second quarter of fiscal 2022. During the second quarter of fiscal 2022, there were no material items impacting the Company's effective tax rate. During the second quarter of fiscal 2021, the Company's effective tax rate on its income before taxes was 44.3%. During the second quarter of fiscal 2021, the Company's effective tax rate was unfavorably impacted primarily by increases to valuation allowances, partially offset by the mix of income in lower tax jurisdictions. For the first six months of fiscal 2022, the Company's effective tax rate on its income before taxes was 22.2%. The effective tax rate for the first six months of fiscal 2022 was unfavorably impacted primarily by increases to valuation allowances.
During the first six months of fiscal 2021, the Company's effective tax rate on its income before taxes was 97.5%. The effective tax rate for the first six months of fiscal 2021 was unfavorably impacted primarily by increases to valuation allowances, partially offset by the mix of income in lower tax jurisdictions.
23
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In January 2022 , the U.S. Treasury published new regulations impacting foreign
tax credit utilization. The Company is still evaluating this new tax regulation
and the impact to income tax expense, which could have a significant impact on
income expense in the third quarter of 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 second quarter of fiscal 2022 was $150.8 million ,
or $1.50 per share on a diluted basis, as compared with $19.2 million , or $0.19
per share on a diluted basis, in the second 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 six months of fiscal 2022 was $262.1 million ,
or $2.60 per share on a diluted basis, as compared with $0.3 million , or $0.00
per share on a diluted basis, in the first six months of fiscal 2021.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the first six months of fiscal 2022, the Company used$263.2 million of cash flow for operations compared to$207.4 million of cash generated from operations in the first six 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$631.0 million during the first six months of fiscal 2022, including increases in accounts receivable of$558.7 million and in inventories of$359.8 million both to support sales growth in the first six months of fiscal 2022, and a decrease in accrued expenses and other of$41.1 million , partially offset by an increase in accounts payable of$328.6 million . Comparatively, cash generated from working capital and other was$57.3 million during the first six months of fiscal 2021, including an increase in accounts payable of$130.8 million , and a decrease in inventories of$51.2 million , partially offset by an increase in accounts receivable of$94.8 million , and a decrease in accrued expenses and other of$29.8 million .
Cash Flow from Financing Activities
During the first six months of fiscal 2022, the Company received net proceeds of$190.4 million under the Securitization Program, and$109.7 million under the Credit Facility. During the first six months of fiscal 2022, the Company paid dividends on common stock of$47.6 million and repurchased$45.6 million of common stock. During the first six months of fiscal 2021, the Company received net proceeds of$11.8 million under the Securitization Program and made a net repayment of$239.4 million under the Credit Facility. During the first six months of fiscal 2021, the Company paid dividends on common stock of$41.5 million .
Cash Flow from Investing Activities
During the first six months of fiscal 2022, the Company used$22.1 million for capital expenditures compared to$30.0 million for capital expenditures in the first six months of fiscal 2021. Additionally, during the first six months of fiscal 2022, the$67.6 million received from other investing activities was substantially all related to the liquidation of Company owned life insurance policies. During the first six months of fiscal 2021, the Company paid$18.4 million for an asset acquisition. 24 Table of Contents 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 endedJuly 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 ofJanuary 1, 2022 . The Company was in compliance with all covenants under the Credit Facility and the Securitization Program as ofJanuary 1, 2022 , andJuly 3, 2021 . The Company has various lines of credit, financing arrangements, and other forms of bank debt in theU.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 second quarter of fiscal 2022 was$90.2 million . As an alternative form of financing outside ofthe 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$167.8 million as ofJanuary 1, 2022 , of which$106.4 million was held outsidethe United States . As ofJuly 3, 2021 , the Company held cash and cash equivalents of$199.7 million , of which$150.5 million was held outside ofthe United States . As of the end of the second 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$213.3 million outstanding under the Securitization Program, resulting in approximately$1.49 billion of total availability as ofJanuary 1, 2022 . Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable inthe United States to support desired borrowings. During the second quarter and first six months of fiscal 2022, the Company had an average daily balance outstanding of approximately$520.3 million and$436.7 million , respectively, under the Credit Facility and approximately$275.7 million and$207.6 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$379.7 million in cash flows for operating activities over the trailing four fiscal quarters
endedJanuary 1, 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 theU.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. 25
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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 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 ofJanuary 1, 2022 , the Company may repurchase up to an aggregate of$423.1 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 second quarter of fiscal 2022, the Company repurchased$35.3 million of common stock.
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 second quarter of fiscal 2022, the Board of Directors
approved a dividend of
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.
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