Avnet Inc: Form 10-Q for the period ended Sep 28, 2024

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 September 28, 2024, 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 June 29, 2024.

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, when the U.S. Dollar weakens, the 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.”

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:

• “Adjusted operating income,” which is operating income excluding (i) restructuring, integration, and other expenses, and (ii) amortization of acquired intangible assets.

The reconciliation of operating income to adjusted operating income is presented in the following table:

Management believes that providing this additional information is useful to financial statement users 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 with and without 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 in conjunction with results presented in accordance with GAAP.

OVERVIEW

Organization

Avnet, Inc., including its consolidated subsidiaries (collectively, the “Company” or “Avnet”), is a leading global electronic component distributor and solutions provider that has served customers’ evolving needs for more than a century. 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. Both operating groups have operations in each of the three major economic regions of the world: (i) the Americas, (ii) EMEA, and (iii) Asia. EC markets, sells, and distributes (i) semiconductors, (ii) interconnect, passive and electromechanical components, and (iii) other integrated and embedded components, to a diverse customer base serving many end-markets. Farnell distributes electronic components and industrial products to a diverse customer base utilizing multi-channel sales and marketing resources.

Industry outlook

The global electronic components market has a history of cyclical downturns followed by periods of increased demand. Beginning in the second half of calendar year 2023, the industry began to experience a downturn marked by a decrease in sales due to a combination of elevated customer inventory levels and lower underlying demand for electronic components. As a result, the Company has seen elevated inventory levels and decreased sales, resulting in lower operating income. The duration of the current downturn is uncertain, although the Company had year over year sales growth in the Asia region during the first quarter of fiscal 2025. The Company expects sales in the second quarter of fiscal 2025 to be down 4% to up 2% as compared to the first quarter of fiscal 2025.

Results of Operations

Sales

The following table presents the percentage change in sales for the first quarter of fiscal 2025 as compared to fiscal 2024, by geographic region and operating group.

Sales of $5.60 billion for the first quarter of fiscal 2025 decreased $731.5 million, or 11.6%, as compared to $6.34 billion for the same quarter last year, primarily due to reduced demand for electronic components resulting from the current market downturn in the electronic components industry.

EC sales of $5.26 billion in the first quarter of fiscal 2025 decreased $657.3 million, or 11.1%, from the prior year first quarter sales of $5.91 billion, with the Americas and EMEA regions contributing to the decrease offset by sales growth in the Asia region. The decrease in sales is primarily due to sales volume decreases due to the market downturn in the electronic components industry and, to a lesser extent, an unfavorable product mix of lower priced electronic components.

Farnell sales for the first quarter of fiscal 2025 were $347.1 million, reflecting a decrease of $74.1 million, or 17.6%, compared to the same period in the prior year. Farnell sales in constant currency for the first quarter of fiscal 2025 decreased by 18.2% year over year. The decrease in sales in the first quarter of fiscal 2025 is primarily due to lower demand for on-the-board electronic components.

Gross Profit

The Company’s gross profit is primarily affected by sales volume and product and geographic sales mix. Gross profit for the first quarter of fiscal 2025 was $140.7 million, or 18.8% lower than the first quarter of fiscal 2024. This decrease is primarily due to sales volume decreases in both operating groups.

Gross profit margin decreased by 97 basis points to 10.8% for the first quarter of fiscal 2025 when compared to the first quarter of fiscal 2024. The decrease in gross profit margin is primarily due to shifts in geographic sales mix. Sales in the higher gross profit margin western regions represented approximately 53% of sales in the first quarter of fiscal 2025, versus 61% during the first quarter of fiscal 2024.

EC gross profit margin decreased year over year largely due to the change in geographic mix and from an increase in product mix to lower margin electronic components. Farnell gross profit margin decreased year over year, primarily due to lower sales of higher margin on-the-board electronic components.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (“SG&A expenses”) decreased $48.5 million or 10.0% from the first quarter of fiscal 2024. The decrease in SG&A expenses is primarily due to decreases in variable operating expenses associated with the decrease in sales volumes discussed above and from restructuring actions, slightly offset by the impact of changes in foreign currency translation rates.

Management monitors SG&A expenses as a percentage of sales and as a percentage of gross profit. In the first quarter of fiscal 2025, SG&A expenses were 7.8% of sales and 72.2% of gross profit, as compared with 7.7% and 65.1%, respectively, in the first quarter of fiscal 2024. The year-over-year increases in SG&A expenses as a percentage of both sales and gross profit are primarily due to the decrease in sales and gross profit without a proportional reduction in SG&A expenses, resulting in lower operating leverage.

Restructuring, Integration, and Other Expenses

In fiscal 2024, the Company initiated a restructuring plan to improve operating income by reducing SG&A expenses including within the Farnell operating group. In the first quarter of fiscal 2025, these efforts continued, leading to $23.5 million in restructuring, integration, and other expenses primarily for Farnell. Additionally, the Company incurred $2.9 million in distribution center start-up integration costs, primarily in EC EMEA.

As a result of these initiatives, the Company recorded total restructuring, integration, and other expense in the first quarter of fiscal 2025 of $26.4 million comprised of severance and other employee-related expenses of $3.4 million for reductions of approximately 40 employees across the Company, $5.2 million of facility exit costs primarily related to an office closure in the Americas, $14.9 million of asset impairments, and $2.9 million of integration and other costs. The after-tax impact of restructuring, integration, and other expenses were $19.7 million and $0.22 per share on a diluted basis.

Comparatively, the Company recorded restructuring, integration, and other expenses of $7.1 million during the first quarter of fiscal 2024 consisting of severance costs of $2.7 million, and other expenses of $4.4 million.

See Note 13 “Restructuring expenses” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

Operating Income

Operating income for the first quarter of fiscal 2025 was $142.2 million, a decrease of $111.5 million or 44.0%, year over year. Operating income margin for the first quarter of fiscal 2025 was 2.5%, a decrease of 147 basis points compared to 4.0% in the first quarter of fiscal 2024. The decreases in operating income and operating income margin are primarily due to the decrease in gross profit primarily from lower sales without a proportionate decrease in SG&A expenses, and restructuring, integration and other expenses, as discussed above. Adjusted operating income for the first quarter of fiscal 2025 was $168.9 million, a decrease of $92.8 million, or 35.4%.

Comparing the first quarter of fiscal 2025 to the first quarter of fiscal 2024, EC operating income decreased 27.6% to $197.4 million, and EC operating income margin decreased 86 basis points to 3.8%, with decreases in the Americas and EMEA regions offset by an improvement in the Asia region. Farnell operating income decreased 89.5% to $1.9 million in the first quarter of fiscal 2025 and Farnell operating income margin decreased 366 basis points year over year to 0.5%. The decreases in operating income and operating income margin in both operating groups are due to the decrease in gross profit primarily from lower sales without a proportionate decrease in SG&A expenses. Corporate operating expenses were $30.3 million in the first quarter of fiscal 2025, an increase of 5.4% when compared with $28.7 million in the first quarter of fiscal 2024.

Interest and Other Financing Expenses, Net and Other (Expense) Income, Net

Interest and other financing expenses in the first quarter of fiscal 2025 were $64.4 million, a decrease of $6.4 million as compared to $70.8 million in the first quarter of fiscal 2024. The decrease in interest and other financing expenses in the first quarter of fiscal 2025 compared to fiscal 2024 is primarily a result of lower outstanding borrowings and average borrowing rates.

The Company had other expenses of $3.0 million in the first quarter of fiscal 2025 compared to other income of $6.0 million in the first quarter of fiscal 2024. The increase in other expenses in the first quarter of fiscal 2025 is primarily due to foreign currency translation losses.

Gain on Legal Settlements and other

During the first quarter of fiscal 2024, the Company recorded a gain on legal settlements and other of $86.5 million in connection with the settlements of claims filed against certain manufacturers of capacitors.

Income Tax

Income tax expenses were $15.8 million for the first quarter of fiscal 2025, reflecting an effective tax rate of 21.1% compared to $66.2 million, reflecting an effective tax rate of 24.0% in the first quarter of fiscal 2024. The decrease in the effective tax rate for the first quarter of fiscal 2025 as compared to the first quarter of fiscal 2024 was primarily due to the increases in tax attribute carryforwards, partially offset by the mix of income in higher tax jurisdictions. See Note 7 “Income taxes” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

Net Income

As a result of the factors described above, the Company’s net income for the first quarter of fiscal 2025 was $59.0 million, or $0.66 per share on a diluted basis, as compared with $209.3 million, or $2.25 per share on a diluted basis, in the first quarter of fiscal 2024.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Operating Activities

Net cash provided by operating activities was $106.3 million for the first quarter of fiscal 2025, compared to net cash used by operating activities of $41.3 million for the first quarter of fiscal 2024. The $147.6 million increase in net cash provided by operating activities year over year is primarily due to improvements in cash used for working capital and other as working capital levels have begun to be more in line with sales, offset by lower cash provided by net income. Cash generated from working capital and other was $0.8 million during the first quarter of fiscal 2025, compared to cash used of $280.1 million during the first quarter of fiscal 2024, with the difference attributable primarily to inventories. During the first quarter of fiscal 2025, the Company used less cash to purchase inventory due to inventory levels already being elevated and because of lower sales. The Company also had increases in accounts receivable due to timing of sales and collections when compared to the prior year. The Company received $86.1 million of cash from legal settlements during the first quarter of fiscal 2024.

Financing Activities

Net borrowings of debt totaled $15.7 million during the first quarter of fiscal 2025, including net proceeds of $27.9 million under the Securitization Program, offset by net repayments of $11.4 million under the Credit Facility and $0.8 million for other debt. This compares to $151.4 million of net borrowing during the first quarter of the prior fiscal year. The Company paid cash dividends to shareholders of $0.33 per share, or $28.9 million, during the first quarter of fiscal 2025 as compared to $0.31 per share, or $28.3 million, during the first quarter of fiscal 2024. The Company has repurchased $100.0 million of common stock under the share repurchase plan during the first quarter of fiscal 2025 compared to $24.3 million in the same period of the prior year.

Investing Activities

The Company’s purchases of property, plant and equipment decreased during the first quarter of fiscal 2025 by $44.3 million, when compared to the same period in fiscal 2024, primarily due to distribution center investments in EMEA in the first quarter of fiscal 2024.

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 June 29, 2024. 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 September 28, 2024. The Company was in compliance with all covenants under the Credit Facility and the Securitization Program as of September 28, 2024, and June 29, 2024.

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, capital expenditure, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of first quarter of fiscal 2025 was $0.10 billion.

As an alternative form of liquidity 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 to the consolidated financial statements.

Liquidity

The Company held cash and cash equivalents of $267.5 million as of September 28, 2024, of which $230.1 million was held outside the United States. As of June 29, 2024, the Company held cash and cash equivalents of $310.9 million, of which $179.6 million was held outside of the United States.

During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company will use cash for working capital requirements during periods of higher growth. The Company generated $837.6 million in cash flows from operating activities over the trailing four fiscal quarters ended September 28, 2024.

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. Cash balances held in foreign locations that cannot be remitted back to the U.S. in a tax efficient manner are generally used for ongoing working capital, including the need to purchase inventories, 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.

As of the end of the first quarter of fiscal 2025, the Company had a combined total borrowing capacity of $2.20 billion under the Credit Facility and the Securitization Program. There were $768.6 million of borrowings outstanding and $0.9 million in letters of credit issued under the Credit Facility, and $443.0 million outstanding under the Securitization Program, resulting in approximately $824.7 million of total committed availability as of September 28, 2024. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings. The Company expects to amend and extend the Securitization Program during the second quarter of fiscal 2025 in the normal course of business.

During the first quarter of fiscal 2025, the Company had an average daily balance outstanding of approximately $1.09 billion under the Credit Facility, and approximately $468.4 million under the Securitization Program. The Company also has average borrowings that are higher than quarter end borrowings from various lines of credit, financing arrangements, and other forms of bank debt in the U.S. and various foreign locations.

As of September 28, 2024, the Company may repurchase up to an aggregate of $566.6 million of shares of the Company’s common stock through the 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 (including share price), and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During the first quarter of fiscal 2025, the Company repurchased $99.0 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 first quarter of fiscal 2025, the Board of Directors approved a dividend of $0.33 per share, which resulted in $28.9 million of dividend payments during the quarter.

The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows through the liquidation of working capital 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. Additionally, the Company believes that it has sufficient access to additional liquidity from the capital markets if necessary.

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.

The Company seeks to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates through financial arrangements that are intended to provide an economic hedge against 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 June 29, 2024, 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 June 29, 2024, as the Company continues to economically hedge the majority of its foreign currency exchange exposures. Thus, any increase or decrease in the 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 September 28, 2024, approximately 56% of the Company’s debt bears interest at a fixed rate and 44% 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 $3.2 million decrease in income before income taxes in the Company’s consolidated statement of operations for the first quarter of fiscal 2025.

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 first quarter of fiscal 2025, 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 materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

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 June 29, 2024, 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 September 28, 2024, 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 June 29, 2024.