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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2022

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File #1-4224

AVNET, INC.

(Exact name of registrant as specified in its charter)

New York

 

 

11-1890605

(State or other jurisdiction

 

 

(IRS Employer

of incorporation or organization)

 

 

Identification No.)

2211 South 47th Street, Phoenix, Arizona

 

85034

(Address of principal executive offices)

 

(Zip Code)

(480) 643-2000

(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:

Common stock, par value $1.00 per share

 

AVT

 

Nasdaq Global Select Market

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. Yes No

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).

Yes þ No

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.

Large Accelerated Filer

  

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 No

As of January 19, 2022, the total number of shares outstanding of the registrant’s Common Stock was 98,963,138 shares, net of treasury shares.

Table of Contents

AVNET, INC. AND SUBSIDIARIES

INDEX

Page No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets at January 1, 2022 and July 3, 2021

2

Consolidated Statements of Operations for the second quarters and six months ended January 1, 2022 and January 2, 2021

3

Consolidated Statements of Comprehensive Income for the second quarters and six months ended January 1, 2022 and January 2, 2021

4

Consolidated Statements of Shareholders’ Equity for the second quarters and six months ended January 1, 2022 and January 2, 2021

5

Consolidated Statements of Cash Flows for the six months ended January 1, 2022 and January 2, 2021

6

Notes to Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

27

Item 1A. Risk Factors

27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 6. Exhibits

29

Signature Page

30

1

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

January 1,

    

July 3,

 

2022

2021

 

(Thousands, except share

 

amounts)

 

ASSETS

Current assets:

Cash and cash equivalents

$

167,818

$

199,691

Receivables

 

4,077,707

 

3,576,130

Inventories

 

3,542,723

 

3,236,837

Prepaid and other current assets

 

155,963

 

150,763

Total current assets

 

7,944,211

 

7,163,421

Property, plant and equipment, net

 

338,199

 

368,452

Goodwill

 

823,728

 

838,105

Intangible assets, net

 

19,271

 

28,539

Operating lease assets

248,020

265,988

Other assets

 

207,441

 

260,917

Total assets

$

9,580,870

$

8,925,422

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term debt

$

350,000

$

23,078

Accounts payable

 

2,693,696

 

2,401,357

Accrued expenses and other

588,581

572,457

Short-term operating lease liabilities

 

56,228

 

58,346

Total current liabilities

 

3,688,505

 

3,055,238

Long-term debt

 

1,144,592

 

1,191,329

Long-term operating lease liabilities

221,294

239,838

Other liabilities

 

323,253

 

354,833

Total liabilities

 

5,377,644

 

4,841,238

Commitments and contingencies (Note 7)

Shareholders’ equity:

Common stock $1.00 par; authorized 300,000,000 shares; issued 98,430,306 shares and 99,601,393 shares, respectively

 

98,430

 

99,601

Additional paid-in capital

 

1,642,521

 

1,622,160

Retained earnings

 

2,686,018

 

2,516,170

Accumulated other comprehensive loss

 

(223,743)

 

(153,747)

Total shareholders’ equity

 

4,203,226

 

4,084,184

Total liabilities and shareholders’ equity

$

9,580,870

$

8,925,422

See notes to consolidated financial statements.

2

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Second Quarters Ended

Six Months Ended

    

January 1,

    

January 2,

    

January 1,

    

January 2,

2022

2021

2022

2021

(Thousands, except per share amounts)

Sales

$

5,865,217

$

4,668,172

$

11,449,912

$

9,391,232

Cost of sales

 

5,152,182

 

4,156,919

 

10,077,185

 

8,363,899

Gross profit

 

713,035

 

511,253

 

1,372,727

 

1,027,333

Selling, general and administrative expenses

 

501,363

 

442,084

 

987,540

 

913,241

Restructuring, integration and other expenses

 

 

11,948

 

5,272

 

38,369

Operating income

 

211,672

 

57,221

 

379,915

 

75,723

Other income (expense), net

 

1,737

 

(1,333)

 

1,327

 

(20,831)

Interest and other financing expenses, net

 

(21,630)

 

(21,485)

 

(44,474)

 

(43,787)

Income before taxes

 

191,779

 

34,403

 

336,768

 

11,105

Income tax expense

 

40,958

 

15,240

 

74,629

 

10,831

Net income

$

150,821

$

19,163

$

262,139

$

274

Earnings per share:

Basic

$

1.52

$

0.19

$

2.64

$

0.00

Diluted

$

1.50

$

0.19

$

2.60

$

0.00

Shares used to compute earnings per share:

Basic

 

99,032

 

98,937

 

99,340

 

98,917

Diluted

 

100,286

 

99,932

 

100,701

 

99,897

Cash dividends paid per common share

$

0.24

$

0.21

$

0.48

$

0.42

See notes to consolidated financial statements.

3

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Second Quarters Ended

Six Months Ended

    

January 1,

    

January 2,

     

January 1,

    

January 2,

2022

2021

2022

2021

(Thousands)

Net income

$

150,821

$

19,163

$

262,139

$

274

Other comprehensive income, net of tax:

Foreign currency translation and other

 

(48,982)

 

120,000

 

(78,018)

 

210,373

Pension adjustments, net

 

4,010

 

3,983

 

8,022

 

13,606

Total comprehensive income

$

105,849

$

143,146

$

192,143

$

224,253

See notes to consolidated financial statements.

4

Table of Contents

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

 

99,601

$

99,601

$

1,622,160

$

2,516,170

$

(153,747)

$

4,084,184

Net income

 

 

 

 

111,318

 

 

111,318

Translation adjustments and other

 

 

 

 

 

(29,036)

 

(29,036)

Pension liability adjustments, net

4,012

4,012

Cash dividends

 

 

 

 

(23,893)

 

 

(23,893)

Repurchases of common stock

 

(275)

 

(275)

 

(10,228)

 

(10,503)

Stock-based compensation

 

10

10

9,507

9,517

Balance, October 2, 2021

 

99,336

99,336

1,631,667

2,593,367

(178,771)

4,145,599

Net income

 

 

 

 

150,821

 

 

150,821

Translation adjustments and other

 

 

 

 

 

(48,982)

 

(48,982)

Pension liability adjustments, net

4,010

4,010

Cash dividends

 

 

 

 

(23,749)

 

 

(23,749)

Repurchases of common stock

 

(921)

 

(921)

 

(34,421)

 

(35,342)

Stock-based compensation

 

15

 

15

 

10,854

 

 

 

10,869

Balance, January 1, 2022

98,430

$

98,430

$

1,642,521

$

2,686,018

$

(223,743)

$

4,203,226

    

    

    

    

    

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

 

98,793

$

98,793

$

1,594,140

$

2,421,845

$

(388,380)

$

3,726,398

Net loss

 

 

 

 

(18,889)

 

 

(18,889)

Translation adjustments and other

 

 

 

 

 

90,373

 

90,373

Pension liability adjustments, net

9,623

9,623

Cash dividends

 

 

 

 

(20,756)

 

 

(20,756)

Effects of new accounting principles, net

 

 

 

(14,480)

 

 

(14,480)

Stock-based compensation

 

51

51

5,191

 

 

 

5,242

Balance, October 3, 2020

 

98,844

98,844

1,599,331

2,367,720

(288,384)

3,777,511

Net income

 

 

 

 

19,163

 

 

19,163

Translation adjustments and other

 

 

 

 

 

120,000

 

120,000

Pension liability adjustments, net

3,983

3,983

Cash dividends

 

 

 

 

(20,756)

 

 

(20,756)

Stock-based compensation

 

18

 

18

 

10,814

 

 

 

10,832

Balance, January 2, 2021

98,862

$

98,862

$

1,610,145

$

2,366,127

$

(164,401)

$

3,910,733

See notes to consolidated financial statements.

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AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended

    

January 1,

    

January 2,

2022

2021

(Thousands)

Cash flows from operating activities:

Net income

$

262,139

$

274

Non-cash and other reconciling items:

Depreciation

 

43,876

 

44,002

Amortization

 

8,964

 

30,474

Amortization of operating lease assets

27,426

28,111

Deferred income taxes

 

(4,451)

 

(311)

Stock-based compensation

 

19,556

 

15,331

Impairments

 

 

15,166

Other, net

 

10,281

 

17,004

Changes in (net of effects from businesses acquired and divested):

Receivables

 

(558,702)

 

(94,831)

Inventories

 

(359,755)

 

51,185

Accounts payable

 

328,574

 

130,768

Accrued expenses and other, net

 

(41,117)

 

(29,779)

Net cash flows (used) provided by operating activities

 

(263,209)

 

207,394

Cash flows from financing activities:

Borrowings under accounts receivable securitization, net

 

190,400

 

11,800

Borrowings (repayments) under senior unsecured credit facility, net

109,669

 

(239,430)

Repayments under bank credit facilities and other debt, net

 

(1,550)

 

(1,480)

Repurchases of common stock

 

(45,570)

 

Dividends paid on common stock

 

(47,642)

 

(41,512)

Other, net

 

(6,069)

 

(2,301)

Net cash flows provided (used) for financing activities

 

199,238

 

(272,923)

Cash flows from investing activities:

Purchases of property, plant and equipment

 

(22,116)

 

(30,022)

Acquisitions of assets and businesses

 

 

(18,371)

Other, net

 

68,270

 

725

Net cash flows provided (used) for investing activities

 

46,154

 

(47,668)

Effect of currency exchange rate changes on cash and cash equivalents

 

(14,056)

 

12,492

Cash and cash equivalents:

— decrease

(31,873)

(100,705)

— at beginning of period

199,691

477,038

— at end of period

$

167,818

$

376,333

See notes to consolidated financial statements.

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Table of Contents

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 six months of fiscal 2022, contained 26 weeks compared to the first six months of fiscal 2021, which contained 27 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 is currently evaluating the effects of adopting the provisions of ASU No. 2020-04 and ASU No. 2021-01, but does not currently expect a material impact on the Company’s consolidated financial statements.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Receivables

The Company’s receivables and allowance for credit losses were as follows:

January 1,

July 3,

2022

2021

(Thousands)

Receivables

$

4,167,281

$

3,664,290

Allowance for Credit Losses

(89,574)

(88,160)

The Company had the following activity in the allowance for credit losses during the first six months of fiscal 2022 and 2021:

January 1,

January 2,

2022

2021

(Thousands)

Balance at beginning of the period

$

88,160

$

65,018

Effect of adopting credit loss accounting standard

17,205

Credit Loss Provisions

8,391

4,438

Credit Loss Recoveries

(321)

(283)

Receivables Write offs

(4,930)

(4,621)

Foreign Currency Effect and Other

(1,726)

3,693

Balance at end of the period

$

89,574

$

85,450

3. Goodwill and intangible assets

Goodwill

The following table presents the change in goodwill by reportable segment for the six months ended January 1, 2022.

  

Electronic

  

  

Components

Farnell

Total

(Thousands)

Carrying value at July 3, 2021 (1)

$

310,582

$

527,523

$

838,105

Foreign currency translation

 

(4,980)

 

(9,397)

 

(14,377)

Carrying value at January 1, 2022 (1)

$

305,602

$

518,126

$

823,728

(1)Includes accumulated impairments of $1,482,677 from prior fiscal years.

8

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible Assets

The following table presents the Company’s acquired intangible assets at January 1, 2022 and July 3, 2021, respectively.

January 1, 2022

July 3, 2021

 

Acquired

Accumulated

Net Book

 Acquired 

 Accumulated 

 Net Book 

 

    

Amount

    

Amortization

    

Value

    

Amount(1)

    

Amortization

    

Value

 

(Thousands)

 

Customer related

$

318,723

$

(308,131)

$

10,592

$

324,416

$

(312,392)

$

12,024

Trade name

 

56,103

 

(48,635)

 

7,468

 

57,184

 

(45,019)

 

12,165

Technology and other

 

56,510

 

(55,299)

 

1,211

 

57,809

 

(53,459)

 

4,350

$

431,336

$

(412,065)

$

19,271

$

439,409

$

(410,870)

$

28,539

(1)Acquired amount reduced by impairment of $17,473 from prior fiscal years.

Intangible asset amortization expense was $3.8 million and $10.4 million for the second quarters of fiscal 2022 and 2021, respectively, and $9.0 million and $30.5 million for the first six months of fiscal 2022 and 2021, respectively.

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

$

6,250

2023

6,525

2024

 

3,184

2025

 

1,472

2026

 

1,472

2027

 

368

Total

$

19,271

4. Debt

Short-term debt consists of the following (carrying balances in thousands):

January 1,

July 3,

January 1,

July 3,

2022

   

2021

   

2022

   

2021

Interest Rate

Carrying Balance

 

Bank credit facilities and other

1.24

%

$

$

23,078

Public notes due December 2022

4.88

%

 

350,000

 

Short-term debt

$

350,000

$

23,078

Bank credit facilities and other 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.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Long-term debt consists of the following (carrying balances in thousands):

January 1,

July 3,

January 1,

July 3,

2022

    

2021

  

2022

  

2021

Interest Rate

Carrying Balance

 

Revolving credit facilities:

Accounts receivable securitization program

0.85

%

$

213,300

$

Credit Facility (due June 2023)

1.27

%

90,006

Public notes due:

December 2022

4.88

%

 

 

350,000

April 2026

4.63

%

4.63

%

550,000

550,000

May 2031

3.00

%

3.00

%

300,000

300,000

Other long-term debt

0.00

%

1.22

%

 

161

 

1,185

Long-term debt before discount and debt issuance costs

 

1,153,467

 

1,201,185

Discount and debt issuance costs – unamortized

 

(8,875)

 

(9,856)

Long-term debt

$

1,144,592

$

1,191,329

In August 2021, the Company amended and extended for two years its trade accounts receivable securitization program (the “Securitization Program”) in the United States with a group of financial institutions. The Securitization Program allows the Company to transfer, on an ongoing revolving basis, an undivided interest in a designated pool of trade accounts receivable, to provide security or collateral for borrowings of up to a maximum of $450 million. The Securitization Program does not qualify for off balance sheet accounting treatment and any borrowings under the Securitization Program are recorded as debt in the consolidated balance sheets. Under the Securitization Program, the Company legally sells and isolates certain U.S. trade accounts receivable into a wholly owned and consolidated bankruptcy remote special purpose entity. Such receivables, which are recorded within “Receivables” in the consolidated balance sheets, totaled $915.6 million and $717.4 million at January 1, 2022, and July 3, 2021, respectively. The Securitization Program contains certain covenants relating to the quality of the receivables sold. Interest on borrowings is calculated using a one-month LIBOR rate plus a spread of 0.75%. The facility fee on the unused balance of the facility is up to 0.35%.

The Company has a five-year $1.25 billion revolving credit facility (the “Credit Facility”) with a syndicate of banks, which expires in June 2023. It consists of revolving credit facilities and the issuance of up to $200.0 million of letters of credit and up to $300.0 million of loans in certain approved currencies. Subject to certain conditions, the Credit Facility may be increased up to $1.50 billion. Under the Credit Facility, the Company may select from various interest rate options, currencies, and maturities. The Credit Facility contains certain covenants including various limitations on debt incurrence, share repurchases, dividends, investments, and capital expenditures. The Credit Facility also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios, which the Company was in compliance with as of January 1, 2022, and July 3, 2021.

As of January 1, 2022, and July 3, 2021, there were $1.2 million and $1.3 million, respectively, in letters of credit issued under the Credit Facility.

As of January 1, 2022, the carrying value and fair value of the Company’s total debt was $1.49 billion and $1.56 billion, respectively. At July 3, 2021, the carrying value and fair value of the Company’s total debt was $1.21 billion and $1.30 billion, respectively. Fair value for the public notes was estimated based upon quoted market prices and, for other forms of debt, fair value approximates carrying value due to the market based variable nature of the interest rates on those debt facilities.

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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 16 years. The Company’s equipment leases are primarily for automobiles and equipment and are not material to the consolidated financial statements.

The components of lease cost related to the Company’s operating leases were as follows (in thousands):

Second Quarters Ended

Six Months Ended

January 1,

January 2,

January 1,

January 2,

2022

  

2021

2022

  

2021

Operating lease cost

$

17,129

$

18,095

$

34,975

$

36,497

Variable lease cost

6,733

5,423

12,851

11,711

Total lease cost

$

23,862

$

23,518

$

47,826

$

48,208

Future minimum operating lease payments as of January 1, 2022, are as follows (in thousands):

Fiscal Year

Remainder of fiscal 2022

$

34,027

2023

 

59,916

2024

 

43,094

2025

 

33,862

2026

 

28,943

Thereafter

 

133,754

Total future operating lease payments

333,596

Total imputed interest on operating lease liabilities

(56,074)

Total operating lease liabilities

$

277,522

Other information pertaining to operating leases consists of the following:

Six Months Ended

January 1,

January 2,

2022

  

2021

Operating Lease Term and Discount Rate

Weighted-average remaining lease term in years

8.9

9.3

Weighted-average discount rate

3.8

%

3.8

%

Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):

Six Months Ended

January 1,

January 2,

2022

  

2021

Supplemental Cash Flow Information:

Cash paid for operating lease liabilities

$

29,456

$

29,157

Operating lease assets obtained from new operating lease liabilities

13,478

28,346

11

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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 60 days, but no longer than one year). The Company continues to have exposure to foreign currency risks to the extent they are not economically hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “Other expense, net.” The fair value of forward foreign exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions “Prepaid and other current assets” or “Accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of January 1, 2022, and July 3, 2021. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. The Company’s policy is to present derivative financial instruments with the same counterparty as either a net asset or liability when the right of offset exists.

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:

January 1,

    

July 3,

 

2022

2021

(Thousands)

Prepaid and other current assets

$

14,532

$

15,722

Accrued expenses and other

12,686

23,994

The amounts recorded to other income expense, net, related to derivative financial instruments for economic hedges are as follows:

Second Quarters Ended

Six Months Ended

January 1,

    

January 2,

 

January 1,

    

January 2,

2022

2021

2022

2021

(Thousands)

Net derivative financial instrument loss

$

(7,012)

$

(2,810)

$

(15,783)

$

(10,627)

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

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. Commitments and contingencies

F