UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of principal executive offices)
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which registered:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value (approximate) of the registrant’s common equity held by non-affiliates based on the closing price of a share of the registrant’s common stock for Nasdaq Global Select Market composite transactions on December 31, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter) was $
As of July 29, 2022, the total number of shares outstanding of the registrant’s Common Stock was
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item 1. Business
Avnet, Inc. and its consolidated subsidiaries (collectively, the “Company” or “Avnet”), is a leading global technology distributor and solutions provider that has served customers’ evolving needs for more than a 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. Founded in 1921, the Company works with suppliers in every major technology segment to serve customers in more than 140 countries.
Avnet serves a wide range of customers: from startups and mid-sized businesses to enterprise-level original equipment manufacturers (“OEMs”), electronic manufacturing services (“EMS”) providers, and original design manufacturers (“ODMs”).
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) the Americas, (ii) Europe, Middle East, and Africa (“EMEA”) and (iii) Asia/Pacific (“Asia”). Each operating group has its own management team, who manage various functions within each operating group. Each operating group also has distinct financial reporting to the executive level, which informs operating decisions and strategic planning and resource allocation for the Company as a whole. Divisions (“business units”) within each operating group serve primarily as sales and marketing units to streamline sales efforts and enhance each operating group’s ability to work with its customers and suppliers, generally along more specific geographies or product lines. However, each business unit relies heavily on support services from the operating groups, as well as centralized support at the corporate level.
A description of each operating group is presented below. Further financial information by operating group is provided in Note 16 “Segment information” to the consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-K.
Avnet’s EC operating group primarily supports high-volume customers. It markets, sells, and distributes electronic components from the world’s leading electronic component manufacturers, including semiconductors, IP&E components (interconnect, passive and electromechanical components), and other integrated and embedded components.
EC serves a variety of markets ranging from automotive to medical to defense and aerospace. It offers an array of customer support options throughout the entire product lifecycle, including both turnkey and customized design, supply chain, new product introduction, programming, logistics and post-sales services.
Within the EC operating group for 2022, net sales of approximately 80% consist of semiconductor products, approximately 17% consist of interconnect, passive, and electromechanical components, approximately 2% consist of computers, and approximately 1% consist of other products and services.
Design Chain Solutions
EC offers design chain support that provides engineers with a host of technical design solutions, which helps EC support a broad range of customers seeking complex products and technologies. With access to a suite of design tools and engineering support, customers can get product specifications along with evaluation kits and reference designs that enable a broad range of applications from any point in the design cycle. EC also offers engineering and technical resources deployed globally to support product design, bill of materials development, and technical education and training. By utilizing EC’s design chain support, customers can optimize their component selection and accelerate their time to market. EC’s extensive product line card provides customers access to a diverse range of products from a complete spectrum of electronic component manufacturers.
Supply Chain Solutions
EC’s supply chain solutions provide support and logistical services to OEMs, EMS providers, and electronic component manufacturers, enabling them to optimize supply chains on a local, regional or global basis. EC’s internal competencies in global warehousing and logistics, information technology, and asset management, combined with its global footprint and extensive partner relationships, allow EC to develop supply chain solutions that provide for a deeper level of engagement with its customers. These customers can manage their supply chains to meet the demands of a competitive global environment without a commensurate investment in physical assets, systems, and personnel. With supply chain planning tools and a variety of inventory management solutions, EC provides solutions that meet a customer’s requirements and minimize risk in a variety of scenarios, including lean manufacturing, demand flow, and outsourcing.
Embedded and Integrated Solutions
EC provides embedded solutions including technical design, integration and assembly of embedded products, systems, and solutions primarily for industrial applications. EC also provides integrated solutions for intelligent and innovative embedded display solutions, including touch and passive displays. In addition, EC develops and produces standard board and industrial subsystems and application-specific devices that enable it to produce specialized systems tailored to specific customer requirements. EC serves OEMs that require embedded systems and solutions, including engineering, product prototyping, integration, and other value-added services in the medical, telecommunications, industrial, and digital editing markets.
EC also provides integrated solutions and services for software companies that bring their intellectual property to market via hardware solutions, including custom-built embedded servers.
Avnet’s Farnell operating group primarily supports lower-volume customers that need electronic components quickly to develop, prototype, and test their products. It distributes a comprehensive portfolio of kits, tools, electronic components, industrial automation components, and test and measurement products to both engineers and entrepreneurs, primarily through an e-commerce channel. Farnell brings the latest products, services, and development trends all together in element14, an industry-leading online community where engineers collaborate to solve one another’s design challenges. In element14, members get consolidated information on new technologies, as well as access to experts and product specifications. Members can see what other engineers are working on, learn from online training, and get the help they need to optimize their own designs.
Within the Farnell operating group for 2022, net sales of approximately 21% consist of semiconductor products, approximately 51% consist of interconnect, passive, and electromechanical components, approximately 7% consist of computers, and approximately 21% consist of other products and services.
One of Avnet’s competitive strengths is the breadth and quality of the suppliers whose products it distributes. Products from no single supplier exceeded 10% of consolidated sales during fiscal years 2022, 2021 and 2020. Listed in the table below are the major product categories and the Company’s approximate sales of each during the past three fiscal years. “Other” consists primarily of test and measurement products, as well as maintenance, repair and operations (MRO) products.
Interconnect, passive & electromechanical (IP&E)
Competition & Markets
The electronic components industry continues to be extremely competitive. The Company’s major competitors include: Arrow Electronics, Inc., Future Electronics, World Peace Group, Mouser Electronics and Digi-Key Electronics. There are also certain smaller, specialized competitors who generally focus on particular sectors or on narrower geographic locations, markets, or products. As a result of these factors, Avnet’s pricing and product availability must remain competitive.
A key competitive factor in the electronic component distribution industry is the need to carry a sufficient amount and selection of inventory to meet customers’ demand and rapid delivery requirements. To minimize its exposure related to inventory on hand, the Company purchases a majority of its products pursuant to franchised distribution agreements, which typically provide certain protections for product obsolescence and price erosion. These agreements are generally cancelable upon 30 to 180 days’ notice and, in most cases, provide for or require inventory return privileges upon cancellation. In addition, the Company enhances its competitive position by offering a variety of value-added services, which are tailored to individual customer specifications and business needs, such as point of use replenishment, testing, assembly, programming, supply chain management, and materials management.
A competitive advantage is the breadth of the Company’s supplier product line card. Because of the number of Avnet’s suppliers, many customers can simplify their procurement process and make all of their required purchases from Avnet, rather than purchasing from several different parties.
Historically, Avnet’s business has not been materially impacted by seasonality, with the exception of an impact on consolidated results from shifts in geographic sales trends from Asia in the first half of a fiscal year to the Americas and EMEA regions in the second half of a fiscal year, which impact gross profit and operating income margins as a result of such seasonal geographic sales mix changes.
The Company highly values its employees, and recognizes their significant contributions to the success of the Company. The Company invests in its global workforce to drive diversity and inclusion; provide fair and market-competitive pay and benefits; foster employee development for future opportunities within the company; promote employees health and safety; and obtain employees’ feedback to better understand employees’ experiences and identify opportunities. Its core values of integrity, customer focus, ownership, teamwork and inclusiveness establish the foundation on which its culture is built and are key expectations of its employees. The Company believes that its culture and commitment to its employees are vital in its ability to attract, motivate and retain exceptional talent.
Additional information regarding the Company’s Human Capital programs, initiatives, and metrics can be found on its website as well as in its Sustainability Reports accessible on its website. The Sustainability Reports and other information contained on the Company’s website are neither part of nor incorporated by reference into this Annual Report.
Number of Employees
As of July 2, 2022, the Company’s global workforce totaled approximately 15,300 employees across 48 countries. Broken down by geographic region, approximately 4,500 employees are in the Americas, 6,600 employees in EMEA, and 4,200 employees in the Asia as of July 2, 2022.
Diversity, Equity and Inclusion (“DEI”)
The Company’s DEI Vision is to have (i) an employee population that reflects the diverse communities in which they live, work, and do business, and (ii) an organizational culture which seeks out varying perspectives that allow the best ideas to come to light and help the Company achieve and maximize business success. The Company recognizes that everyone deserves respect and equal treatment, regardless of gender, race, ethnicity, age, disability, sexual orientation, gender identity, veteran status, cultural background, or religious beliefs. The Company’s commitment to diversity is evidenced by the makeup of its Board of Directors and its employees. As of July 2, 2022, the Board was 45% racially and ethnically diverse, and 27% women, and its global employees were over 45% women.
To oversee inclusion efforts, the Company created the Global DEI Council, which is made up of 20 individuals who represent various business units and corporate functions. The council meets regularly and engages with colleagues across the Company to connect DEI initiatives to the Company’s broader business strategy. In addition, for fiscal 2022 and 2021, executive’s annual incentive compensation included an ESG non-financial performance goal to demonstrate the Company’s ESG commitment.
In furtherance of DEI goals, the Company conducts listen-and-learn sessions on a variety of DEI topics, which promote meaningful discussions and allow employees to better understand and support each other. These group conversations are open to the entire Company, and are regularly attended by senior leaders, including the CEO. During fiscal 2022, five sessions were conducted covering Black History Month, Allyship and Gender Partnership in the Workplace, Autism, Women and Bias, and Gender Inclusivity. The Company also supports employee-led Employee Resource Groups (ERGs) that are open to all employees and provide a forum to communicate and exchange ideas, build a network of relationships across the Company, and support each other in personal and career development. There are two ERGs for Black and women employees, and a third ERG for Hispanic and Latino employees is being formed. Additionally, the Company maintains an official culture and diversity calendar and publishes articles on its intranet to celebrate events and holidays around the world. In fiscal 2022, the Company’s employees celebrated International Women’s Day by holding a global event with external speakers discussing gender bias. Since 2020, Juneteenth, which
commemorates the official end of slavery in the United States and the emancipation of Black slaves, has been an official company-paid holiday for employees in the United States, a year before the federal government recognized it officially.
The Company provided unconscious bias training to its top 500 leaders, and is developing a suitable training for all employees. DEI education topics are regularly presented at the company-wide quarterly town hall, team and leadership meetings, and through internal webinars and podcasts open to all employees.
The Company employs diversity initiatives to ensure women and minorities are considered for its internship program and leadership roles, and attempts to utilize inclusive recruitment practices to attract and source diverse talent and mitigate potential bias. It has formed partnerships with ABILITYJobs, an employment website for people with disabilities, and Diversity Jobs, a recruiting and employment website with a network of niche sites for Black, Latinx, Asians, Native Americans, women, veterans, people with disabilities, people over age fifty, and LGBTQIA+ community. The Company has built new relationships with college career services departments and diversity-based student organizations such as YearUp, and attends multiple diversity, veteran, disability, and college job fairs.
The Company further undertakes DEI initiatives to improve its supplier and vendor diversity and support businesses with a Minority, Women or Veteran Business Enterprise (MWVBE) designation. For example, it provides opportunities regarding underwriting and other active roles in the Company’s capital-raising activities and short-term investments. In the area of procurement, the Company is exploring the possibility of dual sourcing as a strategy to give entry to MWVBE suppliers and vendors. For fiscal 2022, the Company began capturing its procurement diversity spend in the United States.
The Company continues to support women in the electronics industry, and has been a member of the Arizona Technology and Diversity Council since 2021. In addition, the Company’s CEO and another Company leader serve on the advisory board of Women in Electronics. It has participated in McKinsey’s “Women in the Workplace” study for the last six years, and has conducted for the past two years an industry-wide Women in Engineering Survey with results published annually on Farnell’s website.
Pay Equity, Benefits and Wellness
The Company strives to pay all its employees fairly, without regard to gender, race, or other personal characteristics, and competitively to attract, retain and incentivize talent. The Company sets pay ranges based on market data and considers factors such as an employee’s role, experience, tenure, job location, and job performance. Depending on the position, the Company uses a combination of fixed and variable pay including base salary, incentive awards, commissions, and merit increases. In addition, as part of its long-term incentive plan for certain employees, the Company provides share-based compensation to align employee’s interests with shareholders. The Company reviews its compensation practices, both in terms of its overall workforce and individual employees, to help ensure that pay remains fair and equitable.
The Company also offers a wide array of benefits that support employees’ physical, financial, and emotional well-being. Benefits include health benefits for eligible full-time and part-time U.S. employees and dependents, such as medical, behavioral, dental, vision, pharmacy, fertility and transgender coverage as well as disability and life insurance coverage. The Company offers time-off benefits, including paid family care leave for both hourly and salaried employees; a pension plan benefit for U.S. employees after one year of service; a 401(k) plan for employees to contribute towards their retirement goals; and an employee stock purchase plan that allows employees to purchase Company shares at a discount. In Canada and the United States, the Company provides education financial assistance for employees who wish to pursue undergraduate or graduate education to further their career development, and a
scholarship program for their dependents.
The Company offers all employees resources for living well through its THRIVE program, which offers resources, information, benefits and assistance to support overall well-being covering the following topics: (1) Mind & Body: physical and mental health, fitness and well-being; (2) Career: professional growth, skills, and development; (3) Money: total rewards, retirement planning and money management; and (4) Connection: community, networks, and social interests. An online wellness platform offers an interactive way to accomplish personal and financial goals and rewards employees for completing well-being activities. Further, the Company’s Employee Assistance Program (EAP) offers all employees free professional and confidential counseling for personal and work-related issues, life coaching, and mindfulness coaching, and runs webinars on a variety of mental health and well-being topics.
The Company also looks for creative benefits that provide needed support to employees. For example, in the United States, the Company covers six months rental of a SNOO Smart Sleeper Bassinet to new parents to help them rest and keep babies safe. In response to the COVID-19 pandemic, the Company added a short-term employee loan program to assist employees during the difficult time. Further, as employees return to work, the Company expanded its flexible, hybrid work model to allow employees in certain functions or roles to work remotely during part of the week.
Development and Training
The Company provides development opportunities and training to empower employees to grow and reach their career potential. The performance management process provides ongoing performance and development goals and discussions between employees and their leaders. Through the HR Now portal, the Company provides career development training and tools so employees can create a development plan. In addition, the Company offers a range of learning resources including face-to-face, virtual, and online training, as well as mentoring and coaching programs. Training programs for all employees include LinkedIn Learning and Business Book Summaries which cover a variety of technical, business, interpersonal, and leadership topics. Lead2Achieve and InsideOut Coaching are available for leaders to develop skills in effective goal-setting, coaching, feedback, and development. The Company’s annual compliance training includes business ethics and anti-corruption, and the Company offers training on various other topics including life skills, health and safety, environmental awareness, discrimination, and diversity.
Health and Safety
The Company strives to create workspaces and practices that foster a safe and secure work environment. As such, it provides comprehensive health and safety training to employees relevant to their specific work functions. The training is part of a continual improvement process and focuses on identified risks. In fiscal 2022, the Company created the position of Global Director of Environment, Health and Safety, to improve alignment and consistency of policies and procedures globally and increase ISO certifications at operational facilities. During fiscal 2022, the total injuries requiring medical treatment continued to decline as noted below:
Total Injuries requiring medical treatment (1)
43 total injuries
63 total injuries
72 total injuries
84 total injuries
|(1)||Injuries reported meeting OSHA/local industrial injuring reporting requirements at major Avnet and Farnell global facilities.|
In response to the COVID-19 pandemic, the Company formed a COVID-19 emergency response team with senior
management level representation from each region. The team leads and coordinates the Company’s overall response and communications with its global workforce. The Company implemented various measures that it determined were in the best interest of its employees’ health and safety, and in alignment with government legislation and guidance from key health authorities. These measures included work-from-home arrangements and additional safety measures for essential employees who continued to work on site, such as body temperature checks, face masks requirements, sanitization measures, social distancing where possible, split work-shifts on a rotated basis, enhanced facility cleanings, and expanded health and safety training. The Company regularly issued e-newsletters titled “COVID-19: What you need to know” that included regional updates, health and safety information, related business strategy changes, and useful resources for all employees. It also communicated guidance for employees returning to the office. Further, during fiscal 2021 and 2022, the Company increased paid sick leave allowances to mitigate earning gaps for hourly employees who contracted COVID-19 or needed to isolate after possible exposure to prevent the spread among its employees.
The Company engages with its employees and encourages open and direct feedback through employee engagement surveys. Through such surveys, the Company regularly collects feedback to better understand its employees’ experiences and identify opportunities to improve the work environment, increase employee satisfaction, and strengthen its culture. In fiscal 2022, the Company conducted one global employee engagement survey and achieved completion by 56% of its employees. Based on feedback received, the Company has included more explanations around leadership decisions during its quarterly town hall and senior management meetings and broadened the application of incentive pay structures for director-level employees.
The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other documents (including registration statements) with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 or the Securities Act of 1933, as applicable. The Company’s SEC filings are available to the public on the SEC’s website at http://www.sec.gov and through The Nasdaq Global Select Market (“Nasdaq”), 165 Broadway, New York, New York 10006, on which the Company’s common stock is listed.
A copy of any of the Company’s filings with the SEC, or any of the agreements or other documents that constitute exhibits to those filings, can be obtained by request directed to the Company at the following address and telephone number:
2211 South 47th Street
Phoenix, Arizona 85034
Attention: Corporate Secretary
The Company also makes these filings available, free of charge, through its website (see “Avnet Website” below).
In addition to the information about the Company contained in this Report, extensive information about the Company can be found at http://www.avnet.com, including information about its management team, products and services, and corporate governance practices.
The corporate governance information on the Company’s website includes the Company’s Corporate Governance Guidelines, the Code of Conduct and the charters for each of the committees of its Board of Directors. In addition, amendments to these documents and waivers granted to directors and executive officers under the Code of Conduct, if any, will be posted in this area of the website. These documents can be accessed at ir.avnet.com/documents-charters. Printed versions can be obtained, free of charge, by writing to the Company at the address listed above in “Available Information.”
In addition, the Company’s filings with the SEC, as well as Section 16 filings made by any of the Company’s executive officers or directors with respect to the Company’s common stock, are available on the Company’s website (ir.avnet.com/financial-information/sec-filings) as soon as reasonably practicable after the filing is electronically filed with, or furnished to, the SEC.
These details about the Company’s website and its content are only for information. The contents of the Company’s website are not, nor shall they be deemed to be, incorporated by reference in this Report.
Item 1A. Risk Factors
Forward-Looking Statements and Risk Factors
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with respect to the financial condition, results of operations, and business of Avnet. These statements are generally identified by words like “believes,” “plans,” “projects,” “expects,” “anticipates,” “should,” “will,” “may,” “estimates,” or similar expressions. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results and other outcomes could differ materially from those expressed or implied in the forward-looking statements. Any forward-looking statement speaks only as of the date on which that statement is made. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date on which the statement is made.
Risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements include the risk factors discussed below, but may also include risks and uncertainties not presently known to the Company or that management does not currently consider material. Such factors make the Company’s operating results for future periods difficult to predict and, therefore, prior results do not necessarily indicate results in future periods except as disclosed. Some of the risks disclosed below may have already occurred, but not to a degree that management considers material unless otherwise noted. Any of the below factors, or any other factors discussed elsewhere in this Report, may have an adverse effect on the Company’s financial condition, operating results, prospects, and liquidity. Similarly, the price of the Company’s common stock is subject to volatility due to fluctuations in general market conditions; actual financial results that do not meet the Company’s or the investment community’s expectations; changes in the Company’s or the investment community’s expectations for the Company’s future results, dividends or share repurchases; and other factors, many of which are beyond the Company’s control.
Business and Operations Risks
Changes in customer needs and consumption models
Changes in customer product demands and consumption models may cause a decline in the Company’s billings, which would have a negative impact on the Company’s financial results. While the Company attempts to identify changes in market conditions as soon as possible, the dynamics of the industries in which it operates make it difficult to predict and timely react to such changes, including those relating to product capacity and lead times. Also, future
downturns or supply chain challenges, including in the semiconductor and embedded solutions industries, could adversely affect the Company’s relationships with its customers, operating results, and profitability.
Specifically, the semiconductor industry experiences periodic fluctuations in product supply and demand (often associated with changes in economic conditions, technology, and manufacturing capacity) and suppliers may not adequately predict or meet customer demand. The Russia-Ukraine conflict and the COVID-19 pandemic have led, and may continue to lead, to shortages, extended lead times, and unpredictability in the supply of certain semiconductors and other electronic components. In reaction, customers may over order to ensure sufficient inventory, which, when the shortage lessens, may result in order cancellations and decreases. In cases where customers have entered into non-cancellable/ non-returnable orders, customers may not be able or willing to carry out the terms of the orders. The Company’s prices to customers depend on many factors, including product availability, supplier costs, and competitive pressures. In fiscal 2022, pricing to customers increased due to higher costs from suppliers, as well as higher freight and other costs. However, the Company may not be able to maintain higher prices to customers in the future. As product becomes more available, customer and competitive pressures may lower prices to customers, which could reduce the Company’s margins. In addition, the Company may be unable to increase prices to customers to offset higher internal costs, which could also reduce margins. During fiscal 2022, 2021, and 2020, sales of semiconductors represented approximately 76%, 75%, and 76% of the Company’s consolidated sales, respectively, and the Company’s sales closely follow the strength or weakness of the semiconductor industry. These conditions make it more difficult to manage the Company’s business and predict future performance.
Due to the Company’s increased online sales, system interruptions and delays that make its websites and services unavailable or slow to respond may reduce the attractiveness of its products and services to its customers. If the Company is unable to continually improve the efficiency of its systems, it could cause systems interruptions or delays and adversely affect the Company’s operating results.
Disruptions to key supplier and customer relationships
One of the Company’s competitive strengths is the breadth and quality of the suppliers whose products the Company distributes. For fiscal 2022, there were no Company suppliers that accounted for 10% or more of the Company’s consolidated billings. The Company’s contracts with its suppliers vary in duration and are generally terminable by either party at will upon notice. The Company’s suppliers may terminate or significantly reduce their volume of business with the Company because of a product shortage, an unwillingness to do business with the Company, changes in strategy, or otherwise.
Shortages of products or loss of a supplier may negatively affect the Company’s business and relationships with its customers, as customers depend on the Company’s timely delivery of technology hardware and software from the industry’s leading suppliers. In addition, shifts in suppliers’ strategies, or performance and delivery issues, may negatively affect the Company’s financial results. These conditions make it more difficult to manage the Company’s business and predict future performance. The competitive landscape has also experienced a consolidation among suppliers and capacity constraints, which could negatively impact the Company’s profitability and customer base.
Further, if key suppliers modify the terms of their contracts (including, without limitation, terms regarding price protection, rights of return, order cancellation rights, delivery commitments, rebates, or other terms that protect or enhance the Company’s gross margins), it could negatively affect the Company’s results of operations, financial condition, or liquidity. Due to recent global shortages of semiconductors, some suppliers have increased the amount of non-cancellable/ non-returnable orders, which may limit the Company’s ability to adjust down its inventory levels in the event of market downturns. The Company may attempt to limit associated risks by passing such terms on to its customers, but this may not be possible.
Risks related to international operations
During fiscal 2022, 2021, and 2020 approximately 77%, 78% and 75%, respectively, of the Company’s sales came from its operations outside the United States. The Company’s operations are subject to a variety of risks that are specific to international operations, including, but not limited to, the following:
|●||potential restrictions on the Company’s ability to repatriate funds from its foreign subsidiaries;|
|●||foreign currency and interest rate fluctuations;|
|●||non-compliance with foreign and domestic data privacy regulations, business licensing requirements, environmental regulations, and anti-corruption laws, the failure of which could result in severe penalties including monetary fines and criminal proceedings;|
|●||non-compliance with foreign and domestic import and export regulations and adoption or expansion of trade restrictions, including technology transfer restrictions, additional license, permit or authorization requirements for shipments, specific company sanctions, new and higher duties, tariffs or surcharges, or other import/export controls;|
|●||complex and changing tax laws and regulations;|
|●||regulatory requirements and prohibitions that differ between jurisdictions;|
|●||economic and political instability, terrorism, military conflicts (including the Russia-Ukraine conflict), or civilian unrest;|
|●||fluctuations in freight costs (both inbound and outbound), limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure;|
|●||natural disasters (including as a result of climate change), pandemics, and other public health crises;|
|●||differing employment practices and labor issues; and|
|●||non-compliance with local laws.|
In addition to the cost of compliance, the potential criminal penalties for violations of import or export regulations and anti-corruption laws, by the Company or its third-party agents, create heightened risks for the Company’s international operations. If a regulatory body determines that the Company has violated such laws, the Company could be fined significant sums, incur sizable legal defense costs, have its import or export capabilities restricted or denied, or have its inventories seized, which could have a material and adverse effect on the Company’s business. Additionally, allegations that the Company has violated any such regulations may negatively impact the Company’s reputation, which may result in customers or suppliers being unwilling to do business with the Company. While the Company has adopted measures and controls designed to ensure compliance with these laws, the Company cannot be assured that such measures will be adequate or that its business will not be materially and adversely impacted in the event of an alleged violation.
Tariffs, trade restrictions, and sanctions resulting from international trade disputes, changes in trade policies, or military conflicts may adversely affect the Company’s sales and profitability. For example, the U.S. government imposed several trade policies, rules, and restrictions applicable to China and Hong Kong. In addition, in response to the Russian-Ukraine conflict, the United States, the European Union, the United Kingdom, and numerous other countries initiated a variety of sanctions, export restrictions, currency controls and other restrictions against Russia. The Chinese and Russian governments have responded in kind with restrictions, sanctions, and other measures. These actions have resulted in losses; increased costs, including increased costs of procuring certain products the Company purchases from its suppliers; shortages of materials and electronic components; increased expenses such as energy, fuel, and freight costs, which may not
be possible to pass on to customers; increased cyber security attacks; credit market disruptions; and inflation, which may impact the Company’s sales, customer demand for certain products, access to certain markets, and profits. In addition, increased operational expenses incurred in minimizing the number of products subject to the tariffs could adversely affect the Company’s operating profits. Neither U.S. tariffs nor any retaliatory tariffs imposed by other countries on U.S. goods have yet had a material impact, but any future actions or escalations that affect trade relations could materially affect the Company’s sales and results of operations.
The Company transacts sales, pays expenses, owns assets, and incurs liabilities in countries using currencies other than the U.S. Dollar. Because the Company’s consolidated financial statements are presented in U.S. Dollars, the Company must translate such activities and amounts into U.S. Dollars at exchange rates in effect during each reporting period. Therefore, increases or decreases in the exchange rates between the U.S. Dollar and other currencies affect the Company’s reported amounts of sales, operating income, and assets and liabilities denominated in foreign currencies. In addition, unexpected and dramatic changes in foreign currency exchange rates may negatively affect the Company’s earnings from those markets. While the Company may use derivative financial instruments to reduce its net exposure, foreign currency exchange rate fluctuations may materially affect the Company’s financial results. Further, foreign currency instability and disruptions in the credit and capital markets may increase credit risks for some of the Company’s customers and may impair its customers’ ability to repay existing obligations.
Internal information systems failures
The Company depends on its information systems to facilitate its day-to-day operations and to produce timely, accurate, and reliable information on financial and operational results. Currently, the Company’s global operations are tracked with multiple information systems, including systems from acquired businesses, some of which are subject to ongoing IT projects designed to streamline or optimize the Company’s systems. These IT projects are extremely complex, in part because of wide ranging processes, use of on-premise and cloud environments, and the Company’s business operations. The Company may not always succeed at these efforts. Implementation or integration difficulties may adversely affect the Company’s ability to complete business transactions and ensure accurate recording and reporting of financial data. In addition, IT projects may not achieve the expected efficiencies and cost savings, which could negatively impact the Company’s financial results. A failure of any of these information systems (including due to power losses, computer and telecommunications failures, cyber security incidents, or manmade or natural disasters), or material difficulties in upgrading these information systems, could have an adverse effect on the Company’s business, internal controls, and reporting obligations under federal securities laws.
The Company’s global logistics services are operated through specialized and centralized distribution centers around the globe, some of which are outsourced. The Company also depends almost entirely on third-party transportation service providers to deliver products to its customers. A major interruption or disruption in service at one or more of its distribution centers for any reason (such as information technology upgrades and operating issues, warehouse modernization and relocation efforts, natural disasters, pandemics and other public health crises, geopolitical instability, military conflicts or terrorist attacks) or significant disruptions of services from the Company’s third-party transportation providers (such as transportation constraints due to labor shortages, disruptions to ports and other shipping infrastructures, border closures, other travel or health-related restrictions, and increased transportation costs related to gas price increases and shortages) could cause a delay in expected cost savings or an increase in expenses, which may not be possible to pass on to customers. In addition, as the Company continues to increase capacity at various distribution centers, it may experience operational challenges, increased costs, decreased efficiency, and customer delivery delays and failures. Such operational challenges could have an adverse impact on the Company’s business partners, and on the Company’s business, operations, financial performance, and reputation.
Data security and privacy threats
Threats to the Company’s data and information technology systems (including cyber security attacks such as phishing and ransomware) are becoming more frequent and sophisticated. Threat actors have successfully breached the Company’s systems and processes in various ways, and such cyber security breaches expose the Company to significant potential liability and reputational harm. Cyber security attacks have not yet materially impacted the Company’s data (including data about customers, suppliers, and employees) or the Company’s operations, financial condition, or data security, but future attacks could have a material impact. Threat actors seek unauthorized access to intellectual property, or confidential or proprietary information regarding the Company, its customers, its business partners, or its employees. They deploy malicious software programs that exploit security vulnerabilities, including ransomware designed to encrypt the Company’s files so an attacker may demand a ransom for restored access. They also seek to misdirect money, sabotage data and systems, takeover internal processes, and induce employees or other system users to disclose sensitive information, including login credentials. In addition, some Company employees continue to work from home on a full-time or hybrid basis, which increases the Company’s vulnerability to cyber and other information technology risks. Further, the Company’s business partners and service providers, such as suppliers, customers, and hosted solution providers, pose a security risk because their own security systems or infrastructure may become compromised.
The Company seeks to protect and secure its systems and information, prevent and detect evolving threats, and respond to threats as they occur. Measures taken include implementing and enhancing information security controls such as enterprise-wide firewalls, intrusion detection, endpoint protection, email security, disaster recovery, vulnerability management, and cyber security training for employees to enhance awareness of general security best practices, financial fraud, and phishing. Despite these efforts, the Company may not always be successful. Threat actors frequently change their techniques and, consequently, the Company may not always promptly detect the existence or scope of a security breach. As these types of threats grow and evolve, the Company may make further investments to protect its data and information technology infrastructure, which may impact the Company’s profitability. The Company’s insurance coverage for protecting against cyber-attacks may not be sufficient to cover all possible claims, and the Company may suffer losses that could have a material adverse effect on its business. As a global enterprise, the Company may be negatively impacted by existing and proposed laws and regulations, as well as government policies and practices, related to cybersecurity, data privacy, data localization, and data protection. Failure to comply with such requirements could have an adverse effect on the Company’s reputation, business, financial condition, and results of operations, as well as subject the Company to significant fines, litigation losses, third-party damages, and other liabilities.
Inventory value decline
The electronic components and integrated products industries are subject to rapid technological change, new and enhanced products, changes in customer needs, and changes in industry standards and regulatory requirements, which can cause the Company’s inventory to decline in value or become obsolete. Regardless of the general economic environment, prices may decline due to a decrease in demand or an oversupply of products, which may increase the risk of declines in inventory value. Many of the Company’s suppliers offer certain protections from the loss in value of inventory (such as price protection and limited rights of return), but such policies may not fully compensate for the loss. Also, suppliers may not honor such agreements, some of which are subject to the supplier discretion. In addition, most Company sales are made pursuant to individual purchase orders, rather than through long-term sales contracts. Where there are contracts, such contracts are generally terminable at will upon notice. Unforeseen product developments, inventory value declines, or customer cancellations may adversely affect the Company’s business, results of operations, financial condition, or liquidity.
Accounts receivable defaults
Accounts receivable are a significant portion of the Company’s working capital. If entities responsible for a significant amount of accounts receivable cease doing business, direct their business elsewhere, fail to pay, or delay payment, the Company’s business, results of operations, financial condition, or liquidity could be adversely affected. An economic or industry downturn could adversely affect the Company’s ability to collect receivables, which could result in longer payment cycles, increased collection costs, and defaults exceeding management’s expectations. A significant deterioration in the Company’s ability to collect accounts receivable in the United States could impact the cost or availability of financing under its accounts receivable securitization program.
Liquidity and capital resources constraints
The Company’s ability to satisfy its cash needs and implement its capital allocation strategy depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. The Company may need to satisfy its cash needs through external financing. However, various factors affect external financing, including general market conditions and the Company’s debt ratings and operating results, and may not be available on acceptable terms or at all. An increase in the Company’s debt or deterioration of its operating results may cause a reduction in its debt ratings. Any such reduction could negatively impact the Company’s ability to obtain additional financing or renew existing financing, and could result in reduced credit limits, increased financing expenses, and additional restrictions and covenants. A reduction in its current debt rating may also negatively impact the Company’s working capital and impair its relationship with its customers and suppliers.
As of July 2, 2022, the Company had debt outstanding with financial institutions under various notes, secured borrowings, and committed and uncommitted lines of credit. The Company needs cash to pay debt principal and interest, and for general corporate purposes, such as funding its ongoing working capital and capital expenditure needs. Under certain of its credit facilities, the applicable interest rate and costs are based in part on the Company’s current debt rating. If its debt rating is reduced, higher interest rates and increased costs would result. Any material increase in the Company’s financing costs or loss of access to cost-effective financing could have an adverse effect on its profitability, results of operations, and cash flows.
Under some of its credit facilities, the Company is required to maintain certain specified financial ratios and pass certain financial tests. If the Company increases its level of debt or its operating results deteriorate, it may fail to meet these financial ratios or pass these tests, which may result in an event of default. In such an event, lenders may accelerate payment and the Company may be unable to continue to utilize these facilities. If the Company is unable to utilize these facilities or is required to repay debt earlier than management expected, it may not have sufficient cash available to make interest payments, to repay indebtedness, or for general corporate needs.
General economic or business conditions, both domestic and foreign, may be less favorable than management expects and could adversely impact the Company’s sales or its ability to collect receivables from its customers, which may impact access to the Company’s accounts receivable securitization program.
Financing covenants and restrictions may limit management discretion
The agreements governing the Company’s financing, including its credit facility, accounts receivable securitization program, and the indentures governing the Company’s outstanding notes, contain various covenants and restrictions that, in certain circumstances, limit the Company’s ability, and the ability of certain subsidiaries, to:
|●||grant liens on assets;|
|●||make restricted payments (including, under certain circumstances, paying dividends on, redeeming or repurchasing common stock);|
|●||make certain investments;|
|●||merge, consolidate, or transfer all, or substantially all, of the Company’s assets;|
|●||incur additional debt; or|
|●||engage in certain transactions with affiliates.|
As a result of these covenants and restrictions, the Company may be limited in the future in how it conducts its business and may be unable to raise additional debt, repurchase common stock, pay a dividend, compete effectively, or make further investments.
Tax law changes and compliance
As a multinational corporation, the Company is subject to the tax laws and regulations of the United States and many foreign jurisdictions. From time to time, governments enact or revise tax laws or regulations, including changes in the interpretation of such laws, that may adversely affect the Company’s cash flow and effective tax rate.
Many countries are adopting provisions to align their international tax rules with the Base Erosion and Profit Shifting Project, led by the Organisation for Economic Co-operation and Development (“OECD”) and supported by the United States. The project aims to standardize and modernize global corporate tax policy, including with regard to tax rate increases and adopting a global minimum tax. In October 2021, a substantial majority of the OECD’s participating countries and jurisdictions agreed to introduce a 15% global minimum corporate tax rate that would apply to companies with revenue over a set threshold. Furthermore, many countries are independently evaluating their corporate tax policy, which could result in tax legislation and enforcement that adversely impacts the Company’s tax provision and value of deferred assets and liabilities. These provisions, if enacted, individually or as a whole, may negatively impact taxation of international business.
The tax laws and regulations of the various countries where the Company has operations are extremely complex and subject to varying interpretations. Although the Company believes that its historical tax positions are sound and consistent with applicable law, taxing authorities may challenge these tax positions and the Company may not be successful in defending against any such challenges.
The Company’s future income tax expense could be favorably or adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets, and liabilities and changes to its operating structure.
Constraints on internal controls
Effective internal controls are necessary for the Company to provide reliable financial reports, safeguard its assets, and prevent and detect fraud. If the Company cannot do so, its brand and operating results could be harmed. Internal controls over financial reporting are intended to prevent and detect material misstatements in its financial reporting and material fraudulent activity, but are limited by human error, circumventing or overriding controls, and fraud. As a result, the Company may not identify all material activity or all immaterial activity that could aggregate into a material misstatement. Therefore, even effective internal controls cannot guarantee that financial statements are wholly accurate or prevent all fraud and loss of assets. Management continually evaluates the effectiveness of the design and operation of the Company’s internal controls. However, if the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved internal controls, or if the Company experiences
difficulties in their implementation, the Company’s business and operating results could be harmed. Additionally, the Company may be subject to sanctions or investigations by regulatory authorities, or the Company could fail to meet its reporting obligations, all of which could have an adverse effect on its business or the market price of the Company’s securities.
Acquisition expected benefits shortfall
The Company has made, and expects to continue to make, strategic acquisitions or investments globally to further its strategic objectives and support key business initiatives. Acquisitions and investments involve risks and uncertainties, some of which may differ from those associated with the Company’s historical operations. Such risks include, but are not limited to, risks relating to expanding into emerging markets and business areas, adding additional product lines and services, impacting existing customer and supplier relationships, incurring costs or liabilities associated with the companies acquired, incurring potential impairment charges on acquired goodwill and other intangible assets, and diverting management’s attention from existing business operations. As a result, the Company’s profitability may be negatively impacted. In addition, the Company may not successfully integrate the acquired businesses, or the integration may be more difficult, costly, or time-consuming than anticipated. Further, any litigation relating to a potential acquisition will increase expenses associated with the acquisition or cause a delay in completing the acquisition, which may impact the Company’s profitability. The Company may experience disruptions that could, depending on the size of the acquisition, have an adverse effect on its business, especially where an acquisition target may have pre-existing compliance issues or deficiencies, or material weaknesses in internal controls over financial reporting. Furthermore, the Company may not realize all of the anticipated benefits from its acquisitions, which could adversely affect the Company’s financial performance.
Legal and Regulatory Risks
Legal proceedings costs and damages
From time to time, the Company may become involved in legal proceedings, including government investigations, that arise out of the ordinary conduct of the Company’s business, including matters involving intellectual property rights, commercial matters, merger-related matters, product liability, and other actions. Legal proceedings could result in substantial costs and diversion of management’s efforts and other resources, and could have an adverse effect on the Company’s operations and business reputation. The Company may be obligated to indemnify and defend its customers if the products or services that the Company sells are alleged to infringe any third party’s intellectual property rights. The Company may not be able to obtain supplier indemnification for itself and its customers against such claims, or such indemnification may not fully protect the Company and its customers against such claims. Also, the Company is exposed to potential liability for technology and products that it develops for which it has no indemnification protections. If an infringement claim against the Company is successful, the Company may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. The Company may have to stop selling certain products or services, which could affect its ability to compete effectively. In addition, the Company’s expanding business activities may include the assembly or manufacture of electronic component products and systems. Product defects, whether caused by a design, assembly, manufacture or component failure or error, or manufacturing processes not in compliance with applicable statutory and regulatory requirements, may result in product liability claims, product recalls, fines, and penalties. Product liability risks could be particularly significant with respect to aerospace, automotive, and medical applications because of the risk of serious harm to users of such products.
Environmental regulations non-compliance
The Company is subject to various federal, state, local, and foreign laws and regulations addressing environmental and other impacts from industrial processes, waste disposal, carbon emissions, use of hazardous materials in products and operations, recycling products, and other related matters. While the Company strives to fully comply with all applicable regulations, certain of these regulations impose liability without fault. Additionally, the Company may be held responsible for the prior activities of an entity it acquired. Failure to comply with these regulations could result in substantial costs, fines, and civil or criminal sanctions, as well as third-party claims for property damage or personal injury. Future environmental laws and regulations may become more stringent over time, imposing greater compliance costs, and increasing risks, penalties and reputational harm associated with violations.
General Risk Factors
Negative impacts of a pandemic or other health crisis on economy, operations, and financial results
A pandemic, epidemic or other health related crisis could negatively impact the global economy, disrupt global supply chains, increase demand uncertainty, constrain workforce participation, disrupt logistics and distribution systems, and create significant volatility and disruption of financial markets, which could negatively impact the operations of the Company and its customers and suppliers. Such crises could also result in or heighten the risks of customer bankruptcies, customer delayed or defaulted payments, delays in product deliveries, restrictions on access to financial markets, and other risk factors described in the Company’s Annual Report. Due to the COVID-19 pandemic, even though the Company has not yet experienced any material disruption to its upstream supply chain and many of its distribution centers remain operational under business continuity plans, it has experienced increased logistics costs, product demand fluctuations, product pricing challenges, longer lead times, reduction in global distribution center utilization, and shipping delays. As the scope and duration of the COVID-19 outbreak is unknown and the extent of its economic impact continues to evolve globally, there is significant uncertainty related to the ultimate impact that it will have on the Company’s business, its employees, product supply and demand, results of operations, and financial condition, and to what extent the Company’s actions to mitigate such impacts will be successful and sufficient.
Economic and geopolitical uncertainty
The Company’s financial results, operations, and prospects depend significantly on worldwide economic and geopolitical conditions, the demand for its products and services, and the financial condition of its customers and suppliers. Economic weakness and geopolitical uncertainty (including the uncertainty caused by military conflicts; pandemics, epidemics, and other health related crises; and international trade disputes) have resulted, and may result in the future, in decreased sales, margins, and earnings. Economic weakness and geopolitical uncertainty may also lead the Company to impair assets (including goodwill, intangible assets, and other long-lived assets), implement restructuring actions, and reduce expenses in response to decreased sales or margins.
The Company may not be able to adequately adjust its cost structure in a timely fashion, which may adversely impact its profitability. Uncertainty about economic conditions may increase foreign currency volatility, which may negatively impact the Company’s results. Economic weakness and geopolitical uncertainty also make it more difficult for the Company to manage inventory levels (including when customers decrease orders, cancel existing orders, or are unable to fulfill their obligations under non-cancelable/ non-return orders) and collect customer receivables, which may result in provisions to create reserves, write-offs, reduced access to liquidity, higher financing costs and increased pressure on cash flows.
Further, an increase in or prolonged period of inflation could affect the Company’s profitability and cash flows, due to higher wages, higher operating expenses, higher financing costs, and/or higher supplier prices. Inflation may also adversely affect foreign exchange rates. The Company may be unable to pass along such higher costs to its customers, which may result in lower gross profit margins. In addition, Inflation may adversely affect customers’ financing costs, cash flows, and profitability, which could adversely impact their operations and the Company’s ability to offer credit and collect receivables.
The Company is monitoring the implementation and effects of Brexit and developing contingency plans, including changes to its logistics operations and shipment routes, and preparing for changes in trade facilitation regulations. While the extent of the impact of Brexit is not yet fully known, Brexit has led to instability and uncertainty in the United Kingdom and the European Union, could contribute to logistical and regulatory delays at borders, and volatility in the foreign exchange markets, and may have an adverse effect on the Company’s trade operations and financial results.
The market for the Company’s products and services is very competitive and subject to rapid technological advances, new competitors, non-traditional competitors, changes in industry standards, and changes in customer product demands and consumption models. The Company competes with other global and regional distributors, as well as some of the Company’s own suppliers that maintain direct sales efforts. In addition, as the Company expands its offerings and geographies, the Company may encounter increased competition from current or new competitors. The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects. Furthermore, the Company’s efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.
The size of the Company’s competitors varies across market sectors, as do the resources the Company has allocated to the sectors and geographic areas in which it does business. Therefore, some competitors may have greater resources or a more extensive customer or supplier base in some market sectors and geographic areas. As a result, the Company may not be able to effectively compete in certain markets, which could impact the Company’s profitability and prospects.
Employee retention and hiring constraints
Identifying, hiring, training, developing, and retaining qualified and engaged employees is critical to the Company’s success, and competition for experienced employees in the Company’s industry can be intense. Restrictions on immigration or changes in immigration laws, including visa restrictions, may limit the Company’s acquisition of key talent, including talent with diverse experience, background, ability, and perspectives. Changing demographics and labor work force trends may result in a loss of knowledge and skills as experienced workers leave the Company. In addition, as global opportunities and industry demands shift, and as the Company expands its offerings, the Company may encounter challenges in realigning, training, and hiring skilled personnel. Through organizational design activities, the Company periodically eliminates positions due to restructurings or other reasons, which may risk the Company’s brand reputation as an employer of choice and negatively impact the Company’s ability to hire and retain qualified personnel. Also, position eliminations may negatively impact the morale of employees who are not terminated, which could result in work stoppages or slowdowns, particularly where employees are represented by unions or works councils. If these circumstances occur, the Company’s business, financial condition, and results of operations could be seriously harmed.
Item 1B. Unresolved Staff Comments
Item 2. Properties
The Company owns and leases approximately 1.8 million and 4.0 million square feet of space, respectively, of which approximately 28% is in the United States. The following table summarizes certain of the Company’s key facilities:
EC warehousing and value-added operations
EC warehousing and value-added operations
Leeds, United Kingdom
Farnell warehousing and value-added operations
EC warehousing and value-added operations
Gaffney, South Carolina
Hong Kong, China
Corporate and EC Americas headquarters
EC warehousing, integration and value-added operations
See Note 5, “Property, plant and equipment, net” and Note 11, “Leases” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on property, plant and equipment, and operating leases.
Item 3. Legal Proceedings
Pursuant to SEC regulations, including but not limited to Item 103 of Regulation S-K, the Company regularly assesses the status of and developments in pending legal proceedings to determine whether any such proceedings should be identified specifically in this discussion of legal proceedings, and has concluded that no particular pending legal proceeding requires public disclosure. Based on the information known to date, management believes that the Company has appropriately accrued in its consolidated financial statements for its share of the estimable costs of legal proceedings.
The Company is also currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations. The Company currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position or liquidity, but could possibly be material to its results of operations in any single reporting period.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is listed on the Nasdaq Global Select Market under the symbol AVT.
The declaration and payment of future dividends will be at the discretion of the Board of Directors and will be dependent upon the Company’s financial condition, results of operations, capital requirements, and other factors the Board of Directors considers relevant. In addition, certain of the Company’s debt facilities may restrict the declaration and payment of dividends, depending upon the Company’s then current compliance with certain covenants.
As of July 29, 2022, there were 1,464 registered holders of record of Avnet’s common stock.
Stock Performance Graphs and Cumulative Total Returns
The graph below matches the cumulative 5-year total return of holders of Avnet’s common stock with (i) the cumulative total returns of the Nasdaq Composite Index and (ii) a customized peer group of five companies (Agilysys Inc., Arrow Electronics Inc., Insight Enterprises Inc., Scansource Inc., and TD Synnex Corporation). The graph assumes that the value of the investment in Avnet’s common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on 7/1/2017 and tracks it through 7/2/2022.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Issuer Purchases of Equity Securities
In May 2022, the Company’s Board of Directors approved a new share repurchase plan with an authorization to repurchase up to an aggregate of $600 million of common stock. The authorization amount includes the amount remaining under the previous share repurchase plan approved in August 2011, as last amended in August 2019. The new plan was publicly announced on June 6, 2022. The following table includes the Company’s monthly purchases of the Company’s common stock during the fourth quarter of fiscal 2022, under the share repurchase program, which is part of publicly announced plans.
Total Number of
Value of Shares That
as Part of Publicly
May Yet Be
Purchased under the
Plans or Programs
April 3 – April 30
May 1 – May 28
May 29 – July 2
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 past three fiscal years, the following discussion should be read in conjunction with the description of the business appearing in Item 1 of this Report and the consolidated financial statements, including the related notes and schedule, and other information appearing in Item 8 of this Report. The Company operates on a “52/53 week” fiscal year. Fiscal 2022 contains 52 weeks compared to 53 weeks in fiscal 2021 and 52 weeks in fiscal 2020. The extra week, 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 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 EMEA and 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:
|●||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 fiscal 2021 due to it being a 53-week year, as discussed above. Additionally, the Company has adjusted sales for the impact of the termination of the 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), (ii) goodwill and long-lived asset impairment expense, (iii) Russian-Ukraine conflict related expenses (see Russian-Ukraine conflict related expenses in this MD&A), and (vi) amortization of acquired intangible assets is referred to as “adjusted operating income.”|
The reconciliation of operating income (loss) to adjusted operating income is presented in the following table:
Operating income (loss)
Restructuring, integration and other expenses
Goodwill and intangible asset impairment expense
Russian-Ukraine conflict related expenses
Amortization of acquired intangible assets and other
Adjusted operating income
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 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.
Results of Operations
Recent Global Events and Uncertainties
In February 2022, Russian forces invaded Ukraine (“Russian-Ukraine conflict”), and in response, the member countries of NATO initiated a variety of sanctions and export controls targeting Russia and associated entities. The sanctions currently in place limit the Company’s ability to provide goods to Russian customers and banking sanctions significantly negate our ability to collect outstanding receivables; as such, the Company has recorded an allowance for credit losses against those receivables that are not covered by customer credit insurance as of July 2, 2022. Historically, the Company’s sales and gross profit generated from sales to Russian customers is less than 1% of consolidated sales and consolidated gross profit. See further discussion of the impacts of the Russian-Ukraine conflict on the Company’s results of operations in fiscal 2022 below.
Sales for fiscal 2022 were $24.31 billion, an increase of 24.5% from fiscal 2021 sales of $19.53 billion. Excluding the impact of changes in foreign currency, sales increased 27.2% as compared to sales in the prior year. This increase in sales was predominately driven by sales growth in both operating groups across all regions driven by strong demand and pricing globally for electronic components.
Gross profit margin of 12.2% increased 73 basis points compared to 11.5% in fiscal 2021. This increase is primarily due to strong overall demand for electronic components and improvements in pricing, product, customer mix, and geographic sales mix.
Operating income of $939.0 million was $657.6 million higher than fiscal 2021. Operating income margin was 3.9% in fiscal 2022, as compared to 1.4% in fiscal 2021. 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 to support sales growth. Adjusted operating income margin was 4.1% in fiscal 2022 as compared to 2.1% in 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 profit margin, partially offset by increases in selling, general and administrative expenses to support sales growth.
Three-Year Analysis of Sales: By Operating Group and Geography
The table below provides a year-over-year summary of sales for the Company and its operating groups.
(Dollars in millions)
Sales by Operating Group:
Sales by Geographic Region:
Reported sales were the same as organic sales in fiscal 2022. The table below provides the reconciliation of reported sales to organic sales for fiscal 2021 by region and operating group.
Adj for TI
(Dollars in millions)
Avnet by region
Avnet by operating group
|(2)||Sales adjusted for the impact of the termination of the TI distribution agreement.|
The table below provides reported and organic sales growth rates for fiscal 2022 as compared to fiscal 2021 by region and operating group.
Adj for TI
Avnet by region
Avnet by operating group
|(1)||Sales growth rates excluding the impact of the termination of the TI distribution agreement.|
Avnet’s sales for fiscal 2022 were $24.31 billion, an increase of $4.78 billion, or 24.5%, from fiscal 2021 sales of $19.53 billion. Organic sales in constant currency increased 29.2% year over year, reflecting sales growth in both operating groups across all regions driven by strong demand and pricing globally for electronic components.
EC sales in fiscal 2022 were $22.50 billion, representing a 24.8% increase over fiscal 2021 sales. EC organic sales in constant currency increased 29.6% year over year reflecting sales growth in all three regions. The increase in sales in the Company’s EC operating group is primarily due to overall stronger market demand and pricing for electronic components, especially in the transportation and industrial sectors.
Farnell sales in fiscal 2022 were $1.81 billion, an increase of $303.2 million or 20.2% from fiscal 2021 sales of $1.50 billion. Sales in constant currency increased 22.2% year over year. These increases were primarily a result of increased market demand and pricing for the products that Farnell sells.
As a result of the 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 less than 3% of total sales in fiscal 2022.
Gross Profit and Gross Profit Margin
Gross profit in fiscal 2022 was $2.97 billion, an increase of $724.8 million, or 32.4%, from fiscal 2021 gross profit of $2.24 billion. Gross profit margin increased to 12.2% in fiscal 2022 or 73 basis points from fiscal 2021 gross profit margin of 11.5%, driven by increases in gross profit margin in both operating groups. Sales in the higher margin western regions represented approximately 56% of sales in fiscal 2022 as compared to 55% during fiscal 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) in fiscal 2022 were $1.99 billion, an increase of $120.0 million, or 6.4%, from fiscal 2021. The year-over-year increase in SG&A expenses was primarily due to
increases in costs to support sales growth and to a lesser extent increased costs related to inflation, partially offset by lower expenses due to foreign currency translation from the strengthening 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 fiscal 2022, SG&A expenses as a percentage of sales were 8.2% and as a percentage of gross profit were 67.3%, as compared with 9.6% and 83.7%, respectively, in fiscal 2021. The decrease in SG&A expenses as a percentage of gross profit is primarily due to the 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.
Russian-Ukraine Conflict Related Expenses
The Company incurred $26.3 million of costs associated with the Russian-Ukraine conflict in the third quarter of fiscal 2022, primarily comprised of $17.2 million of expense for credit loss reserves for trade accounts receivable from Russian customers that are no longer considered collectible. The remaining expense is primarily related to product write-downs for Russia based customers and other Russian business operation wind-down costs.
Restructuring, Integration and Other Expenses
During fiscal 2022, the Company recorded restructuring, integration and other expenses of $5.3 million, substantially all of which was related to integration costs.
During fiscal 2021, the Company recorded restructuring, integration and other expenses of $84.4 million consisted of restructuring cost of $59.4 million, integration costs of $35.8 million, offset by a gain on legal settlement of $8.2 million, and a reversal of $2.6 million for changes in estimates for costs associated with prior year restructuring actions.
See Note 17, “Restructuring expenses” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to restructuring expenses.
Operating income for fiscal 2022 was $939.0 million, an increase of $657.6 million, from fiscal 2021 operating income of $281.4 million. Operating income margin was 3.9% in fiscal 2022 compared to 1.4% in fiscal 2021. Adjusted operating income for fiscal 2022 was $985.6 million, an increase of $578.5 million or 142.1%, from fiscal 2021. Adjusted operating income margin was 4.1% in fiscal 2022 compared to 2.1% in fiscal 2021. The year-over-year increase in adjusted operating income and adjusted operating income margin was primarily driven by the increase in sales and in gross profit margin and lower amortization expense.
Interest and Other Financing Expenses, Net and Other Expense, Net
Interest and other financing expenses for fiscal 2022 was $100.4 million, an increase of $10.9 million, or 12.2%, compared with interest and other financing expenses of $89.5 million in fiscal 2021. The increase in interest and other financing expenses in fiscal 2022 compared to fiscal 2021 was primarily a result of higher outstanding borrowings during fiscal 2022 as compared to fiscal 2021.
In fiscal 2022, the Company had $5.3 million of other expense as compared with $19.0 million of other expense in fiscal 2021. The year-over-year differences in other expense was primarily due to an equity investment impairment expense included in the other expense in the first quarter of fiscal 2021, and differences in foreign currency exchange rates between fiscal 2022 and fiscal 2021.
Income Tax Expense
Avnet’s effective tax rate on its income before income taxes was 16.9% in fiscal 2022. The effective tax rate for fiscal 2022 was favorably impacted primarily by decreases to valuation allowances against deferred tax assets.
For fiscal 2021, the Company’s effective tax rate on its income before income taxes was a benefit of 11.7%. The effective tax rate for fiscal 2021 was favorably impacted primarily by (i) a tax benefit arising from the reduction in fair value of certain businesses, resulting in losses that can be carried back under U.S. tax law and, (ii) the mix of income in lower tax jurisdictions, partially offset by (iii) increases to unrecognized tax benefit reserves.
See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the effective tax rate.
As a result of the factors described in the preceding sections of this MD&A, the Company’s net income in fiscal 2022 was $692.4 million, or earnings per share on a diluted basis of $6.94, compared with fiscal 2021 net income of $193.1 million, or earnings per share on a diluted basis of $1.93.
Fiscal 2021 Comparison to Fiscal 2020
For comparison of the Company’s results of operations between fiscal 2021 and fiscal 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021 filed with the SEC on August 13, 2021.
Liquidity and Capital Resources
Cash Flows from Operating Activities
The Company used $219.3 million of cash from its operating activities in fiscal 2022 as compared to $90.9 million of cash generated in fiscal 2021. These operating cash flows are comprised of: (i) cash flows generated from net income, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expense, 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 to support sales growth was $1.09 billion during fiscal 2022, including increases in accounts receivable of $1.13 billion and inventories of $1.22 billion, offset by increases in accounts payable of $1.13 billion and accrued expenses and other of $134.4 million. Comparatively, cash used for working capital and other was $372.5 million during fiscal 2021, including increases in accounts receivable of $615.4 million and inventories of $409.1 million, offset by increases in accounts payable of $621.0 million and accrued expenses and other of $30.9 million.
Cash Flows from Financing Activities
During fiscal 2022, the Company received net proceeds of $300.0 million as a result of the issuance of $300.0 million of 5.50% Notes due May 2032, $274.9 million under the Securitization Program, and $235.0 million from borrowings of various bank credit facilities. During fiscal 2022, the Company repaid $354.3 million of notes, paid dividends on common stock of $98.5 million, and repurchased $184.4 million of common stock.
During fiscal 2021, the Company received net proceeds of $297.7 million as a result of the issuance of $300.0
million of 3.00% Notes due May 2031 and $22.9 million under the Securitization Program. During fiscal 2021, the Company repaid $305.1 million of notes and $231.7 million under the Credit Facility, and paid dividends on common stock of $84.3 million.
Cash Flows from Investing Activities
During fiscal 2022, the Company used $48.9 million for capital expenditures primarily related to warehouse and facilities, and information technology hardware and software costs compared to $50.4 million in fiscal 2021. During fiscal 2022, the Company received $90.4 million from investing activities related to the liquidation of Company owned life insurance policies. During fiscal 2021, the Company used $18.4 million of cash for acquisitions, which is net of the cash acquired.
The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations in addition to cash generated from operating activities. The Company also uses several funding sources to avoid becoming overly dependent on one financing source, and to lower funding costs. These financing arrangements include public debt, short-term and long-term bank loans, a revolving credit facility (the “Credit Facility”), and an accounts receivable securitization program (the “Securitization Program”).
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 working capital including purchases of inventories, foreign exchange, overdraft, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of fiscal 2022 was $174.6 million.
As an alternative form of financing outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to third-party 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 receivables are recorded within “Interest and other financing expenses, net” and are not material.
See Note 7, “Debt” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on financing transactions including the Credit Facility, the Securitization Program and the outstanding Notes as of July 2, 2022.
Covenants and Conditions
The Company’s Credit Facility contains certain covenants with various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures, and also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios. The Company was in compliance with all such covenants as of July 2, 2022.
The Company’s Securitization Program contains certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company may not be able to borrow any additional funds and the financial institutions may consider this an amortization event, as defined in the Securitization Program agreements, which would permit the financial institutions to liquidate the accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the Company’s ability to meet the required covenants and conditions of the Securitization Program include the Company’s ongoing profitability and various other economic, market, and industry factors. The Company was in
compliance with all such covenants as of July 2, 2022.
Management does not believe that the covenants under the Credit Facility or Securitization Program limit the Company’s ability to pursue its intended business strategy or its future financing needs.
See Liquidity below for further discussion of the Company’s availability under these various facilities.
The Company had cash and cash equivalents of $153.7 million as of July 2, 2022, of which $60.4 million was held outside the United States. As of July 3, 2021, the Company had cash and cash equivalents of $199.7 million, of which $150.5 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 is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company used $219.3 million in cash flows for operating activities during the fiscal year ended July 2, 2022, to support the fiscal 2022 sales growth.
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 the U.S. in a tax efficient manner, those cash balances 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 July 2, 2022, there were no borrowings outstanding under the Credit Facility, with $1.2 million in letters of credit issued and $297.8 million outstanding under the Securitization Program. During fiscal 2022, the Company had an average daily balance outstanding under the Credit Facility of approximately $541.4 million and $241.4 million under the Securitization Program. As of July 2, 2022, the combined availability under the Credit Facility and the Securitization Program was $1.40 billion. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings. In August 2022, subsequent to the end of fiscal 2022, the Company amended and extended the Credit Facility to expire in August 2027.
The Company has the following contractual obligations outstanding as of July 2, 2022 (in millions):
Payments due by period
Long-term debt obligations(1)
Interest expense on long-term debt obligations(2)
Operating lease obligations(3)
|(1)||Includes amounts due within one year and excludes unamortized discount and issuance costs on debt.|
|(2)||Represents interest expense due on debt by using fixed interest rates for fixed rate debt and assuming the same interest rate at the end of fiscal 2022 for variable rate debt.|
|(3)||Excludes imputed interest on operating lease liabilities.|
The Company acquires inventories in the normal course of business throughout the year through the issuance of purchase orders to suppliers. During fiscal 2022, the Company’s cost of sales, substantially all of which related to the underlying purchase of inventories was $21.3 billion and the Company had $4.2 billion of inventories as of July 2, 2022. The Company expects to continue to purchase sufficient inventory to meet its customers’ demands in fiscal year 2023, much of which relates to outstanding purchase orders at the end of fiscal 2022. Outstanding purchase orders with suppliers may be non-cancellable/non-returnable at the point such orders are issued, or may become non-cancellable at some point in the future, typically within 30 days to 90 days from the requested delivery date of inventories. The majority of the purchase orders related to inventories expected to be received during the first quarter of fiscal 2023, are subject to such non-cancellable terms and conditions.
At July 2, 2022, the Company had an estimated liability for income tax contingencies of $134.6 million, which is not included in the above table. Cash payments associated with the settlement of these liabilities that are expected to be paid within the next 12 months is $1.1 million. The settlement period for the remaining amount of the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined, and therefore was not included in the table.
As of July 2, 2022, the Company may repurchase up to an aggregate of $531.3 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 and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During fiscal 2022, the Company repurchased $193.3 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 fourth quarter of fiscal 2022, the Board of Directors approved a dividend of $0.26 per share, which resulted in $25.2 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 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.
Critical Accounting Policies
The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are based upon the Company’s continual evaluation of available information, including historical results and anticipated future events. Actual results may differ materially from these estimates.
The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and that require significant judgments and estimates. Management believes the Company’s most critical accounting policies at the end of fiscal 2022 relate to:
Valuation of Inventories
Inventories are recorded at the lower of cost or estimated net realizable value. Inventory cost includes the purchase price of finished goods and any freight cost incurred to receive the inventory into the Company’s distribution centers. The Company’s inventories include electronic components sold into changing, cyclical, and competitive markets, so inventories may decline in market value or become obsolete.
The Company regularly evaluates inventories for expected customer demand, obsolescence, current market prices, and other factors that may render inventories less marketable. Write-downs are recorded so that inventories reflect the estimated net realizable value and take into account the Company’s contractual provisions with its suppliers, which may provide certain protections to the Company for product obsolescence and price erosion in the form of rights of return, stock rotation rights, obsolescence allowances, and price protections. Because of the large number of products and suppliers and the complexity of managing the process around price protections and stock rotations, estimates are made regarding the net realizable value of inventories. Additionally, assumptions about future demand and market conditions, as well as decisions to discontinue certain product lines, impact the evaluation of whether to write-down inventories. If future demand changes or actual market conditions are less favorable than assumed, then management evaluates whether additional write-downs of inventories are required. In any case, actual net realizable values could be different from those currently estimated.
Accounting for Income Taxes
Management’s judgment is required in determining income tax expenses and unrecognized tax benefits, in measuring deferred tax assets and liabilities, and valuation allowances recorded against net deferred tax assets. Recovering net deferred tax assets depends on the Company’s ability to generate sufficient future taxable income in certain jurisdictions. In addition, when assessing the need for valuation allowances, the Company considers historic levels and types of income, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. If the Company determines that it cannot realize all or part of its deferred tax assets in the future, it may record additional valuation allowances against the deferred tax assets with a corresponding increase to income tax expense in the period such determination is made. Similarly, if the Company determines that it can realize all or part of its deferred tax assets that have an associated valuation allowance established, the Company may release a valuation allowance with a corresponding benefit to income tax expense in the period such determination is made.
The Company establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The anticipated and actual outcomes of these matters may differ, which may result in changes in estimates to such liabilities. To the extent such changes in estimates are necessary, the Company’s effective tax rate may fluctuate. In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.
In determining the Company’s income tax expense, management considers current tax regulations in the numerous jurisdictions in which it operates, including the impact of tax law and regulation changes in the jurisdictions the Company operates in. The Company exercises judgment for interpretation and application of such current tax regulations. Changes to such tax regulations or disagreements with the Company’s interpretation or application by tax authorities in any of the Company’s major jurisdictions may have a significant impact on the Company’s income tax expense.
See Note 9 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on income tax expense, valuation allowances and unrecognized tax benefits.
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 plans to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is discontinued and does not currently expect a material impact on the Company’s consolidated financial statements as the Company’s debt agreements already contemplate the discontinuation of LIBOR.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company seeks to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements, from time to time, which are intended to provide an economic hedge against all or a portion of the risks associated with such volatility. The Company continues to have exposure to such risks to the extent they are not economically hedged.
The following table sets forth the scheduled maturities of the Company’s debt outstanding at July 2, 2022 (dollars in millions):
Fixed rate debt(1)
Floating rate debt
|(1)||Excludes unamortized discounts and issuance costs.|
The following table sets forth the carrying value and fair value of the Company’s debt and the average interest rates at July 2, 2022, and July 3, 2021 (dollars in millions):
Fair Value at
Fair Value at
at July 2, 2022
at July 2, 2022
at July 3, 2021
July 3, 2021
Fixed rate debt(1)
Average interest rate
Floating rate debt
Average interest rate
|(1)||Excludes unamortized discounts and issuance costs. Fair value was estimated primarily based upon quoted market prices for the Company’s public long-term notes.|
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 derivative financial instruments (primarily forward foreign currency exchange contracts typically with maturities of less than sixty days, but not greater than one year). The Company continues to be exposed to foreign currency risks to the extent they are not hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations, primarily within “Other expense, net.” Therefore, the changes in valuation of the underlying items being economically hedged are offset by the changes in fair value of the forward foreign exchange contracts. A hypothetical 10% change in foreign currency exchange rates under the forward foreign currency exchange contracts outstanding at July 2, 2022, would result in an increase or decrease of approximately $50.0 million to the fair value of the forward foreign exchange contracts, which would generally be offset by an opposite effect on the underlying exposure being economically hedged. See Note 2 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (
Avnet, Inc. and Subsidiaries Consolidated Financial Statements:
Financial Statement Schedule:
Schedules other than that above have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Avnet, Inc. and subsidiaries (the Company) as of July 2, 2022 and July 3, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended July 2, 2022, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of July 2, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 2, 2022 and July 3, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended July 2, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of accounting for income taxes
As discussed in Notes 1 and 9 to the consolidated financial statements, the Company recognized $156.5 million of deferred tax assets, net and income tax expense of $141.0 million as of and for the year ended July 2, 2022. Additionally, as discussed in Note 9, the Company recognized income taxes receivable of $56.1 million as of July 2, 2022. The Company conducts business globally and consequently is subject to U.S. federal, state, and local income taxes as well as foreign income taxes in many of the jurisdictions in which it operates. The Company exercises judgment for the interpretation and application of such current tax regulations.
We identified the evaluation of accounting for income taxes as a critical audit matter. Evaluating the Company’s application of current tax regulations in various foreign jurisdictions and the impact of those regulations on foreign, U.S. federal, state and local income tax provisions required complex auditor judgment and the use of tax professionals with specialized skills.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including controls related to the application of current tax regulations in the various tax jurisdictions and impact on the Company’s tax provisions. We involved tax professionals with specialized skills and knowledge in various tax jurisdictions, who assisted in evaluating the Company’s analyses over the application of current tax regulations and the Company’s interpretation of tax laws and regulations in those jurisdictions.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
August 12, 2022
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except share
Cash and cash equivalents
Prepaid and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Operating lease assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accrued expenses and other
Short-term operating lease liabilities
Total current liabilities
Long-term operating lease liabilities
Commitments and contingencies (Note 13)
Common stock $
Additional paid-in capital
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
AVNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
Selling, general and administrative expenses
Goodwill and long-lived asset impairment expense
Russian-Ukraine conflict related expenses
Restructuring, integration and other expenses
Operating income (loss)
Other expense, net
Interest and other financing expenses, net
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Shares used to compute earnings per share: