# AVNET INC (AVT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AVNET INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/8858/000000885822000031/avt-20220702x10k.htm
Accession: 0000008858-22-000031
Filing date: 2022-08-12
Report date: 2022-07-02
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVT/
All MD&A years: /company/AVT/mda/
Next year: /company/AVT/mda/fy2023/ (FY 2023)

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Sales adjusted for certain items that impact the year-over-year analysis, which includes the impact of certain acquisitions by adjusting Avnet\u2019s 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 \u201corganic sales.\u201d"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Operating income excluding (i) restructuring, integration and other expenses (see Restructuring, Integration"]]
[[/GREPCENT_TABLE]]

23

[[GREPCENT_TABLE]]
[["","","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 \u201cadjusted operating income.\u201d"]]
[[/GREPCENT_TABLE]]

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended"],["\u200b","","July 2,","","July 3,","","June 27,"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["\u200b","\u200b","(Thousands)"],["Operating income (loss)","\u200b","$","939,011","\u200b","$","281,408","\u200b","$","(4,628)"],["Restructuring, integration and other expenses","\u200b","","5,272","\u200b","","84,391","\u200b","","81,870"],["Goodwill and intangible asset impairment expense","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","144,092"],["Russian-Ukraine conflict related expenses","\u200b","\u200b","26,261","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014"],["Amortization of acquired intangible assets and other","\u200b","","15,038","\u200b","","41,245","\u200b","","81,555"],["Adjusted operating income","\u200b","$","985,582","\u200b","$","407,044","\u200b","$","302,889"]]
[[/GREPCENT_TABLE]]

​

Management believes that providing this additional information is useful to financial statement users to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business 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.

Executive Summary

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.

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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.

Sales

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.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended","\u200b","Percent Change"],["\u200b","","July 2,","","% of","\u200b","July 3,","","% of","\u200b","June 27,","","% of","\u200b","2022 to","\u200b","2021 to"],["\u200b","\u200b","2022","","Total","","2021","\u200b","Total","","2020","","Total","","2021","","2020"],["\u200b","\u200b","(Dollars in millions)"],["Sales by Operating Group:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["EC","\u200b","$","22,503.3","\u200b","92.6","%","\u200b","$","18,030.5","\u200b","92.3","%","\u200b","$","16,340.1","\u200b","92.7","%","\u200b","24.8","%","\u200b","10.3","%"],["Farnell","\u200b","\u200b","1,807.4","\u200b","7.4","\u200b","\u200b","\u200b","1,504.2","\u200b","7.7","\u200b","\u200b","\u200b","1,294.2","\u200b","7.3","\u200b","\u200b","20.2","\u200b","\u200b","16.2","\u200b"],["\u200b","\u200b","$","24,310.7","\u200b","\u200b","\u200b","\u200b","$","19,534.7","\u200b","\u200b","\u200b","\u200b","$","17,634.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Sales by Geographic Region:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Americas","\u200b","$","5,896.0","","24.3","%","\u200b","$","4,662.5","","23.9","%","\u200b","$","4,755.3","","27.0","%","\u200b","26.5","%","\u200b","(2.0)","%"],["EMEA","\u200b","","7,838.1","","32.2","\u200b","\u200b","","6,149.9","","31.5","\u200b","\u200b","","5,753.4","","32.6","\u200b","\u200b","27.5","\u200b","\u200b","6.9","\u200b"],["Asia","\u200b","","10,576.6","","43.5","\u200b","\u200b","","8,722.3","","44.6","\u200b","\u200b","","7,125.6","","40.4","\u200b","\u200b","21.3","\u200b","\u200b","22.4","\u200b"],["Total Avnet","\u200b","$","24,310.7","\u200b","\u200b","\u200b","\u200b","$","19,534.7","\u200b","\u200b","\u200b","\u200b","$","17,634.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

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.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Organic"],["\u200b","\u200b","Sales","\u200b","\u200b","\u200b","Organic","\u200b","\u200b","\u200b","Sales"],["\u200b","\u200b","as Reported","\u200b","Estimated","\u200b","Sales","\u200b","TI Sales","\u200b","Adj for TI"],["\u200b","\u200b","Fiscal","\u200b","Extra","\u200b","Fiscal","\u200b","Fiscal","\u200b","Fiscal"],["\u200b","","2021","","Week(1)","","2021","","2021(2)","","2021(2)"],["\u200b","\u200b","(Dollars in millions)"],["Avnet","\u200b","$","19,534.7","\u200b","$","306.0","\u200b","$","19,228.7","\u200b","$","292.2","","$","18,936.5"],["Avnet by region","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Americas","\u200b","$","4,662.5","\u200b","$","77.0","\u200b","$","4,585.5","\u200b","$","82.9","","$","4,502.6"],["EMEA","\u200b","","6,149.9","\u200b","","97.0","\u200b","","6,052.9","\u200b","","124.2","","","5,928.7"],["Asia","\u200b","","8,722.3","\u200b","","132.0","\u200b","","8,590.3","\u200b","","85.1","","","8,505.2"],["Avnet by operating group","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["EC","\u200b","$","18,030.5","\u200b","$","284.0","\u200b","$","17,746.5","\u200b","$","292.2","","$","17,454.3"],["Farnell","\u200b","","1,504.2","\u200b","","22.0","\u200b","","1,482.2","\u200b","","\u2014","\u200b","","1,482.2"]]
[[/GREPCENT_TABLE]]

(1)The impact of the additional week of sales in the first quarter of fiscal 2021 is estimated.

[[GREPCENT_TABLE]]
[["(2)","Sales adjusted for the impact of the termination of the TI distribution agreement."]]
[[/GREPCENT_TABLE]]

25

The table below provides reported and organic sales growth rates for fiscal 2022 as compared to fiscal 2021 by region and operating group.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Organic"],["\u200b","\u200b","\u200b","\u200b","\u200b","Sales As","\u200b","\u200b","\u200b","\u200b","Organic","\u200b","Sales"],["\u200b","\u200b","\u200b","\u200b","Reported","\u200b","\u200b","\u200b","Sales","\u200b","Adj for TI"],["\u200b","\u200b","Sales As","\u200b","Year-Year %","\u200b","Organic","\u200b","Year-Year %","\u200b","Year-Year %"],["\u200b","\u200b","Reported","\u200b","Change in","\u200b","Sales","\u200b","Change in","\u200b","Change in"],["\u200b","\u200b","Year-Year","\u200b","Constant","\u200b","Year-Year","\u200b","Constant","\u200b","Constant"],["\u200b","","% Change","","Currency","","% Change","","Currency","","Currency(1)"],["Avnet","\u200b","24.5","%","","27.2","%","\u200b","26.4","%","","29.2","%","","31.2","%"],["Avnet by region","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Americas","\u200b","26.5","%","","26.5","%","\u200b","28.6","%","","28.6","%","","31.0","%"],["EMEA","\u200b","27.5","\u200b","","34.6","\u200b","\u200b","29.5","\u200b","","36.8","\u200b","","39.6","\u200b"],["Asia","\u200b","21.3","\u200b","","22.4","\u200b","\u200b","23.1","\u200b","","24.3","\u200b","","25.5","\u200b"],["Avnet by operating group","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["EC","\u200b","24.8","%","","27.6","%","\u200b","26.8","%","","29.6","%","","31.8","%"],["Farnell","\u200b","20.2","\u200b","\u200b","22.2","\u200b","\u200b","21.9","\u200b","\u200b","24.0","\u200b","\u200b","24.0","\u200b"]]
[[/GREPCENT_TABLE]]

​

​

[[GREPCENT_TABLE]]
[["(1)","Sales growth rates excluding the impact of the termination of the TI distribution agreement."]]
[[/GREPCENT_TABLE]]

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

26

Table of Contents

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

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.

27

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.

Net Income

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

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

28

Table of Contents

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.

Financing Transactions

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

29

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.

Liquidity

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):

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","\u200b","","Payments due by period"],["\u200b","\u200b","\u200b","\u200b","\u200b","Less than","\u200b","\u200b","\u200b","\u200b","\u200b","More than","\u200b"],["Contractual Obligations","\u200b","Total","\u200b","1 year","\u200b","1-3 years","\u200b","3-5 years","\u200b","5 years"],["Long-term debt obligations(1)","\u200b","$","1,622.4","\u200b","$","174.4","\u200b","$","298.0","\u200b","$","550.0","\u200b","$","600.0","\u200b"],["Interest expense on long-term debt obligations(2)","\u200b","\u200b","364.3","\u200b","\u200b","67.5","\u200b","\u200b","109.4","\u200b","\u200b","71.1","\u200b","\u200b","116.3","\u200b"],["Operating lease obligations(3)","\u200b","\u200b","304.2","\u200b","\u200b","61.0","\u200b","\u200b","82.3","\u200b","\u200b","48.9","\u200b","\u200b","112.0","\u200b"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(1)","Includes amounts due within one year and excludes unamortized discount and issuance costs on debt."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Excludes imputed interest on operating lease liabilities."]]
[[/GREPCENT_TABLE]]

30

Table of Contents

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:

31

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.

32

Table of Contents

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.

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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.

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