Avnet Inc

NASDAQ:AVT

Earnings Call Transcript 2021-Q3

[Operator]

Greetings, and welcome to the Avnet Third Quarter Fiscal Year 2021 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.

[Joe Burke, IR]

Thank you, operator. Earlier this afternoon, Avnet released financial results for the third fiscal quarter of 2021. The release is available on the Investor Relations section of the company's Web site. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release, as well as on the IR section of Avnet's Web site. Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Today's call will be led by Phil Gallagher, Avnet's CEO; and Tom Liguori, Avnet's CFO.

With that, let me turn the call over to Phil Gallagher. Phil?

[Phil Gallagher, CEO]

Thank you, Joe and thank you, everyone for joining us for our third quarter fiscal year 2021 earnings conference call. I hope everyone is safe and healthy. Overall, we're very pleased with our third quarter results and I'm excited to talk through some of the quarter’s highlights. Over the past year, our employees have continued to demonstrate incredible resilience despite the enduring challenges associated with the pandemic. And I'm personally impressed by and proud of the strides we've made as an organization, sticking to the plan, we set for ourselves, even in the face where it can only be described as a complex operating environment. Let me kick this call off by providing a bit of insight about what that operating environment looks like today from our seat in the center of the technology supply chain. As many of you know, whether it's a glimpse of light at the end of the tunnel, as countries around the world work to vaccinate their populations, we are still operating in an unpredictable market. Supply constraints, combined with the recent strong rebounded demand, have resulted in the kind of widespread inflation we have not seen for many years.

As we highlighted in our second fiscal quarter, we saw notable demand increases across the automotive, consumer and industrial segments. Those end markets, in addition to communications and computing, drove end market demand throughout the third quarter. Customers are seeking to reduce supply chain risks by securing longer term supply agreements and exploring second sources, providing welcome opportunities that we were not previously seeing. On top of that, many suppliers are also experiencing raw material price increases for items such as resins, coppers and more. Avnet that is in most cases able to pass along these price increases to our customers. While this type of operating environment is not ideal, we certainly navigated similar circumstances throughout our 100 year history and have a number of systems and processes in place that enable us to effectively serve our customers and suppliers. Those systems are incredibly effective and enable us to continue to compete in this market. But what really key to our success is our commitment to prioritizing strong partnerships. Avnet is and will continue to act responsibly and transparently in both how we manage and how we communicate about the supply and demand curves.

Our teams have established relationships that are unmatched in this industry by remaining in constant contact with our customers and suppliers and working collaboratively, upstream and downstream, to manage forecasts and mitigate supply chain risks. These deep relationships, some of which extend four to five decades or more, provide us with strong visibility into potential pricing shifts and customer response. We take great pride in the supply chain engagement practices we've built with both our supplier partners and customers, and we strive to maintain this approach. Of note, we continue to see strong design activity coming off record registrations in the second quarter. In our fiscal third quarter, our demand creation revenue, design registrations and design wins, increased sequentially and year-over-year, really proud of that.

And tied to this success directly to the investment in relationships in our engineering capabilities, which include digital self serve and design tools and of course our account management team and field application engineers, not only does this result in engagements with stronger margins but it improves our revenue visibility, which in turn allows us to operate our business more intentionally with fewer surprises. Our success is stabilizing our business while prioritizing strong partnerships has proven effective as the environment has become more dynamic, and I'm confident it will enable us to continue to adapt to the changes as we have for the past the 100 years.

Now turning to Slide 5, you'll see evidence of our progress in the third quarter of fiscal year 2021. In the third quarter, revenues were $4.9 billion, up year over year and sequentially, exceeding our guidance range and also up sequentially and year over year on a constant currency basis. Excluding TI in both periods, sales grew 22% year over year on a constant currency basis. We were pleased with how we performed in the Americas and the EMEA regions, and we’re encouraged by the continued progress we are seeing at Farnell. In the Asia region, a shortened Chinese New Year and continued strong demand in all end markets contributed to continued momentum in the region.

Looking at our core electronic components business on Slide 6. Revenues were up year over year and sequentially in the quarter at $4.5 billion. As mentioned earlier, strong continued growth in Asia drove the outperformance in this segment, demonstrating solid execution against our China growth plan, as we gained share across the entire APAC region. We were also encouraged by better than expected results in Americas and continued incremental improvement in Europe, our strongest region. Lead times of course lengthened throughout the quarter, driving very high book to bill ratios in every region. We are continuing to tightly manage our backlog and our teams are working closely with our customers to gain extended visibility, which we are then sharing with our supplier partners. While it is difficult to forecast how long the supply constrains will continue, most market participants expected to extend through at least the second half of calendar year 2021.

Turning to Farnell on Slide 7, revenues were up year over year and sequentially in the quarter at $396 million and operating margin increased sequentially to 6%, progressing towards our target of 10%. We made the conscious decision this quarter to continue to maintain operations at both the leads distribution center and the existing facility for the foreseeable future. This decision is in line with our commitment to provide seamless service to our customers as we continue to see increased demand out of Farnell. We remain steadfast in our commitment to continue to invest in this critical aspect of Avnet and are excited about the clear potential of Farnell as we further digitize our business. Casing point, Farnell saw e-commerce sales up 20% year over year. We are bullish about the contributions Farnell can make to Avnet value proposition and continue to invest in Farnell. We added 67,000 SKUs through the first nine months of fiscal year 2021 and progressing on our plans to add up to 250,000 SKUs through the fiscal year 2022.

So with that, I'll turn it over to Tom, and so he can dive a bit deeper into our third quarter results.

[Tom Liguori, CFO]

Thank you, Phil. Good afternoon, everyone, and thank you for attending today's call. As Phil stated, we are pleased with the progress we made and the results we posted in the third fiscal quarter. Looking at the key highlights on Slide 9. In the third quarter, we grew our top line by 14.1% year over year and expanded operating margins for the third consecutive quarter. Our efforts today have put Avnet in a much stronger position to execute in this dynamic operating environment. And I am excited to walk you through more of the highlights from the quarter as I continue to indicate Avnet’s critical role in the center of the technology supply chain.

Our revenues for the third quarter were $4.9 billion and adjusted EPS was $0.74. Both our revenues and adjusted EPS exceeded our guidance range and grew from $4.3 billion and $0.38 in the prior year's quarter. As Phil mentioned, strong revenues were primarily driven by an exceptional quarter in Asia and Farnell and better than expected performance across Americas and EMEA. We used $10 million of cash flow for operations to support our top line growth. While working capital was up slightly in the quarter. We further reduced our net working capital days to 72, the lowest level in several years, further demonstrating our team's success in managing cash and working capital as we continue to navigate the volatile market. We are seeing strong returns from our investments, in low touch e-commerce and in our steadfast commitment to deep supplier and customer relationships, which are yielding exciting design wins.

Looking at the income statement on Slide 10. Gross margin of 11.6% was up sequentially, primarily due to increased prices we are passing through and regional mix. Farnell, EMEA and Asia, each increased their gross profit margin sequentially, an encouraging trend. As far as our revenue mix by region, Asia revenues, while better than typical seasonality, were bit lower than last quarter while Americans and EMEA revenues both grew sequentially, thus contributing to the higher gross margin. OpEx as a percentage of gross profit continues to decrease, reaching 80.6% from 84.4% last quarter. Adjusted operating expenses of $458 million were up by 6.1% sequentially. The dollar increase was primarily due to increased volume, strong euro and pound exchange rates against the dollar, the discontinuation of temporary cost containment measures and higher distribution costs, as we continued to maintain operation of both Farnell warehouses. As Phil mentioned, the decision to continue to operate both warehouses was primarily driven by strong demand and a decision to prioritize customer service over cost savings. Of course, this means we will maintain higher operating stances in the near term. But with continued growth at Farnell and improving e-commerce results, we continue to expect to achieve our 10% operating margin target by the end of fiscal year '22.

On the non operating front, interest expense is slightly up sequentially due to slightly higher debt through the quarter for working capital. Though interest expense declined year-over-year by 25%, hitting $22.3 million this quarter, the decrease year-over-year was due to lower debt levels, which reflects our continued commitment to maintain an investment grade profile. We recorded foreign currency transaction gains of $1.2 million this quarter due to some favorable one off items and we revised our annual tax rate expectations for fiscal year 2021 to 16%, up from 15%. As a result, we booked 20% tax rate in the third quarter to true up year-to-date amount to 15%.

On Slide 11, we highlight results across our three geographic regions and from our two business segments. Total revenue growth was largely driven by strong sales in Asia, which benefited from more shipping days in the region due to the shorter than expected Chinese New Year and broadband market demand. Farnell revenues grew substantially as our e-commerce and inventory investments are paying off and Farnell is capturing increased demand. We saw signs of continued recovery across the Americas and EMEA regions. Looking at the electronic components segment, we achieved revenue of $4.5 billion increasing 4.1% sequentially and 13.7% versus the prior year. The electronic component segment operating margins were 2.6%, a 23 basis point improvement from last quarter. Farnell revenues for the quarter totaled $396 million, up sequentially and year-over-year, primarily driven by our improving ability to capture share and increase demand. We saw a strong e-commerce revenues that were up 20% year-over-year, indicating that investments to improve customers’ online experience are drawing a notable return. We are continuing to invest in the business by adding SKUs and prioritizing excellence in customer service. The Farnell segment had an operating margin of 6% in the quarter. While the OpEx was higher than anticipated, primarily due to our decision to maintain operation of the existing facility and lease distribution center, ee expect Farnell operating margins to continue to steadily improve over the coming quarters. And we remain on track to achieve 10% target operating margin by the end of fiscal year '22.

Turning to cash, liquidity and the balance sheet on Slide 12. Our liquidity position remains strong and our debt leverage continues to improve. We ended the quarter with cash and equivalent of $323 million and with $1.7 billion of available lines of credit. We are comfortable with our debt position, especially as the macro environment continues to recover. We maintained moderate debt levels quarter-over-quarter with debt coming in at $1.2 billion and net debt at $873 million. Our gross leverage was 2.7 and net that leverage was 2.0. We intent to refinance $300 million of capital market notes due in December of this year. We continue to support our dividend and return $21 million to shareholders in the quarter. Our net book value per share was $39.

Turning to Slide 13. I will wrap up with some comments about our expectations for the next quarter. For our fiscal Q4, we are guiding revenue in the range of $4.7 billion to $5.1 billion in adjusted diluted EPS in the range of $0.71 to $0.77. Our guidance is based upon current market conditions and inventory availability. Before I turn it back over to Phil, I just want to reiterate how incredibly proud we are of our team's efforts. Today, thanks to their work, Avnet is in a much stronger position to deliver to its stakeholders, especially as we navigate this dynamic market and capitalize on growth opportunities. I'm excited and optimistic about what lies ahead. Phil?

[Phil Gallagher, CEO]

Thanks, Tom. Before we turn it over to Q&A, I just wanted to reiterate my excitement about celebrating Avnet's 100 year anniversary. As many of you know, I've been with Avnet for nearly 40 years. And despite the macro challenges we've had to navigate over the past year, any uncertainties associated with the supply constraints, the digital transformation that companies like Avnet are undergoing is significant. Those of us who've been running complex businesses for a long time understand what a game changer digitalization is. It is one of the most exciting times to be at Avnet and in our industry, and I'm proud to be leading such a tremendous team at this time. It is because of our team's hard work that we continue to play a pivotal role at the center of the technology supply chain. I just want to thank our employees for their continued support and dedication to our customers, suppliers and Avnet.

So with that, I'll turn it over to the operator for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James.

[Adam Tindle, Raymond James]

I just wanted to start with a question on margins and the trajectory. You talked about being on track for the 10% Farnell margin by the end of fiscal '22. We can clearly see the progress this quarter. I wanted to ask in core components, you said you're around 2.6% now. Americas, I think, beat expectations in this quarter and is maybe turning. How do you think about the core components opportunity ex that Farnell piece during this time to fiscal '22 and the key drivers? And if you want to touch on near term Americas performance in that response, that would be helpful.

[Tom Liguori, CFO]

Electronic Components was at 2.6% this quarter. Our target is 3% to 3.5% and we see that as very doable by the fourth quarter of fiscal year '22. A lot of that is continued revenue growth while we hold our OpEx relatively constant and get drop through. When we look at it, we will get some benefits from pricing. And again, we're just passing on price increases, that would more be a benefit on the Farnell side. With region mix, if you look at it today, Asia is very strong and I think that's not unique to Avnet. Americas and EMEA, they did very well this quarter. But Adam, I would consider them recovering, like they're still on an upward track. We're very happy with EMEA, they're up 17%, I think, sequentially. They grew their operating margin 100 basis points, but there's more to go. And as we look at our budgets for next year, that's what we're seeing from the team. And lastly, demand creation. As Phil said, demand creation is very, very strong.

On the Farnell side, we see a lot of good things happening. The investment from adding SKUs is paying off. You see that in the revenue number. The investments in e-commerce are paying off. You see that on the online sales, growing 20% year-over-year. And Adam, that's important because online revenues are at a slightly higher gross margin because people are coming in and they're electing to choose a market price -- in choosing that because they can get the inventory and have it on their desk in two days. We see national instruments starting to contribute in fiscal year '22. And one thing we didn't say, Raspberry Pi has been very strong. So there's a lot of levers here for operating margin improvement. Electronic Components, 3% to 3.5%. Farnell getting from 6% up to 10%, very positive story going forward.

[Phil Gallagher, CEO]

And just specifically on the Americas comment earlier you asked, I just want to reemphasize it's real opportunity for us still. We saw the improvement that we were looking for. They hit the numbers we wanted them to hit or they work to hit, and that's still one of the bigger needle movers. I mean we talk a lot about Farnell, as you know, but the Americas is one of the bigger needle movers. And we have a plan to get that back to where it needs to get to. So just that why -- we're pleased with our momentum in all the regions. So just wanted to highlight that.

[Adam Tindle, Raymond James]

And maybe just as a follow-up in terms of the near term guidance. Just have to ask why would revenue and EPS be flat sequentially in the June quarter? On revenue, you typically get a little bit of an uptick sequentially. And I know that there's typically some margin pressure from mix and stuff sequentially. But pricing is only getting tighter on a go forward. You've got more wood to chop in Farnell. There's some good guys happening on margin. So maybe what are the main offsets near term? I think we went through a long term trajectory, but just in near term guidance, why would be flat on revenue and EPS?

[Tom Liguori, CFO]

I think part of it, Adam, is March was very strong. Asia revenues, they were much higher than seasonality, higher than expected and probably true for our peers as well. So I would say that's really the main reason why it's flat. When we look at what our peers are reporting, I think generally, peers are reporting June revenues up versus consensus but somewhat flat to March. Now that said, what would be the drivers to exceed? Well, the inventory availability depends on things like auto production and how successful are people in continuing the strong demand. We believe the demand is still there. And those would all drive some margin upside as well. But I think really, the main thing is March was a very strong quarter.

[Phil Gallagher, CEO]

And typically, I'm just looking at multiple years of history here in front of me. And typically, March is one of our stronger quarters. So that's not really totally atypical to be flattish in June. Now with the current market environment, yes, there's a possibility we can exceed that, obviously, but there are a lot of factors out there playing right now. But Asia strength, growing at 50% year-on-year without the guys in Texas is pretty phenomenal growth. So we're just watching that closely.

[Operator]

Our next question comes from Nik Todorov with Longbow Research.

[Nik Todorov, Longbow Research]

Phil, you talked about customers exploring second sources. I guess can you talk about this opportunity, what it means to Avnet? And what can you do to turn those potential opportunities or longer term relationships rather than the one offs?

[Phil Gallagher, CEO]

I was referring to a couple of things, really. Obviously, there's some -- we'll get the question here sooner later on some of the tightness in the market of certain technologies and had a conversation yesterday with the supplier that might be seeing some opportunities around -- if they can't get certain parts, they got to do redesigns and try to second source a different platform, if you will. It's not an easy redesign but that's happening out there right now, too, is they can't get the parts, I think they've got to do something to fill that application. What I was also referring to is both on the supplier and the customer side that they are looking for options. And one of the silver linings in here is that we're seeing new opportunities from suppliers coming to us to help manage supply chains that's our expertise and it's what we do is [fitness] center technology supply.

And we got customers, obviously, come to us and they want options. So on both, customers and suppliers where maybe we were playing, we're not playing or playing at a smaller level are bringing us in to help with their supply chains, architect new ways to go to market and to move their products around. I think, Nik, the real takeaway is people could take supply chains for granted until they can't get the product, whether it's a consumer or an industrial. We all look through that in the last year, year and half and certain things around our household, and people start to relook at the supply chain. So that's what I was referring to on both sides of the aisle, if you will, for us, upstream and downstream.

[Nik Todorov, Longbow Research]

And as a follow up, your inventory decline on an absolute basis and you mentioned inventory availability a couple of times by now. So can you talk about what are inventory constraints is limiting your sequential performance in June quarter? I wonder what's your ability to build inventory at this time. I guess it's limited. But when do you think you're going to be able to potentially put some inventory on your books?

[Phil Gallagher, CEO]

Well, let me take a crack at that. And it's tough -- work backwards with first part of that, which really ties back to Adam's question probably on the June guidance. It's tough to say what kind of constraints might be there that could affect billings. I mean I know we'll get another question, our customers are not taking other products because we can't get certain technologies, and we're really not seeing that a whole lot right now, that could come into play. So it's tough to forecast that. As far as inventory, yes, we would like to have a little bit more inventory. And we have an inventory call weekly with our asset folks around the world, and they all came in at the broader inventory forecast. And that's just a factor of the market. That is just what it is. So we could -- you get another 10%, we take it in another 10% on inventory days. So we're managing that up and down. Again, daily calls with suppliers and customers, it's a complex market. But I'd remind our sales team, we still got a lot of inventory in the shelf. So it's easy to sell what you can't get, let's go sell what we have on the shelf. So [Technical Difficulty] people listening, they talk about that I guess.

[Nik Todorov, Longbow Research]

Let me just quick sneak one more, if I can. I'm just wondering, because now [TE] has gone off the equation, at what sales level would you consider America and EMEA recover as everybody understands those are central to your gross margin improvement?

[Phil Gallagher, CEO]

You said [TE]. You mean TI, I think.

[Nik Todorov, Longbow Research]

Yes.

[Phil Gallagher, CEO]

We're getting close to full lapse on that right now, Nik. We're probably -- in Asia, we're pretty much there. In Americas and Europe, I think we'll be there close to it through this year. And remember, we said it'd take about 18 months to two years, and we think we'll have that gap filled as we get into fiscal '22.

[Operator]

Our next question comes from Jim Suva with Citigroup Investment Research.

[Jim Suva, Citigroup Investment Research]

I just have a kind of longer term strategy question, especially with the tenure of how long you've been there. With the pandemic now behind us or at least making progress coming out of it, at least in certain countries and now with the supply chain shock from the semiconductors, as the management team there at Avnet, do you ever talk with customers, or your Board of Directors, or CFO and CEO about structurally, do you need to kind of really change things? I mean you mentioned -- and I don't mean it in a bad way, but you mentioned some of your customers and suppliers are looking at new ways to come to market. Can you explain a little bit about what does that mean? Does that mean like changes like maybe it's worthwhile to hold a lot more inventory for the next shock that we can't participate or anticipate? How should we think about that kind of longer term of what we've learned through these two very different but challenging situations, the pandemic and the semiconductor shortage?

[Phil Gallagher, CEO]

Sure, we're having these conversations. I think the biggest thing -- well, let's go back to what next question was, yes, the supply chain services, if you will, roughly 50%, 55% of our business today is in some type of MRP management where we're getting feeds and some kind of electronic format automation that we're getting daily, weekly, monthly from thousands of customers. So I think that's just going to continue to accelerate. And I think on the opportunity -- already is opportunity today with some, let’s just say, large OEMs that are coming to us for new models to look at and service models and things along those lines. It might require more inventory, or different types of inventory, or different types of managing the inventory and DMI and consignment program. So I think what our suppliers do, what they want to invest in is technology, R&D, engineering, fabs possibly and what we do really well is help with design services and supply chain services. And that's our core, if you will, and its contact to many of our suppliers. So I think this is accelerating some of the thought process, some of the Tier 1 customers and of course, with our suppliers. I think that's going to accelerate.

I think the big change we’re all going through, it's exciting and kind of the point of my closing comments there was is digitization. So this has just accelerated digital, maybe whether it's three years, five years, what have you. So we're absolutely looking at our go to market strategy, physical go to market strategy aligned with digital. Demand creation, Jim, for example. I mean being very clear. FAEs, I don't think going [away] and account managers aren't going away. But the add to that is how do we put more digital online tools, self serve, design tools, things on those lines where we can make our -- feed industry that much more valuable on the valuable we want them to spend time on. So they are the two big areas. One, it wasn't brought up it didn't bring up and then, of course, has ESG effect on that, and that's a separate topic altogether. We have initiatives around that that's going to be a big play in the next several years as well as it already is. So those are some big ones, I would say, Jim, the then the workplace, working back to the office, all those things that we're looking at, our footprint, we're looking at. So yes, there's a lot of dialog with the Board and with Tom and the executive leadership team.

[Operator]

Our next question comes from Matt Sheerin with Stifel.

[Matt Sheerin, Stifel]

I wanted to ask about the [premier] Farnell growth that you saw, certainly accelerated growth there. And just trying to figure out whether that's just a function of design activity picking up, as you talked about, Phil, in terms of demand creation? Or is it also due just to the fact that shortages are driving customers to the so called tech catalog distributors or small volume distributors where they may have inventory? I know you saw some of that last cycle. Is that part of it at all?

[Phil Gallagher, CEO]

I think in terms of all of them. It's kind of an and, and an or. Our designs overall are way up, registrations, design wins and revenue. We're leveraging the core and Farnell really well. So we're getting some really good sharing of leads back and forth from the Avnet core to Farnell and Farnell to the Avnet core. We've invested quite a bit in the quick side of things with the e-commerce and the digital with Farnell and [Chris Breslin] and his team. And then I think as big as anything, the SKUs that we've added, we've added another 67,000 SKUs and work into the [250,000] SKUs we want to add to fiscal '22. And just to remind many on the line that years ago that Farnell didn't have the capital to do that or the cash to do that. And under Avnet, they do. The part of that SKU count was not only the dollars and expanding the SKUs, it was having the warehouse to be able to put it in. And that's the Leeds UK that we referenced in the script, that's allowing us to expand our SKU count because we were kind of at capacity in the previous facility. So I think it's a little bit of a -- those three or four things, Matt, I think, are contributing to the growth.

[Matt Sheerin, Stifel]

And then in terms of the gross margin, you saw some nice sequential growth there. I know a part of it maybe because of the mix of business, you saw growth sequentially in EMEA, in North America and no TI business. But you would think that in terms of the overall pricing environment would be favorable for you now. I know there may be some input costs such as freight. It sounds like you're passing them along. So should we expect gross margins to improve here as we go through this cycle?

[Phil Gallagher, CEO]

Well, I think we'll see gross margins improve modestly, tough to forecast out. We are seeing -- it's a good point, a little bit of inflation, in freight and some things along those lines. But we are planning on margin to expand a bit. And on price increases, first of all, we've got about 40 different suppliers we're managing through that, and we feel confident that our teams are working really what the customers do to pass on the cost where we can -- it's possible for us to absorb all that. But in doing that, we're not looking to gauge, I mean, we're just very transparent about what the increase is and where we have contracts. We manage through that, whether there's a shipping debit that's canceling, we get a new one, and we manage through that. So as you can imagine, it's hundreds of thousands of [Technical Difficulty] and we're managing in that. But we feel confident we're having good success in passing on the increases, which should help a bit on ASP and modestly on the margin percent.

[Operator]

[Operator Instructions] Our next question comes from Ruplu Bhattacharya with Bank of America.

[Ruplu Bhattacharya, Bank of America]

My first one is on free cash flow. Can you give us your thoughts on how component shortages would impact your working capital needs? How do you see your inventory turns versus a normal year? And as part of this, can you also talk about your capital allocation strategy, buybacks versus dividend versus any thoughts on M&A at this point?

[Tom Liguori, CFO]

As we go forward and revenues grow, we will be using some cash for working capital. I think this quarter, we were up about $130 million, most of that's receivables. We're fine with that level of investment because it's higher margin business. And as Phil said, a little up on the gross margin going forward, a little ways to go on the operating margin. These are good return on capital. With our capital allocation, really our priorities are just that in the near term liquidity and reinvest in the business as revenue grows and we see that continuing for some time, we will use some cash for working capital. We're clearly going to support our dividend going forward. Debt, we're very happy with our debt levels. Our gross leverage is down to 2.7. You see that coming down into the low 2s, and that's probably more from earnings momentum and actually paying down more debt. But we think debt is in a very good position. And then every quarter, we talk to our finance committee about buybacks and M&A. And with M&A, we continue to be focused on what we've said in the past. To the extent that we find a company that either as a product, a supplier, a new market, something that makes the greater Avnet, a healthier stronger business, we will continue to look at that. We have a pipeline. Most of them are companies in the revenue range of $100 million to $200 million, but that's how we view our capital allocation priorities going forward. Thank you for that.

[Ruplu Bhattacharya, Bank of America]

I have another question for Phil. Can you give us some color on what you saw by end market? I think in the prepared remarks, you said that EMEA and Americas came in better than expected. So were there any particular end markets that drove that outperformance? And also, I think you talked about design activity trending strong for Avnet. Can you just talk about, like are these related to the initiatives that you have around Avnet integrated and IoT? And just in general, how does the pipeline of new business look for you?

[Phil Gallagher, CEO]

Let me start with the end markets, Ruplu. I think we're really seeing strong across the board, as I did say in the prepared remarks. I know EMEA and Americas came in above where we thought they would come in. Asia, we already spoke about, kind of across the board, all regions in Asia, including Japan, are performing very well, of course, led by China and Greater China area. But the other regions are performing well as well, and that's automotive, telecom, consumer, industrial, medical. And so it's really across all of the segments in Europe and Americas. And again, we're playing more in automotive. We all know some of the challenges there. We're still planning there, but we saw a strong rebound in the industrial space, which is -- and particularly in Europe, it's an extremely strong position for us there, and a long tail of customers, which is good revenue as well. And I think that's what's caused some of the challenges in the marketplace, which are positive challenges. The challenge is then the less with demand, that it's much more diverse, if you will, from a standpoint of the portfolio. And of course, our EMS sector isn't necessarily a vertical or country manufacturers, but that's going well for us as well, still roughly 30% of our business with all the EMS guys out there.

Second part of the question, I think, was demand creation in the pipeline. We had a normal actually demand creation quarter, one of the highest revenue quarters we've ever had and actually design win revenue, as we call it, it’s pushing 30%, 32% of our revenue out of the core. We saw registration activity up year-on-year and quarter-on-quarter, as well as actual registered design wins. And so new design wins came in at a really high number over 15% year-on-year and Q-on-Q. So the final answer to your question is, from a design standpoint, it's looking really positive, which is almost kind of people wonder how that happen with the work from home, but there's that much more accessibility to the engineers and design engineers and with our suppliers and our FAEs and digital, all connecting. So pretty bullish on the demand creation -- very bullish on the demand creation side of the equation.

[Operator]

Our next question comes from Steven Fox with Fox Advisors.

[Steven Fox, Fox Advisors]

A couple from me, please. First off, I was wondering if there's any way to put in perspective how things have maybe tightened up further since your last update either a month ago or 90 days ago, what's the difference is? And along those lines, I think you guys mentioned that there's a path to maybe seeing the current constraints and by the end of this calendar year. So what is that path to sort of normalizing?

[Phil Gallagher, CEO]

I'll start off with the second question first. We're just trying to get a good handle on what we think the balance of the demand is going to be through the calendar year, something to get visibility much beyond that based on technology, supplier, vertically in the summer, as you know, and I'm not going to quote who say, it could be through 2022. I'm just giving a look as been around a long time, hey, we definitely see it through 2021. We're not saying it's going to be over 2020, but that's what we see. So just to clarify that and that's what we're planning for. But I think there's -- probably there will still be constraints into 2022, at least based on the dialog and also with some of the key suppliers that we are partnered with. As far as the first part of the question, we talked a lot -- I mean [Technical Difficulty] Steve, I'm sorry, are you there?

[Steven Fox, Fox Advisors]

Yes. You cut out when you started to answer the first part of the question. Sorry, if you could start again.

[Phil Gallagher, CEO]

Yes, on the first part of the question. So you heard about the second question. So the first part is, at sox months ago, let's call it, don't hold me to the month, topic of conversation was in the controller space, high end controllers and then kind of into the lower end controllers, 32% [Technical Difficulty]

[Steven Fox, Fox Advisors]

I think I might have lost you again. I can take it off…

[Phil Gallagher, CEO]

No, it's not your fault. I think it's on our end. So I apologize. Let me try again, at least getting a couple of cracks at it. So yes, there you go. Okay. So about six months ago, we talked about the high end controllers and then it leaked into the, let's call it, 16, 8 bit, et cetera. And that continues, that continued to be -- I'd still say that probably the longest pole in the tent when it comes to the lead times extending. I think what's starting to spread out now is a little bit more pervasive than that and in some other commodities, even in some power areas, some analog areas, [op ends], things along those lines is starting to get a little broader. And what we haven't talked a lot about is in the IP&E, the interconnect passive. And they're whole going okay right now but there are some signs that there's some lead time extensions coming out of some of the passive guys and some of the capacitors and in the connectors to now, with the pretty -- the certain resins, plastics, et cetera. We're starting to see some lead times in the connector area as well. So I think it's just broadened a little bit, Steve. And again, I think that's based on what I said answering Ruplu's question because of the widespread growth of the different verticals is just affecting different technologies. That's what we see right now.

[Steven Fox, Fox Advisors]

And then just as a quick follow-up. Can you talk about what you do to sort of avoid double ordering by your customers? I know you could probably extend the window on noncancelable orders, things like that. Are you taking any of those steps to try and -- I mean I know it's hard to tell if it's happening in a moment, but are you doing anything to try to make sure your orders are real?

[Phil Gallagher, CEO]

Yes, you answered part of the question with the NCNR. And for those who don't know, that's noncanceled nonreturnable. So as some of that is getting imposed on us from the suppliers where maybe the products weren't typically NCNR, we're passing on to our customers, obviously [Technical Difficulty] that's going to help limit some of the double booking. But when I talk about the double booking, it's more difficult for us to catch that. What we'll catch, Steve, is inflated demand. So we've taken these forecasts from the customers, thousands of them. And you see Fox Industries using 50 pieces a week or something. And all of a sudden, you're coming in for 250 pieces a week. And we catch that right away we go back and have that dialog with the customer and make sure we're scrubbing that backlog appropriately. And so that's what we catch more, I'll call it, more inflated. I had a conversation yesterday with a supplier on the double and they tend to catch that more. And then once the part is up, they're not really seeing that. So they’re somewhere but we're not really seeing that but the NCNR itself and you answered part of that that is helping. And the [Technical Difficulty], we're certainly noticing -- there's certainly a lot of stress in the supply chains and deliveries and all that. But I think as we just continue to work through it responsibly, those are tough challenges, but we'll get some -- we've been here before, this one's a little bit different but we've been here before.

[Operator]

[Operator Instructions] Our next question comes from David Williams with Loop Capital.

[David Williams, Loop Capital]

Congrats on the solid execution. But I wanted to see -- maybe tie into the last question and just think about some of at the OEM and maybe EMS. We're hearing that maybe they're trying to build a little bit of inventory from a couple of different channels. Are you seeing that at all, any inventory builds, I guess, beyond your direct customers, maybe at the EMS or even at the OEM level?

[Phil Gallagher, CEO]

Tough for us to really manage that, to be honest with you, to get visibility into their inventories because you got -- there's finished products inventory could be built up a little bit and then there's raw material. So really difficult for us to see that, to be candid with you. And rather not comment on any one customer segment building inventories or not. I go back first answering Steve's question. What we look for is inflated bookings and inflated backlog. And a lot of the book to bill is because of lead times are going out, too. So as the lead times go out, the MRPs get adjusted and we pipeline further out with our suppliers, we're seeing what the visibility for. But for us to call that and we try to watch that. We do surveys and things along those lines, but we don't have direct access to the end customer build.

[David Williams, Loop Capital]

And then I guess if I can ask one more real quick. What do you think the largest execution hurdles are between here and the end of the year? Just kind of thinking about what you're doing with Farnell and the margin profiles. Do you think -- is there anything there that we should be thinking about?

[Phil Gallagher, CEO]

No, I think the biggest challenge that will be us just against, as I call it, center technology. This is be sure we're managing the suppliers and stay in close communication with them, which we're doing and with our customers, and managing all the information flow that's coming in and be sure we're helping as much as possibly we can to any products that are needed by our customers, from our suppliers. And I think right now that's one of the biggest things that it may sound easy, but it's certainly not. And that team's full board ahead and focused on that externally. Internally, Tom told that we think we have a lot of sight to the projections for Farnell and the Americas, which are the two big needle movers. Asia looks really good right now still as does Europe. And I think that's what we need to focus on, I think -- and of course, getting the appropriate inventory to fill those needs, which, again, that's back to working with the suppliers, which we do. We feel good about where we are right now.

[Operator]

Our next question comes from Joe Quatrochi with Wells Fargo.

[Joe Quatrochi, Wells Fargo]

I was curious on the change in book to bill relative to last quarter. I guess how do we think about the makeup of that change? Is it more a strengthening of kind of the inside 90 to 120 days or is it customers giving you, I guess, indications into late 2021?

[Phil Gallagher, CEO]

So as I looked at it, our book to bill was high last quarter as well. Just looking at -- and it was high this quarter. And so much is what I just said, the demands -- we're getting a lot more visibility on the demand from the customers based on the lead times going out -- as the lead times go out, they change their internal customer schedules and needs and demand and of course, we get fed that. So I would say that’s the majority of it. The inside of 90 days, 120 days, it looks really solid actually from a coverage standpoint of what's in the pipeline to go out in the next 30, 60, 90 to 120 days. We don’t see that moving that much. Actually a great question, because what we also track, which really ties to this, Joe, is we track our cancellations and reschedules daily, obviously. And in the normal market, we flex our -- our backlog is the buffer -- that's what we do with a buffer in the supply chain. 20%, 25% is normal. So we go up and down 20%, 25%. And that's about where it is right now. So no, we're not seeing anything that saying also reschedules getting pushed out of things along those lines we're not seeing that yet. But when we do, that's the first indicator, we know something is going on then we drill down. But right now, the cancellation windows and the reschedules would look pretty consistent with what we typically see.

[Tom Liguori, CFO]

Joe, if you look at, what are we, three and half, four weeks into the quarter, if you look at what we shipped in our backlog, it's a very healthy percentage, very similar to last quarter, which is encouraging. It's not getting worse. It's not getting -- it's not changing. So we're pretty much on track. It's far better than it was 12 months ago. I think we would all agree with that. So things are looking internally where they should be. They're looking stable. Backlog is a good indicator.

[Phil Gallagher, CEO]

Joe, I think tied to a lot of the questions I think is the diversification of our portfolio. I mean we're talking about hundreds of thousands of customers that we're managing, which helps level load much of the questions that were brought up today. And no one customers -- any more than 5% of our revenue and without any supplier that's greater than 10%. So that helps smooth some of this out from a vulnerability standpoint, if you will, but helps de-risk what you asked and some of the other questions as well.

[Joe Quatrochi, Wells Fargo]

And then just you talked about customers looking to sign maybe longer term supply contracts. Can you just kind of help us understand what do those look like in terms of the contract length, volume commitment? Is it based on fixed pricing? Just any type of detail like that would be helpful.

[Phil Gallagher, CEO]

A little bit all those. I mean some of those complex supply chains we've been managing, Joe, and we've had them for years. They just get more complex, but I'm talking 10, 15 years that we've been ingrained with these, again, some of the household names customers, imagine their supply for the suppliers. And we're kind of -- look at that as a hub. So we're integral to almost everything that they do from a supply chain standpoint. So some of them are traditional. You have a consignment implant store, that's fine, no problem, that's a typical contract. Some we have engagements where we've got 40, 50 people on site, managing the intake of demand, the forecast, the orders, receiving, taking right to the shelf and that's the customer at the top of my head that we've been engaging for 12 years. And so it's really become integral. You almost go into some of these customers, you wouldn't know who the Avnet person was versus the customer person, which is great. But for the most part, they're typically longer when you get really complex, because you've got to make investments. So you’re making investments upfront and we're transparent on that and we need to get a return on that investment. And so they typically tend to be much more strategic, much more longer term in nature.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the call back over to Phil Gallagher for any closing comments.

[Phil Gallagher, CEO]

Thank you, operator, and thank you all for attending today's earnings call. We really appreciate it. I look forward to speaking to everyone again in August for our fiscal fourth quarter earnings report. In the interim, stay safe, and have a great rest of the week. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.