Attached files

file filename
EX-32.1 - EX-32.1 - AVNET INCavt-20150328ex321309f35.htm
EX-31.1 - EX-31.1 - AVNET INCavt-20150328ex311da51f8.htm
EX-10.1 - EX-10.1 - AVNET INCavt-20150328ex1014f8c74.htm
EX-32.2 - EX-32.2 - AVNET INCavt-20150328ex3221d7b62.htm
EXCEL - IDEA: XBRL DOCUMENT - AVNET INCFinancial_Report.xls
EX-31.2 - EX-31.2 - AVNET INCavt-20150328ex3127584e3.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


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

For the quarterly period ended March 28, 2015 


Commission File #1-4224

AVNET, INC.

Incorporated in New York


IRS Employer Identification No. 11-1890605

2211 South 47th Street, Phoenix, Arizona 85034

(480) 643-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

  

Accelerated filer

  

Non-accelerated filer

  

Smaller Reporting Company

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of April 16, 2015, the total number of shares outstanding of the registrant’s Common Stock was 135,822,544 shares, net of treasury shares.

 

 

 

 


 

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets at March 28, 2015 and June 28, 2014 

2

 

 

Consolidated Statements of Operations for the third quarters and nine months ended March 28, 2015 and March 29, 2014 

3

 

 

Consolidated Statements of Comprehensive Income for the third quarters and nine months ended March 28, 2015 and March 29, 2014 

4

 

 

Consolidated Statements of Cash Flows for the nine months ended March 28, 2015 and March 29, 2014 

5

 

 

Notes to Consolidated Financial Statements 

6

 

 

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

18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

26

 

 

Item 4. Controls and Procedures 

26

 

 

PART II. OTHER INFORMATION 

26

 

 

Item 1. Legal Proceedings 

26

 

 

Item 1A. Risk Factors 

27

 

 

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

28

 

 

Item 6. Exhibits 

29

 

 

Signature Page 

30

 

 

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

March 28,

    

June 28,

 

 

 

2015

 

2014

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

803,468 

 

$

928,971 

 

Receivables, less allowances of $95,313 and $96,382, respectively

 

 

4,994,751 

 

 

5,220,528 

 

Inventories

 

 

2,474,402 

 

 

2,613,363 

 

Prepaid and other current assets

 

 

211,336 

 

 

191,337 

 

Total current assets

 

 

8,483,957 

 

 

8,954,199 

 

Property, plant and equipment, net

 

 

548,433 

 

 

534,999 

 

Goodwill

 

 

1,262,533 

 

 

1,348,468 

 

Intangible assets, net

 

 

134,837 

 

 

184,308 

 

Other assets

 

 

184,745 

 

 

233,543 

 

Total assets

 

$

10,614,505 

 

$

11,255,517 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

350,277 

 

$

865,088 

 

Accounts payable

 

 

3,272,030 

 

 

3,402,369 

 

Accrued expenses and other

 

 

618,665 

 

 

711,369 

 

Total current liabilities

 

 

4,240,972 

 

 

4,978,826 

 

Long-term debt

 

 

1,725,238 

 

 

1,213,814 

 

Other liabilities

 

 

146,785 

 

 

172,684 

 

Total liabilities

 

 

6,112,995 

 

 

6,365,324 

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 135,843,580 shares and 138,285,825 shares, respectively

 

 

135,844 

 

 

138,286 

 

Additional paid-in capital

 

 

1,394,859 

 

 

1,355,663 

 

Retained earnings

 

 

3,461,011 

 

 

3,257,407 

 

Accumulated other comprehensive (loss) income

 

 

(489,688)

 

 

139,512 

 

Treasury stock at cost, 33,129 shares and 36,836 shares, respectively

 

 

(516)

 

 

(675)

 

Total shareholders’ equity

 

 

4,501,510 

 

 

4,890,193 

 

Total liabilities and shareholders’ equity

 

$

10,614,505 

 

$

11,255,517 

 

 

See notes to consolidated financial statements.    

2


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 28,

    

March 29,

    

March 28,

    

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Thousands, except per share amounts)

 

Sales

 

$

6,736,860 

 

$

6,683,616 

 

$

21,128,326 

 

$

20,450,945 

 

Cost of sales

 

 

5,962,506 

 

 

5,878,704 

 

 

18,721,003 

 

 

18,062,230 

 

Gross profit

 

 

774,354 

 

 

804,912 

 

 

2,407,323 

 

 

2,388,715 

 

Selling, general and administrative expenses

 

 

555,148 

 

 

593,986 

 

 

1,713,056 

 

 

1,736,689 

 

Restructuring, integration and other expenses

 

 

15,494 

 

 

26,083 

 

 

47,071 

 

 

66,624 

 

Operating income

 

 

203,712 

 

 

184,843 

 

 

647,196 

 

 

585,402 

 

Other (expense) income, net

 

 

(8,945)

 

 

2,511 

 

 

(15,963)

 

 

(1,488)

 

Interest expense

 

 

(23,871)

 

 

(25,326)

 

 

(71,936)

 

 

(80,529)

 

Gain on legal settlement (Note 6)

 

 

 —

 

 

2,965 

 

 

 —

 

 

22,102 

 

Income before income taxes

 

 

170,896 

 

 

164,993 

 

 

559,297 

 

 

525,487 

 

Income tax expense

 

 

49,367 

 

 

51,142 

 

 

146,117 

 

 

166,148 

 

Net income

 

$

121,529 

 

$

113,851 

 

$

413,180 

 

$

359,339 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.89 

 

$

0.82 

 

$

3.02 

 

$

2.61 

 

Diluted

 

$

0.88 

 

$

0.81 

 

$

2.97 

 

$

2.57 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

136,046 

 

 

138,418 

 

 

136,965 

 

 

137,845 

 

Diluted

 

 

137,721 

 

 

140,179 

 

 

139,181 

 

 

140,015 

 

Cash dividends paid per common share

 

$

0.16 

 

$

0.15 

 

$

0.48 

 

$

0.45 

 

 

See notes to consolidated financial statements.

3


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 28,

    

March 29,

    

March 28,

    

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Thousands)

 

Net income

 

$

121,529 

 

$

113,851 

 

$

413,180 

 

$

359,339 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

(270,518)

 

 

14,069 

 

 

(634,554)

 

 

122,066 

 

Pension adjustments, net

 

 

1,785 

 

 

1,644 

 

 

5,354 

 

 

4,939 

 

Total comprehensive (loss) income

 

$

(147,204)

 

$

129,564 

 

$

(216,020)

 

$

486,344 

 

 

See notes to consolidated financial statements.

4


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

March 28,

    

March 29,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

413,180 

 

$

359,339 

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

70,919 

 

 

67,392 

 

Amortization

 

 

32,630 

 

 

33,081 

 

Deferred income taxes

 

 

29,500 

 

 

20,850 

 

Stock-based compensation

 

 

48,890 

 

 

33,896 

 

Other, net

 

 

57,766 

 

 

54,824 

 

Changes in (net of effects from businesses acquired):

 

 

 

 

 

 

 

Receivables

 

 

(186,037)

 

 

(55,853)

 

Inventories

 

 

(89,994)

 

 

(114,258)

 

Accounts payable

 

 

118,449 

 

 

(148,825)

 

Accrued expenses and other, net

 

 

(210,751)

 

 

(46,541)

 

Net cash flows provided by operating activities

 

 

284,552 

 

 

203,905 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of notes

 

 

 —

 

 

(300,000)

 

Borrowings under accounts receivable securitization program, net

 

 

110,000 

 

 

230,000 

 

(Repayments) borrowings of bank and other debt, net

 

 

(96,372)

 

 

56,658 

 

Repurchases of common stock (Note 9)

 

 

(147,606)

 

 

(1,252)

 

Dividends paid on common stock

 

 

(65,602)

 

 

(62,009)

 

Other, net

 

 

(13,993)

 

 

10,390 

 

Net cash flows used for financing activities

 

 

(213,573)

 

 

(66,213)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(133,422)

 

 

(81,232)

 

Acquisitions of businesses, net of cash acquired

 

 

 —

 

 

(116,882)

 

Other, net

 

 

(8,765)

 

 

4,058 

 

Net cash flows used for investing activities

 

 

(142,187)

 

 

(194,056)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(54,295)

 

 

7,170 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— decrease

 

 

(125,503)

 

 

(49,194)

 

— at beginning of period

 

 

928,971 

 

 

1,009,343 

 

— at end of period

 

$

803,468 

 

$

960,149 

 

 

See notes to consolidated financial statements.

 

 

5


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of presentation and new accounting pronouncements

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly Avnet, Inc.'s and its consolidated subsidiaries' (the “Company” or “Avnet”) financial position, results of operations, comprehensive income and cash flows. All such adjustments are of a normal recurring nature.

 

The preparation of financial statements in accordance with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results may differ from these estimates.

 

Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2014.

 

New accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under GAAP. The core principles of ASU 2014-09 are to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Application of the requirements of ASU 2014-09 may require more judgment and estimates within the revenue recognition process compared to existing GAAP. In April 2015, the FASB proposed a one-year delay in the effective date of ASU 2014-09, which, if approved, would make the effective date for the Company the first quarter of fiscal 2019 instead of the current effective date, which is the first quarter of fiscal 2018. The Company may adopt the requirements of ASU 2014-09 using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) adoption with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined within ASU 2014-09. The Company is currently evaluating the potential impact of the future adoption of ASU 2014-09 on its consolidated financial statements, including the method of adoption to be used.

 

During the nine months ended March 28, 2015 there have been no additional new accounting pronouncements that are expected to significantly impact the Company's consolidated financial statements.

 

2. Acquisitions and divestitures

 

During fiscal 2014, the Company completed three acquisitions with historical annualized revenue of approximately $492.0 million. Cash paid for acquisitions during the first nine months of fiscal 2014 was $116.9 million, net of cash acquired. The Company has not disclosed the pro-forma impact of the fiscal 2014 acquisitions as such impact was not material to the Company's consolidated financial position or results of operations.

 

The aggregate consideration, excluding cash acquired, for the fiscal 2014 acquisitions was $219.7 million, which consisted of the following (in thousands):

 

 

 

 

 

 

 

Cash paid

    

$

181,645 

 

Contingent consideration

 

 

38,081 

 

Total consideration

 

$

219,726 

 

 

The contingent consideration arrangements stipulate that the Company pay up to a maximum of approximately $50.0 million of additional consideration to the former shareholders of the acquired businesses based upon the achievement of

6


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

certain future operating results. The Company estimated the fair value of the contingent consideration of $38.1 million using an income approach, which is based on significant inputs, primarily forecasted future operating results of the acquired businesses, not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The Company adjusts the fair value of contingent consideration through operating expenses if there are changes to the inputs used in the income approach and as a result of the passage of time.

 

During fiscal 2014 and the first nine months of fiscal 2015 there were no material measurement period adjustments for the fiscal 2014 acquisitions. The Company recognized restructuring, integration, and other expenses associated with the fiscal 2014 acquisitions, which are described further in Note 13.

 

3. Goodwill and intangible assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the nine months ended March 28, 2015. All of the accumulated impairment was recognized in fiscal 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Electronics

    

Technology

    

 

 

 

 

 

Marketing

 

Solutions

 

Total

 

 

 

(Thousands)

 

Gross goodwill

 

$

1,713,567 

 

$

1,014,635 

 

$

2,728,202 

 

Accumulated impairment

 

 

(1,045,110)

 

 

(334,624)

 

 

(1,379,734)

 

Carrying value at June 28, 2014

 

 

668,457 

 

 

680,011 

 

 

1,348,468 

 

Adjustments

 

 

561 

 

 

 

 

569 

 

Foreign currency translation

 

 

(41,276)

 

 

(45,228)

 

 

(86,504)

 

Carrying value at March 28, 2015

 

$

627,742 

 

$

634,791 

 

$

1,262,533 

 

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

1,672,852 

 

$

969,415 

 

$

2,642,267 

 

Accumulated impairment

 

 

(1,045,110)

 

 

(334,624)

 

 

(1,379,734)

 

Carrying value at March 28, 2015

 

$

627,742 

 

$

634,791 

 

$

1,262,533 

 

 

The goodwill adjustments represent the net measurement period adjustments for acquisitions during the related measurement periods.

 

7


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible Assets

 

The following table presents the Company’s acquired intangible assets at March 28, 2015 and June 28, 2014, respectively. These intangible assets have a weighted average remaining useful life of approximately 5 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 28, 2015

 

June 28, 2014

 

 

 

Acquired

 

Accumulated

 

Net Book

 

 Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

291,236 

 

$

(172,958)

 

$

118,278 

 

$

319,496 

 

$

(155,604)

 

$

163,892 

 

Trade name

 

 

5,187 

 

 

(1,570)

 

 

3,617 

 

 

5,993 

 

 

(1,555)

 

 

4,438 

 

Other

 

 

15,686 

 

 

(2,744)

 

 

12,942 

 

 

18,833 

 

 

(2,855)

 

 

15,978 

 

 

 

$

312,109 

 

$

(177,272)

 

$

134,837 

 

$

344,322 

 

$

(160,014)

 

$

184,308 

 

 

Intangible asset amortization expense was $10.6 million and $12.2 million for the third quarters of fiscal 2015 and 2014, respectively, and $32.6 million and $33.1 million for the first nine months of fiscal 2015 and 2014, respectively. The following table presents the estimated future amortization expense for the remainder of fiscal 2015, the next five fiscal years and thereafter (in thousands):

 

 

 

 

 

 

 

Fiscal Year

    

 

 

Remainder of fiscal 2015

 

$

10,841 

 

2016

 

 

31,373 

 

2017

 

 

29,587 

 

2018

 

 

21,165 

 

2019

 

 

17,688 

 

2020

 

 

15,461 

 

Thereafter

 

 

8,722 

 

Total

 

$

134,837 

 

 

 

 

 

4. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 28, 2015

    

June 28, 2014

    

March 28, 2015

    

June 28, 2014

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

5.56 

%

 

3.20 

%

 

$

100,277 

 

$

250,088 

 

Accounts receivable securitization program

 

 —

 

 

0.60 

%

 

 

 —

 

 

615,000 

 

Notes due September 1, 2015

 

6.00 

%

 

 —

 

 

 

250,000 

 

 

 

Short-term debt

 

 

 

 

 

 

 

$

350,277 

 

$

865,088 

 

 

Bank credit facilities and other consists of various committed and uncommitted lines of credit and other forms of bank debt with financial institutions utilized primarily to support the working capital requirements of foreign operations.

 

8


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 28, 2015

    

June 28, 2014

    

March 28, 2015

    

June 28, 2014

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

0.58 

%

 

 —

 

 

$

725,000 

 

$

 —

 

2014 Credit Facility

 

3.55 

%

 

 —

 

 

 

50,000 

 

 

 —

 

2012 Credit Facility

 

 —

 

 

3.55 

%

 

 

 —

 

 

12,000 

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 1, 2015

 

 —

 

 

6.00 

%

 

 

 —

 

 

250,000 

 

September 15, 2016

 

6.63 

%

 

6.63 

%

 

 

300,000 

 

 

300,000 

 

June 15, 2020

 

5.88 

%

 

5.88 

%

 

 

300,000 

 

 

300,000 

 

December 1, 2022

 

4.88 

%

 

4.88 

%

 

 

350,000 

 

 

350,000 

 

Other long-term debt

 

1.42 

%

 

1.40 

%

 

 

1,901 

 

 

3,867 

 

Long-term debt before discount

 

 

 

 

 

 

 

 

1,726,901 

 

 

1,215,867 

 

Discount on Notes

 

 

 

 

 

 

 

 

(1,663)

 

 

(2,053)

 

Long-term debt

 

 

 

 

 

 

 

$

1,725,238 

 

$

1,213,814 

 

 

In August 2014, the Company amended and extended its accounts receivable securitization program (the “Program”) with a group of financial institutions to allow the Company to transfer, on an ongoing revolving basis, an undivided interest in a designated pool of accounts receivable, to provide security or collateral for borrowings up to a maximum of $900.0 million. The Program does not qualify for off balance sheet sale accounting treatment and, as a result, any borrowings under the Program are recorded as debt on the consolidated balance sheets. Under the Program, the Company legally isolates certain U.S. trade receivables into a wholly-owned and consolidated bankruptcy remote special purpose entity. Such isolated receivables, which are recorded within “Receivables” in the consolidated balance sheets, totaled $1.47 billion and $1.65 billion at March 28, 2015 and June 28, 2014, respectively. The Program contains certain covenants relating to the quality of the receivables sold. The Program also requires the Company to maintain certain minimum interest coverage and leverage ratios, which the Company was in compliance with as of March 28, 2015. The Program has a two-year term that expires in August 2016. As a result of the two-year term, outstanding borrowings under the Program are classified as long-term debt at March 28, 2015. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread of 0.38%. The facility fee is 0.38%.

 

In July 2014, the Company terminated its existing Credit Facility (the “2012 Credit Facility”) and entered into a five-year $1.25 billion senior unsecured revolving credit facility (the “2014 Credit Facility”) with a syndicate of banks, consisting of revolving credit facilities and the issuance of up to $150.0 million of letters of credit, which expires in July 2019. Under the 2014 Credit Facility, the Company may select from various interest rate options, currencies and maturities. The 2014 Credit Facility contains certain covenants including various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures. The 2014 Credit Facility also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios, which the Company was in compliance with as of March 28, 2015. At March 28, 2015, there were $1.9 million in letters of credit issued under the 2014 Credit Facility. At June 28, 2014, there were $2.0 million in letters of credit issued under the 2012 Credit Facility.

 

At March 28, 2015, the carrying value and fair value of the Company’s total debt was $2.08 billion and $2.17 billion, respectively. At June 28, 2014, the carrying value and fair value of the Company's total debt was $2.08 billion and $2.19 billion, respectively. Fair value was estimated primarily based upon quoted market prices.

 

5. Derivative financial instruments

 

Many of the Company’s subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Company to the risks associated with fluctuations in foreign currency exchange rates. The Company

9


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

reduces this risk by utilizing natural hedging (i.e., offsetting receivables and payables) as well as by creating offsetting positions through the use of derivative financial instruments, primarily forward foreign exchange contracts typically with maturities of less than sixty days (“economic hedges”). The Company continues to have exposure 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 income (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. The fair value of forward foreign exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions “other current assets” or “accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets and were not material as of March 28, 2015 and June 28, 2014. The Company did not have material gains or losses related to the forward foreign exchange contracts during the third quarters and first nine months of fiscal 2015 and fiscal 2014.

 

The Company generally does not hedge its investments in its foreign operations. The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.

 

6. Commitments and contingencies

 

Bell

 

During fiscal 2011, the Company recognized a contingent liability for potential unpaid import duties associated with the acquisition of Bell Microproducts Inc. (“Bell”). Prior to the acquisition of Bell by Avnet, Customs and Border Protection (“CBP”) initiated a review of the importing process at one of Bell’s subsidiaries and identified compliance deficiencies. Subsequent to the acquisition of Bell by Avnet, CBP began a compliance audit. The Company evaluated projected duties, interest and penalties that potentially may be imposed as a result of the audit and recognized a contingent liability of $10.0 million which was recorded to goodwill in fiscal 2011. Depending on the ultimate resolution of the matter with CBP, the Company estimates that the range of the potential exposure associated with the liability may be up to $73.0 million; however, the Company believes the contingent liability recorded is a reasonable estimate of the liability based upon the facts available at this time.

 

LCD Class Action Settlement

 

The Company filed a proof of claim in the settlement of a class action proceeding that sought damages from certain manufacturers of LCD flat panel displays. A settlement was reached in the proceedings and in the first quarter of fiscal 2014 the federal district judge overseeing the proceeding issued an order approving the distribution of settlement funds to the class claimants and the Company received an award payment of $19.1 million. In the third quarter of fiscal 2014, the federal district judge overseeing the proceedings issued an order approving a final distribution of funds and the Company received a final award payment of $3.0 million. The total award of $22.1 million is classified within “gain on legal settlement” in the consolidated statements of operations.

 

Other

 

From time to time, the Company may become a party to, or be otherwise involved in various lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of conducting its business. While litigation is subject to inherent uncertainties, management does not anticipate that any ongoing matters will have a material adverse effect on the Company’s financial condition, liquidity or results of operations.

 

7. Income taxes

 

The Company’s effective tax rate on its income before income taxes was 28.9% in the third quarter of fiscal 2015 as compared with 31.0% in the third quarter of fiscal 2014. During the third quarter of fiscal 2015, the Company's effective

10


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

tax rate was favorably impacted primarily by the mix of income in lower tax rate jurisdictions partially offset by an increase due to the write-off of a deferred tax asset. During the third quarter of fiscal 2014, the Company's effective tax rate was unfavorably impacted primarily by increases to valuation allowances and reserves.

 

For the first nine months of fiscal 2015 and 2014, the Company's effective tax rate was 26.1% and 31.6%, respectively. The effective tax rate for the first nine months of fiscal 2015 was favorably impacted by the mix of income in lower tax rate jurisdictions and the release of reserves, primarily related to the formal deregistration of a foreign branch and the settlement of an audit in a foreign jurisdiction. The effective tax rate for the first nine months of fiscal 2014 was unfavorably impacted primarily by increases to valuation allowances and reserves.

 

The Company applies the guidance in ASC 740, which requires management to use its judgment for the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Company examines all available evidence on a jurisdiction by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risks associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the semiconductor and related industries; and (iii) prudent and feasible tax planning strategies.

 

As of the end of fiscal 2014, the Company had a partial valuation allowance against significant net operating loss carry-forward deferred tax assets related to a legal entity in Europe due to, among several other factors, a history of losses in that entity. In recent fiscal years, such entity has been experiencing improved earnings, which required the partial release of the valuation allowance to the extent such entity has projected future taxable income. ASC 740 requires a preponderance of positive evidence in order to reach a conclusion to release all or a portion of a valuation allowance when negative evidence exists. The Company continues to evaluate the need for a valuation allowance against these deferred tax assets and will adjust the valuation allowance as appropriate, which, if reduced, could result in a significant decrease to the effective tax rate in the period of the adjustment.

 

8. Pension plan

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) for which the components of net periodic pension costs during the third quarters and nine months ended March 28, 2015 and March 29, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 28,

    

March 29,

    

March 28,

    

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Thousands)

 

Service cost

 

$

9,873 

 

$

9,183 

 

$

29,619 

 

$

27,549 

 

Interest cost

 

 

4,449 

 

 

4,289 

 

 

13,347 

 

 

12,867 

 

Expected return on plan assets

 

 

(9,055)

 

 

(7,727)

 

 

(27,165)

 

 

(23,181)

 

Recognized net actuarial loss

 

 

3,251 

 

 

3,171 

 

 

9,753 

 

 

9,513 

 

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

 

(1,179)

 

 

(1,179)

 

Net periodic pension cost

 

$

8,125 

 

$

8,523 

 

$

24,375 

 

$

25,569 

 

 

The Company made contributions to the Plan of $30.0 million during the first nine months of fiscal 2015. The Company expects to make an additional contribution to the Plan of $10.0 million in the fourth quarter of fiscal 2015.

 

11


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Plan meets the definition of a defined benefit plan and as a result, the Company must apply ASC 715 pension accounting to the Plan. The Plan itself, however, is a cash balance plan that is similar in nature to a defined contribution plan in that a participant's benefit is defined in terms of a stated account balance. A cash balance plan provides the Company with the benefit of applying any earnings on the Plan’s investments beyond the fixed return provided to participants, toward the Company’s future cash funding obligations.

 

Amounts reclassified out of accumulated other comprehensive (loss) income, net of tax, to operating expenses during the first nine months of fiscal 2015 and fiscal 2014 were not material and substantially all related to net periodic pension costs including recognition of actuarial losses and amortization of prior service credits.

 

9. Shareholders' equity

 

Share repurchase program

 

In November 2014, the Company’s Board of Directors amended the Company's existing share repurchase program to authorize the repurchase of up to $1.00 billion of common stock in the open market or through privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as share price, corporate and regulatory requirements, and prevailing market conditions. During the third quarter of fiscal 2015, the Company repurchased 0.9 million shares under this program at an average market price of $41.97 per share for a total cost of $38.8 million. Since the beginning of the repurchase program through the end of the third quarter of fiscal 2015, the Company has repurchased 21.7 million shares at an aggregate cost of $681.7 million, and $318.3 million remained available for future repurchases under the share repurchase program.

 

Common stock dividend

 

In February 2015, the Company's Board of Directors approved a dividend of $0.16 per common share and dividend payments of $21.7 million were made in March 2015. During the nine months ended March 28, 2015, the Company has paid dividends of $0.48 per common share and $65.6 million in total.

 

10. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(Thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

121,529 

 

$

113,851 

 

$

413,180 

 

$

359,339 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

136,046 

 

 

138,418 

 

 

136,965 

 

 

137,845 

 

Net effect of dilutive stock options, restricted incentive shares and performance shares

 

 

1,675 

 

 

1,761 

 

 

2,216 

 

 

2,170 

 

Weighted average common shares for diluted earnings per share

 

 

137,721 

 

 

140,179 

 

 

139,181 

 

 

140,015 

 

Basic earnings per share

 

$

0.89 

 

$

0.82 

 

$

3.02 

 

$

2.61 

 

Diluted earnings per share

 

$

0.88 

 

$

0.81 

 

$

2.97 

 

$

2.57 

 

Stock options excluded from earnings per share calculation due to anti-dilutive effect

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

12


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Additional cash flow information

 

Interest and income taxes paid in the nine months ended March 28, 2015 and March 29, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

March 28,

    

March 29,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

Interest

 

$

80,478 

 

$

86,844 

 

Income taxes

 

$

122,056 

 

$

165,885 

 

 

The Company includes book overdrafts as part of accounts payable on its consolidated balance sheets and reflects changes in such balances as part of cash flows from operating activities in its consolidated statements of cash flows.

 

During the nine months ended March 29, 2014, the Company had non-cash financing activities of $38.1 million related to contingent consideration in connection with acquisition activity in fiscal 2014.

 

13


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Segment information

 

Electronics Marketing (“EM”) and Technology Solutions (“TS”) are the Company's reportable segments (“operating groups”). EM markets and sells semiconductors and interconnect, passive and electromechanical devices and embedded products to a diverse customer base serving many end-markets. TS focuses on the value-added distribution of enterprise computing servers and systems, software, storage, services and complex solutions from the world’s foremost technology manufacturers. TS also provides the latest hard disk drives, microprocessor, motherboard and DRAM module technologies to manufacturers of general-purpose computers and system builders.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Thousands)

 

Sales:

    

 

    

    

 

    

    

 

    

    

 

    

 

Electronics Marketing

 

$

4,219,528 

 

$

4,133,004 

 

$

13,028,812 

 

$

12,225,911 

 

Technology Solutions

 

 

2,517,332 

 

 

2,550,612 

 

 

8,099,514 

 

 

8,225,034 

 

 

 

$

6,736,860 

 

$

6,683,616 

 

$

21,128,326 

 

$

20,450,945 

 

Operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronics Marketing

 

$

197,287 

 

$

193,437 

 

$

591,447 

 

$

540,905 

 

Technology Solutions

 

 

68,098 

 

 

60,887 

 

 

248,072 

 

 

243,703 

 

Corporate

 

 

(34,992)

 

 

(30,530)

 

 

(110,805)

 

 

(98,126)

 

 

 

 

230,393 

 

 

223,794 

 

 

728,714 

 

 

686,482 

 

Restructuring, integration and other expenses (Note 13)

 

 

(15,494)

 

 

(26,083)

 

 

(47,071)

 

 

(66,624)

 

Amortization of acquired intangible assets and other

 

 

(11,187)

 

 

(12,868)

 

 

(34,447)

 

 

(34,456)

 

 

 

$

203,712 

 

$

184,843 

 

$

647,196 

 

$

585,402 

 

Sales, by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas (1)

 

$

2,677,745 

 

$

2,567,139 

 

$

8,376,754 

 

$

8,119,450 

 

EMEA (2)

 

 

1,969,069 

 

 

2,160,383 

 

 

6,006,500 

 

 

6,105,393 

 

Asia/Pacific (3)

 

 

2,090,046 

 

 

1,956,094 

 

 

6,745,072 

 

 

6,226,102 

 

 

 

$

6,736,860 

 

$

6,683,616 

 

$

21,128,326 

 

$

20,450,945 

 

 


(1)Includes sales from the United States of $2.39 billion and $2.30 billion for the quarters ended March 28, 2015, and March 29, 2014, respectively. Includes sales from the United States of $7.45 billion and $7.20 billion for the first nine months of fiscal 2015 and 2014, respectively.

 

(2)Includes sales from Germany and the United Kingdom of $688.7 million and $372.3 million, respectively, for the quarter ended March 28, 2015, and $2.22 billion and $1.12 billion, respectively, for the first nine months of fiscal 2015. Includes sales from Germany of $861.4 million for the quarter ended March 29, 2014, and $2.50 billion for the first nine months of fiscal 2014.

 

(3)Includes sales from China (including Hong Kong) and Taiwan of $667.5 million and $802.2 million, respectively, for the quarter ended March 28, 2015, and $2.13 billion and $2.62 billion, respectively, for the first nine months of fiscal 2015. Includes sales from China (including Hong Kong) and Taiwan of $700.3 million and $605.7

14


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

million, respectively, for the quarter ended March 29, 2014, and $2.20 billion and $2.00 billion, respectively, for the first nine months of fiscal 2014.

 

 

 

 

 

 

 

 

 

 

 

 

March 28,

 

June 28,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

Assets:

    

 

    

    

 

    

 

Electronics Marketing

 

$

6,367,106 

 

$

6,840,166 

 

Technology Solutions

 

 

3,699,717 

 

 

4,140,230 

 

Corporate

 

 

547,682 

 

 

275,121 

 

 

 

$

10,614,505 

 

$

11,255,517 

 

Property, plant, and equipment, net, by geographic area:

 

 

 

 

 

 

 

Americas (1)

 

$

340,844 

 

$

306,167 

 

EMEA (2)

 

 

179,385 

 

 

199,374 

 

Asia/Pacific

 

 

28,204 

 

 

29,458 

 

 

 

$

548,433 

 

$

534,999 

 

 


(1)Includes property, plant and equipment, net, of $335.4 million and $298.1 million as of March 28, 2015 and June 28, 2014, respectively, in the United States.

 

(2)Includes property, plant and equipment, net, of $73.9 million and $73.5 million in Germany and Belgium, respectively, as of March 28, 2015 and $95.5 million and $61.0 million in Germany and Belgium, respectively, as of June 28, 2014.

 

 

13. Restructuring, integration and other expenses

 

Fiscal 2015

 

During the third quarter and first nine months of fiscal 2015, the Company took certain actions in an effort to reduce future operating expenses. In addition, the Company incurred integration and other costs primarily associated with the integration of acquisitions and certain global and regional businesses. The following table presents the restructuring, integration and other expenses recorded during the third quarter and first nine months of fiscal 2015:

 

 

 

 

 

 

 

 

 

 

 

    

Third Quarter Ended

    

Nine Months Ended

 

 

 

March 28, 2015

 

March 28, 2015

 

 

 

(Thousands, except per share data)

 

Restructuring expenses

 

$

8,095 

 

$

25,447 

 

Integration costs

 

 

5,269 

 

 

15,559 

 

Other costs including acquisition costs

 

 

2,443 

 

 

6,156 

 

Changes in estimates for prior year restructuring liabilities

 

 

(313)

 

 

(91)

 

Restructuring, integration and other expenses before tax

 

$

15,494 

 

$

47,071 

 

Restructuring, integration and other expenses after tax

 

$

12,035 

 

$

35,383 

 

Restructuring, integration and other expenses per share on a diluted basis

 

$

0.09 

 

$

0.25 

 

 

15


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The activity related to the restructuring liabilities established and other associated expenses incurred during fiscal 2015 is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Facility

    

 

 

    

 

 

 

 

 

 

 

 

Exit Costs and

 

 

 

 

 

 

 

 

 

 

 

 

Asset

 

 

 

 

 

 

 

 

 

Severance

 

Impairments

 

Other

 

Total

 

 

 

(Thousands)

 

Fiscal 2015 restructuring expenses

 

$

9,455 

 

$

10,802 

 

$

5,190 

 

$

25,447 

 

Cash payments

 

 

(6,642)

 

 

(4,279)

 

 

 —

 

 

(10,921)

 

Non-cash amounts

 

 

 —

 

 

(2,395)

 

 

(5,190)

 

 

(7,585)

 

Other, principally foreign currency translation

 

 

(201)

 

 

(228)

 

 

 —

 

 

(429)

 

Balance at March 28, 2015

 

$

2,612 

 

$

3,900 

 

$

 —

 

$

6,512 

 

 

Severance expense recorded in the first nine months of fiscal 2015 related to the reduction of over 200 employees, primarily in operations and business support functions, in connection with cost reduction actions taken at both operating groups. Facility exit costs primarily consist of liabilities for remaining lease obligations and the impairment of long-lived assets for locations and information technology hardware and software the Company has divested or has ceased using. Other restructuring costs related primarily to other miscellaneous restructuring and exit costs including a loss incurred upon the divestiture of a small business in EMEA. Of the $25.4 million in restructuring expenses recorded during the first nine months of fiscal 2015, $11.8 million related to EM, $12.8 million related to TS, and $0.8 million related to corporate business support functions. As of March 28, 2015, the Company expects the majority of the remaining severance and facility exit costs to be paid by the end of fiscal 2015.

 

Integration costs are primarily related to the integration of acquired businesses, integration of global or regional businesses, integration of information technology systems, and specific and incremental costs incurred as part of the consolidation, relocation and closure of warehouse and office facilities. Integration costs also include consulting costs for information technology system and business operation integration assistance, legal fees, travel, meeting, marketing and communication costs that are incrementally incurred as a result of such integration activities. Also included in integration costs are incremental salary costs specific to integration, consolidation and closure activities. Other costs consist primarily of professional fees incurred for acquisitions, additional costs incurred for businesses divested or exited in current or prior periods, any ongoing facilities operating costs associated with the consolidation, relocation and closure of facilities once such facilities have been vacated or substantially vacated, and other miscellaneous costs that relate to restructuring, integration and other expenses. Integration and other costs in the first nine months of fiscal 2015 were comprised of many different costs, none of which were individually material.

 

16


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fiscal 2014

 

During fiscal 2014, the Company incurred restructuring expenses related to various restructuring actions intended to achieve planned synergies from acquired businesses and to reduce future operating expenses. The following table presents the activity during the first nine months of fiscal 2015 related to the remaining restructuring liabilities established during fiscal 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Facility

    

 

 

    

 

 

 

 

 

 

 

 

Exit Costs and

 

 

 

 

 

 

 

 

    

 

 

    

Asset 

    

 

 

    

 

 

 

 

 

Severance

 

 Impairments

 

Other

 

Total

 

 

 

(Thousands)

 

Balance at June 28, 2014

 

$

23,744 

 

$

3,697 

 

$

344 

 

$

27,785 

 

Cash payments

 

 

(16,694)

 

 

(1,385)

 

 

 —

 

 

(18,079)

 

Changes in estimates, net

 

 

308 

 

 

93 

 

 

 —

 

 

401 

 

Non-cash amounts

 

 

(92)

 

 

(824)

 

 

 —

 

 

(916)

 

Other, principally foreign currency translation

 

 

(1,742)

 

 

(338)

 

 

 —

 

 

(2,080)

 

Balance at March 28, 2015

 

$

5,524 

 

$

1,243 

 

$

344 

 

$

7,111 

 

 

As of March 28, 2015, the Company expects the majority of the remaining severance, facility exit costs and other liabilities to be paid by the end of fiscal 2015.

 

Fiscal 2013 and prior

 

As of June 28, 2014, there were $13.1 million of restructuring liabilities remaining related to restructuring actions taken in fiscal years 2013 and prior, the majority of which relates to facility exit costs. The remaining balance for such historical restructuring actions as of March 28, 2015 was $6.3 million, which is expected to be paid by the end of fiscal 2016.

 

 

17


 

Item 2.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 the significant factors that influenced the Company’s performance during the quarter ended March 28, 2015, this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Report, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2014.

 

<