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EX-32.1 - EX-32.1 - AVNET INCavt-20160102ex32141ad63.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 January 2, 2016


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 January 21, 2016, the total number of shares outstanding of the registrant’s Common Stock was 131,265,883 shares, net of treasury shares.

 

 

 

 


 

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets at January 2, 2016 and June 27, 2015 

2

 

 

Consolidated Statements of Operations for the second quarters and six months ended January 2, 2016 and December 27, 2014 

3

 

 

Consolidated Statements of Comprehensive Income for the second quarters  and six months ended January 2, 2016 and December 27, 2014 

4

 

 

Consolidated Statements of Cash Flows for the six months ended January 2, 2016 and December 27, 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 

27

 

 

PART II. OTHER INFORMATION 

27

 

 

Item 1. Legal Proceedings 

27

 

 

Item 1A. Risk Factors 

28

 

 

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

29

 

 

Item 6. Exhibits 

30

 

 

Signature Page 

31

 

 

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

January 2,

    

June 27,

 

 

 

2016

 

2015

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

916,088

 

$

932,553

 

Receivables, less allowances of $69,247 and $80,721, respectively

 

 

5,395,005

 

 

5,054,307

 

Inventories

 

 

2,650,220

 

 

2,482,183

 

Prepaid and other current assets

 

 

181,074

 

 

173,030

 

Total current assets

 

 

9,142,387

 

 

8,642,073

 

Property, plant and equipment, net

 

 

587,216

 

 

568,779

 

Goodwill

 

 

1,283,408

 

 

1,278,756

 

Intangible assets, net

 

 

91,371

 

 

99,731

 

Other assets

 

 

197,970

 

 

210,614

 

Total assets

 

$

11,302,352

 

$

10,799,953

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

1,136,218

 

$

331,115

 

Accounts payable

 

 

3,628,073

 

 

3,338,052

 

Accrued expenses and other

 

 

599,007

 

 

603,129

 

Total current liabilities

 

 

5,363,298

 

 

4,272,296

 

Long-term debt

 

 

1,072,188

 

 

1,646,501

 

Other liabilities

 

 

192,864

 

 

196,135

 

Total liabilities

 

 

6,628,350

 

 

6,114,932

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 131,327,636 shares and 135,496,472 shares, respectively

 

 

131,328

 

 

135,496

 

Additional paid-in capital

 

 

1,445,494

 

 

1,408,422

 

Retained earnings

 

 

3,643,248

 

 

3,582,599

 

Accumulated other comprehensive loss

 

 

(545,699)

 

 

(441,038)

 

Treasury stock at cost, 29,852 shares and 31,901 shares, respectively

 

 

(369)

 

 

(458)

 

Total shareholders’ equity

 

 

4,674,002

 

 

4,685,021

 

Total liabilities and shareholders’ equity

 

$

11,302,352

 

$

10,799,953

 

 

See notes to consolidated financial statements.    

2


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

    

January 2,

    

December 27,

    

January 2,

    

December 27,

    

 

 

 

2016

 

2014

 

2016

 

2014

 

 

 

 

(Thousands, except per share amounts)

 

 

Sales

 

$

6,848,057

 

$

7,551,880

 

$

13,817,751

 

$

14,391,466

 

 

Cost of sales

 

 

6,069,889

 

 

6,714,374

 

 

12,248,107

 

 

12,758,497

 

 

Gross profit

 

 

778,168

 

 

837,506

 

 

1,569,644

 

 

1,632,969

 

 

Selling, general and administrative expenses

 

 

530,831

 

 

573,962

 

 

1,089,387

 

 

1,157,908

 

 

Restructuring, integration and other expenses

 

 

21,222

 

 

13,257

 

 

47,180

 

 

31,577

 

 

Operating income

 

 

226,115

 

 

250,287

 

 

433,077

 

 

443,484

 

 

Other expense, net

 

 

(6,485)

 

 

(5,524)

 

 

(12,338)

 

 

(7,017)

 

 

Interest expense

 

 

(22,423)

 

 

(24,666)

 

 

(46,025)

 

 

(48,066)

 

 

Income before income taxes

 

 

197,207

 

 

220,097

 

 

374,714

 

 

388,401

 

 

Income tax expense

 

 

41,195

 

 

56,391

 

 

88,448

 

 

96,749

 

 

Net income

 

$

156,012

 

$

163,706

 

$

286,266

 

$

291,652

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.18

 

$

1.20

 

$

2.15

 

$

2.12

 

 

Diluted

 

$

1.16

 

$

1.18

 

$

2.11

 

$

2.08

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

131,909

 

 

136,541

 

 

132,846

 

 

137,425

 

 

Diluted

 

 

134,918

 

 

138,972

 

 

135,622

 

 

139,911

 

 

Cash dividends paid per common share

 

$

0.17

 

$

0.16

 

$

0.34

 

$

0.32

 

 

 

See notes to consolidated financial statements.

3


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

    

January 2,

    

December 27,

     

January 2,

    

December 27,

 

 

 

 

2016

 

2014

 

2016

 

2014

    

 

 

 

(Thousands)

 

 

Net income

 

$

156,012

 

$

163,706

 

$

286,266

 

$

291,652

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

(68,637)

 

 

(158,303)

 

 

(108,885)

 

 

(364,036)

 

 

Pension adjustments, net

 

 

2,157

 

 

1,784

 

 

4,224

 

 

3,569

 

 

Total comprehensive income (loss)

 

$

89,532

 

$

7,187

 

$

181,605

 

$

(68,815)

 

 

 

See notes to consolidated financial statements.

4


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

January 2,

    

December 27,

 

 

 

2016

 

2014

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

286,266

 

$

291,652

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

47,612

 

 

46,972

 

Amortization

 

 

14,307

 

 

21,990

 

Deferred income taxes

 

 

(708)

 

 

15,275

 

Stock-based compensation

 

 

38,424

 

 

36,130

 

Other, net

 

 

28,596

 

 

34,523

 

Changes in (net of effects from businesses acquired):

 

 

 

 

 

 

 

Receivables

 

 

(413,149)

 

 

(711,060)

 

Inventories

 

 

(197,800)

 

 

(5,957)

 

Accounts payable

 

 

323,447

 

 

583,337

 

Accrued expenses and other, net

 

 

(42,753)

 

 

(88,438)

 

Net cash flows provided by operating activities

 

 

84,242

 

 

224,424

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of notes

 

 

(250,000)

 

 

 —

 

Borrowings under accounts receivable securitization program, net

 

 

40,000

 

 

77,000

 

Borrowings (repayments) of bank and revolving debt, net

 

 

444,343

 

 

(37,414)

 

Repurchases of common stock (Note 9)

 

 

(184,704)

 

 

(109,129)

 

Dividends paid on common stock

 

 

(45,020)

 

 

(43,875)

 

Other, net

 

 

(1,080)

 

 

(5,439)

 

Net cash flows provided (used) for financing activities

 

 

3,539

 

 

(118,857)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(74,806)

 

 

(83,642)

 

Acquisitions of businesses, net of cash acquired (Note 2)

 

 

(19,199)

 

 

 —

 

Other, net

 

 

7,736

 

 

(8,795)

 

Net cash flows used for investing activities

 

 

(86,269)

 

 

(92,437)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(17,977)

 

 

(38,770)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— (decrease)

 

 

(16,465)

 

 

(25,640)

 

— at beginning of period

 

 

932,553

 

 

928,971

 

— at end of period

 

$

916,088

 

$

903,331

 

 

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 (loss) 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 27, 2015.

 

Fiscal year

 

The Company operates on a “52/53 week” fiscal year and fiscal 2016 contains 53 weeks compared to 52 weeks in fiscal 2015. As a result, the first six months of fiscal 2016 contained 27 weeks compared to the first six months of fiscal 2015, which contained 26 weeks.

 

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 July 2015, the FASB approved a one-year delay in the effective date of ASU 2014-09, which makes the effective date for the Company the first quarter of fiscal 2019. 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 impact of the future adoption of ASU 2014-09 on its consolidated financial statements, including the method of adoption to be used.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,  to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The planned early adoption of this update at the end of fiscal 2016 is not expected to have a material impact on the Company’s financial statements.

 

Recently adopted accounting pronouncements

 

In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The update requires that an acquiror recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The Company early adopted this update in the first quarter of fiscal 2016, with no impact to its consolidated financial statements. 

 

6


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

During the six months ended January 2, 2016, there have been no additional new accounting pronouncements that are expected to significantly impact the Company’s consolidated financial statements.

 

2. Acquisitions

During the second quarter of fiscal 2016, the Company acquired two businesses with aggregated annualized sales of approximately $120.0 million for an aggregate purchase price $36.6 million. The Company paid cash of $19.2 million, net of cash acquired, for such acquisitions in the second quarter of fiscal 2016. The Company has not disclosed the pro-forma impact of the fiscal 2016 acquisitions, as such impact was not material to the Company’s consolidated financial position or results of operations.  

 

3. Goodwill and intangible assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the six months ended January 2, 2016. All of the accumulated impairment was recognized in fiscal 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Electronics

    

Technology

    

 

 

 

 

 

Marketing

 

Solutions

 

Total

 

 

 

(Thousands)

 

Gross goodwill

 

$

1,684,216

 

$

974,274

 

$

2,658,490

 

Accumulated impairment

 

 

(1,045,110)

 

 

(334,624)

 

 

(1,379,734)

 

Carrying value at June 27, 2015

 

 

639,106

 

 

639,650

 

 

1,278,756

 

Additions

 

 

 —

 

 

24,976

 

 

24,976

 

Adjustments

 

 

 —

 

 

 —

 

 

 —

 

Foreign currency translation

 

 

(11,778)

 

 

(8,546)

 

 

(20,324)

 

Carrying value at January 2, 2016

 

$

627,328

 

$

656,080

 

$

1,283,408

 

Gross goodwill

 

$

1,672,438

 

$

990,704

 

$

2,663,142

 

Accumulated impairment

 

 

(1,045,110)

 

 

(334,624)

 

 

(1,379,734)

 

Carrying value at January 2, 2016

 

$

627,328

 

$

656,080

 

$

1,283,408

 

 

The goodwill additions are a result of businesses acquired in the second quarter of fiscal 2016.

 

In accordance with ASC 350, the Company does not amortize goodwill, but instead tests goodwill for impairment at least annually in the fourth fiscal quarter. The Company determined there was no goodwill impairment at any of its reporting units as a result of the fiscal 2015 goodwill impairment testing. As a result of the fiscal 2015 goodwill impairment testing, two reporting units (TS Asia and TS EMEA) had estimated fair values that were not substantially in excess of the carrying value of such reporting units. The Company evaluates each quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value, which would require the Company to perform an interim goodwill impairment test. Indicators the Company evaluates to determine whether an interim goodwill impairment test is necessary include, but are not limited to (i) a sustained decrease in share price or market capitalization, (ii) changes in the macroeconomic or industry environments and (iii) the financial performance of its’ reporting units. During the second quarter of fiscal 2016, the Company concluded that an interim goodwill impairment test was not necessary. 

 

In assessing goodwill for impairment, the Company is required to make significant assumptions, judgments and estimates including evaluating whether facts and circumstances indicate that an interim goodwill impairment test is necessary. These assumptions, judgments and estimates may change in the future based upon market conditions or other

7


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

events and could result in a goodwill impairment. The Company continues to evaluate each quarter those indicators that may require an interim goodwill impairment test. 

 

Intangible Assets

 

The following table presents the Company’s acquired intangible assets at January 2, 2016, and June 27, 2015, respectively. These intangible assets have a weighted average remaining useful life of approximately 4 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2, 2016

 

June 27, 2015

 

 

 

Acquired

 

Accumulated

 

Net Book

 

 Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

274,444

 

$

(194,248)

 

$

80,196

 

$

276,921

 

$

(190,593)

 

$

86,328

 

Trade name

 

 

4,807

 

 

(2,482)

 

 

2,325

 

 

6,240

 

 

(3,792)

 

 

2,448

 

Other

 

 

12,112

 

 

(3,262)

 

 

8,850

 

 

12,309

 

 

(1,354)

 

 

10,955

 

 

 

$

291,363

 

$

(199,992)

 

$

91,371

 

$

295,470

 

$

(195,739)

 

$

99,731

 

 

Intangible asset amortization expense was $7.4 million and $10.4 million for the second quarters of fiscal 2016 and 2015, respectively, and $14.3 million and $22.0 million for the first six months of fiscal 2016 and 2015, respectively. The following table presents the estimated future amortization expense for the remainder of fiscal 2016, the next five fiscal years and thereafter (in thousands):

 

 

 

 

 

 

 

Fiscal Year

    

 

 

Remainder of fiscal 2016

 

 

14,213

 

2017

 

 

24,815

 

2018

 

 

16,494

 

2019

 

 

13,028

 

2020

 

 

11,278

 

2021

 

 

7,008

 

Thereafter

 

 

4,535

 

Total

 

$

91,371

 

 

 

 

4. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

January 2, 2016

    

June 27, 2015

    

January 2, 2016

    

June 27, 2015

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

4.75

%

 

5.54

%

 

$

146,218

 

$

81,115

 

Accounts receivable securitization program

 

0.78

%

 

 —

 

 

 

690,000

 

 

 —

 

Notes due September 1, 2015

 

 —

 

 

6.00

%

 

 

 —

 

 

250,000

 

Notes due September 15, 2016

 

6.63

%

 

 —

 

 

 

300,000

 

 

 —

 

Short-term debt

 

 

 

 

 

 

 

$

1,136,218

 

$

331,115

 

 

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

 

8


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 accounting treatment and, as a result, any borrowings under the Program are recorded as debt in the consolidated balance sheets. Under the Program, the Company legally sells and isolates certain U.S. trade accounts receivable into a wholly owned and consolidated bankruptcy remote special purpose entity. Such receivables, which are recorded within “Receivables” in the consolidated balance sheets, totaled $1.59 billion and $1.41 billion at January 2, 2016, and June 27, 2015, 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 January 2, 2016, and June 27, 2015. The Program has a two-year term that expires in August 2016 and as a result is considered short-term debt as of January 2, 2016. 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 September 2015, the Company redeemed the $250.0 million of outstanding 6.00% Notes due September 1, 2015, upon their maturity.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

January 2, 2016

    

June 27, 2015

    

January 2, 2016

    

June 27, 2015

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

 —

 

 

0.59

%

 

$

 —

 

$

650,000

 

Credit Facility

 

1.47

%

 

1.45

%

 

 

426,212

 

 

50,000

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 15, 2016

 

 —

 

 

6.63

%

 

 

 —

 

 

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

 

2.99

%

 

2.06

%

 

 

733

 

 

1,828

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

1,076,945

 

 

1,651,828

 

Discount and debt issuance costs

 

 

 

 

 

 

 

 

(4,757)

 

 

(5,327)

 

Long-term debt

 

 

 

 

 

 

 

$

1,072,188

 

$

1,646,501

 

 

The Company has a five-year $1.25 billion senior unsecured revolving credit facility (the “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. Subject to certain conditions, the Credit Facility may be increased up to $1.5 billion. Under the Credit Facility, the Company may select from various interest rate options, currencies and maturities. The Credit Facility contains certain covenants including various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures. The Credit Facility also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios, which the Company was in compliance with as of January 2, 2016 and June 27, 2015. As of January 2, 2016 and June 27, 2015, there were $4.9 million and $1.9 million, respectively, in letters of credit issued under the Credit Facility.

 

As of January 2, 2016, the carrying value and fair value of the Company’s total debt was $2.21 billion and $2.26 billion, respectively. At June 27, 2015, the carrying value and fair value of the Company's total debt was $1.98 billion and $2.04 billion, respectively. Fair value was estimated primarily based upon quoted market prices.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 reduces this risk by utilizing natural hedging (i.e., offsetting receivables and payables in the same foreign currency) 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 as of January 2, 2016, and June 27, 2015 and were not material. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. Avnet’s policy is to present derivative financial instruments with the same counterparty as either a net asset or liability when the right of offset exists. The Company did not have material net gains or losses related to forward foreign exchange contracts in the second quarters and first six months of fiscal 2016 and 2015, which are recorded as a component of “other expense, net” in the consolidated statements of operations.

 

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

 

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 such matters will have a material adverse effect on the Company’s financial condition, liquidity or results of operations.

 

The Company also is currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export, environmental, anticorruption and competition. For certain of these matters it is not possible to determine the ultimate outcome, and the Company cannot reasonably estimate the maximum potential exposure or the range of possible loss for such matters due primarily to being in the preliminary stages of the related proceedings and investigations. The Company currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position or liquidity, but could possibly be material to our results of operations in any one reporting period.

 

As of January 2, 2016, and June 27, 2015, the Company has aggregate estimated liabilities of $21.3 million and $17.2 million, respectively, classified within accrued expenses and other for such compliance-related matters that were reasonably estimable as of such dates. Of this amount, $10.0 million relates to a contingent liability for potential unpaid import duties associated with the acquisition of Bell Microproducts Inc. for estimated duties, interest and penalties that may be imposed from an ongoing compliance audit by Customs and Border Protection.

 

7. Income taxes

 

The Company’s effective tax rate on its income before income taxes was 20.9% in the second quarter of fiscal 2016 as compared with 25.6% in the second quarter of fiscal 2015. During the second quarter of fiscal 2016, the Company’s effective tax rate was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions, (ii) the release of valuation allowances against deferred tax assets that were determined to be realizable and (iii) the release of reserves

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

related to audit settlements and the expiration of statutes of limitation. During the second quarter of fiscal 2015, the Company’s effective tax rate was favorably impacted by the mix of income in lower tax jurisdictions and the release of reserves related to the settlement of an audit in a foreign jurisdiction.

 

For the first six months of fiscal 2016 and 2015, the Company’s effective tax rate was 23.6% and 24.9%, respectively. The effective tax rate for the first six months of fiscal 2016 was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions, (ii) the release of valuation allowances against deferred tax assets that were determined to be realizable and (iii) the release of reserves related to audit settlements and the expiration of statutes of limitation. The effective tax rate for the first six months of fiscal 2015 was favorably impacted by the mix of income in lower tax 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 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; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies.

 

The Company continues to evaluate the need for the valuation allowances against its deferred tax assets and will adjust valuation allowances as appropriate, which, if adjusted, could result in a significant decrease or increase 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 second quarters ended January 2, 2016, and December 27, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

    

January 2,

    

December 27,

    

January 2,

    

December 27,

 

 

 

2016

 

2014

 

2016

 

2014

 

 

 

(Thousands)

 

Service cost

 

$

9,935

 

$

9,873

 

$

20,421

 

$

19,746

 

Interest cost

 

 

5,328

 

 

4,449

 

 

10,656

 

 

8,898

 

Expected return on plan assets

 

 

(10,071)

 

 

(9,055)

 

 

(20,142)

 

 

(18,110)

 

Recognized net actuarial loss

 

 

3,183

 

 

3,251

 

 

6,366

 

 

6,502

 

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

 

(786)

 

 

(786)

 

Net periodic pension cost

 

$

7,982

 

$

8,125

 

$

16,515

 

$

16,250

 

 

The Company made contributions to the Plan of $20.0 million during the first six months of fiscal 2016. The Company expects to make an additional contribution to the Plan of $10.0 million in each of the remaining two quarters of fiscal 2016.

 

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

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 second quarters  and first six months of fiscal 2016 and fiscal 2015 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 August 2015, the Company’s Board of Directors amended the Company’s existing share repurchase program to authorize the repurchase of up to $1.25 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 second quarter of fiscal 2016, the Company repurchased 0.9 million shares under this program at an average market price of $44.42 per share for a total cost of $39.9 million. During the first six months of fiscal 2016, the Company repurchased 4.4 million shares under this program at an average price of $41.83 per share for a total cost of $185.0 million. Since the beginning of the repurchase program through the end of the second quarter of fiscal 2016, the Company has repurchased 26.5 million shares at an aggregate cost of $882.6 million, and $367.4 million remains available for future repurchases.

 

Common stock dividend

 

In November 2015, the Companys Board of Directors approved a dividend of $0.17 per common share and dividend payments of $22.4 million were made in December 2015. During the six months ended January 2, 2016, the Company has paid dividends of $0.34 per common share and $45.0 million in total.

 

10. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

January 2,

 

December 27,

 

January 2,

 

December 27,

 

 

 

2016

  

2014

  

2016

  

2014

 

 

 

(Thousands, except per share data)

 

Numerator:

 

 

 

   

 

 

 

 

 

 

 

 

 

Net income

 

$

156,012

 

$

163,706

 

$

286,266

 

$

291,652

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

131,909

 

 

136,541

 

 

132,846

 

 

137,425

 

Net effect of dilutive stock options, restricted stock units and performance share units

 

 

3,009

 

 

2,431

 

 

2,776

 

 

2,486

 

Weighted average common shares for diluted earnings per share

 

 

134,918

 

 

138,972

 

 

135,622

 

 

139,911

 

Basic earnings per share

 

$

1.18

 

$

1.20

 

$

2.15

 

$

2.12

 

Diluted earnings per share

 

$

1.16

 

$

1.18

 

$

2.11

 

$

2.08

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Additional cash flow information

 

Interest and income taxes paid in the six months ended January 2, 2016, and December 27, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

January 2,

    

December 27,

 

 

 

2016

 

2014

 

 

 

(Thousands)

 

Interest

 

$

52,724

 

$

50,355

 

Income taxes

 

$

48,942

 

$

86,486

 

 

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.

 

Non-cash investing activities related to purchases of property, plant and equipment that have been accrued, but not paid for, were $12.7 million and $15.3 million as of January 2, 2016, and December 27, 2014, respectively.

 

Included in cash and cash equivalents as of January 2, 2016, was $8.0 million of cash equivalents, which was primarily comprised of overnight time deposits whose fair value was determined using Level 1 measurements under the ASC 820 fair value hierarchy.

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

January 2,

 

December 27,

 

January 2,

 

December 27,

 

 

 

2016

 

2014

 

2016

 

2014

 

 

 

(Thousands)

 

Sales:

    

 

    

    

 

    

    

 

    

    

 

    

 

Electronics Marketing

 

$

4,114,614

 

$

4,435,190

 

$

8,586,016

 

$

8,809,285

 

Technology Solutions

 

 

2,733,443

 

 

3,116,690

 

 

5,231,735

 

 

5,582,181

 

 

 

$

6,848,057

 

$

7,551,880

 

$

13,817,751

 

$

14,391,466

 

Operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronics Marketing

 

$

173,984

 

$

191,449

 

$

387,015

 

$

394,160

 

Technology Solutions

 

 

117,100

 

 

117,582

 

 

191,638

 

 

179,974

 

Corporate

 

 

(35,826)

 

 

(34,435)

 

 

(82,984)

 

 

(75,813)

 

 

 

 

255,258

 

 

274,596

 

 

495,669

 

 

498,321

 

Restructuring, integration and other expenses (Note 13)

 

 

(21,222)

 

 

(13,257)

 

 

(47,180)

 

 

(31,577)

 

Amortization of acquired intangible assets and other

 

 

(7,921)

 

 

(11,052)

 

 

(15,412)

 

 

(23,260)

 

 

 

$

226,115

 

$

250,287

 

$

433,077

 

$

443,484

 

Sales, by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas (1)

 

$

2,750,560

 

$

3,051,888

 

$

5,524,503

 

$

5,699,010

 

EMEA (2)

 

 

1,935,449

 

 

2,062,052

 

 

3,950,668

 

 

4,037,431

 

Asia/Pacific (3)

 

 

2,162,048

 

 

2,437,940

 

 

4,342,580

 

 

4,655,025

 

 

 

$

6,848,057

 

$

7,551,880

 

$

13,817,751

 

$

14,391,466

 

 


(1)Includes sales from the United States of $2.48 billion and $2.70 billion for the quarters ended January 2, 2016, and December 27, 2014, respectively. Includes sales from the United States of $4.99 billion and $5.06 billion for the first six months of fiscal 2016 and 2015, respectively.

 

(2)Includes sales from Germany and the United Kingdom of $760.6 million and $340.5 million, respectively, for the quarter ended January 2, 2016, and $1.56 billion and $681.1 million, respectively, for the first six months of fiscal 2016. Includes sales from Germany and the United Kingdom of $787.8 million and $384.8 million, respectively, for the quarter ended December 27, 2014, and $1.53 billion and $745.2 million, respectively, for the first six months of fiscal 2015.

 

(3)Includes sales from China (including Hong Kong) and Taiwan of $703.9 million and $864.0 million, respectively, for the quarter ended January 2, 2016, and $1.42 billion and $1.69 billion, respectively, for the first six months of fiscal 2016. Includes sales from China (including Hong Kong) and Taiwan of $727.1 million and $1.01 billion, respectively, for the quarter ended December 27, 2014, and $1.47 billion and $1.82 billion, respectively, for the first six months of fiscal 2015.

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January 2,

 

June 27,

 

 

 

2016

 

2015

 

 

 

(Thousands)

 

Assets:

    

 

    

    

 

    

 

Electronics Marketing

 

$

6,403,582

 

$

6,497,714

 

Technology Solutions

 

 

4,238,135

 

 

3,608,953

 

Corporate

 

 

660,635

 

 

693,286

 

 

 

$

11,302,352

 

$

10,799,953

 

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

 

 

 

 

 

 

 

Americas (1)

 

$

385,816

 

$

358,063

 

EMEA (2)

 

 

174,030

 

 

182,311

 

Asia/Pacific

 

 

27,370

 

 

28,405

 

 

 

$

587,216

 

$

568,779

 

 


(1)Includes property, plant and equipment, net, of $376.4 million and $352.2 million as of January 2, 2016, and June 27, 2015, respectively, in the United States.

 

(2)Includes property, plant and equipment, net, of $72.8 million and $70.5 million in Germany and Belgium, respectively, as of January 2, 2016, and $74.2 million and $74.7 million in Germany and Belgium, respectively, as of June 27, 2015.

 

13. Restructuring, integration and other expenses

 

Fiscal 2016

 

During the second quarter and first six months of fiscal 2016, the Company took certain actions in an effort to reduce future operating expenses, including the continuation of the restructuring activities started in the fourth quarter of fiscal 2015 and the first quarter of fiscal 2016. These actions include activities related to the Avnet Advantage initiative, which is focused on creating operational efficiencies. In addition, the Company incurred integration and other costs primarily associated with the integration of acquired businesses, the integration of certain global and regional businesses and the closure or divestiture of certain businesses. The following table presents the restructuring, integration and other expenses recorded during the second quarter and first six months of fiscal 2016:

 

 

 

 

 

 

 

 

 

 

 

    

Quarter Ended

    

Six Months Ended

 

 

 

January 2, 2016

 

January 2, 2016

 

 

 

(Thousands, except per share data)

 

Restructuring expenses

 

$

16,950

 

$

31,476

 

Integration costs

 

 

2,982

 

 

4,493

 

Other costs

 

 

954

 

 

12,135

 

Changes in estimates for prior year restructuring liabilities

 

 

336

 

 

(924)

 

Restructuring, integration and other expenses before tax

 

$

21,222

 

$

47,180

 

Restructuring, integration and other expenses after tax

 

$

14,100

 

$

30,426

 

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

 

$

0.10

 

$

0.22

 

 

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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 2016 is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Facility

    

 

Asset

     

   

 

    

 

 

 

 

Severance

 

Exit Costs

 

Impairments

 

Other

 

Total

 

 

(Thousands)

Fiscal 2016 restructuring expenses

 

$

25,684

 

$

4,163

 

$

806

 

$

823

 

$

31,476

Cash payments

 

 

(6,134)

 

 

(1,381)

 

 

 —

 

 

(243)

 

 

(7,758)

Non-cash amounts

 

 

 —

 

 

479

 

 

(806)

 

 

(389)

 

 

(716)

Other, principally foreign currency translation

 

 

509

 

 

(2)

 

 

 —

 

 

12

 

 

519