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EX-31.1 - EX-31.1 - AVNET INCavt-20160402ex31133bdfc.htm
EX-32.2 - EX-32.2 - AVNET INCavt-20160402ex322fd6718.htm
EX-32.1 - EX-32.1 - AVNET INCavt-20160402ex3217742b1.htm
EX-31.2 - EX-31.2 - AVNET INCavt-20160402ex3120d2c28.htm
EX-10.1 - EX-10.1 - AVNET INCavt-20160402ex101d2f1e8.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 April 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 April 21, 2016, the total number of shares outstanding of the registrant’s Common Stock was 128,515,224 shares, net of treasury shares.

 

 

 

 


 

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements 

 

 

 

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

 

 

Consolidated Statements of Operations for the third quarters and nine months ended April 2, 2016 and March 28, 2015 

 

 

Consolidated Statements of Comprehensive Income for the third quarters and nine months ended April 2, 2016 and March 28, 2015 

 

 

Consolidated Statements of Cash Flows for the nine months ended April 2, 2016 and March 28, 2015 

 

 

Notes to Consolidated Financial Statements 

 

 

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 

30 

 

 

Item 6. Exhibits 

31 

 

 

Signature Page 

32 

 

 

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

April 2,

    

June 27,

 

 

 

2016

 

2015

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,036,485

 

$

932,553

 

Receivables, less allowances of $69,969 and $80,721, respectively

 

 

4,874,179

 

 

5,054,307

 

Inventories

 

 

2,826,858

 

 

2,482,183

 

Prepaid and other current assets

 

 

200,579

 

 

173,030

 

Total current assets

 

 

8,938,101

 

 

8,642,073

 

Property, plant and equipment, net

 

 

610,747

 

 

568,779

 

Goodwill

 

 

1,295,406

 

 

1,278,756

 

Intangible assets, net

 

 

86,989

 

 

99,731

 

Other assets

 

 

194,217

 

 

210,614

 

Total assets

 

$

11,125,460

 

$

10,799,953

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

706,742

 

$

331,115

 

Accounts payable

 

 

3,297,981

 

 

3,338,052

 

Accrued expenses and other

 

 

559,697

 

 

603,129

 

Total current liabilities

 

 

4,564,420

 

 

4,272,296

 

Long-term debt

 

 

1,610,539

 

 

1,646,501

 

Other liabilities

 

 

190,300

 

 

196,135

 

Total liabilities

 

 

6,365,259

 

 

6,114,932

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 128,542,843 shares and 135,496,472 shares, respectively

 

 

128,543

 

 

135,496

 

Additional paid-in capital

 

 

1,442,947

 

 

1,408,422

 

Retained earnings

 

 

3,602,702

 

 

3,582,599

 

Accumulated other comprehensive loss

 

 

(413,671)

 

 

(441,038)

 

Treasury stock at cost, 28,641 shares and 31,901 shares, respectively

 

 

(320)

 

 

(458)

 

Total shareholders’ equity

 

 

4,760,201

 

 

4,685,021

 

Total liabilities and shareholders’ equity

 

$

11,125,460

 

$

10,799,953

 

 

See notes to consolidated financial statements. 

2


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

    

April 2,

    

March 28,

    

April 2,

    

March 28,

    

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

(Thousands, except per share amounts)

 

 

Sales

 

$

6,174,716

 

$

6,736,860

 

$

19,992,467

 

$

21,128,326

 

 

Cost of sales

 

 

5,437,888

 

 

5,962,506

 

 

17,685,995

 

 

18,721,003

 

 

Gross profit

 

 

736,828

 

 

774,354

 

 

2,306,472

 

 

2,407,323

 

 

Selling, general and administrative expenses

 

 

539,038

 

 

555,148

 

 

1,628,425

 

 

1,713,056

 

 

Restructuring, integration and other expenses

 

 

16,172

 

 

15,494

 

 

63,352

 

 

47,071

 

 

Operating income

 

 

181,618

 

 

203,712

 

 

614,695

 

 

647,196

 

 

Other income (expense), net

 

 

2,200

 

 

(8,945)

 

 

(10,138)

 

 

(15,963)

 

 

Interest expense

 

 

(23,281)

 

 

(23,871)

 

 

(69,306)

 

 

(71,936)

 

 

Income before income taxes

 

 

160,537

 

 

170,896

 

 

535,251

 

 

559,297

 

 

Income tax expense

 

 

37,078

 

 

49,367

 

 

125,526

 

 

146,117

 

 

Net income

 

$

123,459

 

$

121,529

 

$

409,725

 

$

413,180

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.95

 

$

0.89

 

$

3.11

 

$

3.02

 

 

Diluted

 

$

0.94

 

$

0.88

 

$

3.05

 

$

2.97

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

129,811

 

 

136,046

 

 

131,834

 

 

136,965

 

 

Diluted

 

 

131,650

 

 

137,721

 

 

134,298

 

 

139,181

 

 

Cash dividends paid per common share

 

$

0.17

 

$

0.16

 

$

0.51

 

$

0.48

 

 

 

See notes to consolidated financial statements.

3


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

    

April 2,

    

March 28,

     

April 2,

    

March 28,

 

 

 

 

2016

 

2015

 

2016

 

2015

    

 

 

 

(Thousands)

 

 

Net income

 

$

123,459

 

$

121,529

 

$

409,725

 

$

413,180

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

129,872

 

 

(270,518)

 

 

20,987

 

 

(634,554)

 

 

Pension adjustments, net

 

 

2,156

 

 

1,785

 

 

6,380

 

 

5,354

 

 

Total comprehensive income (loss)

 

$

255,487

 

$

(147,204)

 

$

437,092

 

$

(216,020)

 

 

 

See notes to consolidated financial statements.

4


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

April 2,

    

March 28,

 

 

 

2016

 

2015

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

409,725

 

$

413,180

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

71,112

 

 

70,919

 

Amortization

 

 

21,183

 

 

32,630

 

Deferred income taxes

 

 

3,963

 

 

29,500

 

Stock-based compensation

 

 

47,724

 

 

48,890

 

Other, net

 

 

43,665

 

 

57,766

 

Changes in (net of effects from businesses acquired):

 

 

 

 

 

 

 

Receivables

 

 

181,723

 

 

(186,037)

 

Inventories

 

 

(319,865)

 

 

(89,994)

 

Accounts payable

 

 

(74,510)

 

 

118,449

 

Accrued expenses and other, net

 

 

(87,593)

 

 

(210,751)

 

Net cash flows provided by operating activities

 

 

297,127

 

 

284,552

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of notes, net of issuance costs

 

 

542,043

 

 

 

Repayment of notes

 

 

(250,000)

 

 

 —

 

Borrowings (repayments) under accounts receivable securitization program, net

 

 

(400,000)

 

 

110,000

 

Borrowings (repayments) of bank and revolving debt, net

 

 

448,468

 

 

(96,372)

 

Repurchases of common stock (Note 9)

 

 

(334,177)

 

 

(147,606)

 

Dividends paid on common stock

 

 

(66,944)

 

 

(65,602)

 

Other, net

 

 

(12,028)

 

 

(13,993)

 

Net cash flows used for financing activities

 

 

(72,638)

 

 

(213,573)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(111,070)

 

 

(133,422)

 

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

 

 

(19,675)

 

 

 —

 

Other, net

 

 

8,436

 

 

(8,765)

 

Net cash flows used for investing activities

 

 

(122,309)

 

 

(142,187)

 

 

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash and cash equivalents

 

 

1,752

 

 

(54,295)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— increase (decrease)

 

 

103,932

 

 

(125,503)

 

— at beginning of period

 

 

932,553

 

 

928,971

 

— at end of period

 

$

1,036,485

 

$

803,468

 

 

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 nine months of fiscal 2016 contained 40 weeks compared to the first nine months of fiscal 2015, which contained 39 weeks.

 

New accounting pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The update requires a lessee to recognize assets and liabilities on the consolidated balance sheets for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Accordingly, the update will be effective for the Company beginning in the first quarter of fiscal 2020, using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements. 

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740):  Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), to simplify the presentation of deferred income taxes by requiring 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.

 

In May 2014, the 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 revenue 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.

 

6


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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. 

 

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 of $36.4 million. The Company paid cash of $19.7 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.  

 

During the third quarter of fiscal 2016, there were no material measurement period adjustments for the fiscal 2016 acquisitions.

 

3. Goodwill and intangible assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the nine months ended April 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

 

 

 —

 

 

24,591

 

 

24,591

 

Adjustments

 

 

 —

 

 

 —

 

 

 —

 

Foreign currency translation

 

 

(9,395)

 

 

1,454

 

 

(7,941)

 

Carrying value at April 2, 2016

 

$

629,711

 

$

665,695

 

$

1,295,406

 

Gross goodwill

 

$

1,674,821

 

$

1,000,319

 

$

2,675,140

 

Accumulated impairment

 

 

(1,045,110)

 

 

(334,624)

 

 

(1,379,734)

 

Carrying value at April 2, 2016

 

$

629,711

 

$

665,695

 

$

1,295,406

 

 

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

7


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 third 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 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 April 2, 2016, and June 27, 2015, respectively. These intangible assets have a weighted average remaining useful life of approximately 4 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 2, 2016

 

June 27, 2015

 

 

 

Acquired

 

Accumulated

 

Net Book

 

 Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

278,448

 

$

(202,575)

 

$

75,873

 

$

276,921

 

$

(190,593)

 

$

86,328

 

Trade name

 

 

4,973

 

 

(2,649)

 

 

2,324

 

 

6,240

 

 

(3,792)

 

 

2,448

 

Other

 

 

12,699

 

 

(3,907)

 

 

8,792

 

 

12,309

 

 

(1,354)

 

 

10,955

 

 

 

$

296,120

 

$

(209,131)

 

$

86,989

 

$

295,470

 

$

(195,739)

 

$

99,731

 

 

Intangible asset amortization expense was $6.9 million and $10.6 million for the third quarters of fiscal 2016 and 2015, respectively, and $21.2 million and $32.6 million for the first nine 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

 

 

7,457

 

2017

 

 

25,091

 

2018

 

 

17,010

 

2019

 

 

13,525

 

2020

 

 

11,710

 

2021

 

 

7,261

 

Thereafter

 

 

4,935

 

Total

 

$

86,989

 

 

 

 

8


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 2, 2016

    

June 27, 2015

    

April 2, 2016

    

June 27, 2015

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

4.74

%

 

5.54

%

 

$

156,742

 

$

81,115

 

Accounts receivable securitization program

 

0.90

%

 

 —

 

 

 

250,000

 

 

 —

 

Notes due September 2015

 

 —

 

 

6.00

%

 

 

 —

 

 

250,000

 

Notes due September 2016

 

6.63

%

 

 —

 

 

 

300,000

 

 

 —

 

Short-term debt

 

 

 

 

 

 

 

$

706,742

 

$

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.

 

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 trade 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 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 $1.44 billion and $1.41 billion at April 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 April 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 April 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 2015, upon their maturity.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 2, 2016

    

June 27, 2015

    

April 2, 2016

    

June 27, 2015

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

 —

 

 

0.59

%

 

$

 —

 

$

650,000

 

Credit Facility

 

1.86

%

 

1.45

%

 

 

422,236

 

 

50,000

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 2016

 

 —

 

 

6.63

%

 

 

 —

 

 

300,000

 

June 2020

 

5.88

%

 

5.88

%

 

 

300,000

 

 

300,000

 

December 2022

 

4.88

%

 

4.88

%

 

 

350,000

 

 

350,000

 

April 2026

 

4.63

%

 

 —

%

 

 

550,000

 

 

 —

 

Other long-term debt

 

2.51

%

 

2.06

%

 

 

1,201

 

 

1,828

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

1,623,437

 

 

1,651,828

 

Discount and debt issuance costs

 

 

 

 

 

 

 

 

(12,898)

 

 

(5,327)

 

Long-term debt

 

 

 

 

 

 

 

$

1,610,539

 

$

1,646,501

 

 

In March 2016, the Company issued $550.0 million of 4.625% Notes due April 2026 (“4.625% Notes”). The Company received proceeds of $546.0 million from the offering, net of discounts and incurred $4.5 million in underwriting fees and other debt issuance costs. The 4.625% Notes rank equally in right of payment with all existing and future senior unsecured debt of Avnet and interest will be payable semi-annually each year on April 15 and October 15.

 

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 April 2, 2016 and June 27, 2015. As of April 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 April 2, 2016, the carrying value and fair value of the Company’s total debt was $2.32 billion and $2.38 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.

 

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 currency 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 currency exchange contracts. The fair value of forward foreign currency 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

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

sheets as of April 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 currency exchange contracts in the third quarters and first nine months of fiscal 2016 and 2015, which are recorded as a component of “other income (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 its results of operations in any one reporting period.

 

As of April 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 these amounts, $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 23.1% in the third quarter of fiscal 2016 as compared with 28.9% in the third quarter of fiscal 2015. During the third quarter of fiscal 2016, the Company’s effective tax rate was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of reserves related to the expiration of statutes of limitation. During the third quarter of fiscal 2015, the Company’s effective tax rate was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions partially offset by (ii) an increase due to the write-off of a deferred tax asset.

 

For the first nine months of fiscal 2016 and 2015, the Company’s effective tax rate was 23.5% and 26.1%, respectively. The effective tax rate for the first nine 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 nine months of fiscal 2015 was favorably impacted by (i) the mix of income in lower tax jurisdictions and (ii) 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

April 2,

    

March 28,

    

April 2,

    

March 28,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(Thousands)

 

Service cost

 

$

9,935

 

$

9,873

 

$

30,356

 

$

29,619

 

Interest cost

 

 

5,328

 

 

4,449

 

 

15,984

 

 

13,347

 

Expected return on plan assets

 

 

(10,071)

 

 

(9,055)

 

 

(30,213)

 

 

(27,165)

 

Recognized net actuarial loss

 

 

3,183

 

 

3,251

 

 

9,549

 

 

9,753

 

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

 

(1,179)

 

 

(1,179)

 

Net periodic pension cost

 

$

7,982

 

$

8,125

 

$

24,497

 

$

24,375

 

 

The Company made contributions to the Plan of $30.0 million during the first nine months of fiscal 2016. The Company expects to make an additional contribution to the Plan of $10.0 million in the fourth quarter 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 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 income (loss), net of tax, to operating expenses during the third quarters and first nine 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 third quarter of fiscal 2016, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Company repurchased 3.7 million shares under this program at an average market price of $39.73 per share for a total cost of $145.7 million. During the first nine months of fiscal 2016, the Company repurchased 8.1 million shares under this program at an average price of $40.88 per share for a total cost of $330.8 million. Since the beginning of the repurchase program through the end of the third quarter of fiscal 2016, the Company has repurchased 30.2 million shares at an aggregate cost of $1.03 billion, and $221.7 million remains available for future repurchases.

 

Common stock dividend

 

In February 2016, the Company’s Board of Directors approved a dividend of $0.17 per common share and dividend payments of $21.9 million were made in March 2016.

 

10. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

April 2,

 

March 28,

 

April 2,

 

March 28,

 

 

 

2016

  

2015

  

2016

  

2015

 

 

 

(Thousands, except per share data)

 

Numerator:

 

 

 

   

 

 

 

 

 

 

 

 

 

Net income

 

$

123,459

 

$

121,529

 

$

409,725

 

$

413,180

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

129,811

 

 

136,046

 

 

131,834

 

 

136,965

 

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

 

 

1,839

 

 

1,675

 

 

2,464

 

 

2,216

 

Weighted average common shares for diluted earnings per share

 

 

131,650

 

 

137,721

 

 

134,298

 

 

139,181

 

Basic earnings per share

 

$

0.95

 

$

0.89

 

$

3.11

 

$

3.02

 

Diluted earnings per share

 

$

0.94

 

$

0.88

 

$

3.05

 

$

2.97

 

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

 

 

422

 

 

 —

 

 

378

 

 

 —

 

 

 

 

 

11. Additional cash flow information

 

Interest and income taxes paid in the nine months ended April 2, 2016, and March 28, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

April 2,

    

March 28,

 

 

 

2016

 

2015

 

 

 

(Thousands)

 

Interest

 

$

80,313

 

$

80,478

 

Income taxes

 

$

85,323

 

$

122,056

 

 

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 $15.2 million and $40.0 million as of April 2, 2016, and March 28, 2015, respectively.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Included in cash and cash equivalents as of April 2, 2016, was $44.8 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.

 

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 and software developers. 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

 

 

 

April 2,

 

March 28,

 

April 2,

 

March 28,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(Thousands)

 

Sales:

    

 

    

    

 

    

    

 

    

    

 

    

 

Electronics Marketing

 

$

4,041,527

 

$

4,219,528

 

$

12,627,543

 

$

13,028,812

 

Technology Solutions

 

 

2,133,189

 

 

2,517,332

 

 

7,364,924

 

 

8,099,514

 

 

 

$

6,174,716

 

$

6,736,860

 

$

19,992,467

 

$

21,128,326

 

Operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronics Marketing

 

$

183,271

 

$

197,287

 

$

570,286

 

$

591,447

 

Technology Solutions

 

 

55,498

 

 

68,098

 

 

247,136

 

 

248,072

 

Corporate

 

 

(33,546)

 

 

(34,992)

 

 

(116,530)

 

 

(110,805)

 

 

 

 

205,223

 

 

230,393

 

 

700,892

 

 

728,714

 

Restructuring, integration and other expenses (Note 13)

 

 

(16,172)

 

 

(15,494)

 

 

(63,352)

 

 

(47,071)

 

Amortization of acquired intangible assets and other

 

 

(7,433)

 

 

(11,187)

 

 

(22,845)

 

 

(34,447)

 

 

 

$

181,618

 

$

203,712

 

$

614,695

 

$

647,196

 

Sales, by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas (1)

 

$

2,433,904

 

$

2,677,745

 

$

7,958,408

 

$

8,376,754

 

EMEA (2)

 

 

1,946,575

 

 

1,969,069

 

 

5,897,243

 

 

6,006,500

 

Asia/Pacific (3)

 

 

1,794,237

 

 

2,090,046

 

 

6,136,816

 

 

6,745,072

 

 

 

$

6,174,716

 

$

6,736,860

 

$

19,992,467

 

$

21,128,326

 

 


(1)Includes sales from the United States of $2.20 billion and $2.39 billion for the quarters ended April 2, 2016, and March 28, 2015, respectively. Includes sales from the United States of $7.20 billion and $7.45 billion for the first nine months of fiscal 2016 and 2015, respectively.

 

(2)Includes sales from Germany and the United Kingdom of $749.4 million and $294.2 million, respectively, for the quarter ended April 2, 2016, and $2.31 billion and $975.3 million, respectively, for the first nine months of fiscal 2016. 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.

 

(3)Includes sales from China (including Hong Kong) and Taiwan of $627.1 million and $586.6 million, respectively, for the quarter ended April 2, 2016, and $2.05 billion and $2.27 billion, respectively, for the first nine months of fiscal 2016. 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

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

nine months of fiscal 2015.

 

 

 

 

 

 

 

 

 

 

 

 

April 2,

 

June 27,

 

 

 

2016

 

2015

 

 

 

(Thousands)

 

Assets:

    

 

    

    

 

    

 

Electronics Marketing

 

$

6,669,914

 

$

6,497,714

 

Technology Solutions

 

 

3,742,670

 

 

3,608,953

 

Corporate

 

 

712,876

 

 

693,286

 

 

 

$

11,125,460

 

$

10,799,953

 

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

 

 

 

 

 

 

 

Americas (1)

 

$

400,969

 

$

358,063

 

EMEA (2)

 

 

179,850

 

 

182,311

 

Asia/Pacific

 

 

29,928

 

 

28,405

 

 

 

$

610,747

 

$

568,779

 

 


(1)Includes property, plant and equipment, net, of $391.1 million and $352.2 million as of April 2, 2016, and June 27, 2015, respectively, in the United States.

 

(2)Includes property, plant and equipment, net, of $75.4 million and $73.1 million in Germany and Belgium, respectively, as of April 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 third quarter and first nine 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. These actions include activities related to the Avnet Advantage initiative, which is focused on creating long-term operational efficiencies. In addition, the Company incurred integration and other costs as discussed further below.  The following table presents the restructuring, integration and other expenses recorded during the third quarter and first nine months of fiscal 2016:

 

 

 

 

 

 

 

 

 

 

 

    

Quarter Ended

    

Nine Months Ended

 

 

 

April 2, 2016

 

April 2, 2016

 

 

 

(Thousands, except per share data)

 

Restructuring expenses

 

$

7,874

 

$

39,350

 

Integration costs

 

 

4,331

 

 

8,824

 

Other costs

 

 

4,614

 

 

16,749

 

Changes in estimates for prior year restructuring liabilities

 

 

(647)

 

 

(1,571)

 

Restructuring, integration and other expenses before tax

 

$

16,172

 

$

63,352

 

Restructuring, integration and other expenses after tax

 

$

10,804

 

$

42,029

 

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

 

$

0.08

 

$

0.31

 

 

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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: