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EX-32.2 - AVNET INCex-32d2.htm
EX-32.1 - AVNET INCex-32d1.htm
EX-31.2 - AVNET INCex-31d2.htm
EX-31.1 - AVNET INCex-31d1.htm
EX-10.3 - AVNET INCex-10d3.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 December 30, 2017 


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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑

  

Accelerated filer ☐

  

Non-accelerated filer ☐(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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  18, 2018, the total number of shares outstanding of the registrant’s Common Stock was 119,945,293 shares, net of treasury shares.

 

 

 

 


 

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets at December 30, 2017 and July 1, 2017

2

 

 

Consolidated Statements of Operations for the second quarters and six months ended December 30, 2017 and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive Income for the second quarters and six months ended December 30, 2017 and December 31, 2016

4

 

 

Consolidated Statements of Cash Flows for the six months ended December 30, 2017 and December 31, 2016

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

 

 

Item 4. Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

31

 

 

Item 1. Legal Proceedings

31

 

 

Item 1A. Risk Factors

31

 

 

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

32

 

 

Item 6. Exhibits

33

 

 

Signature Page

34

 

 

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

December 30,

    

July 1,

 

 

 

2017

 

2017

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

589,518

 

$

836,384

 

Marketable securities

 

 

136,443

 

 

281,326

 

Receivables, less allowances of $50,559 and $47,272, respectively

 

 

3,295,014

 

 

3,337,624

 

Inventories

 

 

3,285,926

 

 

2,824,709

 

Prepaid and other current assets

 

 

269,204

 

 

253,765

 

Total current assets

 

 

7,576,105

 

 

7,533,808

 

Property, plant and equipment, net

 

 

507,692

 

 

519,575

 

Goodwill

 

 

1,181,013

 

 

1,148,347

 

Intangible assets, net

 

 

269,743

 

 

277,291

 

Other assets

 

 

265,952

 

 

220,568

 

Total assets

 

$

9,800,505

 

$

9,699,589

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

243,351

 

$

50,113

 

Accounts payable

 

 

1,958,145

 

 

1,861,635

 

Accrued expenses and other

 

 

554,140

 

 

542,023

 

Total current liabilities

 

 

2,755,636

 

 

2,453,771

 

Long-term debt

 

 

1,488,066

 

 

1,729,212

 

Other liabilities

 

 

308,259

 

 

334,538

 

Total liabilities

 

 

4,551,961

 

 

4,517,521

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 119,600,864 shares and 123,080,952 shares, respectively

 

 

119,601

 

 

123,081

 

Additional paid-in capital

 

 

1,520,858

 

 

1,503,490

 

Retained earnings

 

 

3,724,978

 

 

3,799,363

 

Accumulated other comprehensive loss

 

 

(116,893)

 

 

(243,866)

 

Total shareholders’ equity

 

 

5,248,544

 

 

5,182,068

 

Total liabilities and shareholders’ equity

 

$

9,800,505

 

$

9,699,589

 

 

See notes to consolidated financial statements. 

2


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

    

December 30,

    

December 31,

    

December 30,

    

December 31,

  

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Thousands, except per share amounts)

 

Sales

 

$

4,521,636

 

$

4,273,559

 

$

9,182,578

 

$

8,391,663

 

Cost of sales

 

 

3,919,175

 

 

3,687,374

 

 

7,967,563

 

 

7,282,823

 

Gross profit

 

 

602,461

 

 

586,185

 

 

1,215,015

 

 

1,108,840

 

Selling, general and administrative expenses

 

 

478,681

 

 

431,555

 

 

974,886

 

 

795,227

 

Restructuring, integration and other expenses

 

 

36,762

 

 

30,400

 

 

83,156

 

 

59,869

 

Operating income

 

 

87,018

 

 

124,230

 

 

156,973

 

 

253,744

 

Other income (expense), net

 

 

762

 

 

(36,514)

 

 

16,341

 

 

(50,248)

 

Interest expense

 

 

(25,640)

 

 

(26,748)

 

 

(49,700)

 

 

(53,984)

 

Income from continuing operations before taxes

 

 

62,140

 

 

60,968

 

 

123,614

 

 

149,512

 

Income tax expense

 

 

5,346

 

 

28,503

 

 

8,638

 

 

49,359

 

Income from continuing operations, net of tax

 

 

56,794

 

 

32,465

 

 

114,976

 

 

100,153

 

Income (loss) from discontinued operations, net of tax

 

 

(10,070)

 

 

70,753

 

 

(9,949)

 

 

71,908

 

Net income

 

 

46,724

 

 

103,218

 

 

105,027

 

 

172,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.25

 

$

0.94

 

$

0.78

 

Discontinued operations

 

 

(0.08)

 

 

0.55

 

 

(0.08)

 

 

0.56

 

Net income per share basic

 

 

0.39

 

 

0.80

 

 

0.86

 

 

1.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.25

 

$

0.93

 

$

0.77

 

Discontinued operations

 

 

(0.08)

 

 

0.54

 

 

(0.08)

 

 

0.55

 

Net income per share diluted

 

 

0.39

 

 

0.79

 

 

0.85

 

 

1.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

120,400

 

 

127,901

 

 

121,543

 

 

127,716

 

Diluted

 

 

121,749

 

 

130,347

 

 

122,867

 

 

130,055

 

Cash dividends paid per common share

 

$

0.18

 

$

0.17

 

$

0.36

 

$

0.34

 

 

See notes to consolidated financial statements.

3


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

    

December 30,

    

December 31,

     

December 30,

    

December 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Thousands)

 

Net income

 

$

46,724

 

$

103,218

 

$

105,027

 

$

172,061

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation and other

 

 

27,941

 

 

(182,663)

 

 

116,784

 

 

(151,002)

 

Pension adjustments, net

 

 

9,250

 

 

3,183

 

 

10,189

 

 

3,802

 

Total comprehensive income (loss)

 

$

83,915

 

$

(76,262)

 

$

232,000

 

$

24,861

 

 

See notes to consolidated financial statements.

4


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

December 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

105,027

 

$

172,061

 

Less: Income (loss) from discontinued operations, net of tax

 

 

(9,949)

 

 

71,908

 

Income from continuing operations

 

 

114,976

 

 

100,153

 

 

 

 

 

 

 

 

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

77,510

 

 

45,616

 

Amortization

 

 

47,256

 

 

11,759

 

Deferred income taxes

 

 

(55,921)

 

 

9,312

 

Stock-based compensation

 

 

17,090

 

 

32,525

 

Other, net

 

 

22,386

 

 

13,069

 

Changes in (net of effects from businesses acquired and divested):

 

 

 

 

 

 

 

Receivables

 

 

108,459

 

 

(127,153)

 

Inventories

 

 

(410,361)

 

 

139,672

 

Accounts payable

 

 

75,342

 

 

133,698

 

Accrued expenses and other, net

 

 

(55,955)

 

 

(55,437)

 

Net cash flows (used) provided by operating activities - continuing operations

 

 

(59,218)

 

 

303,214

 

Net cash flows used by operating activities - discontinued operations

 

 

 —

 

 

(63,124)

 

Net cash flows (used) provided by operating activities

 

 

(59,218)

 

 

240,090

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of notes, net of issuance costs

 

 

 —

 

 

296,374

 

Repayment of notes

 

 

 —

 

 

(378,559)

 

Borrowings (repayments) under accounts receivable securitization, net

 

 

78,000

 

 

(264,963)

 

Borrowings (repayments) under senior unsecured credit facility, net

 

 

(99,971)

 

 

771,174

 

Repayments under bank credit facilities and other debt, net

 

 

(27,381)

 

 

(18,978)

 

Borrowings of term loans

 

 

 —

 

 

530,756

 

Repurchases of common stock

 

 

(135,458)

 

 

 —

 

Dividends paid on common stock

 

 

(43,572)

 

 

(43,426)

 

Other, net

 

 

(1,214)

 

 

13,825

 

Net cash flows (used) provided by financing activities - continuing operations

 

 

(229,596)

 

 

906,203

 

Net cash flows used by financing activities - discontinued operations

 

 

 —

 

 

(16,505)

 

Net cash flows (used) provided by financing activities

 

 

(229,596)

 

 

889,698

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(67,397)

 

 

(70,424)

 

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

 

 

(14,661)

 

 

(798,366)

 

Other, net

 

 

2,402

 

 

7,766

 

Net cash flows used for investing activities - continuing operations

 

 

(79,656)

 

 

(861,024)

 

Net cash flows provided (used) by investing activities - discontinued operations

 

 

112,664

 

 

(3,093)

 

Net cash flows provided (used) by investing activities

 

 

33,008

 

 

(864,117)

 

 

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash and cash equivalents

 

 

8,940

 

 

(27,007)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— (decrease) increase

 

 

(246,866)

 

 

238,664

 

— at beginning of period

 

 

836,384

 

 

1,031,478

 

— at end of period

 

$

589,518

 

$

1,270,142

 

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’ (collectively, 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 in the U.S. (“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 July 1, 2017.

 

Certain reclassifications have been made in prior periods and the fiscal year to date current periods to conform to the current period presentation.

 

New accounting pronouncements

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance related to The Tax Cuts and Jobs Act (the “Act”). The Act changes existing United States tax law and includes numerous provisions that will affect the accounting for U.S. income taxes under ASC 740. SAB 118 allows registrants to record provisional amounts during a one year “measurement period”. The measurement period ends upon finalization of accounting. During the measurement period, impacts of the Act are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. SAB 118 summarizes three stages of applying the impact of the Act to be applied at each reporting period, to account for and qualitatively disclose the accounting impacts of the Act: (i) the effects of the Act for which accounting is complete; (ii) provisional amounts (or adjustments to provisional amounts) for the effects of the Act where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act. See Note 8, “Income Taxes” for further discussion of the application of SAB 118 as of December 30, 2017.

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and makes certain targeted improvements to simplify the qualification and application of the hedge accounting compared to current GAAP. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2017-12 on its consolidated financial statements.

 

In March 2017, the FASB issued Accounting Standards Update 2017-07, Compensation—Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period, and allows only the service cost component to be eligible for capitalization in assets. Other components of the net periodic benefit cost are to be presented separately from the line item that includes the service cost and outside of any subtotal of operating income, and the line item must be appropriately described. If a separate line item is not used, the line item used in the income statement to present the other components of net benefit cost must be disclosed. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within that annual period, with early adoption permitted. The amendment is to be applied retrospectively. The new guidance primarily impacts the income statement

6


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

presentation of net periodic benefit cost and the Company does not believe adoption of this standard will have a material impact on its consolidated financial statements including income before income taxes, but the reported amount of operating income will decrease compared to historical measurements of operating income. Refer to Note 9, “Pension Plan,” for further information on the components of net periodic pension cost.

 

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The update amends accounting guidance for intra-entity transfers of assets other than inventory to require the recognition of income tax consequences when the transfer occurs. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach should be applied. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its consolidated financial statements.

 

In February 2016, the 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. The update will be effective for the Company 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 May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended (“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 guidance in ASU 2014-09 is expected to require more judgment and estimates within the revenue recognition process compared to existing GAAP. ASU 2014-09 is required to be adopted by the Company in the first quarter of fiscal 2019.

 

The Company expects to adopt the requirements of ASU 2014-09 using retrospective adoption to each prior reporting period presented. The company has established an implementation team inclusive of external advisors engaged to assist in evaluating potential differences compared to existing GAAP. The Company has identified its revenue streams and is currently assessing each stream for potential impacts from the adoption of ASU 2014-09. For the revenue streams assessed, the Company does not anticipate a material impact in the timing or amount of revenue recognized. 

 

The Company’s analysis and evaluation of the new standard will continue through its effective date and a substantial amount of work remains to be completed due to the complexity of the new standard, the application of judgment and the requirement for the use of estimates in applying the new standard, as well as the significant number of customers and the related terms and conditions of our contracts that must be reviewed. The Company does not currently expect significant changes in revenue recognition practices for continuing operations compared to existing GAAP.

 

2. Acquisitions

 

Premier Farnell

 

On October 17, 2016, the Company acquired all of the outstanding shares of Premier Farnell Plc (“PF”), a global distributor of electronic components and related products. The cash consideration paid for the acquisition was approximately $841 million, which consisted of £1.85 per share of PF common stock. Additionally, Avnet assumed $242.8 million of debt at fair value.

 

The PF acquisition was accounted for as a business combination. The purchase price of this acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date.

7


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following table summarizes the final purchase price allocation (in thousands):

 

 

 

 

 

Cash

 

$

46,354

Trade and other receivables, net

 

 

187,303

Inventories

 

 

328,037

Property, plant and equipment

 

 

52,621

Intangible assets

 

 

319,966

Total identifiable assets acquired

 

$

934,281

 

 

 

 

Accounts payable, accrued liabilities and other current liabilities

 

$

160,572

Short-term debt

 

 

242,814

Other long-term liabilities

 

 

150,109

Total identifiable liabilities acquired

 

$

553,495

Net identifiable assets acquired

 

 

380,786

Goodwill

 

 

460,534

Net assets acquired

 

$

841,320

 

Approximately $10.0 million of goodwill associated with the PF acquisition is expected to be deductible for tax purposes.

 

Dragon Innovation

 

In August 2017, the Company acquired Dragon Innovation, Inc. (“Dragon”), a provider of manufacturing logistics services to entrepreneurs. The impact of this acquisition was not material to the Company’s consolidated balance sheets or statements of operations.

 

3. Discontinued operations and gain on sale

 

In February 2017, the Company completed the sale of its Technology Solutions (“TS”) business to Tech Data Corporation (the “Buyer”). Included in the gain on sale recorded upon completion of the sale were estimates for certain income taxes due on the gain and additional cash consideration expected from the Buyer related to a closing date net working capital sales price adjustment (the “closing date adjustment”). The Company is finalizing the closing date adjustment with the Buyer as provided for in the sales agreement and has included an estimate of this amount as the principal component of the $269.2 million of prepaid and other current assets as of December 30, 2017. The final closing date adjustment, as determined through the established process outlined in the sales agreement, may be materially different from the Company’s estimate. The impact of any probable changes in the closing date adjustment will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change occurs. Additionally, the income taxes associated with the gain will be impacted by the final geographic allocation of the sales price, which must be agreed to with the Buyer after determination of the closing date adjustment as required in the sales agreement and may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes on the gain will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change in estimate occurs. The Company expects the closing date adjustment to be finalized by the end of fiscal 2018 and the income tax on the gain to be finalized during fiscal 2019.

 

8


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company received 2.8 million shares of the Buyer’s common stock at closing (the “Shares”), which has been recorded within “Marketable securities” on the Company’s Consolidated Balance Sheets. Unrealized and realized gains or losses due to changes in fair value based upon Level 1 quoted active market prices of the Shares are recorded in “Other income (expense), net” on the Consolidated Statements of Operations. The sales agreement includes time based contractual restrictions related to the Company’s sale of the Shares and as such, the Company entered into economic hedges to reduce the Company’s exposure to price fluctuations of the Shares during the restricted period, which fixes the net amount that the Company will realize upon the sale of the Shares. The Company records changes in fair value related to the economic share price hedges within “Other income (expense), net”, offsetting the changes in fair value of the underlying Shares. During the six months ended December 30, 2017, the Company sold 1.4 million Shares, the net proceeds of which have been included in “Cash flows from investing activities – discontinued operations.”

 

In connection with the sale of the TS business, the Company entered into a Transition Services Agreement (“TSA”), pursuant to which the Buyer will pay the Company to provide certain information technology, distribution, facilities, finance and human resources related services for various periods of time depending upon the services not to exceed approximately two years from the closing date. Expenses incurred by the Company to provide such services under the TSA are classified within selling, general and administrative expenses and amounts billed to the Buyer to provide such services are classified as a reduction of such expenses. The Buyer has terminated substantially all TSA services outside of certain information technology services and all remaining TSA services are expected to be terminated by the end of fiscal 2018.

 

Financial results of the TS business for the second quarter and six months ended December 31, 2016 are presented as “Income from discontinued operations, net of tax” on the Consolidated Statements of Operations and are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

    

December 31, 2016

 

 

 

(Thousands)

 

Sales

 

$

2,453,262

 

$

4,375,464

 

Cost of sales

 

 

2,199,235

 

 

3,928,164

 

Gross profit

 

 

254,027

 

 

447,300

 

Selling, general and administrative expenses

 

 

158,356

 

 

324,381

 

Restructuring, integration and other expenses

 

 

3,316

 

 

7,540

 

Operating income

 

 

92,355

 

 

115,379

 

Interest and other expense, net

 

 

(10,635)

 

 

(10,630)

 

Income from discontinued operations before income taxes

 

 

81,720

 

 

104,749

 

Income tax expense

 

 

10,967

 

 

32,841

 

Income from discontinued operations, net of taxes

 

$

70,753

 

$

71,908

 

 

Included within selling, general and administrative expenses of discontinued operations was $14.1 million and $26.6 million of estimated corporate expenses, excluding general overhead, specific to or benefiting the TS business for the second quarter and six months ended December 31, 2016.

 

The loss from discontinued operations, net of tax, in the second quarter and first six months of fiscal 2018 substantially all relates to settlement losses associated with the Company’s pension plan due to former TS business employees requesting and receiving distributions from the Company’s pension plan during fiscal 2018. Refer to Note 9, “Pension plan,” for further information on the pension settlement losses.

 

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Goodwill and long-lived assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the six months ended December 30, 2017. All of the accumulated impairment was recognized in fiscal 2009.

 

 

 

 

 

 

 

 

 

 

 

 

    

Electronic 

    

Premier

    

 

 

 

 

Components

 

Farnell

 

Total

 

 

(Thousands)

Carrying value at July 1, 2017 (1)

 

 

635,048

 

 

513,299

 

 

1,148,347

Additions from acquisitions

 

 

21,539

 

 

 —

 

 

21,539

Foreign currency translation

 

 

6,263

 

 

17,662

 

 

23,925

Measurement period adjustments

 

 

2,530

 

 

(15,328)

 

 

(12,798)

Carrying value at December 30, 2017 (1)

 

$

665,380

 

$

515,633

 

$

1,181,013


(1)

Includes accumulated impairment of $1,045,110

 

The Company’s reporting units passed goodwill impairment testing using a quantitative impairment model in the fourth quarter of fiscal 2017, however, the Company’s Electronic Components (“EC”) Americas reporting units had an estimated fair value that was not substantially in excess of its carrying value. The Company also evaluates each quarter if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value, which would require the Company to perform an interim goodwill impairment test. Indicators that 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, (iii) the results of and the amount of time passed since the last goodwill impairment test and (iv) the long-term expected financial performance of its reporting units.

 

Intangible Assets

 

The following table presents the Company’s acquired intangible assets at December 30, 2017, and July 1, 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2017

 

July 1, 2017

 

 

 

Acquired

 

Accumulated

 

Net Book

 

 Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

308,024

 

$

(118,563)

 

$

189,461

 

$

277,865

 

$

(79,578)

 

$

198,287

 

Trade name

 

 

55,973

 

 

(12,500)

 

 

43,473

 

 

46,915

 

 

(6,720)

 

 

40,195

 

Technology and other

 

 

54,354

 

 

(17,545)

 

 

36,809

 

 

50,369

 

 

(11,560)

 

 

38,809

 

 

 

$

418,351

 

$

(148,608)

 

$

269,743

 

$

375,149

 

$

(97,858)

 

$

277,291

 

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible asset amortization expense from continuing operations was $21.8 million and $9.8 million for the second quarters of fiscal 2018 and 2017, respectively, and $47.3 million and $11.8 million for the first six months of fiscal 2018 and 2017, respectively. Intangible assets have a weighted average remaining useful life of approximately 3 years. The following table presents the estimated future amortization expense for the remainder of fiscal 2018, the next five fiscal years and thereafter (in thousands):

 

 

 

 

 

Fiscal Year

    

 

Remainder of fiscal 2018

 

 

43,635

2019

 

 

85,765

2020

 

 

83,488

2021

 

 

40,226

2022

 

 

12,685

2023

 

 

3,703

Thereafter

 

 

241

Total

 

$

269,743

 

 

 

5. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 30, 2017

    

July 1, 2017

    

December 30, 2017

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

2.41

%

 

2.27

%

 

$

23,351

 

$

50,113

 

Accounts receivable securitization program

 

1.93

%

 

 —

 

 

 

220,000

 

 

 —

 

Short-term debt

 

 

 

 

 

 

 

$

243,351

 

$

50,113

 

 

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.

 

The Company has an accounts receivable securitization program (the “Program”) in the United States 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 $400 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 $730.8 million and $807.5 million at December 30, 2017, and July 1, 2017, 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 December 30, 2017, and July 1, 2017. The Program expires in August 2018 and as a result the Company has classified outstanding balances as short-term debt as of December 30, 2017. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread of 0.40% with a facility fee of 0.40%.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 30, 2017

    

July 1, 2017

    

December 30, 2017

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

 —

 

 

1.53

%

 

$

 —

 

$

142,000

 

Credit Facility

 

 —

 

 

2.77

%

 

 

 —

 

 

99,970

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 2020

 

5.88

%

 

5.88

%

 

 

300,000

 

 

300,000

 

December 2021

 

3.75

%

 

3.75

%

 

 

300,000

 

 

300,000

 

December 2022

 

4.88

%

 

4.88

%

 

 

350,000

 

 

350,000

 

April 2026

 

4.63

%

 

4.63

%

 

 

550,000

 

 

550,000

 

Other long-term debt

 

1.36

%

 

1.36

%

 

 

451

 

 

642

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

1,500,451

 

 

1,742,612

 

Discount and debt issuance costs - unamortized

 

 

 

 

 

 

 

 

(12,385)

 

 

(13,400)

 

Long-term debt

 

 

 

 

 

 

 

$

1,488,066

 

$

1,729,212

 

 

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 $1.50 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 December 30, 2017, and July 1, 2017. As of December 30, 2017, and July 1, 2017, there were $2.0 million and $3.1 million, respectively, in letters of credit issued under the Credit Facility.

 

As of December 30, 2017, the carrying value and fair value of the Company’s total debt was $1.73 billion and $1.80 billion, respectively. At July 1, 2017, the carrying value and fair value of the Company’s total debt was $1.78 billion and $1.85 billion, respectively. Fair value for the notes was estimated based upon quoted market prices and for other forms of debt fair value approximates carrying value due to the market based variable nature of the interest rates on those debt agreements.

 

6. 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 (e.g., 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 60 days (“economic hedges”), but no longer than one year. The Company continues to have exposure to foreign currency risks to the extent they are not economically hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “other income (expense), net.” 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 December 30, 2017, and July 1, 2017. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. The Company’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.

12


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

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.

 

The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase from suppliers. The Company’s foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Canadian Dollar, Japanese Yen, Chinese Yuan, Taiwan Dollar and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other European and Asia/Pacific foreign currencies.

 

The fair values of derivative financial instruments in the Company’s consolidated balance sheets are as follows:

 

 

 

 

 

 

 

 

 

 

 

December 30,

    

July 1,

 

 

 

2017

 

2017

 

 

 

(Thousands)

 

Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in:

 

 

 

 

 

 

 

Other current assets

 

$

4,380

 

$

7,297

 

Accrued expenses

 

 

2,489

 

 

4,142

 

 

In addition to amounts included in the above table, there was approximately $12.8 million and $34.0 million as of December 30, 2017 and July 1, 2017, respectively, of accrued expenses related to derivative financial instruments used to economically hedge the fair value changes in marketable securities discussed further in Note 3.

 

The amounts recorded to other income (expense), net, related to derivative financial instruments for economic hedges are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

December 30,

    

December 31,

 

December 30,

    

December 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Thousands)

 

Net derivative financial instrument (loss) gain

 

$

(1,361)

 

$

771

 

$

1,715

 

$

(8,737)

 

 

The above table excludes approximately $27.0 million and $35.0 million for the second quarter and first six months of fiscal 2017, respectively, of derivative financial instrument losses in other income (expenses), net, associated with foreign currency derivative financial instruments purchased to economically hedge the British Pound purchase price of the PF acquisition.

 

Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are classified within the same line item in the consolidated statements of operations and as the underlying assets or liabilities being economically hedged.

 

7. 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.

 

13


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company is also currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export and environmental matters. 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 early 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 December 30, 2017 and July 1, 2017, the Company had aggregate estimated liabilities of $14.2 million, classified within accrued expenses and other for such compliance-related matters that were reasonably estimable as of such dates.

 

8. Income taxes

 

During the second quarter of fiscal 2018, the Company made certain estimates related to the impact of the Act including the remeasurement of deferred taxes at the new expected tax rates. The amounts recorded in the three months ended December 30, 2017 for the remeasurement of U.S. net deferred tax assets principally relate to the reduction in the U.S. corporate income tax rate. The Company has provisionally recorded an expense of $11.1 million to account for these deferred tax impacts. This estimate is provisional as the Company continues to analyze the impacts of the Act, or in certain cases, U.S. Treasury is expected to issue further guidance on the application of certain provisions of the Act.

 

The Act includes a one-time mandatory repatriation transition tax on certain net accumulated earnings and profits of the Company’s foreign subsidiaries. The Company was not able to make a reasonable estimate of the income tax expense associated with the Company’s approximately $3.3 billion of unremitted foreign earnings as of July 1, 2017, as the required information related to each foreign subsidiaries’ unremitted foreign earnings and related foreign tax credit pools was not readily available. We expect a reasonable estimate to be recorded by the end of fiscal 2018 and the accounting for this aspect of the Act to be complete by the end of the measurement period. As of December 30, 2017, consistent with historical conclusions, the Company’s cash balances held in foreign locations are expected to be permanently reinvested outside the United States as the impact of the Act on the Company’s current position is not yet fully understood and is still under evaluation by the Company.

 

The Company’s effective tax rate on its income before income taxes from continuing operations was 8.6% in the second quarter of fiscal 2018.  During the second quarter of fiscal 2018, the Company’s effective tax rate was favorably impacted primarily by the mix of income in lower tax jurisdictions, partially offset by the tax expense created from remeasuring net deferred tax assets as a result of applying the requirements of the Act.  

 

During the second quarter of fiscal 2017, the Company’s effective tax rate of 46.7% was unfavorably impacted primarily by (i) net increases to valuation allowances against deferred tax assets created primarily from acquisition related expenses that were deemed unrealizable and (ii) the impact of non-deductible acquisition related expenses, partially offset by (iii) the mix of income in lower tax jurisdictions.

 

For the first six months of fiscal 2018 the Company’s effective tax rate on its income before income taxes from continuing operations was 7.0%. The effective tax rate for the first six months of fiscal 2018 was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of unrecognized tax benefit reserves primarily due to the negotiation of a favorable outcome in a foreign jurisdiction, partially offset by (iii) the tax expense created from remeasuring net deferred tax assets as a result of applying the requirements of the Act.

 

During the first six months of fiscal 2017, the Company’s effective tax rate of 33.0% was unfavorably impacted primarily by (i) net increases to valuation allowances against deferred tax assets that were deemed unrealizable and (ii) the impact of non-deductible acquisition related expenses, partially offset by (iii) the mix of income in lower tax jurisdictions.

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

9. Pension plan

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) that covers substantially all U.S. employees as of January 1, 2018, and an acquired closed noncontributory defined benefit pension plan in the U.S. covering certain PF employees (collectively, the “Plans”). Components of net period pension cost for the Plans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

    

December 30,

    

December 31,

    

December 30,

    

December 31,

 

 

 

2017

   

2016 (1)

   

2017

   

2016 (1)

 

 

 

(Thousands)

 

Service cost

 

$

3,867

 

$

10,848

 

$

7,735

 

$

21,696

 

Interest cost

 

 

5,783

 

 

3,774

 

 

11,566

 

 

7,548

 

Expected return on plan assets

 

 

(13,757)

 

 

(10,588)

 

 

(27,514)

 

 

(21,176)

 

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

 

(786)

 

 

(786)

 

Recognized net actuarial loss

 

 

3,746

 

 

3,851

 

 

7,492

 

 

7,702

 

Pension settlement charge

 

 

13,984

 

 

 —

 

 

13,984

 

 

 —

 

Net periodic pension cost

 

$

13,230

 

$

7,492

 

$

12,477

 

$

14,984

 

 


(1)

Includes discontinued operations

 

The Company contributed $8.0 million to the Plans during the first six months of fiscal 2018 and expects to make an additional contribution to the Plans of $8.0 million in the remainder of fiscal 2018.

 

The Plans meet the definition of defined benefit plans and as a result, the Company applies ASC 715 pension accounting to the Plans. The Plans, however, are cash balance plans that are similar in nature to defined contribution plans in that a participant’s benefit is defined in terms of stated account balances. The cash balance plans 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 second quarters and the first six months of fiscal 2018 and fiscal 2017 were not material and substantially all related to net periodic pension costs including recognition of actuarial losses and amortization of prior service credits.

 

In connection with the sale of the TS business, a significant number of former employees became terminated vested employees under the Plan. During the second quarter of fiscal 2018, the aggregate amount of former employee withdrawals from the Plan exceeded the pension accounting threshold for fiscal 2018, which required a settlement charge under ASC 715 pension accounting. As a result, the Company recognized a $14.0 million pension settlement charge before taxes in the second quarter of fiscal 2018 classified within loss from discontinued operations.

 

15


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Shareholders’ equity

 

Share repurchase program

 

In November 2017, the Company’s Board of Directors authorized a $200 million increase in the Company’s existing share repurchase program. With this increase, the Company may repurchase up to $1.95 billion of common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors such as share price, corporate and regulatory requirements, and prevailing market conditions. During the second quarter and six months ended December 30, 2017, the Company repurchased 1.7 million and 3.6 million shares, respectively, under this program for a total cost of $67.4 million and $139.4 million, respectively.  As of December 30, 2017, the Company had $459.6 million remaining under its share repurchase authorization.

 

Common stock dividend

 

In November 2017, the Company’s Board of Directors approved a dividend of $0.18 per common share and dividend payments of $21.6 million were made in December 2017. During the six months ended December 31, 2017, the Company paid dividends of $0.36 per common share and $43.6 million in total.

 

11. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

December 30,

 

December 31,

 

December 30,

 

December 31,

 

 

 

2017

  

2016

  

2017

  

2016

 

 

 

(Thousands, except per share data)

 

Numerator: