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EX-32.2 - EX-32.2 - AVNET INCavt-20180331ex3222a88ef.htm
EX-32.1 - EX-32.1 - AVNET INCavt-20180331ex321848f0d.htm
EX-31.2 - EX-31.2 - AVNET INCavt-20180331ex312b1286c.htm
EX-31.1 - EX-31.1 - AVNET INCavt-20180331ex311ef5638.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


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

For the quarterly period ended March 31, 2018


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 April 19, 2018, the total number of shares outstanding of the registrant’s Common Stock was 117,981,593 shares, net of treasury shares.

 

 

 

 


 

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets at March 31, 2018 and July 1, 2017

2

 

 

Consolidated Statements of Operations for the third quarters and nine months ended March 31, 2018 and April 1, 2017 

3

 

 

Consolidated Statements of Comprehensive Income for the third quarters and nine months ended March 31, 2018 and April 1, 2017 

4

 

 

Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and April 1, 2017 

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 

30

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

July 1,

 

 

 

2018

 

2017

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

430,065

 

$

836,384

 

Marketable securities

 

 

75,051

 

 

281,326

 

Receivables, less allowances of $50,821 and $47,272, respectively

 

 

3,552,531

 

 

3,337,624

 

Inventories

 

 

3,261,897

 

 

2,824,709

 

Prepaid and other current assets

 

 

305,067

 

 

253,765

 

Total current assets

 

 

7,624,611

 

 

7,533,808

 

Property, plant and equipment, net

 

 

520,922

 

 

519,575

 

Goodwill

 

 

1,026,542

 

 

1,148,347

 

Intangible assets, net

 

 

258,267

 

 

277,291

 

Other assets

 

 

281,588

 

 

220,568

 

Total assets

 

$

9,711,930

 

$

9,699,589

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

101,979

 

$

50,113

 

Accounts payable

 

 

2,091,082

 

 

1,861,635

 

Accrued expenses and other

 

 

576,385

 

 

542,023

 

Total current liabilities

 

 

2,769,446

 

 

2,453,771

 

Long-term debt

 

 

1,488,706

 

 

1,729,212

 

Other liabilities

 

 

498,957

 

 

334,538

 

Total liabilities

 

 

4,757,109

 

 

4,517,521

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 118,630,784 shares and 123,080,952 shares, respectively

 

 

118,631

 

 

123,081

 

Additional paid-in capital

 

 

1,519,975

 

 

1,503,490

 

Retained earnings

 

 

3,313,914

 

 

3,799,363

 

Accumulated other comprehensive income (loss)

 

 

2,301

 

 

(243,866)

 

Total shareholders’ equity

 

 

4,954,821

 

 

5,182,068

 

Total liabilities and shareholders’ equity

 

$

9,711,930

 

$

9,699,589

 

 

See notes to consolidated financial statements.

2


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 31,

    

April 1,

    

March 31,

    

April 1,

  

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Thousands, except per share amounts)

 

Sales

 

$

4,795,093

 

$

4,441,896

 

$

13,977,672

 

$

12,833,559

 

Cost of sales

 

 

4,141,556

 

 

3,811,910

 

 

12,109,120

 

 

11,094,733

 

Gross profit

 

 

653,537

 

 

629,986

 

 

1,868,552

 

 

1,738,826

 

Selling, general and administrative expenses

 

 

501,378

 

 

480,190

 

 

1,476,263

 

 

1,275,417

 

Goodwill impairment expense (Note 4)

 

 

181,440

 

 

 —

 

 

181,440

 

 

 —

 

Restructuring, integration and other expenses

 

 

25,120

 

 

35,513

 

 

108,277

 

 

95,382

 

Operating (loss) income

 

 

(54,401)

 

 

114,283

 

 

102,572

 

 

368,027

 

Other income (expense), net

 

 

8,384

 

 

19,439

 

 

24,725

 

 

(30,809)

 

Interest expense

 

 

(26,046)

 

 

(27,534)

 

 

(75,746)

 

 

(81,518)

 

Income (loss) from continuing operations before taxes

 

 

(72,063)

 

 

106,188

 

 

51,551

 

 

255,700

 

Income tax expense

 

 

243,541

 

 

16,268

 

 

252,179

 

 

65,627

 

Income (loss) from continuing operations, net of tax

 

 

(315,604)

 

 

89,920

 

 

(200,628)

 

 

190,073

 

Income (loss) from discontinued operations, net of tax

 

 

(4,462)

 

 

181,851

 

 

(14,411)

 

 

253,759

 

Net (loss) income

 

 

(320,066)

 

 

271,771

 

 

(215,039)

 

 

443,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.64)

 

$

0.70

 

$

(1.66)

 

$

1.48

 

Discontinued operations

 

 

(0.04)

 

 

1.42

 

 

(0.12)

 

 

1.98

 

Net (loss) income per share basic

 

 

(2.68)

 

 

2.12

 

 

(1.78)

 

 

3.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.64)

 

$

0.69

 

$

(1.66)

 

$

1.46

 

Discontinued operations

 

 

(0.04)

 

 

1.41

 

 

(0.12)

 

 

1.95

 

Net (loss) income per share diluted

 

 

(2.68)

 

 

2.10

 

 

(1.78)

 

 

3.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

119,601

 

 

128,487

 

 

120,895

 

 

127,973

 

Diluted

 

 

119,601

 

 

129,432

 

 

120,895

 

 

129,847

 

Cash dividends paid per common share

 

$

0.19

 

$

0.18

 

$

0.55

 

$

0.52

 

 

See notes to consolidated financial statements.

3


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 31,

    

April 1,

     

March 31,

    

April 1,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Thousands)

 

Net (loss) income

 

$

(320,066)

 

$

271,771

 

$

(215,039)

 

$

443,832

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation and other

 

 

114,073

 

 

92,702

 

 

230,857

 

 

(58,300)

 

Impact of TS business divestiture (Note 3)

 

 

 —

 

 

181,465

 

 

 

 

 

181,465

 

Pension adjustments, net

 

 

5,121

 

 

2,102

 

 

15,310

 

 

5,904

 

Total comprehensive (loss) income

 

$

(200,872)

 

$

548,040

 

$

31,128

 

$

572,901

 

 

See notes to consolidated financial statements.

4


 

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

March 31,

    

April 1,

 

 

 

2018

 

2017

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(215,039)

 

$

443,832

 

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

 

 

(14,411)

 

 

253,759

 

Income (loss) from continuing operations

 

 

(200,628)

 

 

190,073

 

 

 

 

 

 

 

 

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

114,111

 

 

63,800

 

Amortization

 

 

69,860

 

 

34,185

 

Deferred income taxes

 

 

(74,126)

 

 

(15,562)

 

Stock-based compensation

 

 

18,427

 

 

41,778

 

Goodwill impairment expense

 

 

181,440

 

 

 —

 

Other, net

 

 

30,305

 

 

10,563

 

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

 

 

 

 

 

 

 

Receivables

 

 

(98,147)

 

 

(335,617)

 

Inventories

 

 

(337,939)

 

 

86,103

 

Accounts payable

 

 

180,732

 

 

86,120

 

Accrued expenses and other, net

 

 

133,837

 

 

(20,977)

 

Net cash flows provided by operating activities - continuing operations

 

 

17,872

 

 

140,466

 

Net cash flows used by operating activities - discontinued operations

 

 

 —

 

 

(325,096)

 

Net cash flows provided (used) by operating activities

 

 

17,872

 

 

(184,630)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of notes, net of issuance costs

 

 

 —

 

 

296,374

 

Repayment of notes

 

 

 —

 

 

(530,800)

 

Repayments under accounts receivable securitization, net

 

 

(47,000)

 

 

(492,000)

 

Repayments under senior unsecured credit facility, net

 

 

(99,971)

 

 

(150,000)

 

Repayments under bank credit facilities and other debt, net

 

 

(44,293)

 

 

(18,386)

 

Borrowings of term loans

 

 

 —

 

 

530,756

 

Repayments of term loans

 

 

 —

 

 

(511,358)

 

Repurchases of common stock

 

 

(209,466)

 

 

(124,598)

 

Dividends paid on common stock

 

 

(66,198)

 

 

(66,477)

 

Other, net

 

 

(2,738)

 

 

15,838

 

Net cash flows used for financing activities - continuing operations

 

 

(469,666)

 

 

(1,050,651)

 

Net cash flows provided by financing activities - discontinued operations

 

 

 —

 

 

3,447

 

Net cash flows used for financing activities

 

 

(469,666)

 

 

(1,047,204)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(112,217)

 

 

(107,960)

 

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

 

 

(18,621)

 

 

(801,164)

 

Other, net

 

 

7,020

 

 

18,404

 

Net cash flows used for investing activities - continuing operations

 

 

(123,818)

 

 

(890,720)

 

Net cash flows provided by investing activities - discontinued operations

 

 

153,933

 

 

2,235,384

 

Net cash flows provided by investing activities

 

 

30,115

 

 

1,344,664

 

 

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash and cash equivalents

 

 

15,360

 

 

(15,075)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— (decrease) increase

 

 

(406,319)

 

 

97,755

 

— at beginning of period

 

 

836,384

 

 

1,031,478

 

— at end of period

 

$

430,065

 

$

1,129,233

 

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 February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2018-02, Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows entities to reclassify accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”). This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the income tax rate change resulting from the Act is recognized. The Company is currently evaluating the impact of the adoption of ASU 2018-02 on its consolidated financial statements.

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance related to 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 on the earlier of finalization of accounting or one year from the date of the enactment. 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 March 31, 2018. Additionally, as a result of the Act, the Company must make an accounting policy election as to whether to record the deferred impacts of the Global Intangible Low Taxed Income (“GILTI”) provision, or to treat it entirely as a period cost. The Company is still evaluating this GILTI accounting policy election.

 

In August 2017, the 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

6


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 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 benefit 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.

 

7


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Acquisitions

 

Dragon Innovation

 

In August 2017, the Company acquired Dragon Innovation, Inc. (“Dragon”), a provider of manufacturing logistics services. 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 primary component of the $305.1 million of prepaid and other current assets as of March 31, 2018. 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. During the third quarter of fiscal 2018, the Company made certain adjustments to the closing date estimates, which were not material and have been included as an adjustment to the gain on sale of discontinued operations classified within “Income (loss) from discontinued operations, net of tax” on the Consolidated Statements of Operations.  

 

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 currently expects the closing date adjustment to be finalized by the first half of fiscal 2019 and the income tax on the gain to be finalized by the end of fiscal 2019.

 

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. As of March 31, 2018, the Company had 0.9 million shares remaining, which had market value of $75.1 million. 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 nine months ended March 31, 2018, the Company sold 1.9 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. As of March 31, 2018, the Buyer has formally terminated substantially all TSA services outside of certain minor information technology services and all remaining TSA services are expected to be terminated by the first half of fiscal 2019.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Financial results of the TS business for the third quarter and nine months ended April 1, 2017 are presented as “Income (loss) from discontinued operations, net of tax” on the Consolidated Statements of Operations and are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

    

April 1, 2017

 

 

 

(Thousands)

 

Sales

 

$

1,056,676

 

$

5,432,140

 

Cost of sales

 

 

955,781

 

 

4,883,945

 

Gross profit

 

 

100,895

 

 

548,195

 

Selling, general and administrative expenses

 

 

105,622

 

 

430,003

 

Restructuring, integration and other expenses

 

 

(260)

 

 

7,280

 

Operating (loss) income

 

 

(4,467)

 

 

110,912

 

Interest and other expense, net

 

 

(13,662)

 

 

(24,292)

 

(Loss) income from discontinued operations before income taxes

 

 

(18,129)

 

 

86,620

 

Income tax expense

 

 

17,108

 

 

49,949

 

(Loss) income from discontinued operations, net of taxes

 

 

(35,237)

 

 

36,671

 

Gain on sales of discontinued operations, net of tax

 

 

217,088

 

 

217,088

 

Net income from discontinued operations, net of taxes

 

$

181,851

 

$

253,759

 

 

Included within selling, general and administrative expenses of discontinued operations was $8.3 million and $34.9 million of estimated corporate expenses, excluding general overhead, specific to or benefiting the TS business for the third quarter and nine months ended April 1, 2017, respectively.

 

The loss from discontinued operations, net of tax, in the third quarter and first nine 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 and the closing date adjustments discussed above. Refer to Note 9, “Pension plan,” for further information on the pension settlement losses.

 

 

4. Goodwill and long-lived assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the nine months ended March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

    

Electronic 

    

Premier

    

 

 

 

 

Components

 

Farnell

 

Total

 

 

(Thousands)

Carrying value at July 1, 2017 (1)

 

$

635,048

 

$

513,299

 

$

1,148,347

Additions from acquisitions

 

 

19,725

 

 

 —

 

 

19,725

Impairment of goodwill

 

 

(181,440)

 

 

 —

 

 

(181,440)

Foreign currency translation

 

 

12,532

 

 

40,176

 

 

52,708

Measurement period adjustments

 

 

2,530

 

 

(15,328)

 

 

(12,798)

Carrying value at March 31, 2018 (2)

 

$

488,395

 

$

538,147

 

$

1,026,542


(1) Includes accumulated impairment of $1,045,110 from fiscal 2009

(2) Includes accumulated impairment of $1,045,110 from fiscal 2009 and $181,440 from fiscal 2018

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

As of December 30, 2017, the $181.4 million of goodwill related to the Electronic Components Americas core reporting unit (the “Americas”) primarily represented goodwill allocated from the acquisitions of Bell Micro, G2 and Round 2, all of which occurred prior to fiscal 2011. The allocation of goodwill to the Americas represented the expected synergies the Americas would realize from these historical acquisitions. Once goodwill has been assigned to a reporting unit, for accounting purposes, the goodwill is no longer directly associated with the underlying acquisitions that the goodwill originated from, but rather the reporting unit to which it has been allocated. In accordance with ASC 350, the Company has been monitoring the Americas each quarter for the potential need to perform an interim goodwill impairment test.

 

In the third quarter of fiscal 2018, in conjunction with the commencement of the Company’s annual long-term planning process, it became apparent that lower cash flows are expected from the Americas over such planning horizon compared to prior year long-term cash flow expectations. As a result of the lower expected cash flows as well as certain other factors, the Company concluded that an interim quantitative goodwill impairment test for the Americas was necessary in the third quarter of fiscal 2018. 

 

In assessing the Americas goodwill for impairment in the third quarter of fiscal 2018, the Company was required to make significant judgments related to the fair value of the Americas. The Company used a combination of an income approach, specifically a discounted cash flow methodology, and a market approach to estimate the fair value of the Americas. The discounted cash flow methodology includes market participant assumptions for, among other factors, forecasted sales, gross profit margins, operating expenses, cash flows, perpetual growth rates and long-term discount rates, all of which required judgments and estimates by management which are inherently uncertain. The market approach methodology required significant assumptions related to comparable transactions, market multiples, capital structure and control premiums.

 

As a result of the impairment testing and related fair value estimate of the Americas in the third quarter of fiscal 2018, the Company impaired all of the goodwill in the Americas and recorded $181.4 million of goodwill impairment expense, which is classified within goodwill impairment expense in the Consolidated Statements of Operations. 

 

Intangible Assets

 

The following table presents the Company’s acquired intangible assets at March 31, 2018, and July 1, 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

July 1, 2017

 

 

 

Acquired

 

Accumulated

 

Net Book

 

 Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

319,744

 

$

(139,888)

 

$

179,856

 

$

277,865

 

$

(79,578)

 

$

198,287

 

Trade name

 

 

58,382

 

 

(15,470)

 

 

42,912

 

 

46,915

 

 

(6,720)

 

 

40,195

 

Technology and other

 

 

56,489

 

 

(20,990)

 

 

35,499

 

 

50,369

 

 

(11,560)

 

 

38,809

 

 

 

$

434,615

 

$

(176,348)

 

$

258,267

 

$

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 $22.6 million and $22.4 million for the third quarters of fiscal 2018 and 2017, respectively, and $69.9 million and $34.2 million for the first nine 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

 

$

22,711

2019

 

 

89,330

2020

 

 

87,010

2021

 

 

41,902

2022

 

 

13,212

2023

 

 

3,854

Thereafter

 

 

248

Total

 

$

258,267

 

 

 

5. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

July 1, 2017

    

March 31, 2018

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

1.86

%

 

2.27

%

 

$

6,979

 

$

50,113

 

Accounts receivable securitization program

 

2.35

%

 

 —

 

 

 

95,000

 

 

 —

 

Short-term debt

 

 

 

 

 

 

 

$

101,979

 

$

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 $774.8 million and $807.5 million at March 31, 2018, 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 March 31, 2018, 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 August 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

July 1, 2017

    

March 31, 2018

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

 —

 

 

1.53

%

 

$

 —

 

$

142,000

 

Credit Facility

 

 —

 

 

2.77

%

 

 

 —

 

 

99,970

 

Public 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

%

 

 

483

 

 

642

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

1,500,483

 

 

1,742,612

 

Discount and debt issuance costs - unamortized

 

 

 

 

 

 

 

 

(11,777)

 

 

(13,400)

 

Long-term debt

 

 

 

 

 

 

 

$

1,488,706

 

$

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 March 31, 2018, and July 1, 2017. As of March 31, 2018, 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 March 31, 2018, the carrying value and fair value of the Company’s total debt was $1.59 billion and $1.63 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 public 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 facilities.

 

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 March 31, 2018, 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


 

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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:

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

July 1,

 

 

 

2018

 

2017

 

 

 

(Thousands)

 

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

 

 

 

 

 

 

 

Other current assets

 

$

849

 

$

7,297

 

Accrued expenses

 

 

3,015

 

 

4,142

 

 

In addition to amounts included in the above table, there was approximately $3.2 million of other current assets and $34.0 million of accrued expenses as of March 31, 2018 and July 1, 2017, respectively, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

March 31,

    

April 1,

 

March 31,

    

April 1,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Thousands)

 

Net derivative financial instrument (loss) gain

 

$

3,354

 

$

26

 

$

5,070

 

$

(8,711)

 

 

The above table excludes approximately $35.0 million of loss for the first nine months of fiscal 2017, 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.

 

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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 March 31, 2018 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 third quarter of fiscal year 2018, the Company recorded a provisional amount for the one-time mandatory deemed repatriation tax liability (the “transition tax”) of $230.0 million of which $22.0 million is classified as a current income tax liability. The calculation of the transition tax is provisional and was based upon preliminary estimates of post-1986 earnings and profits and related foreign tax credits. The Act allows the transition tax to be payable over an eight year period without interest. The Company expects to elect to pay over an eight year period.

 

The Company continues to evaluate the impact of the Act including the Company’s historical assertion related to ASC 740 unremitted earnings being permanently reinvested. The Company has not changed its historical assertion with respect to ASC 740 unremitted earnings and considers its unremitted earnings to be permanently reinvested as of March 31, 2018. 

 

During the second quarter of fiscal year 2018, the Company recorded a provisional expense to account for the deferred tax impacts of the Act, which remained unchanged as of March 31, 2018. The estimates related to the transition tax and deferred taxes are provisional and may change as the Company continues to analyze the impacts of the Act.

 

The Company’s effective tax rate on its loss before income taxes from continuing operations was (338.0)%  in the third quarter of fiscal 2018. During the third quarter of fiscal 2018, the Company’s effective tax rate was unfavorably impacted primarily by (i) the provisional transition tax expense estimate recorded under the requirements of the Act and (ii) the goodwill impairment discussed in Note 4, which was not tax deductible, partially offset primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of reserves due to the expiration of the statute of limitations in various jurisdictions.

 

During the third quarter of fiscal 2017, the Company’s effective tax rate of 15.3% was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of reserves and other discrete tax benefits.

 

For the first nine months of fiscal 2018 the Company’s effective tax rate on its income before income taxes from continuing operations was 489.2%. The effective tax rate for the first nine months of fiscal 2018 was unfavorably impacted primarily by (i) the provisional transition tax expense recorded under the requirements of the Act, (ii) the goodwill impairment, which was not tax deductible, and (iii) the tax expense created from remeasuring net deferred tax assets as a result of applying the requirements of the Act, partially offset primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of reserves.

 

During the first nine months of fiscal 2017, the Company’s effective tax rate of 25.7% was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions, partially offset by (ii) net increases to valuation allowances against deferred tax assets that were deemed unrealizable and (iii) the impact of non-deductible acquisition related expenses.

 

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

    

March 31,

    

April 1,

    

March 31,

    

April 1,

 

 

 

2018

   

2017 (1)

   

2018

   

2017 (1)

 

 

 

(Thousands)

 

Service cost

 

$

4,305

 

$

7,406

 

$

12,040

 

$

22,217

 

Interest cost

 

 

4,529

 

 

3,952

 

 

16,095

 

 

11,856

 

Expected return on plan assets

 

 

(10,862)

 

 

(10,840)

 

 

(38,376)

 

 

(32,520)

 

Amortization of prior service credits

 

 

(393)

 

 

(394)

 

 

(1,179)

 

 

(1,180)

 

Recognized net actuarial loss

 

 

3,456

 

 

3,610

 

 

10,948

 

 

10,830

 

Pension settlement charge

 

 

4,875

 

 

 —

 

 

18,859

 

 

 —

 

Net periodic pension cost

 

$

5,910

 

$

3,734

 

$

18,387

 

$

11,203

 

 


(1)

Includes discontinued operations

 

The Company contributed $12.0 million to the Plans during the first nine months of fiscal 2018 and expects to make an additional contribution to the Plans of $4.0 million in the fourth quarter 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 provide the Company with the benefit of applying any earnings on the Plans’ 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 the first nine months of fiscal 2018 and fiscal 2017 were 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 first nine months of fiscal 2018, the aggregate amount of former employee withdrawals from the Plan exceeded the pension accounting settlement threshold for fiscal 2018, which required a settlement expense under ASC 715 pension accounting. As a result, the Company recognized a $4.9 million and $18.9 million of pension settlement expenses before taxes in the third quarter and first nine months of fiscal 2018, respectively, classified within income (loss) from discontinued operations.

 

15


 

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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 amended the Company’s existing share repurchase program to authorize the repurchase up of 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 third quarter and nine months ended March 31, 2018, the Company repurchased 1.7 million and 5.3 million shares, respectively, under this program for a total cost of $70.0 million and $209.5 million, respectively. As of March 31, 2018, the Company had $389.6 million remaining under its share repurchase authorization.

 

Common stock dividend

 

In February 2018, the Company’s Board of Directors approved a dividend of $0.19 per common share and dividend payments of $22.6 million were made in March 2018. During the nine months ended March 31, 2018, the Company paid dividends of $0.55 per common share and $66.2 million in total.

 

11. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarters Ended

 

Nine Months Ended

 

 

 

March 31,

 

April 1,

 

March 31,

 

April 1,

 

 

 

2018

  

2017

  

2018

  

2017

 

 

 

(Thousands, except per share data)

 

Numerator: